-----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, NxnRvPzILPF2JUHHXOY29dW9582aQ2C/D22QOquogNp9Kr67Sr0gIzQY2vgfz+M8 vSUH+36hGhBITESNg9Id1g== 0000930661-99-000638.txt : 19990402 0000930661-99-000638.hdr.sgml : 19990402 ACCESSION NUMBER: 0000930661-99-000638 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH ANNUITY & LIFE HOLDINGS 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-K SEC ACT: SEC FILE NUMBER: 000-29788 FILM NUMBER: 99579377 BUSINESS ADDRESS: STREET 1: UGLAND HOUSE SOUTH CHURCH STREET STREET 2: GEORGE TOWN GRAND CAYMAN CAYMAN ISLANDS CITY: BRITISH WEST INDIES STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: UGLAND HOUSE SOUTH CHURCH STREET STREET 2: GEORGE TOWN GRAND CAYMAN CAYMAN ISLANDS CITY: BRITISH WEST INDIES STATE: E9 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________ FORM 10-K For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 [_] 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 0-29788 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands Not Applicable (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) P.O. Box 10657 APO 2 Artillery Courts Shedden Road George Town, Grand Cayman Cayman Islands, British West Indies Not Applicable (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (345) 949-2800 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- None Securities Registered Pursuant to Section 12(g) of the Act: Ordinary Shares, par value $.01 per share 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 26, 1999 was $173,213,904.30 As of March 26, 1999, Registrant had 18,568,440 Ordinary Shares outstanding. - -------------------------------------------------------------------------------- PART I Item 1: BUSINESS General Scottish Annuity & Life Holdings, Ltd. completed its initial public offering on November 30, 1998. Scottish Holdings, and its wholly owned subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. were formed in 1998 as offshore companies principally to provide customized variable life insurance products to high net worth individuals and families who are or may become U.S. taxpayers and to provide reinsurance of annuities and life insurance products to insurance and reinsurance companies. Through our variable life insurance business, we are responding to what we believe are increasing demands of high net worth individuals and families for customized life insurance products for use as part of sophisticated estate planning strategies. For us, high net worth generally means individuals and families with a liquid net worth in excess of $10.0 million. Variable life insurance offers a death benefit and a cash value component which is placed in a separate account and invested on behalf of the policyholder by a money manager. As a Cayman Islands insurance company, we have the flexibility to offer policies that permit the use of private independent money managers to manage the separate account and who utilize investment strategies not typically available in variable life insurance policies issued to the general public. We will also seek to leverage our expertise with respect to variable life insurance products by offering structured life insurance products, such as corporate-owned life insurance, which target the deferred compensation market. We seek to focus our reinsurance business on what we believe are meaningful opportunities to reinsure lines of business that are subject to significant reserve or capital requirements under regulatory and rating agency requirements. We believe that, in response to heightened regulatory and rating agency scrutiny, insurers are increasingly seeking reinsurance as a means to improve earnings, risk-based capital or other financial ratios. Our reinsurance business is targeted towards insurance companies that have discontinued writing such business or that seek relief from the reserve and capital requirements associated with such business. We focus our reinsurance activities principally on opportunities in the U.S., although we also expect to target opportunities in the United Kingdom, Western Europe, Canada and Australia. In our planned reinsurance activities we concentrate on blocks of existing annuity type contracts such as deferred annuities, payout annuities, funding agreements and similar contracts, because we believe that the reserve and capital requirements associated with these products have made reinsurance an attractive option for issuers and reinsurers of these products and because the market for such reinsurance is not currently adequately served. We may also reinsure various forms of life insurance products. We believe that reinsurance of these products will enable us to more effectively capitalize on potential relationships with other insurers and reinsurers. Products Offered by Scottish Insurance Variable Life Insurance Variable life insurance is a "separate account" product under which the net premiums paid, after deducting expenses, including the costs of insurance, are placed in a separate account for the policyholder's benefit that is not subject to claims of the insurance company's general creditors. The cash values of this separate account will be then invested for the policyholder by a private independent money manager. We will not provide any investment management or advisory services to any variable life policyholder. Our revenues to be earned from these policies will consist of amounts assessed during the period against policyholders' separate account balances for mortality and expense fees and policy administration and surrender charges. Our variable life insurance contracts will have no guaranteed rate of return on the cash values. The cash value will vary based on the investment results on the policy's assets managed by the policy's private independent money manager. In addition to offering variable life insurance policies to high net worth individuals and families, we offer structured life insurance products that are targeted to the deferred compensation market. We offer variable life insurance to corporate customers in the form of corporate-owned life insurance, bank-owned life insurance and trust-owned life insurance. These types of policies are primarily expected to be used in connection with certain deferred compensation and bonus plans for executive officers and as part of "split-dollar" arrangements in which the premiums on the life insurance policies are paid in part or in whole by the employer. We may also issue variable life insurance policies under a group policy that is owned by the employer and used to fund employee benefits. Reinsurance Reinsurance is an arrangement under which an insurance company, called the reinsurer, agrees to indemnify another insurance company, called the ceding company or cedent, for all or a portion of the insurance risks underwritten by the ceding company. It is standard industry practice for primary insurers to reinsure portions of their insurance risks with other insurance companies. This practice permits primary insurers to write insurance policies in amounts larger than they would be willing or able to retain. Reinsurers may also purchase reinsurance, or "retrocession" coverage, to limit their own risk exposure. We expect to assume risks from both primary insurers as well as reinsurers. We will focus our reinsurance activities principally on the reinsurance of annuity type products. For these products, we intend to write reinsurance generally as coinsurance or modified coinsurance, whereby we will assume all of the liability for the reinsured business. Under coinsurance, ownership of the assets supporting the reserves is transferred to the reinsurer, whereas in modified coinsurance arrangements, the ceding company retains ownership of the assets supporting the reserves. Under a coinsurance or modified coinsurance arrangement, the reinsurer will generally share in all material risks inherent in the underlying policies. -2- We will also reinsure life insurance products, which may include products written on a yearly renewable term basis. Under the yearly renewable term structure, premium rates are generally adjusted annually based on the age and underwriting classification of each insured and the age of the policies and the reinsurer assumes only the mortality risk associated with the underlying policies. On September 18, 1998, we executed a binder with a U.S. reinsurer to provide reinsurance, on a retrocession basis, for approximately 35,000 in force universal life insurance policies. We proposed a transaction structured on a monthly renewable term basis, whereby we would reinsure only the mortality risk on the policies. During the fourth quarter of 1998, we delayed closing on the transaction because of concerns about the mortality experience that arose as we completed our due diligence review prior to closing. We and the original reinsurer are presently engaged in negotiations with respect to the binder. Marketing Under our marketing plan with respect to variable life insurance policies, we rely primarily on referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the U.S. to generate clients. So that we will not be subject to U.S. state insurance regulations, none of these intermediaries represent us or receive any commissions or other remuneration from us for activities undertaken in the U.S. As part of our marketing plan, we have entered into an agreement with The Scottish Annuity Company (Cayman) Ltd., which provides, among other things, that The Scottish Annuity Company will refer potential clients to us as partial consideration for our providing certain insurance administrative services to The Scottish Annuity Company. Additionally, we have retained Westport Partners (Bermuda), Ltd., a developer and administrator of insurance products for international insurance brokers, insurance companies and corporations and an affiliate of Westport Worldwide, pursuant to which Westport provides non- exclusive distribution services with respect to our variable life insurance products. Our marketing plan with respect to our reinsurance business seeks to capitalize on the relationships developed by our Senior Vice President and Chief Insurance Officer with members of the actuarial profession and senior insurance company executives, at both primary insurers and other reinsurers. Given the focus of our reinsurance business (i.e., blocks of in-force contracts), we target a limited number of potential ceding insurers that we believe would benefit from our reinsurance products based on our analysis of publicly available information and other industry data. In addition, reinsurance transactions are often placed by reinsurance intermediaries, brokers and consultants. A significant component of our marketing program involves working with such third party marketers in an effort to maintain a high degree of visibility in the reinsurance marketplace. -3- Underwriting Variable Life Insurance The principal risk associated with our variable life insurance policies is mortality risk. The death benefit provided by our variable life insurance policies will vary based on the investment return of the underlying separate account of policy assets invested by the policy's private independent money manager. The difference between the value of the assets in the underlying separate account and the policy's stated death benefit, known as the "net amount at risk," represents a general liability. In accordance with generally accepted accounting principles, commonly called GAAP, and any additional Cayman Islands regulatory requirements, we are required to establish and record policy reserves designed to meet our estimated future life insurance death benefit obligations. Mortality risk tends to be more stable when spread across large numbers of insureds. We expect to write our variable life insurance policies, which provide substantial death benefits given expected initial premiums of at least $1.0 million for single premium policies and $500,000 for multiple premium policies, with a relatively small number of high net worth policyholders. Consequently, our associated mortality risk exposure will be greater in the aggregate, and our probability of loss less predictable, than an insurer with a broader risk pool. As a result we will allocate a portion of our capital, in addition to any policy reserves required by GAAP or any additional Cayman Islands regulatory requirements, to cover possible volatility in mortality experience. Furthermore, pursuant to our Underwriting Guidelines, we seek to reinsure a significant portion of the mortality risk associated with our variable life insurance business with the objective of limiting the net amount of risk to $100,000 per insured. Our Underwriting Guidelines provide that any reinsurer to whom we cede business must have a financial strength rating of at least "A-" or higher from A.M. Best or an equivalent rating by another major rating agency. Reinsurance The principal risk associated with our planned fixed annuity reinsurance activities is investment risk. Specifically, we will be subject to the following: . asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value; . credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest; . reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than is necessary to match anticipated liabilities; and . disintermediation risk, which is the risk that we may have to sell assets at a loss to provide for policyholder withdrawals or to satisfy liabilities not otherwise properly matched. -4- We may also be subject to mortality risk with respect to the fixed annuities we reinsure, although our exposure to such risk is expected to be generally immaterial as compared to the investment risk associated with these products. We may reinsure various forms of life insurance products, including universal, variable and whole life insurance. The primary risk under life insurance policies is mortality risk. Our Underwriting Guidelines limit such risk to $500,000 per insured and we intend to reinsure, or retrocede, any liability for amounts in excess of $500,000 per insured in order to comply with such guidelines. Universal life insurance and similar interest-rate sensitive policies provide life insurance with adjustable rates of return based on applicable interest rates in effect from time to time. As a consequence, the risks reinsured by us may also include investment risks similar to those for fixed annuities. As with annuities, all life insurance policies are subject to surrender risk. We will generally assume all of the liabilities under the contracts we reinsure, although, in certain circumstances, we may require the ceding company to retain a portion of such liabilities, typically not to exceed 10%. We expect to retrocede to professional reinsurers, on a case by case basis, certain risks associated with our reinsurance business, although no such arrangements are currently in place. Investment Portfolio General We seek to generate attractive levels of investment income through a professionally managed investment portfolio. If we are unable to effectively manage our investment portfolio and the risks associated with such investments, our ability to support our variable life insurance and reinsurance businesses, and our results of operations and financial condition, will be adversely affected. Investment Guidelines Our investment activities are governed by the Investment Guidelines as approved by the Board of Directors. Our investment portfolio, excluding assets transferred and invested as part of any reinsurance transaction, principally consists of fixed income securities with a weighted average investment rating of "A." A fixed income security rated "A" by Standard & Poor's is somewhat susceptible to the adverse effects of changes in circumstances and economic conditions; however, the issuer's capacity to meet its financial commitment on the security is still strong. We will not invest in any fixed income securities in emerging markets or which are not rated by a major rating agency. The Investment Guidelines provide that we may purchase, among other things, securities issued by the United States government and its agencies and instrumentalities, securities issued by foreign governments if rated "A" or better by at least one major rating agency, certain asset backed securities, preferred stocks, mortgage backed securities and corporate debt securities (which may include convertible debt securities, but may not include payment-in- kind corporate securities), including fixed income securities that are rated below investment grade. The Investment Guidelines also provide that the fixed income investment portfolio may not be -5- leveraged and that purchases of securities on margin and short sales may not be made without approval of the Board of Directors. We are exposed to two primary sources of investment risk on fixed income investments: credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, and interest rate risk, relating to the market price and/or cash flow variability associated with changes in market interest rates. We seek to manage credit risk through industry and issuer diversification and asset allocation and interest rate risk through interest rate swaps and other hedging techniques. Our investments in fixed income securities that are rated below investment grade, are subject to greater risks than our investments in investment grade securities. The risk of loss of principal or interest through default is greater with lower-rated securities because they are usually unsecured and are often subordinated to an issuer's other obligations. Additionally, issuers of these securities frequently have higher debt levels making them more susceptible to adverse economic developments, individual corporate developments and rising interest rates which could impair their ability to meet their financial commitments. Consequently, the market price of these securities may be quite volatile, and the risk of loss is greater. As a result, the Investment Guidelines provide that no more than 15% of our investment portfolio may be invested in fixed income securities that are rated below investment grade. We will manage the investment risks on the assets received from reinsurance transactions by matching anticipated payout patterns of the reinsurance liabilities. We invest such assets principally in fixed income and, to a lesser extent, equity securities. We may invest in foreign denominated securities to manage currency risk if the reinsurance transaction has a foreign currency component. We may also enter into interest rate swap and other hedging transactions in an effort to manage interest rate risks associated with such transactions. Although the total investment in derivatives may be substantial, any use of derivatives is expected to be incidental to our efforts to manage interest rate risk rather than a speculative investment. Any investment in equity securities (expected to be typically not more than 10% of the assets transferred to us in a reinsurance transaction) will be made in an effort to enhance our overall return on such assets. Investment Managers On October 22, 1998 we entered into investment advisory agreements with Pacific Investment Management Company, General Re-New England Asset Management, Inc. and Prudential Investment Corporation to manage our fixed income investment portfolio. As of December 31, 1998, Pacific Investment Management Company managed approximately 50% of our investment portfolio and General Re and Prudential Investment each managed approximately 25% of our investment portfolio. We expect that one or more of the Investment Managers will manage the investment of any assets transferred to us in any reinsurance transaction. -6- Investment Oversight Our Board of Directors, from time to time, reviews our investment portfolio and the performance of our investment managers. The Board of Directors can approve exceptions to our Investment Guidelines and periodically reviews our Investment Guidelines in light of prevailing market conditions. The investment managers and our Investment Guidelines may change from time to time as a result of such reviews. Competition and Ratings The insurance and reinsurance industries are highly competitive and most of the companies in such industries are significantly larger, have operating histories and have access to significantly greater financial and other resources than we do. Our variable life insurance products will primarily compete with those issued by U.S. insurance companies. To the extent that our variable life insurance policies provide for management of the underlying separate accounts by private independent money managers, our variable life insurance policies compete with mutual funds and other investment or savings vehicles. We believe that the most important competitive factor affecting the marketability of our variable life insurance products is the degree to which these products meet customer expectations, both in terms of low expenses, returns (after fees and expenses) and service. Competition in the reinsurance business is based on price, ratings, perceived financial strength and service. Because we expect to rely at least initially on a small number of clients in both our variable life insurance and reinsurance businesses, such businesses may be more susceptible to the adverse effects of competition. Insurance ratings are used by prospective purchasers of insurance policies as well as insurers and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers. In addition, a ceding company's own rating may be adversely affected by an unfavorable rating or the lack of a rating of its reinsurer. Duff & Phelps has assigned Scottish Insurance a rating of "A" and A.M. Best has assigned Scottish Insurance a Best Rating of "A-" (Excellent). Duff & Phelps assigns an "A" rating to companies that it characterizes as having, in its opinion, high claims paying ability, average protection factors and an expectation of variability in risk over time due to economic or underwriting conditions. A.M. Best assigns an "A- " (Excellent) rating to companies that have, in its opinion, on balance, excellent financial strength, operating performance and market profile, as well as strong abilities to meet their ongoing obligations to policyholders. These ratings represent each rating agency's opinion of Scottish Insurance's ability to meet its obligations to its policyholders. Employees We currently employ nine full time employees. -7- Regulation Cayman Islands Scottish Holdings is a holding company owning all of the outstanding Ordinary Shares of Scottish Insurance. Scottish Insurance is subject to regulations as a licensed insurance business under Cayman Islands law. Scottish Insurance holds an unrestricted Class B insurance license under Cayman Islands Insurance Law (1998 Revision) and may therefore carry on an insurance business from within the Cayman Islands, but may not engage in any Cayman Islands domestic insurance business. Unless specifically exempted, a Cayman Islands insurance company must engage a licensed insurance manager operating in the Cayman Islands to provide insurance expertise and oversight. Scottish Insurance has engaged International Risk Management (Cayman) Ltd. as its licensed insurance manager in the Cayman Islands. In addition, under the Insurance Law, Cayman Islands insurance companies carrying on long term business (which includes the writing of life insurance policies) must place all receipts by such company of funds in respect of its long-term business in a separate long-term business fund and payments from such long-term business fund may not be made directly or indirectly for any purpose other than those of the insurer's long-term business. Every Cayman Island insurance company carrying on long-term business may establish any number of separate accounts in respect of respective premiums paid to it to provide (i) annuities on human life and (ii) contracts of insurance on human life, and such respective premiums shall be kept segregated one from the other and independent of all other funds of the Cayman Islands insurer, and, notwithstanding the provisions of any other written law to the contrary, are not chargeable with any liability arising from any other business of the insurer. The scope and the validity of the Cayman Islands law regarding separate accounts has not been tested in the courts of the Cayman Islands. United States and Other Neither Scottish Holdings nor Scottish Insurance are licensed to do business in any jurisdiction other than the Cayman Islands. The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance and reinsurance within their jurisdictions by alien insurers, such as Scottish Insurance, that are not admitted to do business within such jurisdictions. With some exceptions, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is generally prohibited. Scottish Insurance conducts its insurance and reinsurance business through its executive offices in the Cayman Islands and does not maintain an office, and its personnel will not solicit, advertise, underwrite, settle claims or conduct other insurance or reinsurance activities in the United States or in any other jurisdiction where such activities are prohibited. All of Scottish Insurance's insurance and reinsurance contracts will be negotiated, executed, and issued, and all premiums are received, at the office of Scottish Insurance in George Town, Grand Cayman or in such other offices outside the United States as Scottish Insurance may establish or designate. -8- Item 2: PROPERTY We currently lease, for a 6 month term expiring on July 1, 1999, a 740 square foot office space in George Town, Grand Cayman, Cayman Islands, British West Indies, where our principal offices are currently located. The rent for the six month term is $10,824. Effective May 1, 1999, we will lease approximately 3,600 square feet of office space in George Town, Grand Cayman where our executive and principal offices will be located. The base term of the lease is seven years. The annual rent will be $97,956 for the first three years and $102,854, $108,006, $113,412, and $119,108, for years four through seven, respectively. We also lease approximately 1,000 square feet of office space in George Town pursuant to a lease with Queensgate Bank and Trust Company Limited. This lease has a one year term which is automatically extended annually for an additional year unless either party gives written notice to the other at least 90 days prior to the end of the then current term. Our annual rent under this lease is $25,000, which is paid on a quarterly basis. We believe that these properties are adequate to meet our needs for the foreseeable future. Item 3: LEGAL PROCEEDINGS The Company is not currently involved in any litigation or arbitration. Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Scottish Holdings did not submit any matter to a vote of securities holders during the fourth quarter of the year covered by this Form 10-K. PART II Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS a. Market for the Ordinary Shares The Ordinary Shares, par value $0.01 per share, of Scottish Holdings are quoted on the Nasdaq Stock Market National Market under the symbol "SCTLF." The Ordinary Shares commenced trading on November 24, 1998. The high and low bid prices for the Ordinary Shares are shown below:
High Low ------- ------- November 24-December 31 $14.50 $11.375 January 1-January 31 14.25 11.25 February 1-February 28 11.50 9.438 March 1-March 15 9.875 8.625
-9- As of March 26, 1998, Scottish Holdings had approximately 23 holders of its Ordinary Shares. Approximately 16,741,300 Ordinary Shares are held in street name. No cash dividends were paid by Scottish Holdings in 1998, although, subject to Board approval, we intend to declare and pay out of earnings a dividend at the quarterly rate of $0.05 per Ordinary Share beginning with our first quarter of 1999. b. Recent Sales of Unregistered Securities Through December 31, 1998, Scottish Holdings issued the following securities that were not registered under the Securities Act: (a) On June 9, 1998, Scottish Holdings sold 1,500,000 Ordinary Shares to its former parent company, Scottish Holdings, Ltd., for an aggregate purchase price of $500,000. (b) On June 9, 1998, Scottish Holdings sold Class A Warrants to purchase an aggregate of 1,550,000 Ordinary Shares to Michael C. French, Michelle L. Boucher, Audubon Asset Limited and Soulieana Limited for an aggregate purchase price of $100,000. (c) On June 18, 1998, Scottish Holdings sold Class B Warrants to purchase an aggregate of 200,000 Ordinary Shares to The Roman Arch Fund L.P. and The Roman Arch Fund II L.P. for an aggregate purchase price of $302,000. (d) On October 22, 1998, Scottish Holdings issued Class A Warrants to purchase an aggregate of 900,000 Ordinary Shares to Audubon Asset Limited, Soulieana Limited and The South Madison Trust in exchange for 1,100,000 Ordinary Shares. (e) On October 27, 1998, Scottish Holdings entered into securities purchase agreements with Audubon Asset Limited, Soulieana Limited, Maverick Fund USA, Ltd., Maverick Fund, L.D.C. and Maverick Fund II, Ltd., pursuant to which Scottish Holdings sold, simultaneously with the closing of our initial public offering, an aggregate of 1,418,440 Ordinary Shares and Class A Warrants to purchase an aggregate of 400,000 Ordinary Shares. The Class A Warrants and Class B Warrants are exercisable for $15.00 per share in three equal annual installments commencing November 30, 1999. Upon a change in control, however, the Class A Warrants and Class B Warrants become immediately exercisable. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof relative to sales by an issuer not involving a public offering. All of the foregoing securities are restricted securities for purposes of the Securities Act. -10- c. Use of Proceeds On November 30, 1998, Scottish Holdings completed its initial public offering of Ordinary Shares. The effective date of its Registration Statement on Form S-1 (Commission File No. 333-57227) was November 23, 1998, pursuant to which Scottish Holdings registered the offer and sale of 16,750,000 Ordinary Shares at $15.00 per share for an aggregate offering price of $251,250,000. Scottish Holdings completed the Offering, selling 16,750,000 Ordinary Shares for the aggregate offering price of $251,250,000. The managing underwriters were Prudential Securities Incorporated, CIBC Oppenheimer Corp., ING Baring Furman Selz LLC and Warburg Dillon Read LLC. The expenses incurred in the initial public offering were as follows:
Printing $ 1,100,000 Stock Certificates 6,019 Accountant's Fees 333,864 Attorneys' Fees 1,340,924 Nasdaq Fees 123,394 SEC Fees 85,237 Rating Agency Fees 52,500 Advisors' Fees 939,222 Travel and other 618,836 Underwriting discount $15,075,000 ----------- Total fees & expenses $19,674,996 ===========
Included in the Advisors' Fees listed above is the payment of an advisory fee to Prudential Securities Incorporated in the amount of $800,000 (plus reimbursement of related out-of-pocket expenses) for investment banking and financial advisory services in connection with the Offering. Separately, Scottish Holdings has entered into an investment advisory agreement with Prudential Investment, as one of the Investment Managers. Prudential Securities Incorporated and Prudential Investment are wholly owned subsidiaries of The Prudential Insurance Company of America. Additionally, included in the Advisors' Fees listed above is the payment of $80,506 to D.C. Planning, an insurance consulting firm with which Scottish Holdings has a consulting relationship. Mr. Howard Shapiro, who is on our Board of Directors, is the managing partner of D.C. Planning. See "Certain Relationships and Related Party Transactions." The net proceeds from the initial public offering after deducting expenses and the underwriting discount was $231,575,004. The full amount of net proceeds were contributed to our wholly-owned subsidiary Scottish Annuity & Life Insurance Company (Cayman) Ltd., which has fully invested the contribution with its investment managers pursuant to its investment guidelines. -11- Item 6: SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements, including the related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
December 31, 1998 --------------------------------- (Stated in United States Dollars) Statement of Income Data: Total revenues $ 1,338,151 Total expenses $ 901,830 Net income $ 436,321 Basic and diluted earnings per share $ 0.12 Book value per share $ 13.57 Market value per share $ 13.750 ------------ Actual number of ordinary shares 18,568,440 outstanding Balance Sheet Data: Total investments $244,267,976 Total assets $254,346,239 Total liabilities $ 2,286,060 Total shareholders' equity $252,060,179
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General We are an insurance holding company, and our principal asset is ownership of Scottish Insurance. We were formed on May 12, 1998, and Scottish Insurance was formed on June 3, 1998, under the laws of the Cayman Islands. We commenced our insurance operations on November 30, 1998, immediately following our initial public offering. Consequently, we have a very short operating history in 1998, and we are still in the start up phase of our operations. Results of operations The following table summarizes our operating earnings for the period from May 12, 1998 to December 31,1998. Operating earnings, which excludes realized investment gains (losses) is a common measure used in the insurance industry. -12- Revenues Interest income, net $1,142,501 Insurance administration fee 209,886 ------------- Total revenues 1,352,387 Expenses Salaries and benefits 319,170 Professional fees 235,824 Miscellaneous expenses 230,567 Recruitment expenses 104,835 Administrative expenses 11,434 ------------- Total expenses 901,830 ------------- Operating earnings $ 450,557 ============= Basic and diluted operating earnings per $0.13 ordinary share =============
Overview Our operating earnings of $450,557 or $0.13 per share were driven by revenues from our investment portfolio and insurance administration fees. The expenses incurred include nonrecurring startup costs. Since we are in a start- up phase, the revenues and expenses set forth above should not be used to project future periods. Investments Our investment portfolio is managed by three professional investment managers, Pacific Investment Management Company, Prudential Investment Corporation and Gen Re - New England Asset Management, Inc. Our investment guidelines are designed to diversify the portfolio to maximize investment income while minimizing risk. At December 31, 1998, the portfolio had an average quality rating of AA+, an average duration of 3.67 years and an average book yield of 5.50%. We anticipate that the average yield will go up in 1999 when the proceeds are fully deployed. At year-end our investment mangers were still in the process of deploying the proceeds from the stock offering. A realized loss of $14,236 and net unrealized depreciation of $853,146 was recognized on investments during the period. Insurance operations Our business consists of three lines of business, variable life insurance, reinsurance and insurance administration. Our 1998 results only reflect one of these lines of business, our insurance administration business. The insurance administration business consists of a variety of insurance administration, accounting and other services on an annuity block of business originally written by Scottish Annuity. -13- Outlook We are currently reviewing a number of variable life and reinsurance transactions and expect to finalize some of them during the first half of 1999. Our variable life insurance product is targeted at high net worth individuals with liquidity in excess of $10 million. Our variable life insurance product offers an unusual feature, independent investment management, which we believe will differentiate us in the market. Our reinsurance focus is on the annuity business although we will consider life reinsurance. On September 18, 1998, we executed a binder with a U.S. reinsurer to provide reinsurance, on a retrocession basis, for approximately 35,000 in force universal life insurance policies. We proposed a transaction structured on a monthly renewable term basis, whereby we would reinsure only the mortality risk on the policies. During the fourth quarter of 1998, we delayed closing on the transaction because of concerns about the mortality experience that arose as we completed our due diligence review prior to closing. We and the original reinsurer are presently engaged in negotiations with respect to the binder. Capital Resources and Liquidity We completed our initial public offering of 16,750,000 Ordinary Shares on November 30,1998 for net proceeds after offering expenses and commissions paid to underwriters of $231,575,004. Simultaneously with this offering we raised $20,000,000 from direct sales to strategic investors of 1,418,440 of Ordinary Shares and Class A Warrants for 400,000 Ordinary Shares. We also raised $402,000 from the sale of other Class A Warrants and B Warrants. Substantially all of the net proceeds were used to capitalize Scottish Insurance. At December 31, 1998, total capitalization was $252,060,179. We currently have no material commitments for capital expenditures and do not anticipate incurring material indebtedness other than letters of credit, which may be required in the ordinary course of our planned reinsurance business. We expect that our cash and investments, together with cash generated from our businesses, will provide sufficient sources of liquidity and capital to meet our needs for the next several years. Year 2000 Risk. Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the year 2000. This "Year 2000" issue is believed to affect virtually all companies and organizations, including us. Because most of our computer hardware and software is less than three years old, we believe that our exposure with respect to our own computer systems to Year 2000-related problems is not significant. In addition, we recently upgraded our principal accounting software from a DOS-based version which was not Year 2000 compliant to a Windows NT version which is certified Year 2000 compliant by the software vendor. -14- We rely significantly on a number of third party service providers, such as Westport, IRM Cayman, Milliman & Robertson, PIMCO, General Re and Prudential Investment, each of whom confirmed to us, or is in the process of confirming, is Year 2000 compliant. We also intend to require that any new investment managers or other third party service providers be or become Year 2000 compliant in a timely manner. There can be no assurance, however, that our operations will not experience disruptions due to the failure of third parties, including reinsurance counter parties, to become fully Year 2000 compliant in a timely manner or that a failure will not otherwise have an adverse effect on our business, results of operations or financial condition. In the event our plans with respect to Year 2000 readiness fail to protect our operations from disruptions or its business, results of operations or financial condition from adverse effect, we have no contingency plan other than the replacement of existing third party service providers which are not Year 2000 compliant with comparable third party service providers who are Year 2000 compliant. We may also have an exposure to Year 2000 issues from reinsurance business we write in the future. Since we have not written any reinsurance business we do not know what these exposures are or whether they will be material. Changes in Accounting Standards. The Financial Accounting Standards Board's Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and requires adoption no later than fiscal quarters or fiscal years beginning after June 15, 1999. The new standard establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. We have not yet completed our evaluation of the effect this standard will have on us. Forward Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking 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. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: our ability to execute the business plan; changes in the general economic conditions including the performance of the financial markets and interest rates; changes in insurance regulations or taxes; changes in rating agency policy; the loss of key executives; and Year 2000 issues. We assume no obligation to update any forward-looking statement to reflect actual results or changes in or additions to the factors affecting such forward-looking statements. -15- RISK FACTORS OF INVESTING IN OUR ORDINARY SHARES Investing in our Ordinary Shares involves a high degree of risk. Potential investors should consider carefully the following risk factors, in addition to the other information set forth in this Form 10-K, prior to investing in the Ordinary Shares. When used, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "plan," "intend" and similar expressions identify forward-looking statements regarding among other things: (i) our business and growth plans; (ii) our relationship with third-party service providers and clients; (iii) trends in the insurance and reinsurance industries; (iv) government regulations; (v) trends that may affect our financial condition or results of operations; and (vi) the declaration and payment of dividends. Potential investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially from those included within the forward- looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described below and under the heading "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and elsewhere in this Form 10-K. Our Variable Life Insurance Business Is Dependent Upon Referral Sources. We will not be successful in our variable life insurance business if we cannot get clients from referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States. Since we are not licensed or registered to do business in the U.S., these referral sources cannot represent us and cannot be compensated by us for any activities in the U.S. As a result, we cannot assure you that we will be able to effectively implement our insurance and reinsurance plans. We can, however, pay non-U.S. referral sources for activities undertaken outside the U.S. We expect to compensate referral sources based on a percentage of the revenue received from referrals. Subject to any regulatory limitations, we may provide referrals to persons or entities that provide referrals to us. We cannot assure you that we will receive a significant amount of referrals or, if so, that any referrals will result in actual sales of variable life insurance policies. Our Ability to Develop Our Reinsurance Business is Dependent Upon Building Relationships. We will not be successful in our fixed annuity and other reinsurance businesses if we cannot develop business primarily through our executive officers' relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives. Our Reinsurance Business Targets an Unexplored Market. Our business plan for our reinsurance activities provides that one of our principle targets is reinsuring blocks of in-force fixed annuities issued by insurers that are no longer actively writing -16- these contracts or that want to lessen the reserve and capital requirements associated with these contracts. Since this market is largely unaddressed by other reinsurers, we consider it an attractive niche opportunity. Since this target business represents an unexploited market, however, we cannot be certain that it will meet our expectations. Annuities in the accumulation phase are subject to surrender risk. Although we will take this into account when negotiating prices, we cannot assure you that we will succeed in negotiating prices that actually take into account such risk. Nor can we assure you that, as these fixed annuities or similar contracts are surrendered, terminate or expire, we will have enough reinsurance business to sustain our growth or that there will be enough reinsurance business in our target market to replace these fixed annuities or similar contracts. Our Ability to Develop Our Business Plan is Dependent Upon Maintaining Our Claims-Paying Ability Rating. Potential purchasers of insurance policies, insurers, reinsurers and insurance and reinsurance intermediaries use insurance ratings to assess the financial strength and quality of insurers and reinsurers. In addition, an unfavorable rating or the lack of a rating will adversely affect a company purchasing reinsurance. Although Duff & Phelps has given us a claims-paying ability rating of "A" and A.M. Best has given us Best Rating of "A-" (Excellent), we cannot assure you that we will be able to maintain these ratings. If we are unable to maintain these ratings, we cannot assure you that we will be able to obtain similar claims-paying ability ratings from other major rating agencies. Changes in U.S. Tax Laws With Respect To Variable Life Insurance Could Adversely Affect Our Product Sales. The favorable tax treatment for variable life insurance products in the United States compared to certain other investment alternatives is the reason for the variable life insurance market. Any material change in this tax treatment, including the imposition of a "flat tax" or a national sales tax in lieu of the current federal income tax structure in the United States, would adversely affect the market for variable life insurance products. Past legislative proposals would have limited the ability of policyholders to change private independent money managers without triggering adverse tax consequences. If any of these proposals were enacted into law, they could adversely affect our variable life insurance business. In addition, certain past proposals would have eliminated transfers to trusts from the annual present interest exclusion from the gift tax. The enactment of these proposals into law would eliminate the primary and most tax- efficient method of making premium payments by insurance trusts. Because we expect that insurance trusts will purchase our variable life insurance (or our variable life insurance will be contributed to insurance trusts) to provide liquidity for estate taxes and to effect the tax-free transfer of the proceeds from one generation to another, adoption of these tax proposals would adversely affect sales of these policies and, as a consequence, would adversely affect our business, results of operations and financial condition. In addition, recent tax changes have adversely affected corporate owned life insurance products. Any -17- additional changes in the tax laws that reduce or eliminate any remaining favorable tax treatment for these products would adversely affect the market for such products. Governmental Regulation of Our Business Could Adversely Affect Our Business. We are licensed as an unrestricted Class B insurer and are subject to regulation and supervision by the Cayman Islands Monetary Authority. We are not registered or licensed to do business in any jurisdiction in the United States or any other country. Generally, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is prohibited. Under our operating guidelines, we do not operate in the United States or, to the extent prohibited, in any other country. We can give no assurance that inquiries or challenges to our insurance activities will not be raised in the future. Our variable life insurance products have customized features that are not typically available from a company subject to those laws. If we were to become subject to those laws, our business, results of operations and financial condition would likely be materially adversely affected. In the past, federal and state governments have proposed to regulate foreign insurers more than currently regulated. While none of these proposals has been adopted, we cannot assure you that federal or state legislation will not be enacted subjecting our business to supervision and regulation in the United States. Our Reinsurance Business Could Be Adversely Affected By Uncertainties of Letters of Credit or Other Collateral Amounts. Because many jurisdictions do not allow insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are in place, we anticipate that our reinsurance clients will typically require us to post a letter of credit or provide other collateral through a funds withheld or trust arrangement. If we are unable to obtain a letter of credit facility on commercially acceptable terms or are unable to arrange for such other collateral, our ability to operate our reinsurance business will be severely limited. Our Products Carry With Them Inherent Insurance Industry Risks And Risks Specific to Our Business Plan. Variable Life Insurance--Mortality Risk. The principal risk associated with our planned variable life insurance policies is mortality risk. Mortality risk typically is more stable when spread across large numbers of insureds. We expect to place our policies with a relatively small number of high net worth policyholders and to provide substantial death benefits with expected initial premiums of at least $1.0 million for single premium policies and $500,000 for multiple premium policies. As a result, our mortality risk exposure is likely to be larger, and our probability of loss is less predictable, than an insurer with a larger risk pool. As a result, we cannot assure you that our planned policy reserves will be adequate, that we will properly match our assets to meet anticipated liabilities, that we will not need to liquidate our assets at a substantial loss to meet our liabilities or that, to the extent we seek to reinsure mortality risk, this -18- reinsurance will be available on commercially acceptable terms or that the reinsurers will perform under their reinsurance agreements. Fixed Annuity Reinsurance--Investment Risk. The principal risk associated with our planned fixed annuity reinsurance activities is investment risk. Specifically, we will be subject to the following risks: . the risk that invested assets supporting the reinsured business will decrease in value; . the credit risk that the continued ability of a given obligor to make timely payments of principal and interest; . the risk that interest rates will decline and funds reinvested will earn less than expected; and . the risk that we may have to sell assets at a loss to provide for policyholder withdrawals. Other Reinsurance Businesses--Mortality, Investment and Surrender Risk. We may also reinsure various forms of life insurance products, including universal life insurance, variable life insurance and traditional whole life insurance. The primary risk under life insurance policies is mortality risk. Our underwriting guidelines limit this risk to $500,000 per insured and we intend to reinsure, or retrocede, any liability for amounts in excess of $500,000 per insured to comply with these guidelines. Universal life insurance and similar policies sensitive to interest rates provide life insurance with adjustable rates of return based on applicable interest rates in effect from time to time. As a result, the risks with respect to reinsuring those kinds of policies may also include investment risks similar to those for fixed annuities. In addition, like annuities, life insurance policies and variable annuities are subject to surrender risk. Reinsurance Business--Ceding Insurer Risk. An additional risk associated with our planned reinsurance business is the risk that the ceding insurer will be unable to pay to us amounts due because of its own financial difficulties. We can give no assurance that the ceding insurers will be able to pay amounts due to us, which could have a material adverse effect on our business, results of operations or financial condition. In addition, we can give no assurance that the ceding companies will maintain appropriate interest crediting rates with respect to fixed annuities or interest rate-sensitive life insurance policies. -19- Our Business is Dependent on Our Ability To Manage Risks In Our Investment Activities. Our fixed income investments are subject to the following two primary sources of investment risk: . credit risk, relating to the continued ability of a given obligor to make timely payments of principal and interest; and . interest rate risk, relating to the market price and/or cash flow variability associated with changes in market interest rates. We cannot assure you we will be able to effectively manage these risks. If we are unable to effectively manage these risks, our ability to support our planned variable life insurance and reinsurance businesses, and our results of operations and financial condition, will be adversely affected. In addition, under our investment guidelines, we can invest up to 15% of our investment portfolio in below investment grade fixed income securities. While any investment carries some risk, the risks of investing in lower-rated securities are greater than the risks of investing in investment grade securities. In addition, if we enter into a coinsurance transaction, we will seek to invest the assets transferred to us to match our anticipated reinsurance liabilities. We expect to invest these assets in fixed income and, to a lesser extent, equity securities. We may invest in foreign denominated securities to manage currency risk if the coinsurance transaction involves foreign currency. We may also enter into interest rate swaps and other hedging transactions in an effort to manage interest rate risks. Our ability to match our anticipated reinsurance liabilities has not been tested. Therefore, we can not assure you that we will successfully structure our investments so as to match our anticipated reinsurance liabilities. If our calculations are incorrect, or if we improperly structure our investments to match these liabilities, we could be forced to sell investments before they mature at a significant loss with the result that our assets may not be adequate to meet our needed reserves, which could adversely affect our business, results of operations and financial condition. Our Success May Be Affected by Foreign Currency Fluctuations. Our functional currency is the United States dollar. However, because a portion of our planned business, including premiums, may be in currencies other than United States dollars and because we may maintain a small portion of our investment portfolio in investments denominated in currencies other than United States dollars, we may have losses if we do not properly manage or otherwise hedge, our currency risks. -20- We Have No Experience Competing With Established Companies in the Life Insurance and Reinsurance Industry. The life insurance and reinsurance industries are highly competitive and most of the companies in these industries are significantly larger, have operating histories and have access to significantly greater financial and other resources than we do. We have no experience competing with these companies. Our Business Would Be Adversely Affected by the Imposition of or Increases in United States Taxes. As a Cayman Islands company, we plan to operate in a manner so that we are not subject to United States tax, other than withholding tax on certain investment income from United States sources. However, the Internal Revenue Service could contend that we are conducting business in the United States. If the Internal Revenue Service were to prevail in that contention, we would be subject to United States tax at regular corporate rates on taxable income that is effectively connected with United States business plus an additional 30% "branch profits" tax on the income remaining after the regular tax, which could adversely affect our results of operation. Insurance and reinsurance premiums that will be paid to us will be subject to a U.S. excise tax for risks located in the United States. In addition, our investment income from United States sources could be subject to withholding tax. These taxes could be increased and other taxes could be imposed on our business, which could also adversely affect our results of operation. Owners of Our Ordinary Shares May in Certain Circumstances Be Exposed to Adverse Personal United States Tax Risks. Controlled Foreign Corporation Rules. Each "United States shareholder" of a "controlled foreign corporation" who owns shares in the controlled foreign corporation on the last day of its taxable year generally must include in his gross income for United States federal income tax purposes his pro-rata share of the controlled foreign corporation's "subpart F income," even if the subpart F income has not been distributed. For these purposes, any United States person who owns directly or indirectly 10% or more of our ordinary shares will be considered to be a "United States shareholder." In general, a foreign insurance company such as our subsidiary, Scottish Annuity & Life Insurance, is treated as a controlled foreign corporation only if such "United States shareholders" collectively own more than 25% of the total combined voting power or total value of our stock for an uninterrupted period of 30 days or more during any year. We believe that, because of the anticipated dispersion of our share ownership among holders and because of the restrictions in our Articles of Association on transfer, issuance or repurchase of our ordinary shares, our shareholders will not be subject to treatment as "United States shareholders" of a controlled foreign corporation. In addition, because under the Articles of Association no single shareholder will be permitted to exercise 10% or more of our total combined voting power, our shareholders should not be viewed as "United States shareholders' of a controlled foreign corporation for purposes of these rules. There can be no assurance, however, that these rules will not apply to our shareholders. -21- Related Person Insurance Income Risks. If our related person insurance income, determined on a gross basis, were to equal or exceed 20% of our gross insurance income in any taxable year, and direct or indirect insureds and persons related to such insureds were directly or indirectly to own more than 20% of the voting power or value of our capital stock, a United States person who directly or indirectly owns our Ordinary Shares on the last day of the taxable year may be required to include in his income for United States federal income tax purposes the shareholder's pro-rata share of our related person insurance income for the taxable year, determined as if this income were distributed proportionately to the United States person at that date. Related person insurance income is generally underwriting premium and related investment income attributable to insurance or reinsurance policies where the direct or indirect insureds are United States shareholders or are related to United States shareholders of the insurance company issuing the policies. If we have related person insurance income, and all United States persons own 25% or more of the voting power or value of our shares, any shareholder who is a United States person who owns 10% or more of our shares and disposes of the shares would have any gain from the disposition generally treated as ordinary income to the extent of the shareholder's portion of our undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares. The shareholder also will be required to follow certain reporting requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to sales of our shares because we, as Scottish Holdings, are not directly engaged in the insurance business and because proposed United States Treasury regulations applicable to this situation appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. We can give no assurances however, that the IRS will interpret the proposed regulations in this manner or that the proposed regulations will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of Ordinary Shares. Passive Foreign Investment Company Risks. You will have adverse United States federal income tax consequences if we are deemed a "passive foreign investment company." In general, a foreign corporation is a passive foreign investment company if 75% or more of its income constitutes "passive income" or 50% or more of its assets produces passive income. "Passive income" generally includes interest, dividends and other investment income. However, "passive income" does not include income "derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business." This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent this income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Because we intend to continue to be in the insurance business and do not intend to have financial reserves in excess of the reasonable needs of our insurance business, we do not expect to be a "passive foreign investment company." We can give no assurance, however, that the IRS or a court will agree in this view. Our Ability to Pay Dividends Is Dependent on the Success of Our Subsidiary and Regulatory Constraints. We are a holding company engaged in the variable life insurance and reinsurance business through our wholly owned subsidiary, Scottish Insurance. Our principal source of income is -22- dividends paid to us by Scottish Insurance. The payment of dividends is at the discretion of our Board of Directors and depends largely on the ability of Scottish Insurance to pay dividends to us. Scottish Insurance is subject to Cayman Islands regulatory constraints which also affect its ability to pay dividends to us. Specifically, Scottish Insurance must keep enough capital to support its variable life insurance and reinsurance businesses and comply with restrictions under Cayman Islands insurance corporate law. Accordingly, there is no assurance that dividends will be declared or paid in the future. Our Articles of Association Contain Substantial Limitations on Ownership, Transfers and Voting Rights. Except as described below with respect to the purchase and sale of our shares on the Nasdaq National Market, our Articles of Association require our directors to decline to register any transfer of our shares if they believe that the transfer would result in a person (or any group of which such person is a member) beneficially owning, directly or indirectly, 10% or more of our outstanding shares. Similar restrictions apply to our issuance and repurchase of shares. The directors also may, in their absolute discretion, decline to register the transfer of any shares if they believe that the transfer may expose us, any subsidiary or shareholder or any person insured or reinsured or proposing to be insured or reinsured by us to adverse tax or regulatory treatment or if they believe that registration of the transfer under any federal or state securities law or under the laws of any other jurisdiction is required and the registration has not been done. A transferor of Ordinary Shares will be deemed to own the shares for dividend, voting and reporting purposes until a transfer of the shares has been registered on our Register of Members. We are authorized to request information from any holder or potential acquirer of our shares as necessary and may decline to register any transaction if we do not receive complete and accurate information. Our directors will not decline to register any transfer of our shares executed on the Nasdaq National Market. However, if any transfer results in the transferee (or any group) beneficially owning, directly or indirectly, 10% or more of any class of shares or causes our directors to have reason to believe that a transfer may expose us, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured to adverse tax or regulatory treatment in any jurisdiction, under our Articles of Association, the directors have the power to deliver a notice to the transferee demanding that the transferee surrender to an agent, designated by the directors, certificates representing the shares and any dividends or distributions that the transferee has received as a result of owning the shares. A transferee who has resold the shares before receiving this 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 such shares, together with any dividends or distributions that the transferee received from us. 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 the shares and any non-cash dividends or distributions to the extent tradeable as market securities in an arm's-length transaction on the Nasdaq National Market. After applying the proceeds from such sale toward reimbursing the transferee for the price paid for such 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 -23- or distributions will not inure to our benefit or the agent's benefit, but the amounts may be used to reimburse expenses incurred by the agent in performing its duties. In addition, the Articles of Association generally provide that any person (or any group) holding 10% or more of the total voting rights of all of our outstanding capital shares, will have the voting rights of to its voting shares reduced so that the person (or group) may not exercise more than approximately 9.9% of the total voting rights. Because of the attribution provisions of the U.S. tax code and the rules of the Securities and Exchange Commission regarding determination of beneficial ownership, this requirement may have the effect of reducing the voting rights of a shareholder whether or not the shareholder directly holds of record 10% or more of the voting shares. The directors also have the authority to request from any shareholder certain information for the purpose of determining whether such shareholder's voting rights are to be reduced. If the shareholder fails to respond to the notice, or submits incomplete or inaccurate information, the directors (or their designee) have the discretion to disregard all votes attached to the shareholder's Ordinary Shares. Our Articles of Association and Cayman Islands Confidentiality Laws Have Anti- takeover Effects. Our Articles of Association contain provisions that make it more difficult to acquire control of us by means of a tender offer, open market purchase, a proxy fight or otherwise, including by reason of the limitation on transfers of Ordinary Shares and voting rights described above. While these provisions are designed to encourage persons seeking to acquire control to negotiate with our Board of Directors, they could have the effect of discouraging a potential purchaser from making a tender offer or otherwise attempting to obtain control. Cayman Islands law restricts disclosure of, among other things, shareholder lists. Accordingly, such laws may make the acquisition of control by means of a tender offer or proxy fight more difficult. Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our qualitative discussion about market risk is contained in the following sections: . Business--Underwriting; . Business--Investment Portfolio; . Management's Discussion and Analysis of Financial Condition and Results of Operations; . Risk Factors of Investing in Our Ordinary Shares--Our Products Carry With Them Inherent Industry Risks and Risks Specific to Our Business Plan; -24- . Risk Factors of Investing in Our Ordinary Shares--Our Business is Dependent on Our Ability to Manage Risks in Our Investment Activities; and . Risk Factors of Investing in Our Ordinary Shares--Our Success May be Affected by Foreign Currency Fluctuations. Quantitative Disclosure of Interest Rate Risk The following table represents a summary of the par values of the Company's financial investments at their expected maturity dates, the weighted average coupons by those maturity dates and the estimated fair value of those instruments for the period ended December 31, 1998. The expected maturity categories take into consideration par amortization (for mortgage backed securities), call features and sinking fund features. The estimated market value of available-for-sale securities is based on bid quotations from security dealers or on bid prices published in news quote services. December 31, 1998 market interest rates were used as discounting rates in the estimation of fair value. SCOTTISH ANNUITY LIFE GRP ------------------------- EXPECTED MATURITY DATE ---------------------- (Dollars in millions, except average interest rate) TOTAL ----- FAIR ---- 1999 2000 2001 2002 2003 Thereafter TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- LONG-TERM DEBT (US $) Principal Amount 18.32 7.56 13.37 8.17 53.81 78.84 179.26 191.30 Book Value 18.28 7.78 13.63 8.43 55.83 88.20 192.16 Average Interest Rate (%) 5.32 5.50 6.22 5.82 4.72 6.07 5.58 5.64 SHORT-TERM DEBT (US $) Principal Amount 56.14 0.00 0.00 0.00 0.00 0.00 56.14 56.03 Book Value 56.03 0.00 0.00 0.00 0.00 0.00 56.03 Average Interest Rate (%) 5.19 0.00 0.00 0.00 0.00 0.00 5.19 5.19
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this item is set forth in "Item 14: Exhibits, Financial Statements and Reports on Form 8-K". Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no changes in or disagreements with accountants or accounting and financial disclosure for the fiscal year ended December 31, 1998. -25- PART III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth the names, ages and titles of the directors of Scottish Holdings and the executive officers of Scottish Holdings and Scottish Insurance.
Name Age Position - ---- --- -------- Sam Wyly/(3)/ 64 Chairman of the Board and Director Michael C. French/(3)/ 56 Chief Executive Officer, President and Director Peter W. Presperin 42 Senior Vice President - Chief Financial Officer and Secretary Henryk Sulikowski 39 Senior Vice President and Chief Insurance Officer Michael Austin/(2)(4)/ 63 Director R. Duke Buchan III/(2)(4)/ 35 Director Robert M. Chmely/(1)(4)/ 64 Director David Matthews/(1)/ 36 Director Howard Shapiro/(2)/ 53 Director Charles J. Wyly, Jr./(3)/ 65 Director
____________________ /(1)/ Term as a director expires at the 1999 annual meeting of stockholders. /(2)/ Term as a director expires at the 2000 annual meeting of stockholders. /(3)/ Term as a director expires at the 2001 annual meeting of stockholders. /(4)/ Member of the Audit Committee. SAM WYLY was elected a director of Scottish Holdings on October 27, 1998. Mr. Wyly was also elected Chairman of the Board of Scottish Holdings on October 27, 1998. Mr. Wyly serves as Chairman of the Board, since 1981, of Sterling Software, Inc., a supplier of software products and services, which he co- founded in 1981. In addition, Mr. Wyly currently serves as a director of Sterling Commerce, Inc., a provider of electronic commerce software and network services, as Chairman of Michaels Stores, Inc., a specialty retail chain, and as a non-managing partner of the General Partner of Maverick. In 1963, Mr. Wyly founded University Computing Company, a computer services and software company. MICHAEL C. FRENCH was elected a director and Scottish Holding's Chairman of the Board and Chief Executive Officer upon its formation. Mr. French is currently Scottish Holding's Chief Executive Officer and President. Mr. French was also elected Chairman of the Board and Chief Executive Officer of Scottish Insurance upon its formation. Mr. French is a founder and a director of The Scottish Annuity Company (Cayman) Ltd. Mr. French serves as a consultant to the law firm of Jones, Day, Reavis & Pogue. Mr. French was a Managing Director of Maverick from 1993 to 1996. He practiced law from 1970 to 1992 with the law firm of Jackson & Walker, L.L.P. where he served as Chairman of the Management Committee from 1988 to 1992. Mr. French also serves as a director of Sterling Software, Inc., a computer software provider, and -26- Michaels Stores, Inc., a national specialty retail chain. He received a B.B.A. and a J.D. (cum laude) from Baylor University. PETER W. PRESPERIN was elected Scottish Holding's Senior Vice President - Chief Financial Officer and Secretary on January 26, 1999. Since 1996, Mr. Presperin has been Senior Vice President and Chief Financial Officer of Cologne Life Reinsurance Company, in Stamford, Connecticut. Prior to that, Mr. Presperin worked for the St. Paul Companies from 1983 through 1996 in a variety of capacities, the most recent being Financial Reporting Control Officer. Mr. Presperin received his Bachelor of Science, Accounting from the University of Illinois. He is a member of the AICPA and the AICPA Insurance Companies Committee. HENRYK SULIKOWSKI became Senior Vice President and Chief Insurance Officer of Scottish Holdings and Scottish Insurance on July 20, 1998. From February 1997 to July 1998, Mr. Sulikowski served as a Director of Swiss Re New Markets as well as Senior Vice President of Atlantic International Reinsurance Company (Barbados) and a Vice President of Swiss Re Atrium Corporation, companies which are all affiliated with Swiss Reinsurance Company. During 1995 and 1996, Mr. Sulikowski was Vice President of Cologne Re and also served as a senior officer of Cologne Re's Barbados subsidiary. From 1991 to 1995, Mr. Sulikowski was employed by Guardian Life Insurance Company of America, where he served as Assistant Vice President in the reinsurance division. Since 1991, Mr. Sulikowski has been actively involved in regulatory affairs affecting the insurance and reinsurance industries, both individually and through life insurance trade associations such as the American Council of Life Insurance and the National Alliance of Life Companies. He has served as a member of the State Activities Task Force of the American Council of Life Insurance's Reinsurance Committee and was instrumental in establishing the Reinsurance Committee of the National Alliance of Life Companies, having served as its first chairman during 1994 and 1995. Mr. Sulikowski has been an associate of the Society of Actuaries since 1986 and a member of the American Academy of Actuaries since 1987. He received a Bachelor of Science Degree, with honors, from the State University of New York at Stony Brook. MICHAEL AUSTIN was elected a director of Scottish Holdings on October 27, 1998. Mr. Austin retired in 1992 as the Managing Partner of the Cayman Islands office of KPMG Peat Marwick, an international accounting and consulting firm. Mr. Austin was a partner resident in the Cayman Islands office for over 20 years. Since 1992, Mr. Austin has been self-employed as a chartered accountant. Mr. Austin currently serves as a Director of the Cayman Monetary Authority for a three- year term expiring on December 31, 1999. R. DUKE BUCHAN III was elected a director of Scottish Holdings on October 27, 1998. Mr. Buchan has been Managing Director of Maverick, an investment management firm, since July 1997. From 1992 until joining Maverick in 1997, he was a Vice President in Investment Banking at Merrill Lynch, Pierce, Fenner & Smith Incorporated in New York, specializing in corporate finance and mergers and acquisitions in the financial services sector in the United States, Latin America and Europe. He received a B.A. in Economics and Spanish with Honors from the University of North Carolina and an M.B.A. from Harvard Business School. -27- ROBERT M. CHMELY was elected a Director of Scottish Holdings on October 27, 1998. Mr. Chmely has been a consultant since the beginning of 1997 when he retired from The Prudential Insurance Company of America, where from January 1988 to his retirement he served as Senior Vice President. From December 1995 to November 1997, Mr. Chmely was President of Prudential Asset Management Group, the corporate pension business of The Prudential Insurance Company of America, and from December 1994 to December 1995, he was Chief Financial Officer of Prudential Asset Management Group. From December 1990 to December 1994, Mr. Chmely served as Senior Managing Director of Portfolio Management at The Prudential Insurance Company of America. He is a Fellow of the Society of Actuaries and a Chartered Financial Analyst. DAVID MATTHEWS was elected a director of Scottish Holdings on October 27, 1998. Mr. Matthews has been a director, since 1991, of Intelecon Services, Inc. ("Intelecon"), a provider of audio-visual services for corporate meetings and events, a company he co-founded, and General Manager of the Outsourcing Department of Intelecon, since 1997. He served as Chief Financial Officer of Intelecon from 1991 to 1997 and General Manager of the Install Department of Intelecon from 1993 to 1996. Mr. Matthews is Sam Wyly's son-in-law. HOWARD SHAPIRO was elected a director of Scottish Holdings on October 27, 1998. Shapiro is the managing partner of DC Planning and has been since 1975, when he founded DC Planning, an insurance consulting firm that develops life insurance products and acts as a consultant on insurance matters for high net worth families, trust companies and other fiduciaries. CHARLES J. WYLY, JR. was elected a director of Scottish Holdings on October 27, 1998. Mr. Wyly also serves as a director, since 1981, and Vice Chairman, since 1984, of Sterling Software, Inc. which he co-founded in 1981. Additionally, Mr. Wyly currently serves as Vice Chairman of Michaels Stores, Inc. and as a director of Sterling Commerce, Inc. He served as an officer and director of University Computing Company, from 1964 to 1975, and President from 1969 to 1973. Mr. Wyly served as Chairman of the Board of Earth Resources Company, an oil refining and silver mining company which he co-founded, from 1968 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse, a restaurant chain, from 1967 to 1989. Mr. Wyly is Sam Wyly's brother. Item 11: EXECUTIVE COMPENSATION The following table includes certain summary information concerning the compensation awarded to, earned by or paid for services rendered to Scottish Annuity in all capacities during 1998, by our President and Chief Executive Officer and our two other Executive Officers who were serving as executive officers at the end of 1998. -28- SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation --------------------------------- Awards ----------------- Other Annual Shares Underlying All Other Name and Principal Position Year/1/ Salary Bonus Compensation/2/ Options/SARs/3/ Compensation - -------------------------------- ------- ------- ------- --------------- ----------------- --------------- Michael C. French(4) 1998 $37,500 $ 0 $ 0 400,000 $ 0 President and Chief Executive Officer Henryk Sulikowski(5) 1998 91,667 75,000 0 300,000 100,286(6) Senior Vice President and Chief Insurance Officer Michelle C. Boucher(7) 1998 14,583 50,000 0 200,000(8) 8,958(9) Senior Vice President, Chief Financial Officer and Secretary
- --------------- (1) Scottish Holdings was formed on May 12, 1998 and, therefore, had no operations prior to 1998. (2) Perquisites and personal benefits furnished to the named executive officers that do not meet the disclosure thresholds established under SEC regulations are not included in this column. (3) Grants of stock options in 1998 vest one-third each year commencing on the first anniversary of the grant. (4) Mr. French became the President and Chief Executive Officer as of June 18, 1998, but his salary did not commence until December 1, 1998, immediately following completion of our initial public offering. Mr. French's annualized salary is $450,000. (5) Mr. Sulikowski became Senior Vice President and the Chief Insurance Officer on July 20, 1998. Mr. Sulikowski's annualized salary is $200,000. (6) Represents expenses related to Mr. Sulikowski's relocation to the Cayman Islands in the amount of $33,859, payments for a housing allowance in the amount of $49,500, payments to our retirement plan in the amount of $9,167, payments for health insurance in the amount of $510, and payments for air transportation to and from the United States in the amount of $7,250. (7) Ms. Boucher became the Senior Vice President, Chief Financial Officer and Secretary on June 18, 1998. Ms. Boucher's annualized salary was $175,000. Ms. Boucher resigned as of February 1, 1999. (8) Ms. Boucher has entered into a Consulting Agreement with the Company pursuant to which Ms. Boucher has agreed to return to the Company for cancellation the Stock Option, originally granted to Ms. Boucher in June, 1998, exercisable for 200,000 Ordinary Shares in exchange for a Stock Option exercisable for 66,600 Ordinary Shares, exercisable in full on November 30, 1999. (9) Represents payments for a housing allowance in the amount of $7,500 and payments to our retirement plan in the amount of $1,458. -29- Option Grants Summary -- 1998 Fiscal Year The following table sets forth information concerning the stock options granted by Scottish Holdings to its executive officers during fiscal year 1998.
Potential Realizable Individual Grants Value at -------------------------------------------------------------- Assumed Annual Rate of Ordinary Share Price Appreciation for Number of Exercise Option Term(2) Ordinary Shares Percent of Total Price ----------------------- Underlying Options Granted Per Expiration Name Options Granted to Employees Share Date 5% 10% - ---- --------------- ---------------- -------- ---------- ---------- ---------- Michael C. French 400,000 37.74% $15.00(1) 11/30/08 $3,773,368 $9,562,455 Henryk Sulikowski 300,000 28.30 15.00(1) 11/30/08 2,830,026 7,171,841 Michelle L. Boucher 200,000(3) 18.87(3) 15.00(3) 11/30/08(3) 1,886,684(3) 4,781,227(3)
- --------------- (1) The stock options are exercisable in three equal installments commencing November 30, 1999. (2) The potential realizable value columns of the table above illustrate the value that might be realized upon exercise of the options immediately prior to the expiration of their terms, assuming the specified compounded rates of appreciation of the price of the Ordinary Shares over the terms of the options. These amounts do not take into account provisions of certain options providing for termination of the options following termination of employment or vesting over periods of up to three years. The use of the assumed 5% and 10% returns is established by the Commission and is not intended by the Company to forecast possible future appreciation of the price of the Ordinary Shares. (3) Ms. Boucher resigned, effective February 1, 1999. Ms. Boucher has entered into a Consulting Agreement with the Company pursuant to which Ms. Boucher has agreed to return to the Company for cancellation a Stock Option, originally granted to Ms. Boucher in June, 1998, exercisable for 200,000 Ordinary Shares in exchange for a Stock Option exercisable for 66,600 Ordinary Shares, exercisable in full on November 30, 1999. -30- Aggregated Options/SAR Exercises in 1998 and December 31, 1998 Option/SAR Values The following table provides information, for each of the named executive officers, regarding the exercise of options during 1998 and unexercised options held as of December 31, 1998.
Number of Shares Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at at December 31, 1998 December 31, 1998 --------------------------- ------------------------------ Shares Value Name Acquired On Realized Exercisable Unexercisable Exercisable Unexercisable - ----------------- Exercise -------- ----------- ------------- ----------- ------------- ------------- Michael C. French 0 0 0 400,000 0 0 Henryk Sulikowski 0 0 0 300,000 0 0 Michelle L. Boucher 0 0 0 200,000(1) 0 0
- --------------- (1) Ms. Boucher has entered into a Consulting Agreement with the Company pursuant to which Ms. Boucher has agreed to return to the Company for cancellation the Stock Option, originally granted to Ms. Boucher in June, 1998, exercisable for 200,000 Ordinary Shares in exchange for a Stock Option exercisable for 66,600 Ordinary Shares, exercisable in full on November 30, 1999. Compensation of Directors Directors who are employees of Scottish Holdings are not paid any fees or additional compensation for services as members of Scottish Holding's Board of Directors or any committee thereof. Non-employee Directors receive cash in the amount of $20,000 per annum and $1,000 per board or committee meeting attended. On November 30, 1998, each non-employee Director was granted an option to purchase 10,000 Ordinary Shares pursuant to Scottish Holding's Second Amended and Restated 1998 Stock Option Plan with an exercise price per share equal to the initial public offering price of $15.00. Subject to certain conditions, each non-employee Director will be granted an option to purchase 2,000 Ordinary Shares at each successive annual general meeting after December 31, 1998 with an exercise price equal to the fair market value of the Ordinary Shares at the date of grant. Employment and Change of Control Agreements Michael C. French. Under his employment agreement, Mr. French has agreed to serve as Chief Executive Officer and President for an initial term ending on June 18, 2001 to be automatically extended on June 18, 2001 and each anniversary thereafter for an additional year, subject to 90 days advance notice before June 18, 2001 or any subsequent anniversary by either us or Mr. French of an intention not to renew. Mr. French receives an annual salary of $450,000 and is eligible to participate in all of our employee benefit programs and to receive an annual performance-based bonus in an amount to be determined by our Board of Directors. Mr. French is entitled to a gross-up of certain excise taxes and to the payment or reimbursement of any legal fees or related expenses incurred by Mr. French with respect to the interpretation, enforcement or defense of his rights under his -31- employment agreement. Upon execution of the employment agreement, Mr. French received stock options exercisable for 400,000 Ordinary Shares. Peter W. Presperin. Under his employment agreement, Mr. Presperin has agreed to serve as Senior Vice President - Chief Financial Officer and Secretary for an initial term commencing on February 2, 1999 and ending on February 2, 2002, to be automatically extended on February 2, 2002 and each anniversary thereafter for an additional year, subject to 90 days advance notice before February 2, 2002 or any subsequent anniversary by us or Mr. Presperin of an intention not to renew. Mr. Presperin receives an annual salary of $250,000 and is eligible to participate in all of our employee benefit programs. Mr. Presperin received a one-time bonus of 8,000 Ordinary Shares of the Company valued at a per share price of $11. Mr. Presperin is also eligible to receive an annual performance-based bonus to be determined by our Board of Directors. In addition, during the term of employment, Mr. Presperin is eligible to participate in all of our employee benefit programs, and we must fund a retirement account for Mr. Presperin in an amount not less than 10% of annual salary for each year during the term of his employment. We must also pay or reimburse any legal fees or related expenses incurred by Mr. Presperin with respect to the interpretation, enforcement or defense of his rights under his employment agreement. Upon execution of the employment agreement, Mr. Presperin received stock options exercisable for 300,000 Ordinary Shares. Henryk Sulikowski. Under his employment agreement, Mr. Sulikowski agreed to serve as Senior Vice President and Chief Insurance Officer for an initial term ending on July 20, 2001, to be automatically extended for an additional year, at the expiration of the initial term and each anniversary thereafter, subject to 90 days advance notice before such expiration or anniversary by either us or Mr. Sulikowski of an intention not to renew. Mr. Sulikowski receives an annual salary of $200,000 and is eligible to participate in all of our employee benefit programs. Mr. Sulikowski received a one-time cash bonus of $75,000 on November 30, 1998. Mr. Sulikowski is eligible to receive an annual performance-based bonus in an amount to be determined by our Board of Directors and receives a monthly housing and travel allowance of $9,000. In addition, during the term of Mr. Sulikowski's employment, Mr. Sulikowski is eligible to participate in all of our employee benefit programs, and we must fund a retirement account for Mr. Sulikowski in an amount not less than 10% of Mr. Sulikowski's annual salary for each year during the term of his employment. We must also pay or reimburse Mr. Sulikowski for any legal fees or related expenses incurred by Mr. Sulikowski with respect to the interpretation, enforcement or defense of his rights under his employment agreement. Upon execution of the employment agreement, Mr. Sulikowski received stock options exercisable for 300,000 Ordinary Shares. Mr. French's, Presperin's and Sulikowski's employment agreements each provide that the executive will maintain in confidence all confidential matters and that each will not: . during their employment or, if they receive severance compensation upon termination of their employment, for one year thereafter, participate in the management of any business enterprise that engages in substantial and direct competition with us; or . during his employment or for one year thereafter, attempt to influence, persuade or induce (or assist any other person in so persuading or inducing) any employee to leave us. -32- In addition, pursuant to each executive's employment agreement, each is entitled to severance compensation . if we terminate his employment in any case other than death, disability or cause; . if the executive terminates his employment upon our failure to keep the executive in his office or position (or a substantially equivalent office or position); . an adverse change affecting the authorities, powers, functions, responsibilities or duties attaching to his position with us; . a reduction in his compensation; . the failure of any of our successors to assume our duties and obligations under the executive's employment agreement; . a relocation of the principal location of the executive's work in excess of 25 miles of its original location (or for Mr. Sulikowski, to any location other than the Cayman Islands); . a change in control of Scottish Holdings (provided the executive terminates his employment within one year of such change in control); . an unremedied breach of the executive's employment agreement by us or any successor; or . if we notify the executive of our intent not to renew the executive's employment agreement at the expiration of its initial term or any anniversary thereafter. The severance compensation that Mr. French will be entitled to upon any termination referred to above includes a lump sum payment equal to three times the sum of his annual base salary and incentive compensation at the highest respective rates in effect for any year prior to the termination. The severance compensation that each of Mr. Presperin and Mr. Sulikowski will be entitled to upon any such termination includes a lump sum payment equal to the sum of . the greater of any amounts of his respective annual base salary relating to the first three years of the term of his employment not paid prior to the termination of their employment; . his respective annual base salary at the highest rate in effect for any year prior to the termination; . the annual incentive compensation at the highest rate in effect for any year prior to the termination; and -33- . the transportation expenses for his and his immediate family's relocation to the United States. Insider Participation in Compensation Decisions and Board Interlocks Our Board of Directors does not have a compensation committee. Instead, compensation is determined by the full Board of Directors. Mr. Michael C. French is a director and is our President and Chief Executive Officer. No other directors are officers. Mr. French is an executive officer and director of our company and a director and executive officer of The Scottish Annuity Company (Cayman) Ltd. Mr. French participated in decisions related to compensation of executive officers of each of our company and The Scottish Annuity Company. Effective October 1, 1998, we entered into an agreement with The Scottish Annuity Company for Scottish Insurance to provide The Scottish Annuity Company with a variety of insurance administration, accounting and other services. For these services, The Scottish Annuity Company pays Scottish Insurance quarterly, for each annuity contract issued by Scottish Annuity, an amount equal to 0.50% per annum of the separate account value of such contracts, except that such amount will not be less than $25,000 per year. In addition, The Scottish Annuity Company must refrain . from the direct or indirect offer or sale of any life insurance products and must refer only to Scottish Insurance any opportunity or inquiry that it may receive to issue and sell any life insurance products, an d . from the direct or indirect offer or sale of any variable annuity products and must refer only to The Scottish Annuity Company any opportunity or inquiry that it may receive to issue and sell any annuity products. Under separate agreements and as partial consideration for entering into the agreement described above, Scottish Insurance also subleases to The Scottish Annuity Company a portion of its leased space in the Cayman Islands, and The Scottish Annuity Company sold certain of its computer hardware and software to Scottish Insurance. Ms. Boucher, formerly the Senior Vice President, Chief Financial Officer and Secretary of Holdings, is a consultant to our Company, and is the former Manager of Finance and Administration of, and now a consultant to Scottish Annuity. Mr. French is also a director of Michaels Stores, Inc. and Sterling Software, Inc. Each of Sam Wyly and Charles J. Wyly, Jr., each a director of our company, is also an executive officer of both Michaels Stores and Sterling Software. Sam Wyly and Charles J. Wyly, Jr. participate in compensation decisions related to executive officers of our company. Mr. French does not participate in compensation decisions related to executive officers of Michaels Stores and Sterling Software. -34- REPORT ON EXECUTIVE COMPENSATION The Board of Directors has responsibility for our executive compensation practices and policies. Of the eight directors on the Board, seven are outside directors who are not officers or employees. The executive compensation for 1998 was established by the Board of Directors prior to our initial public offering, and the sole Board Member at that time was Michael C. French. Executive Pay Policy Our compensation is intended to attract, retain and motivate the key people necessary to lead us to achieve our strategic objective of increased stockholder value over the long term, reflecting our belief that executive compensation should seek to align the interests of our executives with those of our stockholders. The program utilizes three components: base salary, short-term incentives and long-term compensation in the form of stock options. In establishing base salaries, we have adopted a strategy of setting executive salaries at or above market to retain and attract key executives, while providing incentive compensation pay opportunities, based on performance achievement. We set the salary ranges in this manner to ensure that our base salary practices do not put us at a competitive disadvantage in retaining and attracting key executives while ensuring an appropriate cost structure. We believe that our current program of a base salary and long- and short- term performance-based compensation which can be earned by our executive officers will increase long-term stockholder value. Base Salary Mr. French's, Presperin's and Sulikowski's current annual base salary is $450,000, $250,000 and $200,000, respectively. As of the date of this report, the Board of Directors has not reviewed or adjusted the salaries of its executive officers for 1999. Short-Term Incentive and Stock Options Under their respective employment contracts, each executive is eligible to receive a cash bonus at the sole discretion of the Board of Directors. Additionally, the Second Amended and Restated 1998 Stock Option Plan is administered by the Board of Directors and is designed to provide incentive compensation to our directors, executive officers, and other key employees, consultants and advisors. The Board of Directors Sam Wyly, Chairman of the Board Michael C. French Michael Austin David Matthews R. Duke Buchan III Howard Shapiro Robert M. Chmely Charles J. Wyly, Jr. -35- Performance Graph The following graph compares the cumulative stockholder return on our Ordinary Shares with the Nasdaq Composite Index and the Nasdaq Insurance Index. The comparison assumes $100 was invested as of November 24, 1998 (the date our Ordinary Shares began trading on a "when issued" basis) and the reinvestment of all dividends. Comparison of Cumulative Shareholder Return [Graph]
Nov. 24, 1998 Dec. 31, 1998 ------------- ------------- Scottish Annuity & Life Holdings, Ltd. $100 $ 91.67 Nasdaq Composite Index $100 $111.80 Nasdaq Insurance Index $100 $100.01
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of Ordinary Shares of Scottish Holdings by all persons who beneficially own 5% or more of the Ordinary Shares and by each director and executive officer of Scottish Holdings and by all directors and executive officers as a group as of March 26, 1999.
Name and Address of Beneficial Owners(1) Number of Percent of --------------------------------------- --------- ---------- Shares Class ------ ----- Michael C. French(2)(3)(4)................................ 172,000 * Peter W. Presperin(4)..................................... 15,500 * Michelle L. Boucher(3)(4)................................. 12,000 * Henryk Sulikowski(4)...................................... 1,000 * Michael Austin(4)......................................... - - R. Duke Buchan(4)......................................... - - Robert M. Chmely(4)....................................... - - David Matthews(4)(5)...................................... 2,050 * Howard Shapiro(4)(6)...................................... 3,500 * Charles J. Wyly, Jr.(4)(7)................................ 312,047 1.68% Sam Wyly(4)(8)............................................ 632,013 3.40% Maverick Capital, Ltd.(9)................................. 1,688,220 9.09% All directors and executive officers as a group (eleven persons)................................................. 1,138,110 6.13%
-36- - --------------- *Less than 1%. (1) Except as otherwise indicated, the address for each beneficial owner is c/o Scottish Annuity & Life Holdings, Ltd., P.O. Box 10657APO, 2 Artillery Courts, Shedden Road, George Town, Grand Cayman, Cayman Islands, British West Indies. (2) 152,000 of these Ordinary Shares are beneficially owned by an irrevocable trust of which Mr. French and certain family members are beneficiaries. Mr. French disclaims beneficial ownership of such Ordinary Shares. (3) Does not include Ordinary Shares issuable upon exercise of the Class A Warrants not exercisable within 60 days. (4) Does not include Ordinary Shares issuable upon exercise of stock options not exercisable within 60 days. (5) 500 of these Ordinary Shares are beneficially owned by a family partnership, of which Mr. Matthews is the general partner. 800 of these Ordinary Shares are owned by Mr. Matthews' wife, and Mr. Matthews disclaims beneficial ownership of these shares. (6) All of these shares are beneficially owned by the D.C. Planning retirement plan, a qualified plan, of which Mr. Shapiro is a Trustee and beneficiary. Mr. Shapiro disclaims beneficial ownership of these shares. (7) All 312,407 Ordinary Shares are beneficially owned by an irrevocable trust of which Charles J. Wyly, Jr. and certain family members are beneficiaries. Charles J. Wyly, Jr. disclaims beneficial ownership of such Ordinary Shares. (8) All 632,013 Ordinary Shares are beneficially owned by an irrevocable trust of which Sam Wyly and certain family members are beneficiaries. Sam Wyly disclaims beneficial ownership of such Ordinary Shares. (9) Based on a Schedule 13G filed by Maverick Capital, Ltd. with the Securities and Exchange Commission on February 26, 1999 and subsequent information provided by Maverick Capital, Ltd. to our counsel on March 16, 1999. The address of Maverick Capital, Ltd. is 300 Crescent Court, Suite 1850, Dallas, TX 75201. Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS DC Planning Relationships On August 13, 1998, we entered into a consulting services agreement with DC Planning, an insurance consulting firm that develops life insurance products and acts as a consultant on insurance matters for high net worth families, trust companies and other fiduciaries. Under the terms of this agreement, DC Planning provides to us certain consulting services, including with respect to the development and implementation of our business plan. DC Planning is paid $180,000 a year for a term of three years under the agreement. Howard Shapiro, who is on our Board of Directors, is the managing partner of DC Planning. On November 30, 1998, we granted Mr. Shapiro, in his capacity as a consultant, stock options exercisable for 100,000 Ordinary Shares. These options are in addition to the stock options exercisable for 10,000 Ordinary Shares granted to Mr. Shapiro in his capacity as a non-employee director. -37- Direct Investors Relationship Two trusts purchased Ordinary Shares and Class A Warrants exercisable for Ordinary Shares in a private placement in November, 1998. The two trusts purchased an aggregate of 709,220 Ordinary Shares and Class A Warrants exercisable for 200,000 Ordinary Shares at an exercise price of $15.00 per share. The aggregate purchase price for the Ordinary Shares and Class A Warrants was $10 million, or $14.10 for one Ordinary Share and a warrant to purchase 0.282 Ordinary Shares. One of the trusts is an irrevocable trust of which Sam Wyly and certain family members are beneficiaries. The other trust is an irrevocable trust of which Charles J. Wyly, Jr. and certain family members are beneficiaries. Sam Wyly, who is the Chairman of the Board and a Director, and Charles J. Wyly, Jr., who is a Director, both disclaim beneficial ownership of such Ordinary Shares and Class A Warrants. Pre-IPO Equity Adjustment On October 22, 1998, we redeemed 1,100,000 Ordinary Shares of the 1,500,000 Ordinary Shares issued upon our formation. Shareholders participating in the redemption exchanged these shares for either Class A Warrants (exercisable for an aggregate 900,000 Ordinary Shares) or nominal consideration. The shareholders who received Class A Warrants in the redemption are three irrevocable trusts of which, respectively, Sam Wyly, the Chairman of the Board and a Director, Charles J. Wyly, Jr., a Director, and Michael C. French, our Chief Executive Officer, President and a Director, and certain family members of each are beneficiaries. These trusts received Class A Warrants to purchase an aggregate of 466,667 Ordinary Shares, 233,333 Ordinary Shares and 200,000 Ordinary Shares, respectively. Messrs. French, Sam Wyly and Charles J. Wyly, Jr. each disclaim beneficial ownership of such Class A Warrants. The Class A Warrants received in the redemption are exercisable for a price per share equal to the $15 initial public offering price. The shareholders that received nominal consideration in the redemption are two irrevocable trusts of which Sam Wyly and certain family members are beneficiaries and a corporation wholly-owned by Michelle L. Boucher, the former Senior Vice President, Chief Financial Officer and Secretary of the Company. PART IV Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report: (1) Audited Consolidated Financial Statements of Scottish Annuity & Life Holdings, Ltd. and its subsidiary: Report of Independent Auditors Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Comprehensive Loss Consolidated Statement of Shareholders' Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements -38- (2) Consolidated Financial Statement Schedules All financial statement schedules are omitted because they are either not applicable or the required information is included in the balance sheet or notes thereto appearing elsewhere in this Registration Statement. (3) Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof:
Exhibit Number Description of Document - ------- ----------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement between the Company and the Underwriters (incorporated herein by reference to Exhibit 1.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.1 Memorandum of Association of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.2 Articles of Association of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.3 Form of Amended and Restated Class B Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended).
-39-
Exhibit Number Description of Document - ------- ----------------------------------------------------------------------------------- 4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.8 Form of Securities Purchase Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.9 Form of Registration Rights Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.10 Form of Securities Purchase Agreement between the Company and the Non- Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.11 Form of Registration Rights Agreement between the Company and the Non- Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.1 Employment Agreement dated June 18, 1998 between the Company and Michael C. French (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended).
-40-
Exhibit Number Description of Document - ------- ----------------------------------------------------------------------------------- 10.4 Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.5 Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October 1, 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.7 Form of Indemnification Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.8 Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company (incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.9 Investment Management Agreement dated October 22, 1998 between the Company and General Re--New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.10 Agreement dated October 23, 1998 between the Company and Westport Partners (Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.11 Investment Management Agreement dated October 22, 1998 between the Company and The Prudential Investment Corporation (incorporated herein by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended).
-41-
Exhibit Number Description of Document - ------- ----------------------------------------------------------------------------------- 10.13 Employment Agreement, dated February 2, 1999 between the Company and Peter W. Presperin. 10.14 Consulting Agreement dated February 1, 1999 between the Company and Michelle L. Boucher. 10.15 Investment Advisory Service Agreement between the Company and Prudential Securities Corporation. 21.1 Subsidiaries of Registrant. 23.1 Consent of Ernst & Young. 24.1 Powers of Attorney.
(b) Reports on Form 8-K None. -42- Audited Consolidated Financial Statements Scottish Annuity & Life Holdings, Ltd. Period from May 12, 1998 (date of incorporation) to December 31, 1998 with Report of Independent Auditors Scottish Annuity & Life Holdings, Ltd. Audited Consolidated Financial Statements Period from May 12, 1998 (date of incorporation) to December 31, 1998 Contents Report of Independent Auditors.............................................. 1 Audited Consolidated Financial Statements Consolidated Balance Sheet.................................................. 2 Consolidated Statement of Income............................................ 3 Consolidated Statement of Comprehensive Loss................................ 4 Consolidated Statement of Shareholders' Equity.............................. 5 Consolidated Statement of Cash Flows........................................ 6 Notes to Consolidated Financial Statements.................................. 7 Report of Independent Auditors To the Shareholders and Board of Directors Scottish Annuity & Life Holdings, Ltd. We have audited the accompanying consolidated balance sheet of Scottish Annuity & Life Holdings, Ltd. (the "Company") as of December 31, 1998, and the related consolidated statements of income, comprehensive loss, shareholders' equity, and cash flows for the period from May 12, 1998 (date of incorporation) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scottish Annuity & Life Holdings, Ltd. at December 31, 1998, and the consolidated results of its operations and its cash flows for the period from May 12, 1998 (date of incorporation) to December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. George Town, Grand Cayman British West Indies March 25, 1999 1 Scottish Annuity & Life Holdings, Ltd. Consolidated Balance Sheet (Stated in United States Dollars) December 31, 1998 Assets Investments: Fixed maturities $ 229,756,293 Short-term investments 14,511,683 --------------- Total investments 244,267,976 Cash 3,863,042 Receivables: Due from brokers 3,060,543 Accrued interest receivable 2,883,009 Other assets 271,669 --------------- Total assets $ 254,346,239 =============== Liabilities Accounts payable and accrued expenses $ 1,959,160 Due to related party 326,900 --------------- Total liabilities 2,286,060 Shareholders' Equity Share capital , par value $0.01 per share: Issued and fully paid: 18,568,440 ordinary shares 185,684 Additional paid in capital 252,291,320 Accumulated other comprehensive loss - Unrealized depreciation of investments (853,146) Retained earnings 436,321 --------------- Total shareholders' equity 252,060,179 --------------- Total liabilities and shareholders' equity $ 254,346,239 =============== See accompanying notes. 2 Scottish Annuity & Life Holdings, Ltd. Consolidated Statement of Income (Stated in United States Dollars) Period from May 12, 1998 (date of incorporation) to December 31, 1998 Revenues Interest income, net $ 1,142,501 Realized losses on securities, net (14,236) Insurance administration fees 209,886 --------------- Total revenues 1,338,151 Expenses Salaries and benefits 319,170 Professional fees 235,824 Miscellaneous expenses 230,567 Recruitment expenses 104,835 Administrative expenses 11,434 --------------- Total expenses 901,830 --------------- Net income $ 436,321 =============== Basic and diluted earnings per ordinary share $ 0.12 =============== See accompanying notes. 3 Scottish Annuity & Life Holdings, Ltd. Consolidated Statement of Comprehensive Loss (Stated in United States Dollars) Period from May 12, 1998 (date of incorporation) to December 31, 1998 Net income $ 436,321 Other comprehensive loss: Unrealized depreciation on investments: Unrealized holding depreciation arising during the period (867,382) Add: reclassification adjustment for losses included in net income 14,236 --------------- Unrealized depreciation on investments (853,146) --------------- Comprehensive loss $ (416,825) ===============
See accompanying notes. 4 Scottish Annuity & Life Holdings, Ltd. Consolidated Statement of Shareholders' Equity (Stated in United States Dollars) Period from May 12, 1998 (date of incorporation) to December 31, 1998
Accumulated other comprehensive loss - Unrealized Additional depreciation Class A Class B Share paid in on Retained Shares warrants warrants capital capital investments earnings Total ----------------------------------------------------------------------------------------------------- Beginning balance -- -- -- $ -- $ -- $ -- $ -- $ -- Issuance of founder shares 1,500,000 15,000 485,000 500,000 Issuance of Class A warrants 1,550,000 100,000 100,000 Issuance of Class B warrants 200,000 302,000 302,000 Repurchase of shares and issuance of warrants (1,100,000) 900,000 (11,000) 11,000 -- Sales to direct investors 1,418,440 400,000 14,184 19,985,816 20,000,000 Initial public offering 16,750,000 167,500 231,407,504 231,575,004 Unrealized depreciation on investments (853,146) (853,146) Net Income 436,321 436,321 ----------------------------------------------------------------------------------------------------- Ending balance 18,568,440 2,850,000 200,000 $185,684 $252,291,320 $ (853,146) $ 436,321 $ 252,060,179 =====================================================================================================
See accompanying notes. 5 Scottish Annuity & Life Holdings, Ltd. Consolidated Statement of Cash Flows (Stated in United States Dollars) Period from May 12, 1998 (date of incorporation) to December 31, 1998 Operating activities Net income $ 436,321 Adjustments to reconcile net income to net cash used in operating activities: Net realized losses on securities 14,236 Changes in assets and liabilities: Receivables (5,943,552) Other assets (271,669) Accounts payable and accrued expenses 1,959,160 Due to related party 326,900 ----------------- Net cash used in operating activities (3,478,604) Investing activities Purchase of securities (1,792,519,289) Proceeds on sales of securities 1,547,383,931 ----------------- Net cash used in investing activities (245,135,358) Financing activities Net proceeds from sale of company stock 252,075,004 Issuance of Class A warrants 100,000 Issuance of Class B warrants 302,000 ----------------- Net cash provided by financing activities 252,477,004 ----------------- Net change in cash and cash equivalents, being cash and cash equivalents at end of period $ 3,863,042 =================
See accompanying notes. 6 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements December 31, 1998 1. Organization, business, and basis of presentation Organization Scottish Annuity & Life Holdings, Ltd. ("Holdings") was incorporated as an exempted company with limited liability on May 12, 1998 under the laws of the Cayman Islands. Holdings has been organized to provide insurance policies, as discussed below, through its wholly-owned subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish Insurance", and together with Holdings, the "Company", and additionally referred to throughout the notes as "We", "Our", and "Us"). Prior to June 24, 1998, all Ordinary Shares of Holdings were owned by Scottish Holdings, Ltd., a Cayman Islands company ("SHL"). On July 8, 1998, Scottish Insurance received an unrestricted Class `B' insurer's license under the insurance laws of the Cayman Islands. Holdings' initial public offering of its Ordinary Shares (the "Offering") was completed on November 30, 1998. Business Our business activities currently consists of fee income from the administration of variable annuities for Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity") and will, in the future, include sales of life and annuity reinsurance and variable life insurance policies. Variable life insurance is a separate account product where the net premium is placed in a separate account for the policyholder that is not subject to the claims of Scottish Insurance general creditors. Our product will be targeted towards high net worth individuals or families generally worth more than $10 million. A private money manager will manage the cash values on behalf of the variable life policy holder. We will not provide any investment management or advisory services to any individual variable life policyholder. We also will offer variable life insurance products to corporate customers in the form of corporate owned life insurance ("COLI"), bank owned life insurance ("BOLI"), and trust-owned life insurance "TOLI"). These types of policies are primarily used in connection with certain deferred compensation and bonus plans for executives. We may also issue variable life insurance policies under a group policy that is owned by an employer to fund employee benefits. Traditional reinsurance of life and annuity business is an arrangement under which an insurance company (the reinsurer) agrees to insure (assume risks of) another insurance company (the ceding company or cedent) for all or a portion of the insurance underwritten by the ceding company. Our reinsurance activities will primarily be focused on group and individual annuity type contracts. 7 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 1. Organization, business, and basis of presentation (continued) Basis of presentation Accounting Principles - Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and all amounts are reported in U.S. dollars. We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. Consolidation - We consolidate our results and have eliminated all significant intercompany transactions. Estimates, risks and uncertainties - The preparation of GAAP financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant assumptions will be for assumed reinsurance liabilities, which will be provided by the ceding companies. It is typical for these ceding companies to periodically review and revise these estimates. We also will review and revise these estimates as appropriate. Any adjustments made to these estimates will be reflected in the period the estimates are revised. 2. Summary of significant accounting policies Our accounting policies for current and future activities are as follows. Current activities Investments -Fixed maturities are classified as available for sale, which means that we carry these investments at estimated fair values on our balance sheet. The cost of fixed maturities is adjusted for prepayments and the amortization of premiums and discounts. The unrealized appreciation (depreciation) is the difference between market and amortized cost and is recorded directly to equity with no impact to net income. The change in unrealized appreciation (depreciation) is included in accumulated other comprehensive loss - unrealized depreciation on investments. Short-term investments are carried at cost, which approximates fair value. Realized gains (losses) on securities are determined on a specific identification method which means that we track the cost of each security purchased so that we are able to identify and record a gain or loss when it is subsequently sold. In addition, declines in fair value that are determined to be other than temporary are included in realized gains (losses). 8 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued) Insurance administration fees - We collect insurance administration fees for the administration of a variable annuity book of business, which was written by Scottish Annuity. These fees are recognized ratably over the year based on the fair value of the underlying investments. (See note 9 for further discussion.) Due from brokers - Due from brokers includes amounts receivable from one of the Company's brokers for investment transactions that had not settled at December 31, 1998. Organizational and offering expenses - All formation and organization costs incurred have been expensed in the period ending December 31, 1998. All offering costs incurred in connection with the Offering, including certain amounts payable for investment banking and financial advisory services, have been deducted from the gross proceeds of the Offering. Cash and cash equivalents - Cash and cash equivalents include fixed deposits with an original maturity, when purchased, of three months or less. Cash and cash equivalents are recorded at face value, which approximates fair value. All cash and cash equivalents are held with a single financial institution in the Cayman Islands. Management does not anticipate any material losses as a result of this credit concentration. Accounting for future activities Policy revenues and related expenses - Our policy revenues will be generated from reinsurance and variable life activities. The reinsurance revenues will be derived from interest sensitive life products and traditional life reinsurance. The premium on interest sensitive products will be reported as a deposit on the balance sheet with a corresponding liability. Revenues will be reported periodically for the mortality, policy administration and surrender charges. The related policy benefits and claims expenses will include benefit claims incurred in excess of deposits and interest credited to the policyholder for the period. The premiums from traditional reinsurance transactions will be included in revenues over the premium paying period of the underlying policies. The related policy benefits and expenses will be provided against the revenues to recognize profits over the estimated lives of the policies. Variable life insurance policies are also interest sensitive products and will be reported like the reinsurance interest rate sensitive products except that the assets will be reported in a separate account for the benefit of the policyholder. 9 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued) Deferred policy acquisition costs - The cost of acquiring new business such as commissions, certain internal expenses related to policy issuance and underwriting departments and certain variable selling expenses will be capitalized and amortized in future periods. For variable life insurance and reinsurance of investment type fixed annuity contracts and reinsured variable annuity contracts, deferred policy acquisition costs will be amortized over the expected average life of the contracts as a constant percentage of the present value of estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical and anticipated future experience, which will be updated at the end of each accounting period. In computing amortization, interest will accrue to the unamortized balance of capitalized acquisition costs at the rate used to discount expected gross profits. The effect on the amortization of deferred policy acquisition costs of revisions to estimated gross profits will be reflected in earnings in the period such estimated gross profits are revised. For reinsured fixed immediate annuity policies and traditional life insurance contracts, deferred policy acquisition costs will be charged to expense using assumptions consistent with those used in computing policy reserves. Assumptions as to anticipated premiums will be estimated at the date of the policy issuance and will be consistently applied during the life of the policies. Deviations from estimated experience will be reflected in earnings in the period such deviations occur. For these policies, the amortization periods generally will be for the estimated lives of the policies. When the liabilities for future policy benefits plus the present value of expected future gross premiums for a policy are insufficient to provide for expected future benefits and expenses for that policy, a premium deficiency reserve will be established by a charge to income. The deferred policy acquisition costs incurred through December 31, 1998 have been written off because there is no business to amortize it against. Policyholders' benefit liabilities - The liabilities for interest sensitive products will equal the accumulated account values of the policies or contracts as of the valuation date. Liabilities for future benefits under traditional life insurance contracts reinsured will be estimated using actuarial assumptions for mortality, morbidity, terminations, investment yields, and expenses applicable at the time the insurance contracts were entered into. Benefit liabilities for fixed annuities during the accumulation period will be equal to their account values and, after annuitization equal to the accumulated present value of expected future payments. 10 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 2. Summary of significant accounting policies (continued) Separate account assets and liabilities - Separate account assets will be recorded at the fair value of the underlying investments less mortality, policy administration and surrender charges. The funds in the separate accounts will not be available to meet the general obligations of the Company. Separate account liabilities will represent the policyholders' separate account values. They will consist of the initial premiums paid after consideration of net investment gains (losses) attributable to each separate account, less fees and withdrawals. Accounting Standards - The Financial Accounting Standards Board has issued the following accounting standard that will affect us. FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and requires adoption no later than fiscal quarters or fiscal years beginning after June 15, 1999. The new standard establishes accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign- currency-denominated forecasted transaction. We have not yet completed our evaluation of the effect this standard will have on us. 3. Earnings per ordinary share We calculate earnings per ordinary share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"(EPS). Basic EPS excludes the dilutive effect of options and warrants. Diluted EPS includes the dilutive effect of these securities using the treasury stock method. The weighted-average number of shares is calculated by weighting how long the shares have been outstanding over the accounting period. 11 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 3. Earnings per ordinary share (continued) Our warrants and options were not deemed to be dilutive as of December 31, 1998 because the strike price of $15 was greater than our market value.
Period from May 12, 1998 (date of Three months ended incorporation) to December 31, 1998 December 31, 1998 (Unaudited) ------------------------------------------------ Net income $ 436,321 $ 555,551 Weighted average number of shares outstanding 3,586,788 6,785,018 ------------------------------------------------ Basic and diluted earnings per ordinary share $ 0.12 $ 0.08 =============================================== Actual shares outstanding at December 31, 1998 18,568,440 ==================
The Company had a relatively small number of shares outstanding from the date of incorporation through the initial public offering on November 30, 1998. As a result the inception to date weighted average number of shares outstanding and the related EPS are not meaningful, in the opinion of management. 4. Fixed maturities The amortized cost, gross unrealized appreciation and depreciation, and estimated fair values of our fixed maturity investments are as follows:
December 31, 1998 -------------------------------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost appreciation depreciation fair value -------------------------------------------------------------------- U.S. treasury securities and obligations of U.S. government agencies $ 97,674,991 $ 885 $ (633,455) $ 97,042,421 U.S. corporate securities 94,795,887 106,205 (256,060) 94,646,032 Mortgage and asset backed securities 38,138,561 20,102 (90,823) 38,067,840 -------------------------------------------------------------------- Total fixed maturities $ 230,609,439 $ 127,192 $ (980,338) $ 229,756,293 ====================================================================
12 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 4. Fixed maturities (continued) The contractual maturities of the fixed maturities are as follows. Actual maturities may differ as a result of calls and prepayments. Amortized Estimated cost fair value ----------------------------- Due in one year or less $ 56,736,454 $ 56,737,338 Due in one year through five years 74,431,349 73,728,443 Due in five years through ten years 32,165,658 31,636,454 Due after ten years 29,137,417 29,586,218 ----------------------------- 192,470,878 191,688,453 Mortgage and asset backed securities 38,138,561 38,067,840 ----------------------------- $230,609,439 $229,756,293 ============================= Proceeds from sales of securities in the period ended December 31, 1998 were $1,547,383,931. Gross gains of $88,368 and gross losses of $102,604 were realized on those sales. 5. Shareholder's equity Effective June 24, 1998, SHL transferred to its shareholders all of its ordinary shares in Holdings by way of a distribution. On October 22, 1998, we paid nominal consideration and issued 900,000 Class A warrants to reacquire and cancel, 1,100,000 of our issued and outstanding ordinary shares. On November 30, 1998, we closed our Offering of 16,750,000 ordinary shares for proceeds received net of underwriting discounts and commissions totaling $235,375,000. Simultaneous with the initial closing of the Offering, direct sales of 1,418,440 ordinary shares and 400,000 Class A warrants were made to Direct Investors for net proceeds of $20,000,000. Common shares We are authorized to issue 100,000,000 ordinary shares of par value $0.01 each. At the balance sheet date 18,568,440 ordinary shares were outstanding. Preferred shares We are authorized to issue 50,000,000 preferred shares of par value $0.01 each. At the balance sheet date there were no preferred shares issued or outstanding. 13 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 5. Shareholder's equity(continued) Warrants In connection with our initial capitalization, we issued Class A warrants to purchase an aggregate of 1,550,000 ordinary shares to related parties. The aggregate consideration of $100,000 paid for these warrants is reflected as additional paid-in-capital. The Class A warrants were issued on June 9, 1998 at the initial stage of the development of our business plan when the feasibility of proceeding with the offering was uncertain. The consideration paid for the Class A warrants was determined to be fair value in the judgment of management in light of such uncertainty. Effective September 3, 1998, the Class A warrant agreements were superseded by Amended and Restated Class A warrant agreements with no material impact on the operation of the agreements. The exercise price of the Class A warrants is $15 per share of the Company' ordinary shares. The Class A warrants become exercisable in equal amounts over a three-year period commencing on the first anniversary of the consummation of the Offering. The Class A warrants will expire on the tenth anniversary of the consummation of the Offering. We entered into Warrant Purchase Agreements whereby The Roman Arch Fund L.P. and The Roman Arch Fund II L.P. purchased an aggregate of 200,000 Class B warrants for an aggregate purchase price of $302,000 which is reflected as additional paid-in-capital. Class B Warrants are exercisable at $15 per ordinary share, in equal amounts over a three-year period commencing one year after the Offering and expire ten years after the consummation of the Offering. Management is of the view that the agreed sale price of the Class B Warrants represented fair value at the time of purchase. The Roman Arch Fund L.P. and the Roman Arch Fund II L.P. are each limited partnerships and affiliates of Prudential Securities Incorporated, one of the underwriters of the initial public offering, and make investments for the benefit of limited partners who are employees of Prudential Securities Incorporated. The Class B warrants were issued after our business plan underwent further development and we were in a position to proceed with the Offering. As a result, the Class B warrants were issued for greater consideration. Effective September 3, 1998, the Class B warrant agreements were superseded by Amended and Restated Class B warrant agreements with no material impact on the operation of the agreements. 14 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 5. Shareholder's equity (continued) We have entered into an agreement with Westport Partners (Bermuda), Ltd. ("Westport"), a developer and administrator of insurance products for international insurance brokers, insurance companies and corporations, pursuant to which Westport will provide non-exclusive distribution services with respect to the Company's variable life insurance products. In addition, Westport may be retained to provide administration services for certain variable life insurance products that the Company issues. For its distribution activities, we are authorized to issue up to 750,000 Class C warrants to Westport at an exercise price equal to $15 per ordinary share. The warrants are issuable over a four-year period beginning on January 1, 2000 and on each anniversary thereafter in an amount to be determined by a formula, as defined, in the agreement. The Class C warrants, if issued, will be for a term expiring ten years from the date of the Offering. The Company applies the fair value method of FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") in accounting for these warrants. No Class C warrants had been issued as of December 31, 1998. 6. Stock option plan We have a stock option plan (the "Plan") which allows us to grant non-statutory options, subject to certain restrictions, to certain eligible employees, non- employee Directors, advisors and consultants. The aggregate number of options which may be granted under the Plan is limited to 1,600,000 shares with no individual being granted more than 1,000,000 shares. The minimum exercise price of the options will be equal to the fair market value, as defined in the Plan, of our ordinary shares at the date of grant. The term of the options shall not be more than ten years from the date of grant. Unless otherwise provided in the option agreement, the options shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant date. We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for employee stock options. Since the exercise price of the stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. As of December 31, 1998, options for 960,000 ordinary shares, exercisable at a price of $15 per share, had been granted to certain employee participants in the Plan. 15 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 6. Stock option plan (continued) Proforma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if we accounted for the employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Binomial option pricing model with the following weighted-average assumptions; risk-free interest rate of 5.52%; dividend yield of 1.33%; volatility factor of the expected market price of our common stock of 0.22; and a weighted-average expected life of the option of 10 years. The Binomial option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our proforma information follows: December 31, 1998 ----------------- Proforma net income $ 331,699 ================= Proforma basic and diluted earnings per ordinary share $ 0.09 ================= As of December 31, 1998, options for 100,000 ordinary shares, exercisable at a price of $15 per share, had been granted to certain non-employee participants in the Plan. The Company applies the fair value method of SFAS 123, in accounting for stock options granted to non-employees who provide services to the Company. On February 2, 1999, options for 300,000 ordinary shares, exercisable at a price of $15 per share, were granted to an employee participant in the Plan. 7. Taxation There is presently no taxation imposed on income or capital gains by the Government of the Cayman Islands. If any taxation were to be enacted, Holdings and Scottish Insurance have been granted exemptions therefrom until 2018. We operate in a manner such that we will owe no United States tax other than premium excise taxes and withholding taxes on certain investment income. 16 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 8. Statutory requirements and dividend restrictions Under The Insurance Law of the Cayman Islands (1998 Revision), Scottish Insurance must maintain a minimum net capital worth of $240,000. Our ability to pay dividends depends on the ability of Scottish Insurance to pay dividends to us. While we are not subject to any significant legal prohibitions on the payment of the dividends, Scottish Insurance will be subject to Cayman Islands regulatory constraints, which affect its ability to pay dividends. Scottish Insurance is prohibited from declaring or paying a dividend if such payment would reduce its net capital worth below $240,000. 9. Related parties Scottish Annuity agreement - We entered into an Insurance Administration, Services and Referral Agreement (the "Agreement") with Scottish Annuity effective October 1, 1998. We provide Scottish Annuity with a variety of insurance administration, accounting and other services. We receive compensation equal to 0.50% per annum of the quarterly separate account value of each annuity contract issued by Scottish Annuity subject to a minimum of US$25,000 per year In addition, pursuant to this agreement (i) Scottish Annuity will refrain from the direct or indirect offer or sale of any life insurance products and will refer only to Scottish Insurance any opportunity or inquiry that it may receive to issue and sell any life insurance products, and (ii) Scottish Insurance will refrain from the direct or indirect offer or sale of any variable annuity products and will refer only to Scottish Annuity any opportunity or inquiry that it may receive to issue and sell any variable annuity products. The agreement will continue in effect until December 31, 1999 and will thereafter be automatically renewed for successive one-year periods, unless canceled by either party prior to the commencement of a renewal term. In addition, the agreement may terminate earlier under specified circumstances (e.g. bankruptcy or uncured defaults under the agreement). Scottish Annuity and Scottish Insurance have agreed to indemnify each other and their respective employees for certain liabilities. DC Planning agreement - The Company has entered into a consulting services agreement with DC Planning, an insurance consulting firm that develops life insurance products and acts as a consultant on insurance matters for high net worth families, trust companies and other fiduciaries. Under the terms of the agreement, DC Planning provides certain consulting services to the Company, including with respect to the development and implementation of its business plan. DC Planning is paid $180,000 a year for a term of three years under the agreement. Howard Shapiro, who is a Director of Holdings, is the managing partner of DC Planning. 17 Scottish Annuity & Life Holdings, Ltd. Notes to Consolidated Financial Statements (Continued) 10. Quarterly Financial Data (Unaudited) Quarterly financial data for the period from May 12, 1998 (date of incorporation) through December 31, 1998 follows:
Quarter ended Quarter ended Quarter ended June 30, 1998 September 30, 1998 December 31, 1998 ------------------------------------------------------------------ Investment income, net of related expenses $ 1,501 $ $ 1,126,764 Insurance administration fee 209,886 General and administrative expenses 22,578 98,153 781,099 ------------------------------------------------------------------ Net (loss) income $ (21,077) $ (98,153) $ 555,551 ================================================================== Basic and diluted earnings per ordinary share $ (0.01) $ (0.07) $ 0.08 ==================================================================
18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French ---------------------------------------- Michael C. French Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Michael C. French President, Chief Executive Officer March 29, 1999 - ------------------------ and Director (Principal Executive Michael C. French Officer) /s/ Peter W. Presperin Senior Vice President-Chief March 29, 1999 - ------------------------ Financial Officer and Secretary Peter W. Presperin (Principal Financial Officer and Principal Accounting Officer) * Chairman of the Board and Director March 29, 1999 - ------------------------ Sam Wyly * Director March 29, 1999 - ------------------------ Michael Austin * Director March 29, 1999 - ------------------------ R. Duke Buchan III * Director March 29, 1999 - ------------------------ Robert M .Chmely * Director March 29, 1999 - ------------------------ David Matthews * Director March 29, 1999 - ------------------------ Howard Shapiro * Director March 29, 1999 - ------------------------ Charles J. Wyly, Jr.
* The undersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of the above-named officers and directors of the Registrant and contemporaneously filed herewith with the securities and exchange Commission. /s/ Michael C. French ---------------------------------------- Michael C. French Attorney-in-Fact EXHIBIT INDEX
Exhibit Sequential Number Page No. Description of Document - ---------- ----------------------- 1.1 Form of Underwriting Agreement between the Company and the Underwriters (incorporated herein by reference to Exhibit 1.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.1 Memorandum of Association of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 3.2 Articles of Association of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.3 Form of Amended and Restated Class B Warrant (incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated herein by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.8 Form of Securities Purchase Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended)
Exhibit Sequential Number Page No. Description of Document - ---------- ----------------------- 4.9 Form of Registration Rights Agreement between the Company and the Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended) 4.10 Form of Securities Purchase Agreement between the Company and the Non- Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 4.11 Form of Registration Rights Agreement between the Company and the Non- Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.1 Employment Agreement dated June 18, 1998 between the Company and Michael C. French (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.4 Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.5 Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October 1, 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.7 Form of Indemnification Agreement between the Company and each of its directors and officers (incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended).
Exhibit Sequential Number Page No. Description of Document - ---------- ----------------------- 10.8 Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company (incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.9 Investment Management Agreement dated October 22, 1998 between the Company and General Re--New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.10 Agreement dated October 23, 1998 between the Company and Westport Partners (Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.11 Investment Management Agreement dated October 22, 1998 between the Company and The Prudential Investment Corporation (incorporated herein by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as amended). 10.13* Employment Agreement, dated February 2, 1999 between the Company and Peter W. Presperin. 10.14* Consulting Agreement dated as of February 1, 1999 between the Company and Michelle L. Boucher. 10.15* Investment Advisory Service Agreement between the Company and Prudential Securities Corporation. 21.1* Subsidiaries of Registrant. 23.1* Consent of Ernst & Young. 24.1* Powers of Attorney.
__________________ * Filed herewith. EX-10.13 2 PETER W. PRESPERIN EMPLOYMENT AGREEMENT Exhibit 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of February 2, 1999, is made and entered by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and Peter W. Presperin (the "Executive"). WITNESSETH: ---------- WHEREAS, the Executive has agreed to serve as Senior Vice President-Chief Financial Officer and Secretary of the Company and is expected to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; and WHEREAS, the Company wishes to employ the Executive and the Executive is willing to be employed by the Company, both on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary rate as in effect from time to time, as set forth in Section 5(a). (b) "Board" means the Board of Directors of the Company. (c) "Cause" means that the Executive shall have committed any of the following: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary; (ii) intentional wrongful damage to any material property of the Company or any Subsidiary; (iii) intentional wrongful disclosure of secret processes or confidential information of the Company or any Subsidiary; or (iv) conviction of a felony or other crime involving moral turpitude; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive had committed an act constituting "Cause" as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. (d) "Change in Control" means the occurrence of any of the following events: (i) the Company is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Ordinary Shares immediately prior to such transaction; (ii) the Company sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer is held in the aggregate by the holders of Ordinary Shares immediately prior to such sale or transfer; (iii) the Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (iv) if during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each Director first elected during such period was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of any such period. Notwithstanding the foregoing provisions of Paragraph (iii) above, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement (i) solely because (A) the Company; (B) a Subsidiary; or (C) any Company-sponsored employee stock ownership plan or other employee benefit plan of the Company either files or becomes obligated to file a report or proxy statement under or in response to Schedule 13D, 2 Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares, or because the Company reports that a change of control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership; or (ii) solely because of a change in control of any Subsidiary other than Scottish Life Assurance (Cayman) Ltd. (e) "Competitive Activity" means the Executive's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company. "Competitive Activity" will not include the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto. (f) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior officers of the Company are entitled to participate, including without limitation any stock option, performance share, performance unit, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company or a Subsidiary), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or may be adopted hereafter by the Company or a Subsidiary. (g) "Incentive Pay" means an annual bonus, incentive or other payment of compensation, in addition to Base Pay, made or to be made in regard to services rendered in any year or other period pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company or a Subsidiary, or any successor thereto. (h) "Ordinary Shares" means the ordinary shares, par value $.01 per share, of the Company. (i) "Retirement Plans" means the retirement income, supplemental executive retirement, excess benefits and retiree medical, life and similar benefit plans providing retirement perquisites, benefits and service credit for benefits for senior officers of the Company now existing or hereafter adopted. (j) "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock. (k) "Term" means the period commencing as of the date of this Agreement and expiring on the third anniversary of this Agreement; provided, however, that commencing on the third anniversary of the date of this Agreement and each anniversary thereafter, the term of this Agreement will automatically be extended for an additional one year unless, not later than 90 3 days before any such anniversary date, the Company or the Executive shall have given written notice that it or the Executive, as the case may be, does not wish to have the Term extended. (l) "Termination Date" means the date on which the Executive's employment is terminated (the effective date of which shall be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 6(b)). (m) "Voting Stock" means securities entitled to vote generally in the election of directors. 2. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed with the Company for the Term, upon the terms and conditions herein set forth. 3. Positions and Duties. (a) During the Term, the Executive will serve in the position of Senior Vice President-Chief Financial Officer and Secretary of the Company, or such other position as may be agreed upon by the Company and the Executive, and will have such duties, functions, responsibilities and authority as are (i) consistent with the Executive's position as the Company's Senior Vice President-Chief Financial Officer and Secretary; or (ii) assigned to his office in the Company's bylaws; or (iii) reasonably assigned to him by the Board. The Executive will report directly to the Chief Executive Officer of the Company. (b) During the Term, the Executive will be the Company's full-time employee and, except as may otherwise be approved in advance in writing by the Board, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Executive will devote substantially all of his business time and attention to the performance of his duties to the Company. Notwithstanding the foregoing, the Executive may (i) subject to the approval of the Board, serve as a director of a company, provided such service does not constitute a Competitive Act, (ii) serve as an officer, director or otherwise participate in purely educational, welfare, social, religious and civic organizations, (iii) serve as an officer, director or trustee of, or otherwise participate in, any organizations and activities with respect to which the Executive's participation was disclosed to the Company in writing prior to the date hereof, and (iv) manage personal and family investments. 4. Place of Performance. In connection with his employment during the Term, unless otherwise agreed by the Executive, the Executive will be based at the Company's principal executive offices in the Cayman Islands. The Executive will undertake normal business travel on behalf of the Company. The Executive shall not be required to relocate his family to the Cayman Islands. 5. Compensation and Related Matters. (a) Annual Base Salary. During the Term, the Company will pay to the Executive an annual base salary of not less than US $250,000, which annual base salary may be 4 increased (but not decreased) from time to time by the Board (or a duly authorized committee thereof) in its sole discretion, payable at the times and in the manner consistent with the Company's general policies regarding compensation of executive employees. The Board may from time to time authorize such additional compensation to the Executive, in cash or in property, as the Board may determine in its sole discretion to be appropriate. (b) Annual Incentive Compensation. If the Board (or a duly authorized committee thereof) authorizes any cash incentive compensation or approves any other management incentive program or arrangement, the Executive will be eligible to participate in such plan, program or arrangement under the general terms and conditions applicable to executive and management employees. The annual cash incentive compensation paid to the Executive will be paid in accordance with the Company's annual incentive compensation plan. Nothing in this Section 5(b) will guarantee to the Executive any specific amount of incentive compensation, or prevent the Board (or a duly authorized committee thereof) from establishing performance goals and compensation targets applicable only to the Executive. (c) Retirement Account. During the Term, the Company shall fund a retirement account for the Executive in an amount not less than 10% of Executive's Base Pay for each year during the Term. The Company shall provide for the Executive and his dependents medical and health care benefits standard for executive officers of the Company. (d) Executive Benefits. In addition to the compensation described in Section (a) and (b), the Company will make available to the Executive and his eligible dependents, subject to the terms and conditions of the applicable plans, including without limitation the eligibility rules, participation in all Company-sponsored employee benefit plans including all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company participate, including any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, disability, salary continuation, and any other deferred compensation, incentive compensation, group and/or executive life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), expense reimbursement or other employee benefit policies, plans, programs or arrangements, including, without limitation, financial counseling services or any equivalent successor policies, plans, programs or arrangements that may now exist or be adopted hereafter by the Company. (e) Expenses. The Company will promptly reimburse the Executive for all business expenses the Executive incurs in order to perform his duties to the Company under this Agreement in a manner commensurate with the Executive's position and level of responsibility with the Company, and in accordance with the Company's policy regarding substantiation of expenses. (f) Options. The Company shall grant Executive, upon the execution of this Agreement, an option ("Option") to purchase up to 300,000 Ordinary Shares of the Company, such Option to be exercisable at the per share price equal to $15.00 per share and to be governed by the option agreement, a form of which is attached hereto as Exhibit A. 5 (g) Sign-up Bonus. Upon execution of this Agreement, the Company shall pay the Executive a sign-up bonus in the amount of $100,000.00, payable in shares of the Company's Ordinary Shares at a per share price of $12.50. 6. Termination Following the Date of this Agreement. (a) The Executive's employment may be terminated by the Company during the Term and the Executive shall be entitled to the severance compensation provided by Section 7 unless such termination is the result of the occurrence of one or more of the following events: (i) The Executive's death; (ii) If the Executive becomes permanently disabled within the meaning of, and begins actually to receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, the Executive; or (iii) Cause. If, during the Term, the Executive's employment is terminated by the Company or any Subsidiary other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii), the Executive will be entitled to the benefits provided by Section 7 hereof. (b) The Executive may terminate employment with the Company during the Term with the right to severance compensation as provided in Section 7 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment): (i) Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent office or position, of or with the Company (or any successor thereto by operation of law of or otherwise), which the Executive held pursuant to, and upon the date of, this Agreement. (ii) (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company which the Executive held pursuant to, and upon the date of, this Agreement, (B) a reduction in the aggregate of the Executive's Base Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive's rights to Employee Benefits or a reduction in the scope or value thereof, unless such reduction is applicable to all employees of the Company on a pro rata basis, any of which is not remedied by the Company within 30 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (iii) A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided it has been made in good faith and in all 6 events will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following this Agreement, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible pursuant to, and upon the date of, this Agreement, which has rendered the Executive substantially unable to carry out, has substantially hindered the Executive's performance of, or has caused the Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive pursuant to, and upon the date of, this Agreement, which situation is not remedied within 30 calendar days after written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (by operation of law or otherwise) assumed all duties and obligations of the Company under this Agreement pursuant to Section 12(a); (v) The Company relocates its principal executive offices (if such offices are the principal location of Executive's work), or requires the Executive to have his principal location of work changed, to any location that, in either case, is other than the Cayman Islands, without his prior written consent; (vi) A Change in Control has occurred and Executive, within one year thereafter, gives the notice of termination of his employment with the Company contemplated in this Schedule 6(b); or (vii) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto which is not remedied by the Company within 30 calendar days after receipt by the Company of written notice from the Executive of such breach. (c) A termination by the Company pursuant to Section 6(a) or by the Executive pursuant to Section 6(b) will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company or any Subsidiary providing Employee Benefits, which rights shall be governed by the terms thereof. 7. Severance Compensation. (a) If the Company shall terminate the Executive's employment during the Term other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii), if the Executive shall terminate his employment pursuant to Section 6(b), or if the Company shall give Executive written notice not later than 90 days prior to the third anniversary or any subsequent anniversary of this Agreement of non-renewal of this Agreement, the Company shall pay to the Executive the amount specified herein upon the later of (i) five business days after the Termination Date or date of expiration of this Agreement, as the case may be, and (ii) the effective date of a release 7 executed by the Executive and the Company in the form attached hereto as Exhibit B. In lieu of any further payments to the Executive for periods subsequent to the Termination Date or such expiration date, the Company shall make a lump sum payment (the "Severance Payment"), in an amount equal to 100% of the sum of (1) the greater of (A) any amounts of Base Pay relating to the first three years of the Term not paid prior to the Termination Date, and (B) an amount equal to the aggregate annual Base Pay (at the highest rate in effect for any year prior to the Termination Date), (2) the aggregate Incentive Pay (based upon the greatest amount of Incentive Pay paid or payable to the Executive for any year prior to the Termination Date), and (3) the aggregate sum of the reasonable transportation expenses for relocating Executive and his immediate family to the United States. (b) There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof at an annualized rate of interest equal to the then-applicable interest rate prescribed by the Pension Benefit Guarantee Corporation for benefit valuations in connection with non-multiemployer pension plan terminations assuming the immediate commencement of benefit payments. 8. No Mitigation Obligation. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non-competition covenant in Section 9 will further limit the employment opportunities for the Executive. In addition, the Company acknowledges that its severance pay plans applicable in general to its salaried employees do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise. 9. Competitive Activity; Confidentiality; Nonsolicitation. (a) The Executive acknowledges that during the course of his employment with the Company the Executive will learn business information valuable to the Company and will form substantial business relationships with the Company's clients. To protect the Company's legitimate business interests in preserving its valuable confidential business information and client relationships, the Executive shall not without the prior written consent of the Company, which consent shall not be unreasonably withheld, (i) engage in any Competitive Activity during the Term and (ii) if the Executive shall have received or shall be receiving benefits under Section 7, engage in any Competitive Activity for a period ending on the first anniversary of the Termination Date or date of expiration of this Agreement, as the case may be. 8 (b) During the Term, the Company agrees that it will disclose to Executive its confidential or proprietary information (as defined in this Section 9(b)) to the extent necessary for Executive to carry out his obligations to the Company. The Executive hereby acknowledges the Company has a legitimate business interest in protecting its confidential and proprietary information and hereby covenants and agrees that he will not, without the prior written consent of the Company, during the Term or thereafter (i) disclose to any person not employed by the Company, or use in connection with engaging in competition with the Company, any confidential or proprietary information of the Company or (ii) remove, copy or retain in his possession any Company files or records. For purposes of this Agreement, the term "confidential or proprietary information" will include all information of any nature and in any form that is owned by the Company and that is not publicly available (other than by Executive's breach of this Section 9(b)) or generally known to persons engaged in businesses similar or related to those of the Company. Confidential or proprietary information will include, without limitation, the Company's financial matters, customers, employees, industry contracts, strategic business plans, product development (or other proprietary product data), marketing plans, and all other secrets and all other information of a confidential or proprietary nature. For purposes of the preceding two sentences, the term "Company" will also include any Subsidiary (collectively, the "Restricted Group"). The foregoing obligations imposed by this Section 9(b) will not apply (i) during the Term, in the course of the business of and for the benefit of the Company, (ii) if such confidential or proprietary information will have become, through no fault of the Executive, generally known to the public or (iii) if the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). (c) The Executive hereby covenants and agrees that during the Term and for one year thereafter Executive will not, without the prior written consent of the Company, which consent shall not unreasonably be withheld, on behalf of Executive or on behalf of any person, firm or company, directly or indirectly, attempt to influence, persuade or induce, or assist any other person in so persuading or inducing, any employee of the Restricted Group to give up employment or a business relationship with the Restricted Group. (d) The Executive agrees that on or before the Termination Date the Executive shall return all Company property, including without limitation all credit, identification and similar cards, keys and documents, books, records and office equipment. The Executive agrees that he shall abide by, through the Termination Date, the Company's policies and procedures for worldwide business conduct. 10. Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive's rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive 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, the Executive the benefits provided or intended to be 9 provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive 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. Without respect to whether the Executive 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 the Executive in connection with any of the foregoing. 11. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any applicable law, regulation or ruling. 12. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 12(a) and 12(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 12(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 13. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five 10 business days after having been mailed by, or three business days after having been sent by an internationally recognized overnight courier service such as FedEx or UPS, addressed to the Company (to the attention of the Chief Executive Officer of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 14. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the Cayman Islands, British West Indies, without giving effect to the principles of conflict of laws. 15. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 16. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. 17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. 18. Entire Agreement. This Agreement sets forth the entire understanding between the Company and the Executive, and all oral or written agreements or representations, express or implied, with respect to the subject matter of this Agreement are set forth in this Agreement. All prior employment agreements, understandings and obligations (whether written, oral, express or implied) between the Company and the Executive are, without further action, terminated as of the date of this Agreement and are superseded by this Agreement. 11 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. /s/ Peter W. Presperin ------------------------------------------------- Peter W. Presperin SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French -------------------------------------------- Name: Michael C. French Title: President and Chief Executive Officer 12 EX-10.14 3 MICHELLE L. BOUCHER CONSULTING AGREEMENT Exhibit 10.14 CONSULTING AND NON-COMPETITION AGREEMENT THIS CONSULTING AND NON-COMPETITION AGREEMENT is made and entered into as of the 1st day of February, 1999, by and among Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company ("Scottish Holdings"), Scottish Annuity & Life Insurance (Cayman) Ltd., a Cayman Islands company and wholly owned subsidiary of Scottish Holdings ("Scottish Insurance" and, together with Scottish Holdings, the "Company"), and Michelle L. Boucher (the "Consultant"). W I T N E S S E T H : WHEREAS, pursuant to an Employment Agreement dated June 18, 1998 between Scottish Holdings and Consultant, Scottish Holdings has employed Consultant as an employee of Scottish Holdings in the positions of Senior Vice President, Chief Financial Officer, and Secretary; WHEREAS, Scottish Insurance has employed Consultant as an employee of Scottish Insurance in the positions of Senior Vice President, Chief Financial Officer, and Secretary; WHEREAS, Consultant has resigned from such employment with Scottish Holdings and Scottish Insurance; WHEREAS, Consultant has had significant policy-making and operational responsibilities in the conduct of each of Scottish Holdings' and Scottish Insurance's business; WHEREAS, Consultant possesses valuable skills and experience of a special and personal nature, and unique, personal and confidential business knowledge about the operation of each of Scottish Holdings' and Scottish Insurance's business; WHEREAS, the Company desires to secure for itself the benefit of the Consultant's background, experience, ability, expertise and industry; WHEREAS, the Consultant has indicated her willingness to provide consulting and advisory services to the Company on the terms and conditions set forth herein; WHEREAS, as an employee of Company in the past and as a consultant to the Company in the future, Consultant has had and will have access to information that is proprietary and confidential to the Company; and WHEREAS, Company wishes to impose, and Consultant agrees to accept, certain obligations with respect to information that is proprietary and confidential to the Company. NOW, THEREFORE, on the basis of the foregoing and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows: Section 1. Prior Agreement. 1.1 Scottish Holdings. Scottish Holdings and Consultant expressly agree that the Employment Agreement between Scottish Holdings and Consultant, dated June 18, 1998, including any and all rights and obligations of each of Scottish Holdings and Consultant under the Employment Agreement, is hereby terminated, and the employment by Scottish Holdings of Consultant in the positions of Senior Vice President, Chief Financial Officer, and Secretary is hereby terminated, as of the date hereof. Scottish Holdings and Consultant expressly agree that Consultant is not entitled to the severance compensation set forth in Section 6 of the Employment Agreement. 1.2 Option Agreement. Scottish Holdings and Consultant expressly agree that the Option Agreement between Scottish Holdings and Consultant dated June 18, 1998 (the "Employment Option Agreement") is hereby modified to the extent that 133,400 options are canceled and the 66,600 options remaining under the Employment Option Agreement shall be exercisable in full on November 30, 1999. Concurrently with the execution of this Agreement, Consultant has delivered the Employment Option Agreement to the Company for cancellation and the Company has delivered a replacement Option Agreement for 66,600 shares to Consultant. 1.3 Scottish Insurance. Scottish Insurance and Consultant expressly agree that the employment by Scottish Insurance of Consultant in the positions of Senior Vice President, Chief Financial Officer, and Secretary is hereby terminated as of the date hereof. Section 2. Consulting Services. 2.1 Term. Subject to the provisions and conditions of this Agreement, Consultant shall provide the Company with consulting services for a twelve-month term beginning on the date of this Agreement (the "Commencement Date") and ending on February 1, 2000 (the "Consulting Term") unless sooner terminated pursuant to the provisions of this Agreement. 2.2 Duties. (a) Capacity. During the Consulting Term, Consultant shall function in an advisory and consulting capacity, and shall assume and perform such reasonable advisory and consulting responsibilities and duties as may be assigned to her from time to time by the Company. To the extent reasonably requested by the Company, Consultant shall also undertake to train successor individuals, and to preserve and maintain the favorable relationships of the Company with its customers. During the Consulting Term, Consultant will report to such persons as the Company may direct from time to time. Consultant shall perform her services during the Consulting Term as an independent contractor and not as an employee of the Company. (b) Schedule and Location. During the Consulting Term, Consultant shall render consulting services to the Company during normal business hours upon reasonable notice given to the Consultant by the Company. 2 2.3 Compensation. During the Consulting Term, as compensation for the consulting services to be rendered by Consultant during such period, Consultant shall be entitled to the following compensation: (a) Consulting Fees. The Company shall pay to the Consultant $22,083.33 per month, payable on the 15th day of the month, from February, 1999 through July, 1999 and no additional compensation for the remainder of the term. (b) Expenses. During the Consulting Term, the Company shall reimburse Consultant for all itemized, authorized and approved expenses incurred and paid by Consultant in the course of rendering consulting services at the Company's request and consistent with the policies of the Company in effect from time to time. Section 3. Secrecy and Non-Competition. (a) No Competing Employment. The Consultant acknowledges that (i) the agreements and covenants contained in this Section 3 are essential to protect the value of the Company's business and assets and (ii) by virtue of her prior employment with, and retention as a consultant to, the Company, the Consultant has obtained and will obtain such knowledge, know-how, confidential and proprietary information, training and experience and there is a substantial probability that such knowledge, know-how, training, information and experience could be used to the substantial advantage of a competitor of the Company and to the Company's substantial detriment. Therefore, the Consultant agrees that, for the period commencing on the date of this Agreement and ending two years after the Commencement Date (the "Restricted Period"), the Consultant shall not, in (a) any location where the Company, or any predecessor to the Company's business, has conducted business during the five-year period prior to the expiration of the Consulting Term or (b) in any location in which the Company specifically intends to conduct business which location shall be described in a written notice delivered to the Consultant within ninety (90) days following the expiration of the Consulting Term, participate or engage, directly or indirectly, for herself or on behalf of or in conjunction with any person, partnership, corporation or other entity whether as an employee, agent, investor, or otherwise, in any business activities (a "Competitive Activity") if such activity constitutes the purchase, marketing, distribution, sale or provision of products or services that are similar to products or services then being purchased, marketed, distributed, sold, or provided by the Company or any of its successors, including, without limitation, the sale or reinsurance of life insurance products; provided, however, that the Consultant may maintain and/or undertake purely passive investments on behalf of herself, her immediate family, or any trust in companies engaged in a Competitive Activity so long as the aggregate interest represented by such investments does not exceed 1% of any class of the outstanding debt or equity securities of any company engaged in a Competitive Activity. (b) Nondisclosure of Confidential Information. The Consultant, except in connection with her services hereunder, shall not disclose to any person or entity or use, either during the Consulting Term or at any time thereafter, any information not in the public domain, in any form, acquired by the Consultant while employed by, or retained as a consultant to, the Company or any predecessor to the Company's business or, if acquired following the Consulting 3 Term, such information which, to the Consultant's knowledge, has been acquired, directly or indirectly, from any person or entity owing a duty of confidentiality to the Company or any of its affiliates, relating to the Company, its subsidiaries and affiliates, including but not limited to trade secrets, technical information, processes, systems, procedures, know-how, improvements, price lists, financial or other data (including the revenues, costs, or profits associated with any of the Company's products), business plans, and other financial statements, computer programs, discs and printouts, plans, customer and supplier lists, personnel files, sales and advertising material, telephone numbers, names, addresses or any other compilation of information, written or unwritten. Consultant shall not remove from the premises of the Company, except as a consultant of the Company in pursuit of the business of the Company or any of its subsidiaries, or except as specifically permitted in writing by the Company, any document or object containing or reflecting any such information. The Consultant agrees and acknowledges that all of such information, whether developed by her or by someone else, in any form, and copies and extracts thereof are and shall remain the sole and exclusive property of the Company and upon termination of the Consulting Term, the Consultant shall return to the Company the originals and all copies of any such information provided to or acquired by the Consultant in connection with the performance of her duties for the Company, and shall return to the Company all files, correspondence and/or other communications received, maintained and/or originated by the Consultant during the course of her employment, or retention as a consultant to the Company. (c) No Interference. During the Restricted Period, the Consultant shall not, whether for her own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than the Company), intentionally solicit, endeavor to entice away from the Company or any of its subsidiaries or affiliates, or otherwise interfere with the relationship of the Company or any of its subsidiaries with, any person who, to the knowledge of the Consultant, is employed by or otherwise engaged to perform services for the Company or any of its subsidiaries or affiliates (including, but not limited to, any independent sales representatives or organizations) or any person or entity who is, or was within the then most recent twelve-month period, a customer or client of the Company or any of its subsidiaries or affiliates (a "Customer"). (d) Corporate Opportunities. Consultant agrees that during the Consulting Term, she will not take any action that might divert from the Company or any subsidiary of the Company any opportunity that would be within the scope of any of the Company's or such subsidiaries present or future business. (e) Certain Remedies. If Consultant shall breach or otherwise fail to comply with Section 3, the Company shall, in addition to all other remedies herein provided, be entitled to all remedies as may now or hereafter exist at law or in equity for compensation. Section 4. Termination. (a) In the event that the Consultant has (A) committed an act of dishonesty, fraud, embezzlement, or breach of trust against the Company or an act which she knew to be in violation of her duties to the Company (including the unauthorized disclosure of confidential information); (B) committed any insubordination or breach of this Agreement, or continually failed to render services or perform her obligations to the Company, which insubordination, breach or 4 failure is not remedied within 10 days after notice thereof by the Company; (C) committed acts amounting to gross negligence or willful misconduct; (D) performed any act which, if known to the Company's customers or suppliers or other persons with whom the Company has business relationships would materially and adversely affect the Company's business; or (E) been convicted of a felony, the Company shall be entitled to terminate this Agreement (other than Section 3 hereof unless otherwise specified by the Company) and the consulting relationship established hereby, immediately upon the giving of written notice to the Consultant of such termination specifying the grounds therefor. After the effective date of termination under this Section 4(a), the Company shall have no further obligations under this Agreement, except to pay or distribute to Consultant amounts due the Consultant hereunder as of such effective date. (b) In the event that the Consultant resigns, this Agreement (other than Section 3 hereof unless otherwise specified by the Company) and the consulting relationship established hereby shall terminate immediately upon the receipt by the Company of notice of the Consultant's resignation. After the effective date of termination under this Section 4(b), the Company shall have no further obligations to Consultant under this Agreement, except to pay or distribute to Consultant amounts due the Consultant hereunder as of such effective date. (c) In the event that the Consultant dies or becomes Disabled (as hereinafter defined) during the term of this Agreement, this Agreement (other than Section 3 unless otherwise specified by the Company), and the consulting relationship established hereby shall terminate immediately upon the date on which the Consultant dies or becomes Disabled, as the case may be. After the effective date of termination under this Section 4(c), the Company shall have no further obligations to Consultant under this Agreement, other than to pay or distribute to Consultant or the Consultant's heirs, executors, administrators or legal representatives, as the case may be, (i) all amounts due the Consultant hereunder as of such effective date, including any amounts or benefits to which the Consultant may be entitled under the terms of any employee benefit plan of the Company, as in effect on the effective date of such termination and (ii) all amounts due the Consultant pursuant to Section 2.3(a) for the remainder of the Consulting Term in the amounts, in the manner and at the times set forth in such Section. For purposes of this Section 4(c) "Disabled" shall mean, as of any date, the permanent disability of the Consultant in accordance with the then applicable provisions of the disability benefit program of the Company. (d) In the event that the Company elects to terminate Consultant's consulting services prior to the end of the Consulting Term (other than pursuant to subsections (a), (b) or (c) of this Section 4), the Company shall have no further obligations to Consultant under this Agreement except to pay or distribute to Consultant: (i) amounts due Consultant hereunder as of the effective date of such termination and (ii) all amounts due the Consultant pursuant to Section 2.3(a) for the remainder of the Consulting Term in the amounts, in the manner and at the times set forth in such Section. Section 5. Deductions from Compensation. The Consultant agrees that the Company shall be entitled to deduct and withhold from any compensation payable to the Consultant hereunder any taxes in respect of the Consultant that the Company is required to deduct and withhold under law whether arising from compensation hereunder or otherwise. In the event that the Consultant is no longer retained by the Company at a time when the Company otherwise would be 5 entitled to deduct and withhold any amount pursuant to the preceding sentence, the Consultant shall remit such amount to the Company within five (5) days after the receipt of notice from the Company specifying such amount or otherwise in accordance with the Consultant's obligations with respect thereto. Section 6. Confidentiality of Terms. Unless first disclosed by the Company, the Consultant shall not disclose to any person other than the Consultant's lawyer, financial advisor, accountant, and members of her immediate family any of the terms and conditions of her retention as a consultant to the Company, whether contained herein or in any other agreement, unless such disclosure shall be required by law, government regulation, or the order of any court, administrative authority or other government agency. Section 7. Injunctive Relief. Without intending to limit the remedies available to the Company, the Consultant acknowledges that a breach of any of the covenants contained in Section 3 hereof may result in material irreparable injury to the Company or its affiliates for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Consultant from engaging in activities prohibited by Section 3 hereof or such other relief as may be required to specifically enforce any of the covenants in Section 3 hereof. The Consultant hereby agrees and consents that such injunctive relief may be sought in any court of record in the Cayman Islands, British West Indies, or in the location in which such violation may occur, or in any other court, at the election of the Company. Section 8. Extension of Restricted Period. In addition to the remedies the Company may seek and obtain pursuant to Section 7 of this Agreement, the Restricted Period shall be extended by any and all periods during which the Consultant shall be found by a court to have been in violation of the covenants contained in Section 3 hereof. Section 9. Successors: Binding Agreement. (a) In the event of any sale of all or substantially all of the assets of the Company, or the merger, consolidation or other corporate reorganization involving the Company, the Company may assign this Agreement to any successor to the Company by reason of any such transaction, and any such successor shall succeed to all of the Company's obligations, rights and benefits hereunder. (b) Except as provided in subsection (a) above, neither this Agreement, nor any rights or benefits hereunder, may be assigned, delegated, transferred, pledged or hypothecated without the written consent of both parties hereto, and any such assignment, delegations, transfer, pledge or hypothecation shall be null and void and shall be disregarded by the Company. Section 10. Waiver and Modification. Any waiver, alteration, or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a 6 waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. Section 11. Severability and Governing Law. The Consultant acknowledges and agrees that the covenants set forth in Section 3 hereof are reasonable and valid in geographical and temporal scope and in all other respects. If any of such covenants or such other provisions of this Agreement are found to be invalid or unenforceable by a final determination of a court of competent jurisdiction (a) the remaining terms and provisions hereof shall be unimpaired and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. This Agreement shall be governed by and interpreted in accordance with the laws of the Cayman Islands, British West Indies. Any claim, action, suit or proceeding arising out of this Agreement shall be brought only in, and the Company and Consultant hereby agree to submit to the personal jurisdiction of, the courts located in the Cayman Islands, British West Indies; provided, however, that any party may initiate and prosecute any claim, action, suit or proceeding in any other proper court having jurisdiction in the United States or elsewhere in such jurisdiction or jurisdictions in which any violation of this Agreement has occurred. Section 12. Blue-Pencilling. In the event that, notwithstanding the first sentence of Section 11 hereof, any of the provisions of Section 3 relating to the geographic or temporal scope of the covenants contained there in or the nature of the business restricted thereby shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems enforceable, such provision shall be deemed to be replaced herein by the maximum restriction deemed enforceable by such court. Section 13. Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed effective and given upon actual delivery if presented personally, one business day after the date sent if sent by prepaid telegram, overnight courier service, telex, or by facsimile transmission or five business days after the date sent if sent by certified or registered mail, postage prepaid, return receipt requested, which shall be addressed, in the case of the Company, to the attention of the Chief Executive Officer, at its principal executive office, and to the Consultant at her principal residence, or, in each case, to such other address as may be designated in writing by any such party, except that notices of changes of address shall be effective only upon receipt. Section 14. Cautions and Paragraph Headings. Captions and section headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. Section 15. Entire Agreement. This Agreement and the other agreements expressly referred to herein constitute the entire understanding and agreement of the parties hereto regarding the subject matter hereof. Section 16. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By:/s/ Michael C. French ---------------------------------------- Name: Michael C. French Title: Chief Executive Officer, President, and Director SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (COMPANY), LTD. By:/s/ Michael C. French ----------------------------------------- Name: Michael C. French Title: Chairman of the Board and Chief Executive Officer CONSULTANT /s/ Michelle L. Boucher ---------------------------------------- Michelle L. Boucher 8 EX-10.15 4 INVESTMENT ADVISORY SERVICE AGREEMENT Exhibit 10.15 [LETTERHEAD OF PRUDENTIAL SECURITIES INCORPORATED] October 26, 1998 Scottish Annuity & Life Holdings, Ltd. P.O. Box 10657 APO Ugland House George Town, Grand Cayman Cayman Islands, BWI Attn: Michael C. French Dear Sir: This letter confirms the understanding and agreement (the "Agreement") between Prudential Securities Incorporated ("Prudential Securities") and Scottish Annuity & Life Holdings, Ltd. (the "Company") as follows: 1. The Company hereby engages Prudential Securities as its exclusive financial advisor in connection with the evaluation of and preparation for the Company's proposed initial public offering (the "Offering"). 2. Prudential Securities accepts the engagement described in paragraph 1 and in that connection, agrees to: (a) review the business, operations, financial condition and prospects of the Company; (b) review the company's financial plans and analyze its strategic plans; (c) assist the Company in developing a capital markets plan; (d) advise the Company regarding certain structural issues such as, but not limited to, the composition of the board of directors, employee stock option plan, dividend policy, selection of the exchange for listing the company's shares and corporate governance issues; (e) provide the Company with a preliminary valuation analysis and a preliminary assessment of other relevant market data; and (f) be available to meet with the Company's Board of Directors to discuss Prudential Securities' analysis and recommendations. 1 3. The term of this Agreement shall extend from the date hereof through April 30, 1999. Either party may terminate this Agreement at any time, with or without cause, by giving the other party at least 10 days' prior written notice, subject to the provisions of this paragraph through paragraph 11, which shall survive any termination or expiration of this Agreement. 4. As compensation for the services rendered by Prudential Securities, the Company shall pay Prudential Securities as follows: (a) If the Company makes an announcement or files a Registration Statement with the Securities Exchange Commission with respect to the Offering, either during the term of Prudential Securities' engagement hereunder, or at any time during a period of 12 months following the effective date of termination of Prudential Securities' engagement, and the Offering is thereafter consummated, then the Company will pay a financial advisory fee of US$800,000 payable upon the closing of the Offering. (b) All fees payable hereunder shall be payable in U.S. Dollars and shall be made free and clear of, and without deduction or withholding or account of, any present or future income, stamp or other taxes, levies, duties, charges, fees, deductions, or withholding, now or hereafter imposed, levied, collected, withheld, or assessed by any governmental authority in the Cayman Islands (all such taxes, levies, imposts, duties, charges, fees, deductions and withholdings being described hereinafter are called the "Taxes"). If any Taxes are required to be withheld from any amounts payable to Prudential Securities in connection with the Proposed Offering, the amounts so payable to Prudential Securities shall be increased to the extent necessary to yield Prudential Securities (after payment of all Taxes) the amounts payable in connection with the proposed Offering. 5. The Company shall reimburse Prudential Securities on demand for any reasonable out-of-pocket expenses incurred in connection with this Agreement, including the reasonable fees and disbursements of its legal counsel. 6. Because Prudential Securities will be acting on behalf of the Company in connection with the engagement hereunder, the Company agrees to indemnify Prudential Securities and certain other persons as set forth in a separate letter agreement dated the date hereof between Prudential Securities and the Company. 7. In connection with this Agreement, the Company will furnish Prudential Securities with all information concerning the Company which Prudential Securities reasonably deems appropriate and will provide Prudential Securities with access to the Company's officers, directors, employees, accountants, counsel and other advisors and facilities. The Company represents and warrants to Prudential Securities that all such information concerning the Company is and will be true and accurate in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances under which such statements are made. The Company acknowledges and agrees that Prudential Securities will be using and relying upon financial information supplied by the Company and its officers, agents and others and any other publicly available information 2 concerning the Company without any independent investigation or verification thereof or independent appraisal by Prudential Securities. 8. Any advice, either oral or written, provided to the Company by Prudential Securities hereunder shall not be publicly disclosed or made available to third parties without the prior written consent of Prudential Securities. In addition, Prudential Securities may not be otherwise publicly referred to without its prior consent. 9. The Company represents and warrants to Prudential Securities that there are no brokers, representatives or other persons who have an interest in compensation due to Prudential Securities from any transaction contemplated herein. 10. The benefits of this Agreement, together with the separate indemnification letter, shall inure the respective successors and assigns of the parties hereto and of the indemnified parties under the indemnity letter and their successors, assigns and representatives, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon their respective successors and assigns. This Agreement may not be assigned without the prior written consent of the non- assigning party. 11. (a) This Agreement may not be amended or modified except in writing and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. (b) EACH OF PRUDENTIAL SECURITIES AND THE COMPANY (ON ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS SHAREHOLDERS) WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) RELATED TO OR ARISING OUT OF THE ENGAGEMENT OF PRUDENTIAL SECURITIES PURSUANT TO, OR THE PERFORMANCE BY PRUDENTIAL SECURITIES OF THE SERVICES CONTEMPLATED BY THIS AGREEMENT. (c) The Company hereby consents to service of process in the State of New York and to the jurisdiction of and venue in the United States District Court for the Southern District of New York and of any of the courts in the State of New York in any action suit or proceeding arising under this Agreement. The Company irrevocably appoints CT Corporation, as its agent, to receive on behalf of the Company, service of copies of the summons and complaints and any other process which may be served in any such action, claim, suit, proceeding or counterclaim. The Company will provide Prudential Securities with written evidence of such appointment upon the execution of this Agreement. The Company hereby irrevocably waives and agrees not to assert, in any action or proceeding with respect to this Agreement, any claim that (1) it is not personally subject to the jurisdiction of the aforesaid courts, (2) it or its property is exempt or immune from jurisdiction of any such court or from any legal process, (3) the action or proceeding is brought in an inconvenient forum or (d) the venue of the action or proceeding is improper. 3 Prudential Securities is pleased to accept this financial advisory engagement and looks forward to working with you on this assignment. Please confirm that the foregoing correctly sets forth our Agreement by signing and returning the enclosed duplicate of this letter to Prudential Securities. Very truly yours, PRUDENTIAL SECURITIES INCORPORATED By: /s/ Scott E. Willkomm -------------------------- Title: Director Accepted and agreed to as of the date first written above: SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French -------------------------------- Title: President & CEO 4 [LETTERHEAD OF PRUDENTIAL SECURITIES INCORPORATED] October 26, 1998 PRUDENTIAL SECURITIES INCORPORATED One New York Plaza New York, N.Y. 10292 In connection with the engagement, dated October 26, 1998, between Prudential Securities Incorporated ("Prudential Securities") and Scottish Annuity & Life Holdings, Ltd. (the "Company"), the Company hereby agrees to indemnify and hold harmless Prudential Securities and its affiliates, their respective directors, officers, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934), if any, agents and employees of Prudential Securities or any of Prudential Securities' affiliates (collectively, "Indemnified Persons" and individually, an "Indemnified Person") from and against any and all claims, liabilities, losses, damages and expenses incurred by any Indemnified Person (including fees and disbursements of Prudential Securities' and an Indemnified Person's counsel) which (A) are related to or arise out of (i) actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company or (ii) actions taken or omitted to be taken by an Indemnified Person with the Company's consent or in conformity with the Company's instructions or the Company's actions or omissions or (B) are otherwise related to or arise out of Prudential Securities' engagement, and will reimburse Prudential Securities and any other Indemnified Person for all costs and expenses, including fees of Prudential Securities' or an Indemnified Person's counsel, as they are incurred, in connection with investigating, preparing for, or defending any action, formal or informal claim, investigation, inquiry or other proceeding, whether or not in connection with pending or threatened litigation, caused by or arising out of or in connection with pending or threatened litigation, caused by or arising out of or in connection with Prudential Securities acting pursuant to the engagement, whether or not Prudential Securities or any Indemnified Person is named as a party thereto and whether or not any liability results therefrom. The Company will not, however, be responsible for any claims, liabilities, losses, damages, or expenses pursuant to clause (B) of the preceding sentence which are finally judicially determined to have resulted primarily from Prudential Securities' bad faith or gross negligence. The Company also agrees that neither Prudential Securities nor any other Indemnified Person shall have any liability to the Company for or in connection with such engagement except for any such liability for claims, liabilities, losses, damages, or expenses incurred by the Company which are finally judicially determined to have resulted primarily from Prudential Securities' bad faith or gross negligence. The Company further agrees that the Company will not, without the prior written consent of Prudential Securities, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Prudential Securities or any Indemnified Person is an actual or potential party to such claim, action, suit or proceeding) and unless such settlement, compromise or consent includes an unconditional release of Prudential Securities and each other Indemnified Person hereunder from all liability arising out of such claim, action, suit or proceeding. 1 In order to provide for just and equitable contribution, if a claim for indemnification is made pursuant to these provisions but is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification is not available for any reason (except, with respect to indemnification sought solely pursuant to clause (B) of the first paragraph hereof, for the reasons specified in the second sentence thereof), even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and Prudential Securities, on the other hand, shall contribute to such claim, liability, loss, damage or expense for which such indemnification or reimbursement is held unavailable in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Prudential Securities on the other hand, in connection with the transactions contemplated by the engagement, subject to the limitation that in any event Prudential Securities' aggregate contribution to all losses, claims, damages, liabilities and expenses to which contribution is available hereunder shall not exceed the amount of fees actually received by Prudential Securities pursuant to the engagement. The foregoing right to indemnity and contribution shall be in addition to any rights that Prudential Securities and/or any other Indemnified Person may have at common law or otherwise and shall remain in full force and effect following the completion or any termination of your engagement. The Company hereby consents to personal jurisdiction and to service and venue in any court in which any claim which is subject to this Agreement and is brought against Prudential Securities or any other Indemnified Person. EACH OF PRUDENTIAL SECURITIES AND THE COMPANY (ON ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF ITS SHAREHOLDERS) WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT. The benefits of this Indemnification Agreement shall insure to the respective successors and assigns of the parties hereto and of the Indemnified Persons hereunder and their respective successors, assigns and representatives, and the obligations and liabilities assumed in this Indemnification Agreement by the parties hereto shall be binding upon their respective successors and assigns. This Indemnification Agreement may not be assigned without the prior written consent of the non-assigning party. This Indemnification Agreement may not be amended or modified except in a writing signed by the party against whom enforcement is sought and shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. It is understood that, in connection with Prudential Securities' engagement, Prudential Securities may also be engaged to act for the Company in one or more additional capacities, and that the terms of this engagement or any such additional engagement may be embodied in one or more separate written agreements. This indemnification shall apply to said engagement, any such additional engagement(s) (whether written or oral) and any modification of said engagement or such additional engagement(s) and shall remain in full force and effect following the completion or termination of said engagement or such additional engagements. 2 The Company further understands that if Prudential Securities is asked to act for the Company as dealer manager in an exchange of tender offer or as underwriter in connection with the issuance of securities by the Company or to furnish the Company a financial opinion letter or in any other formal capacity, such further action may be subject to a separate agreement containing provisions and terms to be mutually agreed upon. Very truly yours, PRUDENTIAL SECURITIES INCORPORATED By: /s/ Scott E. Willkomm ---------------------------------- Title: Director Accepted and agreed to as of the date first written above: SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: /s/ Michael C. French ------------------------------------ Title: President & CEO 3 EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Subsidiaries of the Registrant Name of Subsidiary Jurisdiction of Incorporation Scottish Annuity & Life Insurance Cayman Islands, British West Indies Company (Cayman) Ltd. EX-23.1 6 CONSENT OF ERNST & YOUNG Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated March 25, 1999 in the Annual Report (Form 10-K) of Scottish Annuity & Life Holdings, Ltd. for the year ended December 31, 1998. George Town, Grand Cayman British West Indies March 30, 1999 EX-24.1 7 POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), hereby constitutes and appoints Michael C. French, Peter W. Presperin, Robert L. Estep and Christopher A. Butner, and each of them, the true and lawful attorney or attorneys-in-fact, with full power of substitution and resubstitution, for the Company, to sign on behalf of the Company and on behalf of the undersigned in his or her capacity as an officer and/or a director of the Company, the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and to sign any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, to or with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder, granting unto said attorney or attorneys-in-fact, and each of them with or without the others, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as the undersigned might or could in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have executed this Power of Attorney as of March 22, 1999. /s/ Sam Wyly /s/ Michael Austin /s/ R. Duke Buchan III - ---------------------- ---------------------- ----------------------- Sam Wyly Michael Austin R. Duke Buchan III /s/ Robert M. Chmely /s/ Michael C. French /s/ David S. Matthews - ---------------------- ---------------------- ----------------------- Robert M. Chmely Michael C. French David S. Matthews /s/ Howard Shapiro /s/ Charles J. Wyly, Jr. /s/ Peter W. Presperin - ---------------------- ---------------------- ----------------------- Howard Shapiro Charles J. Wyly, Jr. Peter W. Presperin -----END PRIVACY-ENHANCED MESSAGE-----