-----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, PaTtEMmmLnH8abJSM9FWB5U7IR+SVEVDxnWdJ2RVvrghCMdIytiEVLl+TG+0lj9F f6ypXJtMOlswcipyxg5JNw== 0000950130-98-005129.txt : 19981028 0000950130-98-005129.hdr.sgml : 19981028 ACCESSION NUMBER: 0000950130-98-005129 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19981027 SROS: NASD 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-57227 FILM NUMBER: 98731388 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 S-1/A 1 AMENDMENT #4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1998 REGISTRATION STATEMENT NO. 333-57227 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- CAYMAN ISLANDS 6311 NOT APPLICABLE (STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER OF INCORPORATION OR INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NUMBER) ORGANIZATION) NUMBER)
CT CORPORATION SYSTEM 1633 BROADWAY NEW UGLAND HOUSE P.O. BOX 10657APO YORK, NEW YORK 10019 (212) 664-1666 GEORGE TOWN, GRAND CAYMAN CAYMAN ISLANDS, BRITISH WEST INDIES (Name, address, including zip code, and (345) 949-2800 telephone number, including area code, (Address, including zip code, and of agent for service) telephone number, including area code, of Registrant's principal executive offices) COPIES TO: ROBERT L. ESTEP, ESQ. HENRY SMITH, ESQ. CRAIG B. BROD, ESQ. JONES, DAY, REAVIS & MAPLES AND CALDER CLEARY, GOTTLIEB, STEEN & POGUE P.O. BOX 309, UGLAND HAMILTON 2300 TRAMMELL CROW CENTER HOUSE GEORGE TOWN, GRAND ONE LIBERTY PLAZA 2001 ROSS AVENUE CAYMAN NEW YORK, NEW YORK 10006 DALLAS, TEXAS 75201 CAYMAN ISLANDS, BWI (212) 225-2000 (214) 220-3939 (345) 949-8066 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION--DATED OCTOBER 27, 1998 PROSPECTUS - -------------------------------------------------------------------------------- 16,750,000 Shares SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Ordinary Shares - -------------------------------------------------------------------------------- All of the 16,750,000 ordinary shares, par value $0.01 per share (the "Ordinary Shares"), offered hereby (the "Offering") are being sold by Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"). Prior to the Offering, the Company has not conducted any business and there has been no public market for the Ordinary Shares. The initial public offering price will be $15.00 per Ordinary Share. In transactions directly with the Company, two shareholders of the Company (the "Shareholder Investors") and Maverick Fund USA, Ltd., Maverick Fund, L.D.C. and Maverick Fund II, Ltd. (collectively, the "Non-Shareholder Investors," and together with the Shareholder Investors, the "Direct Investors") have agreed to purchase for investment an aggregate of 1,418,440 Ordinary Shares and Class A Warrants exercisable for an aggregate of 400,000 Ordinary Shares. The aggregate purchase price of $20.0 million to be paid by the Direct Investors is based on a price of $14.10 (the initial public offering price per Ordinary Share less the underwriting discounts and commissions in the Offering) for (i) one Ordinary Share and (ii) the right to purchase 0.282 of an Ordinary Share under the Class A Warrants. Such purchases by the Direct Investors (the "Direct Sales") will be consummated simultaneously with the consummation of the Offering. The closing of the Offering made hereby is conditioned upon the closing of the Direct Sales. The Ordinary Shares have been approved for quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "SCTLF," subject to official notice of issuance. The Ordinary Shares offered hereby are subject to limitations on ownership, transfers and voting rights which, among other things, generally prevent transfers that would result in any holder beneficially owning 10% or more of the Ordinary Shares of the Company (other than as described herein), require divestiture of Ordinary Shares to reduce the beneficial ownership of any holder to less than 10% of the Ordinary Shares of the Company and reduce the voting power of any holder beneficially owning 10% or more of the Ordinary Shares of the Company to less than 10% of the total voting power of the Company's issued shares. See "Description of Shares." SEE "RISK FACTORS" ON PAGES 9 TO 20 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE ORDINARY SHARES OFFERED HEREBY. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2)(4) - -------------------------------------------------------------------------------- Per Ordinary Share....................... $ $ $ - -------------------------------------------------------------------------------- Total(3)................................$ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting certain advisory fees and Offering expenses payable by the Company estimated to be $2.7 million. See "Underwriting." (3) The Company has granted the several Underwriters a 30-day over-allotment option to purchase up to 2,512,500 additional Ordinary Shares on the same terms and conditions as set forth above. If all such additional Ordinary Shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ and the total Proceeds to Company will be $ . See "Underwriting." (4) Assuming completion of all Direct Sales, the total proceeds to the Company will be $ . If the Underwriters' over-allotment option described above is exercised in full, the total proceeds to the Company including the Direct Sales will be $ . See "Direct Sales." - -------------------------------------------------------------------------------- The Ordinary Shares are offered by the several Underwriters subject to delivery by the Company and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the Ordinary Shares to the Underwriters is expected to be made through the facilities of The Depository Trust Company, New York, New York, on or about , 1998. PRUDENTIAL SECURITIES INCORPORATED CIBC OPPENHEIMER ING BARING FURMAN SELZ LLC WARBURG DILLON READ LLC , 1998 ENFORCEABILITY OF CIVIL LIABILITIES UNDER UNITED STATES FEDERAL SECURITIES LAWS The Company is organized pursuant to the laws of the Cayman Islands. In addition, certain of the directors and officers of the Company, as well as certain of the experts named herein, reside outside the United States, and all or a substantial portion of their assets and the assets of the Company are or may be located in jurisdictions outside the United States. In particular, Scottish Annuity & Life Insurance Company (Cayman) Ltd., the Company's only subsidiary, through which the Company expects to conduct all its operations, is also a Cayman Islands company. Therefore, it may be difficult for investors to effect service of process within the United States upon such persons or to recover against the Company or such persons on judgments of courts in the United States, including judgments predicated upon the civil liability provisions of the United States federal securities laws. However, the Company may be served with process in the United States with respect to actions against it arising out of or in connection with violations of United States federal securities laws relating to offers and sales of Ordinary Shares made hereby by serving CT Corporation System, 1633 Broadway, New York, New York 10019, its United States agent irrevocably appointed for that purpose. The Company has been advised by Maples and Calder, its Cayman Islands counsel, that there is doubt as to whether the courts of the Cayman Islands would enforce (i) judgments of United States courts obtained in actions against the Company or its directors and officers, as well as the experts named herein, who reside outside the United States predicated upon the civil liability provisions of the United States federal securities laws, or (ii) original actions brought in the Cayman Islands against the Company or such persons predicated solely upon United States federal securities laws. The Company has also been advised by Maples and Calder that there is no treaty in effect between the United States and the Cayman Islands providing for such enforcement, and there are grounds upon which the Cayman Islands courts may not enforce judgments of United States courts. Certain remedies available under the laws of United States jurisdictions, including certain remedies available under the United States federal securities laws, may not be allowed in the Cayman Islands courts as contrary to that nation's public policy. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER, INVITATION OR SOLICITATION TO ANY MEMBER OF THE PUBLIC IN THE CAYMAN ISLANDS TO SUBSCRIBE FOR ANY OF THE ORDINARY SHARES. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE ORDINARY SHARES, INCLUDING PURCHASES OF THE ORDINARY SHARES TO STABILIZE THEIR MARKET PRICE, PURCHASES OF THE ORDINARY SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE ORDINARY SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 ADDITIONAL INFORMATION The Company has filed a Registration Statement on Form S-1, of which this Prospectus is a part (the "Registration Statement"), with the United States Securities and Exchange Commission (the "Commission") under the Securities Act, with respect to the Ordinary Shares offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Ordinary Shares offered hereby, reference is made to the Registration Statement, including the exhibits filed therewith. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement shall be deemed qualified in its entirety by such reference. Upon completion of the Offering, the Company will be subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, will file reports, proxy and information statements and other information with the Commission. The Registration Statement, and the exhibits forming a part thereof, as well as such reports, proxy and information statements and other information may be inspected and copied at the public reference section maintained by the Commission at 450 Fifth Street N.W., Washington, D.C. 20549-1004 and at the following regional offices of the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the public reference section of the Commission at its Washington address at prescribed rates. The Commission also maintains an Internet web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the Commission. After giving effect to the Offering, the Company will be treated as a domestic corporation for purposes of certain requirements of the Exchange Act, including the proxy rules. Pursuant to Rule 3b-4 under the Exchange Act, a "foreign private issuer" is a non-United States issuer other than an issuer that meets the following conditions: (1) more than 50% of the outstanding voting securities of the issuer are held of record by residents of the United States and (2) any of the following: (i) the majority of the executive officers or directors of the issuer are United States citizens or residents, (ii) more than 50% of the assets of the issuer are located in the United States or (iii) the business of the issuer is administered principally in the United States. By virtue of (1) and (2) (i), the Company does not expect that it will be a "foreign private issuer," although there is no assurance of such. If the Company were to be treated as a "foreign private issuer," it would be exempted from the proxy and short-swing profit rules under Sections 14 and 16 of the Exchange Act and, for reporting purposes under the Exchange Act, would be subject to rules applicable to "foreign private issuers." The Company intends to furnish its shareholders with annual reports containing financial statements audited by an independent accounting firm and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the balance sheet, including the notes thereto, included elsewhere in this Prospectus. Unless the context otherwise requires, references herein to the "Company" mean Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company ("Holdings"), together with its wholly-owned subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd., a Cayman Islands insurance company ("Scottish Insurance"), through which Holdings expects to conduct all of its operations. Holdings and Scottish Insurance were incorporated on May 12, 1998 and June 3, 1998, respectively, in the Cayman Islands and neither has any operating history. Scottish Insurance was licensed in the Cayman Islands on July 8, 1998 as an unrestricted Class B insurer, which license authorizes it to write variable life insurance and annuity and life reinsurance. See "Glossary of Selected Life Insurance and Annuity Terms" for definitions of certain terms used in this Prospectus. In this Prospectus, amounts are expressed in United States dollars and the balance sheet contained herein has been prepared in accordance with United States generally accepted accounting principles ("GAAP"). Unless otherwise noted, this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. THE COMPANY Holdings and Scottish Insurance were recently formed as offshore companies principally to provide customized variable life insurance products to high net worth individuals and families and reinsurance of in-force blocks of fixed annuities and similar contracts to insurers no longer actively offering such products or otherwise seeking to more efficiently manage capital allocated to existing businesses. In addition to its primary focus, the Company may reinsure in-force blocks of other types of annuity contracts and life insurance products. The Company believes that the favorable regulatory environment in which it will operate, its planned low cost operating strategy and the absence of a corporate level tax in the Cayman Islands will enable it to become a leading offshore provider of variable life insurance and fixed annuity reinsurance products in its target markets. The Company's variable life insurance business seeks to respond to what the Company believes are increasing demands of high net worth individuals and families (generally individuals and families with a liquid net worth in excess of $10.0 million) for customized life insurance products that can be utilized as part of sophisticated estate planning strategies. The Company's variable life insurance products offer both a specified death benefit as well as a cash value component which is placed in a separate account and invested on behalf of the policyholder by a money manager. Because of the Company's domicile and target customers, the Company can offer policies that permit private independent money managers to manage a policy's separate account utilizing investment strategies not typically available in policies issued to the general public. The Company will also seek to leverage its expertise with respect to variable life insurance products by offering structured life insurance products, such as corporate-owned life insurance ("COLI"), which target the deferred compensation market. The Company's reinsurance business seeks to focus on what the Company believes are meaningful opportunities to reinsure lines of business that are subject to significant reserve or risk capital requirements under rating agency requirements and applicable accounting standards. The Company believes that, in response to heightened regulatory and rating agency scrutiny, insurers are increasingly seeking reinsurance of in-force blocks of annuity and life insurance business as a means to improve earnings or risk-based capital or other financial ratios. The Company's reinsurance business will target insurance companies that have discontinued writing such business or that seek relief from the reserve and capital requirements associated with such business. The Company's reinsurance activities will focus principally on opportunities in the U.S., although the Company also expects to target opportunities in the United Kingdom, Western Europe, Canada and Australia. 4 The principal focus of the Company's reinsurance activities will be on blocks of in-force fixed annuity contracts such as structured settlements, single premium deferred annuities, immediate annuities and similar contracts. The Company intends to focus on the reinsurance of these annuities because it believes that the reserve and capital requirements associated with fixed annuities has made reinsurance of such annuities an attractive option for issuers and reinsurers of those products and because the market for such reinsurance is not currently well-developed. In addition, the Company expects that it may also reinsure various forms of life insurance products, including universal, variable and whole life insurance, and variable annuity contracts if and when attractive opportunities become available. The Company believes that reinsurance of these products will enable it to more effectively capitalize on potential relationships with other insurers and reinsurers. BUSINESS STRATEGY In order to achieve its objective to become a leading offshore provider of variable life insurance and fixed annuity reinsurance products in its target markets, the Company intends to utilize a business strategy with the following principal components: LEVERAGE MANAGEMENT EXPERTISE The Company was organized by the management and shareholders of The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity"). In 1994, the Company's Chief Executive Officer and President, Michael C. French founded Scottish Annuity, a privately held Cayman Islands insurance company, to provide to high net worth individuals and families variable annuity contracts that have the same cash value management features, and the same target market, as the Company's variable life insurance policies. In addition, Mr. French was a founder of Maverick Capital, Ltd. ("Maverick"), an investment management company organized in 1993 with approximately $2.5 billion of assets under management as of October 1, 1998. Since 1995, Michelle L. Boucher, the Company's Senior Vice President, Chief Financial Officer and Secretary, has been Manager of Finance and Administration for Scottish Annuity. The Company intends to draw on Mr. French's and Ms. Boucher's experience in developing Scottish Annuity's variable annuity products and business to develop the Company's variable life insurance products and business. Also, the Company intends to build on the relationships with potential clients as well as with financial advisors, investment managers, private bankers, attorneys and other intermediaries and referral sources that Mr. French and Ms. Boucher have developed with Scottish Annuity. Henryk Sulikowski, the Company's Senior Vice President and Chief Insurance Officer, has over 17 years experience in the insurance and reinsurance industry. Prior to joining the Company, Mr. Sulikowski was a Director of Swiss Re New Markets Corporation ("Swiss Re New Markets"), responsible for developing, structuring and marketing annuity and life reinsurance transactions. Prior to his tenure with Swiss Re New Markets, Mr. Sulikowski was Vice President in charge of annuity and life financial reinsurance activities at Cologne Life Reinsurance Company ("Cologne Re"). Mr. Sulikowski has been an associate of the Society of Actuaries since 1986 and a member of the American Academy of Actuaries since 1987. The Company intends to draw on Mr. Sulikowski's experience and relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives to implement its reinsurance business plan. See "Management--Executive Officers and Directors." UTILIZE THIRD PARTY SERVICE PROVIDERS The Company believes that prospective purchasers of variable life insurance products are price-sensitive and that insurers seeking reinsurance focus principally on price in selecting a reinsurer. As a result, the Company is pursuing a low cost operating strategy. In order to minimize its initial investment in systems and personnel and to create and maintain a low cost operating structure, the Company has entered into or expects to enter into agreements with a number of third party service providers to provide key services to the Company. The Company has retained International Risk Management (Cayman) Ltd. ("IRM Cayman"), a member company of 5 International Risk Management Group, Inc. ("IRMG"), an affiliate of Swiss Reinsurance, to act as the Company's licensed insurance manager in the Cayman Islands and to provide to the Company certain additional administrative services. According to IRM Cayman, IRMG is the largest independent captive insurance manager in the world today, operating out of 20 offices in North America, Europe, Australia, Africa and Asia. In addition, the Company has retained Milliman & Robertson, a leading actuarial consulting firm, to provide from time to time certain actuarial services, including pricing and reinsurance analysis. The Company has also retained Pacific Investment Management Company ("PIMCO"), General Re-New England Asset Management, Inc. ("General Re") and The Prudential Investment Corporation ("Prudential Investment") to manage the Company's investment portfolio consistent with the investment guidelines established by the Company (the "Investment Guidelines"). Prior to consummation of the Offering, the Company expects to retain Westport Worldwide Bermuda, Ltd. ("Westport"), a developer and administrator of insurance products for international insurance brokers, insurance companies and corporations and an affiliate of Westport Worldwide, to provide non-exclusive distribution services to its variable life insurance business, as well as certain related administrative services from time to time, including monitoring tax law compliance and preparing policy illustrations. See "Business--Administration and Consulting Services," and "--Investment Portfolio--Investment Managers." BUILD ON SIGNIFICANT CAPITAL BASE Upon consummation of the Offering, the Company will have an equity capitalization of approximately $254.4 million. The Company believes that this level of capitalization will demonstrate a strong financial position and a high level of commitment to potential clients and the variable life insurance and reinsurance marketplace and is necessary in establishing it as a competitive insurance company. The Company does not anticipate that it will incur any material indebtedness in the ordinary course of its business other than possibly obtaining letters of credit in connection with its reinsurance contracts. The Company should also benefit from the fact that, as a recently formed entity, its capital is presently unencumbered by issues such as reserve adequacy, unrealized losses in its investment portfolio and uncollectible reinsurance. In part because of the Company's expected capitalization following the Offering, Duff & Phelps Credit Rating Co. ("Duff & Phelps") has assigned Scottish Insurance a preliminary claims-paying ability rating of "A" and A.M. Best Company ("A.M. Best") has assigned Scottish Insurance a preliminary 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. The ratings assigned to Scottish Insurance by Duff & Phelps and A.M. Best are contingent on the Company raising gross proceeds of $200.0 million in the Offering. Each rating represents the respective rating agency's opinion of the Company's ability to meet its obligations to its policyholders. APPLY PRUDENT RISK MANAGEMENT POLICY The principal risk associated with the Company's variable life insurance policies is mortality risk. Mortality risk tends to be more stable when spread across large numbers of insureds. The Company's variable life insurance policies are expected to be placed with a relatively small number of high net worth policyholders and to 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. As a consequence, the Company's associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than an insurer with a broader risk pool. As a result, the Company intends to allocate a significant portion of its capital, in addition to any policy reserves required under GAAP and any additional Cayman Islands regulatory requirements, to cover possible volatility in mortality experience. The Company's current Underwriting Guidelines limit the maximum aggregate net amount at risk the Company will initially assume on any one life to $500,000. In order to comply with this guideline, the Company intends to reinsure any liability for amounts in excess of $500,000 per insured. 6 The principal risk associated with the Company's fixed annuity reinsurance activities is investment risk. Specifically, the Company is subject to (i) asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value, (ii) 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 (iii) disintermediation risk, which is the risk that the Company may have to sell assets at a loss to provide for policyholder withdrawals or to satisfy liabilities not otherwise properly matched. As part of its reinsurance activities, the Company may also reinsure in-force blocks of life insurance. The principal risk associated with the reinsurance of life insurance is mortality risk. The Company believes that one of the benefits to it resulting from the reinsurance of life insurance policies covering broad pools of insureds is that the Company's mortality risk on such reinsurance will be spread over a larger insured population than will be the case with respect to its variable life insurance policies. To the extent the Company reinsures variable annuity contracts, the principal risk reinsured will be surrender risk, a risk which is also associated with the reinsurance of fixed annuities and life insurance. An additional risk associated with the Company's reinsurance business is the risk that the ceding insurer will be unable to pay amounts due the Company because of its own financial difficulties. The Company believes this risk can be mitigated by conducting an appropriate financial due diligence review of each cedent. The Company will establish policy reserves and allocate risk capital in accordance with actuarial standards of practice, GAAP accounting requirements and any additional Cayman Islands regulatory requirements in an effort to reflect the level of investment, mortality, surrender and other risks associated with the annuities and life insurance it will reinsure. EMPLOY PROFESSIONAL INVESTMENT STRATEGY The Company will seek to generate attractive levels of investment income through a professionally managed fixed income investment portfolio. The Company has entered into an investment advisory agreement with PIMCO, which is anticipated to manage initially approximately 50% of the Company's investment portfolio. The Company has also retained General Re and Prudential Investment (together with PIMCO, the "Investment Managers") to each manage a portion of the other 50% of the Company's investment portfolio. The Company may also retain other investment managers from time to time. Each Investment Manager will have discretionary authority over the portion of the Company's investment portfolio allocated to it, subject to the Investment Guidelines. The Company's investment portfolio (exclusive of assets transferred and invested as part of any coinsurance transaction) will principally consist of fixed income securities with a weighted average investment rating of "A." Consistent with the Investment Guidelines, no more than 15% of the Company's investment portfolio will be invested in below investment grade fixed income securities. DIRECT SALES In transactions directly with the Company, the Direct Investors have agreed to purchase for investment an aggregate of 1,418,440 Ordinary Shares and Class A Warrants exercisable for an aggregate of 400,000 Ordinary Shares. The aggregate purchase price of $20.0 million to be paid by the Direct Investors is based on a price of $14.10 (the initial public offering price per Ordinary Share less the underwriting discounts and commissions in the Offering) for (i) one Ordinary Share and (ii) the right to purchase 0.282 of an Ordinary Share under the Class A Warrants. The Direct Sales will be consummated simultaneously with the consummation of the Offering. The closing of the Offering made hereby is conditioned upon the closing of the Direct Sales. See "Direct Sales." ---------------- The Company's principal executive office is located at Ugland House (P.O. Box 10657APO), George Town, Grand Cayman, Cayman Islands, British West Indies, and its telephone number is (345) 949-2800. 7 THE OFFERING Ordinary Shares Offered Hereby.................. 16,750,000 Ordinary Shares Ordinary Shares Offered in the Direct Sales(1).. 1,418,440 Ordinary Shares Ordinary Shares to be Outstanding after the Offering and the Direct Sales(2)............... 18,568,440 Ordinary Shares Use of Proceeds................................. Substantially all of the net proceeds will be contributed to Scottish Insurance to support its insurance and reinsurance activities. See "Use of Proceeds." Nasdaq National Market Symbol................... SCTLF
- -------- (1) Unless otherwise noted, this Prospectus assumes that upon consummation of the Offering the sale of 1,418,440 Ordinary Shares and Class A Warrants to purchase an aggregate of 400,000 Ordinary Shares to the Direct Investors in the Direct Sales has been completed. (2) Ordinary Shares to be outstanding after the Offering and the Direct Sales (i) includes 400,000 Ordinary Shares outstanding as of the date hereof and (ii) excludes 2,850,000 Ordinary Shares issuable upon exercise of Class A Warrants, 200,000 Ordinary Shares issuable upon exercise of Class B Warrants, 1,060,000 Ordinary Shares issuable upon exercise of options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering and the Direct Sales and 540,000 Ordinary Shares reserved for issuance upon exercise of options that may be granted in the future pursuant to the Company's Amended and Restated 1998 Stock Option Plan (the "Stock Option Plan"). In addition, Ordinary Shares to be outstanding after the Offering and the Direct Sales excludes up to 750,000 Ordinary Shares issuable upon exercise of Class C Warrants, if and to the extent such warrants are issued pursuant to the Company's proposed agreement with Westport. See "Business--Marketing" and "Description of Shares--Warrants--Class C Warrants." If the Underwriters' over-allotment option is exercised in full, upon consummation of the Offering and the Direct Sales, 21,080,940 Ordinary Shares will be outstanding, and the number of Ordinary Shares issuable upon exercise of options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering and the Direct Sales will increase to 1,208,500 Ordinary Shares. The number of Ordinary Shares issuable upon exercise of the Class A Warrants, the Class B Warrants and the Class C Warrants will not change if the Underwriters' over-allotment option is exercised in full. The Class A Warrants, Class B Warrants and options are not currently exercisable. See "Management--Stock Option Plan," "Description of Shares--Warrants" and "--Options," and "Direct Sales." RISK FACTORS Businesses such as the Company which are in their initial stages of development present substantial business and financial risks and may suffer significant losses for reasons not anticipated by management. In addition, the Company's business plan has not been tested and may not succeed. Investors should consider carefully the material risk factors involved in connection with an investment in the Ordinary Shares and the impact to investors from various circumstances which could adversely affect the Company's business, results of operations or financial condition. See "Risk Factors." 8 RISK FACTORS An investment in the Ordinary Shares involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information set forth in this Prospectus, in connection with an investment in the Ordinary Shares. When used in this Prospectus, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "plan," "intend" and similar expressions are intended to identify forward-looking statements regarding among other things: (i) the Company's business and growth plans; (ii) the Company's relationship with third-party service providers and clients; (iii) the use of the net proceeds of the Offering; (iv) trends in the insurance and reinsurance industries; (v) government regulations; (vi) trends that may affect the Company's financial condition or results of operations; and (vii) the declaration and payment of dividends. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described below and under the heading "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and elsewhere in this Prospectus. START UP OPERATIONS; RELIANCE ON THIRD PARTY SERVICE PROVIDERS. Holdings and Scottish Insurance were formed on May 12, 1998 and June 3, 1998, respectively, and neither has any operating history. Businesses which are starting up or in their initial stages of development present substantial business and financial risks and may suffer significant losses. They must successfully develop business relationships, establish operating procedures, hire staff and complete other tasks appropriate for the conduct of their intended business activities. Furthermore, the Company initially intends to have only a limited staff and to outsource many functions, including certain administrative, regulatory, actuarial, reinsurance and underwriting functions. The Company has retained or expects to retain prior to the consummation of the Offering Westport, IRM Cayman, Milliman & Robertson, PIMCO, General Re and Prudential Investment to provide services to the Company. Scottish Insurance will be dependent upon the quality of the services provided by such firms. The inability of Scottish Insurance to retain qualified service providers or the failure of such outside service providers to perform adequately their functions could delay or prevent the Company from fully implementing its business plan or could otherwise adversely affect the Company. Scottish Insurance has retained Henryk Sulikowski as its Senior Vice President and Chief Insurance Officer and intends to hire additional personnel to provide administrative and underwriting support. Such individuals will be critical components of the Company's operations. There can be no assurance that the Company will be successful in attracting or employing the personnel that it is seeking, and if it is unable to do so, such failure could delay or prevent the Company from fully implementing its business plan. See "Business-- Administration and Consulting Services" and "Management--Executive Officers and Directors." ABILITY TO IMPLEMENT ITS BUSINESS PLAN. General. The Company's business plan is focused principally on entering the variable life insurance and fixed annuity reinsurance businesses. The Company's ability to successfully implement this plan is dependent on, among other things, the Company's ability to (i) in the case of its variable life insurance business, attract clients principally through referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States who will not be representing the Company and will not be compensated by the Company for any activities undertaken in the U.S., (ii) in the case of its fixed annuity and other reinsurance businesses, to generate business primarily through its Senior Vice President and Chief Insurance Officer's relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives, (iii) develop and effectively implement underwriting and investment policies appropriate for the risks associated with its insurance and reinsurance products, (iv) maintain a competitive claims- paying ability rating, (v) attract clients through referrals from Scottish Annuity and (vi) effectively manage growth in the Company's businesses. Variable Life Insurance Business. Because neither Holdings nor Scottish Insurance will be licensed or registered to do business in any jurisdiction in the U.S., no intermediary, whether U.S. or foreign, who provides 9 referrals or otherwise directs business to the Company may represent the Company or receive commissions or other remuneration from the Company for activities undertaken in the U.S. As a result of such limitation, no assurance can be given that the Company will be able to effectively implement its insurance and reinsurance plans. The Company, however, may from time to time provide commissions or other remuneration to non-U.S. referral sources for activities undertaken outside the U.S. Other than in connection with certain existing or proposed agreements between the Company and each of Westport and Scottish Annuity, the Company has no current arrangements with respect to any such referral sources, although the Company expects that such referral sources will likely be compensated based on a percentage of the revenue derived from such referrals. Although the Company currently has no existing or proposed contractual or other arrangement with any referral source other than with Westport and Scottish Annuity, the Company, subject to any applicable regulatory limitations, may provide referrals to persons or entities that provide it with referrals. Fixed Annuity Reinsurance Business. The Company's business plan provides that Scottish Insurance will principally focus its reinsurance activities on reinsuring blocks of in-force fixed annuities such as structured settlements, single premium deferred annuities, immediate annuities and similar contracts which are issued by insurers who are no longer actively writing such annuities or similar contracts or who are seeking relief from the reserve and capital requirements associated with such contracts. The Company believes that this market is largely undeveloped and no assurance can be given that such market will develop or if it develops, whether such market will be substantial enough to support Scottish Insurance's reinsurance business, particularly to the extent such contracts have been issued by insurers no longer actively writing new fixed annuity contracts. Also, Scottish Insurance expects that a portion of any block of fixed annuities that it reinsures will be surrendered or otherwise terminated each year, a risk that Scottish Insurance will take into account when negotiating prices for its reinsurance products. No assurance can be given, however, that Scottish Insurance will be successful in negotiating prices that actually take into account such risk or that as such fixed annuities or similar contracts are surrendered, terminate or expire, Scottish Insurance will have sufficient reinsurance business to sustain its growth or that there will be sufficient reinsurance business in the Company's target market to replace such fixed annuities or similar contracts. In addition, the Company expects to seek to enter into retrocessional arrangements for certain risks associated with its reinsurance business; however, the Company currently does not have any such arrangements in place and no assurances can be given that such arrangements will be available when the Company will need them and if available, as to what terms the Company will be able to obtain under such arrangements. Other Reinsurance Businesses. In addition to its primary focus on the reinsurance of fixed annuities, the Company expects that Scottish Insurance may reinsure in-force blocks of life insurance and variable annuity contracts; however, no assurance can be given that the Company will become aware of attractive opportunities in these areas or if it becomes aware of such opportunities, will be in a position to take advantage of them. Underwriting and Investment Policies. Because of the risks associated with its variable life insurance and reinsurance businesses (e.g., mortality, investment and surrender risk), the Company's underwriting and investment policies must be tailored to adequately protect the Company against such risks. No assurance, however, can be given that the Company will be successful in developing or implementing such policies or that such policies will be effective. Third Party Service Providers. No assurance can be given that third party service providers retained by the Company will provide services in accordance with the Company's underwriting, investment and other policies or that such services will be performed adequately. Maintenance of Claims-Paying Ability Rating. Insurance ratings are used by prospective purchasers of insurance policies as well as insurers, reinsurers and insurance and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers and reinsurers. In addition, the rating of a company purchasing reinsurance may be adversely affected by an unfavorable rating or the lack of a rating of its reinsurer. The Company has received a preliminary claims-paying ability rating of "A" from Duff & Phelps and a preliminary Best Rating of "A-" (Excellent) from A.M. Best. The Duff & Phelps and A.M. Best ratings are contingent upon the Company raising gross proceeds of at least $200.0 million in the Offering. If the 10 Company fails to satisfy this condition and consequently does not receive a final rating from Duff & Phelps and/or A.M. Best, the Company's prospects would be adversely affected. See "Business--Competition--Ratings." In addition, if final ratings are received, no assurance can be given that the Company will be able to conduct its operations such that the Company will be able to maintain its "A" claims-paying ability rating from Duff & Phelps or its "A-" (Excellent) claims-paying ability rating from A.M. Best or, if the Company is unable to maintain such ratings, to obtain similar claims-paying ability ratings from other major rating agencies. Scottish Annuity Referrals. No assurance can be given that Scottish Annuity will provide the Company with any meaningful number of referrals or if Scottish Annuity provides such referrals, that such referrals will result in actual sales of the Company's variable life insurance policies. Ability to Manage Growth. Growth in the Company's variable life insurance and reinsurance businesses contemplated by its business plan may place significant demands on the Company's management and its administrative and financial resources. If the Company is unable to manage growth effectively, the Company's business, results of operations and financial condition are likely to be materially adversely affected. EFFECT OF CHANGES IN U.S. TAX LAWS ON VARIABLE LIFE INSURANCE SALES. The market for variable life insurance products in the United States is based in large part on the favorable tax treatment these products receive relative to certain other investment alternatives. Any material change in such 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 have an adverse effect on the market for variable life insurance products. The current budget proposal submitted to the United States Congress by the Clinton Administration includes certain provisions which, if not modified, could limit the ability of policyholders to change private independent money managers from time to time without triggering adverse tax consequences. If these proposed tax changes were enacted into law, they could adversely affect the Company's variable life insurance business. In addition, the Clinton budget proposal contains a provision that would prevent all transfers to trusts from qualifying for the annual present interest exclusion from the gift tax, even if a beneficiary held a so-called "Crummey power" (or right of withdrawal). If this proposal were enacted into law, the primary and most tax-efficient method of funding premium payments by insurance trusts would be eliminated. Because the Company expects that its variable life insurance will generally be purchased by insurance trusts (or for contribution to insurance trusts) so as to provide liquidity for estate taxes and to effect the tax-free transfer of the proceeds from one generation to another, adoption of such proposal would likely adversely affect sales of such policies and, as a consequence, would likely have a material adverse effect on the Company's business, results of operations and financial condition. In addition, COLI products have been affected by recent changes in their tax treatment and any additional changes in the tax laws that reduce or eliminate any remaining favorable tax treatment for such products would likely have a material adverse effect on the market for such products. REGULATION. Scottish Insurance, through which Holdings is expected to conduct all of its business, is a Cayman Islands company licensed as an unrestricted Class B insurer and is subject to regulation and supervision by the Cayman Islands Monetary Authority (the "Cayman Monetary Authority"). Neither Scottish Insurance nor Holdings will be registered or licensed to do business in any jurisdiction in the United States or any other country. The insurance laws of each state in the United States and in most other countries in which the Company would likely conduct business regulate the sale of insurance and reinsurance within their jurisdiction by insurers, such as Scottish Insurance, that are not admitted to do business within such jurisdiction. With some exceptions, the sale of insurance within a jurisdiction where the insurer is not admitted to do business is prohibited. Scottish Insurance is expected to conduct its business through its executive offices in the Cayman Islands and will not maintain an office, and its personnel will not solicit, advertise, underwrite, settle claims or conduct other insurance activities, in the United States or, to the extent prohibited, in any other countries. Substantially all of the Company's variable life insurance clients are expected to be obtained through referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States, none of whom will be representing the Company or may receive any commissions or other remuneration from Scottish Insurance for activities undertaken in the U.S. Substantially all of the Company's reinsurance business is 11 expected to be generated primarily through its Chief Insurance Officer's relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives, none of whom may receive any commissions or other remuneration from Scottish Insurance for any activities undertaken in the U.S. In addition, all insurance contracts of Scottish Insurance are expected to be negotiated, executed and delivered, and all premiums are expected to be received, outside the United States. Accordingly, the Company has received an opinion from its state insurance regulatory counsel, The Bernstein Law Firm, that Scottish Insurance will not be subject to the insurance laws of any state of the United States. To the extent that the Company is subject to similar restrictions in jurisdictions outside the U.S., the Company will develop operating guidelines designed to facilitate the Company's compliance with such restrictions. See "Business--Regulation." There can be no assurance, however, that inquiries or challenges to the insurance activities of Scottish Insurance will not be raised in the future. The Company has structured its business and expects to conduct its operations in the manner described above in order to allow the Company to provide its clients with variable life insurance products which have customized features that would not typically be available from a company subject to such laws. If the Company were to become subject to such laws, its business, results of operations and financial condition would likely be materially adversely affected. From time to time, there have been congressional and other initiatives in the United States regarding the supervision and regulation of the insurance industry, including proposals to supervise and regulate alien insurers to a greater extent than currently regulated. While none of these proposals has been adopted to date on either the federal or state level, there can be no assurance that federal or state legislation will not be enacted subjecting Holdings or Scottish Insurance to supervision and regulation in the United States. In addition, because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are in place, it is anticipated that the Company's reinsurance clients will typically require it to post a letter of credit or provide other collateral through a funds withheld or trust arrangement. If the Company is unable to obtain a letter of credit facility on commercially acceptable terms or is unable to arrange for such other collateral, the Company's ability to operate its reinsurance business will be severely limited. RISKS ASSOCIATED WITH THE COMPANY'S PRODUCTS. Variable Life Insurance--Mortality Risk. The principal risk associated with the Company's variable life insurance policies will be mortality risk. Mortality risk tends to be more stable when spread across large numbers of insureds. The Company's variable life insurance policies are expected to be placed with a relatively small number of high net worth policyholders and to 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. As a consequence, the Company's associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than that of an insurer with a broader risk pool. As a result, no assurance can be given that the Company's policy reserves will be adequate, that assets will be properly matched to meet anticipated liabilities, that assets will not need to be liquidated at substantial losses to meet such liabilities or that, to the extent the Company seeks to reinsure such mortality risk, such reinsurance will be available on commercially acceptable terms or that such reinsurers will perform under their reinsurance agreements. Fixed Annuity Reinsurance--Investment Risk. The principal risk associated with the Company's fixed annuity reinsurance activities is investment risk. Specifically, the Company is subject to (i) asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value, (ii) reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than expected, and (iii) disintermediation risk, which is the risk that the Company may have to sell assets at a loss to provide for policyholder withdrawals. Although the Company expects to reflect such investment risk in product pricing and in establishing policy reserves, no assurance can be given that such reserves will be adequate, that assets will be properly matched to meet anticipated liabilities or that the Company's investments will provide sufficient returns to enable the Company to satisfy its guaranteed fixed benefit obligations. 12 Other Reinsurance Businesses--Mortality, Investment and Surrender Risk. The Company expects that it will also potentially 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. The Company's Underwriting Guidelines limit such risk to $500,000 per insured and the Company intends 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 the Company may also include investment risks similar to those for fixed annuities. In addition, like annuities, life insurance policies are subject to surrender risk. The Company may also reinsure variable annuities. The principal risk reinsured by the Company with respect to these annuities is surrender risk. Reinsurance Business--Ceding Insurer Risk. An additional risk associated with the Company's reinsurance business is the risk that the ceding insurer will be unable to pay amounts due the Company because of its own financial difficulties. No assurance can be given that such ceding insurers will be able to pay amounts due to the Company or that such inability will not have a material adverse effect on the Company's business, results of operations or financial condition. In addition, no assurance can be given that ceding companies will maintain appropriate interest crediting rates with respect to fixed annuities or interest rate-sensitive life insurance policies. RISKS ASSOCIATED WITH INVESTMENT ACTIVITIES. The Company's fixed income investments will be subject to two primary sources of investment risk: credit risk, relating to 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. No assurance can be given that the Company will be able to effectively manage such risks. If the Company is unable to effectively manage such risks or otherwise effectively manage its investment portfolio, the Company's ability to support its variable life insurance and reinsurance businesses, and its results of operations and financial condition, would be adversely affected. In addition, the Investment Guidelines permit up to 15% of the Company's investment portfolio to be invested in below investment grade fixed income securities. While any investment carries some risk, the risks associated with lower-rated securities are greater than the risks associated with investment grade securities. The risk of loss of principal or interest through default is greater because lower-rated securities are usually unsecured and are often subordinated to an issuer's other obligations. Additionally, the issuers of these securities frequently have high debt levels and are thus more sensitive to difficult economic conditions, individual corporate developments and rising interest rates which could impair an issuer's capacity or willingness to meet its financial commitment on such lower-rated securities. Consequently, the market price of these securities may be quite volatile, and the risk of loss is greater. In addition, to the extent that the Company enters into a coinsurance transaction, the Company will seek to manage the investment of the assets transferred to it as part of such transaction in an effort to match its anticipated reinsurance liabilities associated with such transaction. The Company expects to invest such assets principally in fixed income and, to a lesser extent, equity securities. The Company may invest in foreign denominated securities to manage currency risk if the coinsurance transaction has a foreign currency component. The Company may also enter into interest rate swaps and other hedging transactions in an effort to manage interest rate risks associated with such transactions. The Company's ability to structure its investments to match its anticipated reinsurance liabilities has not been tested. Therefore, no assurance can be given that the Company will successfully match the structure of its investments in relation to its anticipated reinsurance liabilities. If the Company's calculations with respect to its reinsurance liabilities are incorrect, or if it improperly structures its investments to match such liabilities, it could be forced to liquidate investments prior to maturity at a significant loss with the result that reserves therefor may not be adequate, which could have an adverse effect on the Company's business, results of operations and financial condition. The Company has entered into investment advisory agreements with PIMCO, General Re and Prudential Investment to manage the Company's investment portfolio. Each Investment Manager will have discretionary 13 authority over the portion of the Company's investment portfolio allocated to it, subject to the Investment Guidelines adopted by the Company. The performance of the Company's investment portfolio, therefore, will depend to a great extent on the ability of the Investment Managers to select and manage appropriate investments. There can be no assurance that the Investment Managers will be successful in meeting the Company's investment objectives. See "Business--Investment Managers." The success of any investment activity is affected by general economic conditions, which may adversely affect the markets for interest-rate-sensitive securities and equity securities, including the level and volatility of interest rates and the extent and timing of investor participation in such markets. Unexpected volatility or illiquidity in the markets in which the Company directly or indirectly holds positions could adversely affect the Company. QUARTERLY FLUCTUATIONS; CERTAIN ECONOMIC AND MARKET RISKS. The Company's results of operations may also fluctuate significantly on a quarterly basis based on changes in, among other things, (i) the capital markets, (ii) the performance results of its investment managers or (iii) the Company's experience under its reinsurance contracts. Furthermore, a downturn in the economy or the capital markets could adversely affect the market for many life insurance and annuity products. If the market for life insurance or annuity contracts were adversely affected, it would likely depress the demand for the Company's variable life insurance and reinsurance products, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, such a downturn could adversely affect the value of policyholders' separate accounts related to the Company's variable life insurance policies and the variable annuity contracts issued by Scottish Annuity, which would reduce the amount of revenue the Company generates from fees charged to policyholders and Scottish Annuity based on the value of such accounts. See "Management's Discussion and Analysis of Financial Condition and Plan of Operations--General" and "Business--Scottish Annuity Agreement." FOREIGN CURRENCY FLUCTUATIONS. The Company's functional currency is the United States dollar. However, because the Company expects that it may write a portion of its business and receive premiums in currencies other than United States dollars and may maintain a small portion of its investment portfolio in investments denominated in currencies other than United States dollars, the Company may experience exchange losses to the extent its foreign currency exposure is not properly managed or otherwise hedged, which in turn could adversely affect the Company's statement of operations and financial condition. IMPORTANCE OF MANAGEMENT AND KEY EMPLOYEES. The Company is highly dependent upon its executive officers and key employees. The unexpected loss of the services of one of these individuals, particularly Michael C. French, Chief Executive Officer and President, Michelle L. Boucher, Senior Vice President, Chief Financial Officer and Secretary, or Henryk Sulikowski, Senior Vice President and Chief Insurance Officer, could have a material adverse effect on the Company. Although the Company has employment agreements with Mr. French, Ms. Boucher and Mr. Sulikowski, no assurance can be given that the Company will be able to retain the services of these individuals. The Company does not carry any key person life insurance policies for any of its executive officers or employees. The Company's success will also be dependent on its ability to attract and maintain a staff of qualified administrative and management personnel and, to the extent qualified Cayman Islands citizens are not available, the willingness and ability of non-Cayman Islands citizens to be located in the Cayman Islands. The Company, which currently has five employees, intends to hire additional qualified administrative and underwriting personnel as the Company's business grows, but no assurance can be given that the Company will be successful in attracting and hiring such personnel. CAYMAN ISLANDS WORK PERMITS. Under Cayman Islands immigration law, those persons who are not Caymanians, Cayman status holders or residents with permission to work may not engage in any gainful occupation in the Cayman Islands without the specific permission of the appropriate Cayman Islands government authority. Ms. Boucher is currently working as an executive of Scottish Annuity under a validly issued work permit, which expires July 24, 1999. Ms. Boucher is seeking an amendment to such work permit to cover her employment by Holdings and Scottish Insurance. Mr. French and Mr. Sulikowski were issued work permits for an initial one year period commencing on October 2, 1998 and September 14, 1998, respectively. Messrs. 14 French's and Sulikowski's permits may be automatically renewed for an additional one year period upon payment of the applicable renewal fee. Although the Company believes that Ms. Boucher's work permit will be amended, no assurance can be given that such work permit will be amended or that any work permits received will be renewed when they expire. See "Business-- Employees" and "Management--Executive Officers and Directors." If such work permits are not amended or renewed, the Company may be required to make other arrangements to permit the person affected to perform services for the Company outside the Cayman Islands. This could involve such person or persons establishing residency in some other location outside the United States, which could increase the Company's administrative expenses. DUAL MANAGEMENT DUTIES. Ms. Boucher is currently an executive officer of Scottish Annuity and will continue to serve in such capacity following the Offering. Ms. Boucher will also be performing services for Scottish Annuity pursuant to the Scottish Annuity Agreement. No assurance can be given that acting in such capacities while serving as an executive of the Company will not adversely affect the ability of Ms. Boucher to perform her duties for the Company. See "Business--Scottish Annuity Agreement." COMPETITION. The life insurance and reinsurance industries are highly competitive and most of the companies in such industries are significantly larger and have operating histories and have access to significantly greater financial and other resources than does the Company. The Company has no experience competing with such companies and there can be no assurance that it will be successful. In addition, to the extent that the Company's variable life insurance policies provide for management of the underlying separate accounts by private independent money managers, the Company's variable life insurance policies compete with mutual funds and other investment and savings vehicles. The Company will compete for customers in its market niches primarily based on price, expertise and service, factors which may be affected by events or conditions (e.g., changes in applicable insurance regulations or tax laws) over which the Company has no control. In addition, competition in the reinsurance business that the Company intends to underwrite is based on many factors, including price, the general reputation and perceived financial strength of the reinsurers, existing relationships with other reinsurers, ratings assigned by independent rating agencies, reputation and experience in structuring transactions which meet client needs and regulatory requirements. In addition, because the Company expects to rely at least initially on a small number of clients for both its variable life insurance and reinsurance businesses, such businesses may be more susceptible to the adverse effects of competition. In addition, substantially all of the Company's variable life insurance clients are expected to be obtained through referrals in the United States by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States, while its reinsurance clients are expected to be obtained through relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives with whom the Company's Senior Vice President and Chief Insurance Officer has a relationship. None of these intermediaries or other referral sources may receive any commission or other remuneration from the Company for activities undertaken in the U.S. or any other jurisdiction that imposes restrictions on the Company's activities similar to those which the Company is subject to in the U.S. Accordingly, no assurance can be given that the Company can successfully compete with the United States and foreign insurance and reinsurance companies that directly market their products in the United States and elsewhere. The Company's domestic competitors are generally registered or otherwise subject to state insurance laws in one or more jurisdictions in the U.S. Because the Company does not intend to solicit, advertise or conduct insurance activities in the U.S., the Company does not expect to be subject to such laws. See "Business--Regulation." Potential clients and/or their advisors will be able to compare the Company's products to the products of its competitors based on publicly available information regarding such competitors' products. INCOME TAX RISKS. Taxation of Holdings and Scottish Insurance. Holdings and Scottish Insurance are Cayman Islands companies and neither are expected to file United States income tax returns. Holdings and Scottish Insurance plan to operate in such a manner that they are not subject to United States tax (other than withholding tax on 15 certain investment income from United States sources) because they do not engage in business in the United States. However, because definitive identification of activities which constitute being engaged in trade or business in the United States is not provided by the Internal Revenue Code of 1986, as amended (the "Code"), or regulations or court decisions, there can be no assurance that the Internal Revenue Service ("IRS") will not contend subsequent to the Offering that Holdings and/or Scottish Insurance is engaged in a trade or business in the United States. If Holdings were considered to be engaged in a trade or business in the United States it would be subject to United States tax at regular corporate rates on its taxable income that is effectively connected with its United States business plus an additional 30% "branch profits" tax on such income remaining after the regular tax, in which case there could be an adverse affect on the Company. See "Material Tax Consequences." The United States currently imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers with respect to risks located in the United States. In addition, Holdings may be subject to withholding tax on certain investment income from United States sources. There can be no assurance that such taxes will not be increased or that other taxes will not be imposed on Holdings' business. Controlled Foreign Corporation Rules. United States persons who may, directly or through certain attribution rules, acquire 10% or more of the Ordinary Shares of Holdings, should consider the possible application of the "controlled foreign corporation" ("CFC") rules. Each "United States shareholder" of a CFC who owns shares in the CFC on the last day of the CFC's taxable year generally must include in his gross income for United States federal income tax purposes his pro-rata share of the CFC's "subpart F income," even if the subpart F income has not been distributed. For these purposes, any United States person who owns directly or indirectly 10% or more of the voting stock of a foreign corporation will be considered to be a "United States shareholder." In general, a foreign insurance company such as Scottish Insurance is treated as a CFC only if such "United States shareholders" collectively own more than 25% of the total combined voting power or total value of Holdings' stock for an uninterrupted period of 30 days or more during any year. Holdings believes that, because of the anticipated dispersion of its share ownership among holders and because of the restrictions in its Articles of Association on transfer, issuance or repurchase of the voting shares of Holdings, shareholders who acquire Ordinary Shares in the Offering will not be subject to treatment as "United States shareholders" of a CFC. In addition, because under the Articles of Association no single shareholder will be permitted to exercise 10% or more of the total combined voting power of Holdings, shareholders of Holdings should not be viewed as "United States shareholders" of a CFC for purposes of these rules. There can be no assurance, however, that these rules will not apply to shareholders of Holdings. See "Material Tax Consequences." Related Person Insurance Income Risks. If Scottish Insurance's related person insurance income ("RPII") determined on a gross basis were to equal or exceed 20% of its gross insurance income in any taxable year and direct or indirect insureds and persons related to such insureds were directly or indirectly to own more than 20% of the voting power or value of Scottish Insurance's capital stock, a United States person who owns Ordinary Shares in Holdings directly or indirectly on the last day of the taxable year may be required to include in income for United States federal income tax purposes the shareholder's pro-rata share of Scottish Insurance's RPII for the taxable year, determined as if such RPII were distributed proportionately to such United States person at that date. RPII is generally underwriting premium and related investment income attributable to insurance or reinsurance policies where the direct or indirect insureds are United States shareholders or are related to United States shareholders of the insurance company issuing such policies. Scottish Insurance does not expect that it will knowingly enter into insurance agreements in which, in the aggregate, the direct or indirect insureds are, or are related to, owners of 20% or more of the Ordinary Shares. Furthermore, Scottish Insurance does not currently believe that the 20% gross insurance income threshold will be met in 1998 or any subsequent year. However, there can be no assurance that this will be the case. Consequently, there can be no assurance that a United States person will not be required to include amounts in its income in respect of RPII in any taxable year. See "Material Tax Consequences." If a shareholder who is a United States person disposes of shares in a foreign insurance corporation that has RPII (even if the amount of RPII is less than 20% of the corporation's gross insurance income) and in which United States persons own 25% or more of the voting power or value of the corporation's shares, any gain from 16 the disposition will generally be treated as ordinary income to the extent of the shareholder's portion of the corporation's undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares (potentially whether or not such earnings and profits are attributable to RPII). In addition, such a shareholder will be required to comply with certain reporting requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to dispositions of Ordinary Shares because Holdings is not itself directly engaged in the insurance business and because proposed United States Treasury regulations applicable to this situation appear to apply only in the case of shares of corporations that are directly engaged in the insurance business. There can be no assurance, however, that the IRS will interpret the proposed regulations in this manner or that the proposed regulations will not be promulgated in final form in a manner that would cause these rules to apply to dispositions of Ordinary Shares. See "Material Tax Consequences." Passive Foreign Investment Company Risks. To avoid significant potential adverse United States federal income tax consequences for any United States person who owns Ordinary Shares of the Company, it is important that Holdings not constitute a "passive foreign investment company" (a "PFIC") in any year in which such person is a shareholder. In general, a foreign corporation is a PFIC for a taxable year if 75% or more of its income constitutes "passive income" or 50% or more of its assets 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 such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Because Holdings, through Scottish Insurance, intends to be predominately engaged in an insurance business and does not intend to have financial reserves in excess of the reasonable needs of its insurance business, Holdings does not expect to meet the requirements for a PFIC. There can be no assurance, however, that the IRS or a court will concur in this view. See "Material Tax Consequences." Cayman Islands Taxes. There are no income, corporation, capital gains or other taxes in effect in the Cayman Islands on the basis of present legislation. In addition, Holdings and Scottish Insurance have each received an undertaking from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended (1995 Revision), that until the year 2018 (i) no subsequently enacted law imposing any tax on profits, income, gains or appreciation shall apply to Holdings or Scottish Insurance and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any shares, debentures or other obligations of Holdings or Scottish Insurance. There can be no assurance that after such date Holdings or Scottish Insurance would not be subject to any such tax. HOLDING COMPANY STRUCTURE AND DIVIDENDS. Holdings is a holding company which will be engaged in the variable life insurance and reinsurance business through its ownership of Scottish Insurance. Holdings' principal source of income will be dividends paid by Scottish Insurance. Holdings intends to begin paying dividends on its Ordinary Shares on a quarterly basis. No dividend, however, has been legally declared by Holdings' Board of Directors. The declaration and payment of dividends by Holdings will be at the discretion of its Board of Directors and will depend upon Holdings' results of operations and cash flows, the financial position and capital requirements of Scottish Insurance, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant. Holdings' ability to pay dividends depends on the ability of Scottish Insurance to pay dividends to Holdings. While Holdings is not itself subject to any significant legal prohibitions on the payment of dividends, Scottish Insurance is subject to Cayman Islands regulatory constraints which affect its ability to pay dividends to Holdings. Specifically, payment of dividends by Scottish Insurance is subject to its need to maintain a level of capital adequate to support its variable life insurance and reinsurance businesses and comply with restrictions under applicable insurance regulations and Cayman Islands corporate law. Scottish Insurance, as the holder of an unrestricted Class B insurance license, will be required by Cayman Islands law to maintain a minimum net worth of $240,000. Accordingly, there is no assurance that dividends will be declared or paid in the future. See "Dividend Policy." 17 LIMITATIONS ON OWNERSHIP, TRANSFERS AND VOTING RIGHTS. Except as described below with respect to transfers of Ordinary Shares executed on the Nasdaq National Market, under the Company's Articles of Association, the Company's directors (or their designee) are required to decline to register any transfer of shares of the Company, including Ordinary Shares, if they have any reason to believe that such 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 any class of shares of the Company. Similar restrictions apply to issuances and repurchases of shares by the Company. The directors (or their designee) also may, in their absolute discretion, decline to register the transfer of any shares if they have reason to believe that such transfer may expose the Company, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured by the Company to adverse tax or regulatory treatment in any jurisdiction or if they have reason to believe that registration of such transfer under the Securities Act, under any state "blue sky" or other United States securities laws or under the laws of any other jurisdiction is required and such registration has not been duly effected. A transferor of Ordinary Shares will be deemed to own such shares for dividend, voting and reporting purposes until a transfer of such Ordinary Shares has been registered on the Register of Members of the Company. The Company is authorized to request information from any holder or prospective acquiror of Ordinary Shares as necessary to effect registration of any such transaction, and may decline to register any such transaction if complete and accurate information is not received as requested. The Company's directors will not decline to register any transfer of Ordinary Shares executed on the Nasdaq National Market for the reasons described above. However, if any transfer results in the transferee (or any group of which such transferee is a member) beneficially owning, directly or indirectly, 10% or more of any class of shares of the Company or causes the Company's directors (or their designee) to have reason to believe that such transfer may expose the Company, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured by the Company to adverse tax or regulatory treatment in any jurisdiction, under the Company's Articles of Association, the directors (or their designee) are empowered to deliver a notice to the transferee demanding that such transferee surrender to an agent designated by the directors (the "Agent") certificates representing the shares and any dividends or distributions that the transferee has received as a result of owning the shares. A transferee who has resold the shares before receiving such notice will be required to transfer to the Agent the proceeds of the sale, to the extent such proceeds exceed the amount that the transferee paid for such shares, together with any dividends or distributions that the transferee received from the Company. As soon as practicable after receiving such shares and any dividends or distributions that the transferee received, the Agent will use its best efforts to sell such shares and any non-cash dividends or distributions to the extent 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 or distributions will not inure to the benefit of the Company or the Agent, but such amounts may be used to reimburse expenses incurred by the Agent in performing its duties. In addition, the Articles of Association generally provide that any person (or any group of which such person is a member) holding directly, or by attribution, or otherwise beneficially owning voting shares of the Company carrying 10% or more of the total voting rights attached to all of the Company's outstanding capital shares, will have the voting rights attached to its voting shares reduced so that it may not exercise more than approximately 9.9% of such total voting rights. Because of the attribution provisions of the Code and the rules of the Commission regarding determination of beneficial ownership, this requirement may have the effect of reducing the voting rights of a shareholder whether or not such shareholder directly holds of record 10% or more of the voting shares of the Company. Further, the directors (or their designee) have the authority to request from any shareholder certain information for the purpose of determining whether such shareholder's voting rights are to be reduced. Failure to respond to such a notice, or submitting incomplete or inaccurate information, gives the directors (or their designee) discretion to disregard all votes attached to such shareholder's Ordinary Shares. See "Description of Shares--Ordinary Shares--Restrictions on Transfer," "--Limitations on Voting Rights" and "--Unilateral Repurchase Right." 18 ANTI-TAKEOVER EFFECTS OF ARTICLES OF ASSOCIATION AND CAYMAN ISLANDS CONFIDENTIALITY LAWS. Holdings' Articles of Association contain certain provisions that make more difficult the acquisition of control of Holdings 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 of Holdings to negotiate with Holdings' Board of Directors, they could have the effect of discouraging a prospective purchaser from making a tender offer or otherwise attempting to obtain control of Holdings. See "Description of Shares--Antitakeover Effects of Articles of Association." 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. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering and the Direct Sales, the Company will have outstanding 18,568,440 Ordinary Shares, Class A Warrants to purchase an aggregate of 2,850,000 Ordinary Shares, Class B Warrants to purchase an aggregate of 200,000 Ordinary Shares, and options to purchase an aggregate of 1,060,000 Ordinary Shares. If the Underwriters' over- allotment option is exercised in full, 21,080,940 Ordinary Shares will be outstanding and the number of Ordinary Shares issuable upon exercise of outstanding options will increase to 1,208,500 Ordinary Shares. The number of Ordinary Shares issuable upon the exercise of Class A Warrants and Class B Warrants will not change if the Underwriters' over-allotment option is exercised. The Class A Warrants, Class B Warrants and the options are not currently exercisable. In addition, Class C Warrants exercisable for up to 750,000 Ordinary Shares may be issued pursuant to the Company's proposed agreement with Westport beginning January 1, 2000. See "Management--Stock Option Plan," "Description of Shares--Warrants" and "--Options," and "Direct Sales." Except as disclosed in "Description of Shares--Restrictions on Transfer" and as discussed below with respect to the lock-up agreements, the Ordinary Shares sold in the Offering will be freely transferable without restriction or further registration under the Securities Act, except for any of those Ordinary Shares owned at any time by an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act (which sales will be subject to the volume limitations and certain other restrictions of such rule). The 400,000 Ordinary Shares currently outstanding which were issued upon formation of the Company, the Ordinary Shares to be sold to the Direct Investors in the Direct Sales and the Ordinary Shares underlying the Class A Warrants, Class B Warrants, any Class C Warrants and the options are, or upon issuance will be, "restricted securities" as defined in Rule 144 under the Securities Act and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from registration, including such rule. The Company, its officers, directors and shareholders, the Shareholder Investors, the Non-Shareholder Investors and the holders of Class A and Class B Warrants have agreed that they will not, for a period of one year from the date of this Prospectus (or six months with respect to the Ordinary Shares and Class A Warrants to be purchased by the Non-Shareholder Investors in the Direct Sales), directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, transfer, assign, hypothecate, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, transfer, assignment, hypothecation, grant of any option to purchase or other sale or disposition) of any Ordinary Shares or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any Ordinary Shares or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, and (other than with respect to the Company and the holders of the Class B Warrants) the Company, provided that in the case of holders of the Class B Warrants, consent to waiver of such restrictions may be granted during such period only with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. Such agreements do not prevent the Company from granting options under the Stock Option Plan so long as such options do not become exercisable until one year from the date of this Prospectus. The Company also has agreed not to file any registration statement on Form S-8 with respect to, or otherwise register the resale with the Commission of Ordinary Shares underlying stock options for a period of one year from the date of this Prospectus. Prudential Securities Incorporated and the Company may, in their sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements, except that in the case of holders of the Class B Warrants, such release may be granted only with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. No prediction can be made as to the effect, if any, that future sales of Ordinary Shares, or the availability of Ordinary Shares for future sale, will have on the market price of the Ordinary Shares prevailing from time to time. Sales of substantial amounts of Ordinary Shares in the public market following the Offering, or the 19 perception that such sales could occur, could adversely affect the market price of the Ordinary Shares and may make it more difficult for the Company to sell its equity securities in the future at a time and at a price which it deems appropriate. If the persons holding the Class A Warrants, Class B Warrants, any Class C Warrants or options cause a large number of the Ordinary Shares underlying such securities to be sold in the market, such sales could have an adverse effect on the market price for the Ordinary Shares. See "Shares Eligible for Future Sale." SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS. The Company is a Cayman Islands company and certain of its officers and directors are residents of various jurisdictions outside the United States. All or a substantial portion of the assets of such officers and directors and the Company, at any one time, are or may be located in jurisdictions outside the United States. Although the Company has irrevocably agreed that it may be served with process in New York, New York with respect to actions arising out of or in connection with violations of United States federal securities laws relating to offers and sales of Ordinary Shares made hereby, it could be difficult for investors to effect service of process within the United States on directors and officers of the Company who reside outside the United States or to recover against the Company or such directors and officers on judgments of United States courts predicated upon the civil liability provisions of the United States federal securities laws. NO PRIOR PUBLIC MARKET FOR ORDINARY SHARES. Prior to the Offering, there has been no public market for the Ordinary Shares and there can be no assurance that an active trading market will develop after the Offering or that the Ordinary Shares offered hereby will trade at or above the initial public offering price. The initial public offering price may not be indicative of the market price for the Ordinary Shares after the Offering. Application has been made to include the Ordinary Shares being offered hereby for quotation in the Nasdaq National Market. DILUTION. Purchasers of Ordinary Shares in the Offering will experience immediate and substantial dilution of approximately $1.30 per share (based upon the initial public offering price of $15.00 per Ordinary Share) in the net tangible book value of their Ordinary Shares from the initial public offering price. See "Dilution." YEAR 2000 RISK. Many existing computer programs use only two digits to identify a year in the date field. These programs, if not corrected, could fail or create erroneous results by or at the year 2000. This "Year 2000" issue is believed to affect virtually all companies and organizations, including the Company. The Company has acquired certain computer hardware and software equipment from Scottish Annuity. Because most of the computer hardware and software purchased from Scottish Annuity is less than two years old, the Company believes that its exposure with respect to its own computer systems to Year 2000-related problems is not significant. The Company has contracted to upgrade the principal accounting software acquired from Scottish Annuity from a DOS-based version which is not Year 2000 compliant to a Windows NT version which is certified Year 2000 compliant by the software vendor. The Company estimates that the total cost to upgrade this system will not exceed $50,000 and will be completed and tested by the end of 1998. In addition, the Company relies or expects to 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 whose respective systems the Company has confirmed, or is in the process of confirming, are Year 2000 compliant. The Company also intends 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 the Company's operations will not experience disruptions due to the failure of third parties, including reinsurance counterparties, to become fully Year 2000 compliant in a timely manner or that such failure will not otherwise have an adverse effect on the Company's business, results of operations or financial condition. In the event the Company's plans with respect to its Year 2000 readiness fail to protect its operations from disruptions or its business, results of operations or financial condition from adverse effect, the Company has no contingency plan other than the replacement of existing third party service providers which are not Year 2000 compliant with comparable third party service providers who are Year 2000 compliant. 20 USE OF PROCEEDS The net proceeds from the sale of the Ordinary Shares to be sold in the Offering are estimated to be approximately $233.5 million ($268.9 million if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and commissions, certain advisory fees and other estimated expenses related to the Offering. The net proceeds from the Direct Sales will be approximately $20.0 million. The purpose of the Offering and the Direct Sales is to enable the Company to implement its business plan to enter into the variable life insurance and fixed annuity and other reinsurance businesses. Substantially all of the net proceeds of the Offering and the Direct Sales will be contributed to Scottish Insurance to support its insurance and reinsurance activities and will be invested in accordance with the Company's Investment Guidelines. See "Business--Investment Portfolio-- Investment Guidelines." Until so invested, the net proceeds will be invested in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY The Board of Directors of Holdings intends to declare and pay out of earnings a quarterly dividend of $0.05 per Ordinary Share beginning at the end of the first full fiscal quarter following consummation of the Offering. The Board, however, has not declared such dividend or any other future dividend. The declaration and payment of dividends by Holdings will be at the discretion of its Board of Directors and will depend upon Holdings' results of operations and cash flows, the financial position and capital requirements of Scottish Insurance, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant. Holdings' ability to pay dividends depends on the ability of Scottish Insurance to pay dividends to Holdings. While Holdings is not itself subject to any significant legal prohibitions on the payment of dividends, Scottish Insurance is subject to Cayman Islands regulatory constraints which affect its ability to pay dividends to Holdings. Accordingly, there is no assurance that dividends will be declared or paid in the future. See "Risk Factors--Holding Company Structure and Dividends," "Management's Discussion and Analysis of Financial Condition and Plan of Operations" and "Business--Regulation--Cayman Islands." 21 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of June 30, 1998 (i) on a historical basis, (ii) as adjusted to give effect to the Pre-Offering Equity Adjustment as defined under "Certain Relationships and Related Party Transactions--Pre-Offering Equity Adjustment" and (iii) as further adjusted for the Offering and the Direct Sales and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds."
AS FURTHER ADJUSTED AS ADJUSTED FOR THE FOR OFFERING PRE-OFFERING AND THE HISTORICAL EQUITY ADJUSTMENT(1) DIRECT SALES(2) ---------- -------------------- ------------------- (DOLLARS IN THOUSANDS) (UNAUDITED) Preferred Shares, par value $0.01 per share (50,000,000 shares authorized; no shares outstanding historical, as adjusted and as further adjusted)...... $ -- $ -- $ -- Ordinary Shares, par value $0.01 per share (100,000,000 shares authorized; 1,500,000 shares outstanding historical; 400,000 outstanding as adjusted; 18,568,440 shares outstanding as further adjusted) (3).. 15 4 186 Additional paid-in capital................ 887 898 254,191 Accumulated deficit..... (21) (21) (21) ----- ----- -------- Total shareholder's equity............... 881 881 254,356 ----- ----- -------- Total capitalization.... $ 881 $ 881 $254,356 ===== ===== ========
- -------- (1) On October 22, 1998, the Company redeemed 1,100,000 Ordinary Shares of the 1,500,000 Ordinary Shares issued upon formation of the Company. Shareholders participating in the redemption exchanged such shares for either Class A Warrants (exercisable for an aggregate of 900,000 Ordinary Shares) or nominal consideration. See "Certain Relationships and Related Party Transactions--Pre-Offering Equity Adjustment." (2) Reflects 18,168,440 Ordinary Shares sold in the Offering and the Direct Sales and the receipt of the estimated net proceeds therefrom. (3) Ordinary Shares outstanding as further adjusted for the Offering and the Direct Sales excludes 2,850,000 Ordinary Shares issuable upon exercise of Class A Warrants, 200,000 Ordinary Shares issuable upon exercise of Class B Warrants and 1,060,000 Ordinary Shares issuable upon exercise of options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering and the Direct Sales and 540,000 Ordinary Shares reserved for issuance upon exercise of options that may be granted in the future pursuant to the Stock Option Plan. In addition, Ordinary Shares outstanding after the Offering and the Direct Sales excludes up to 750,000 Ordinary Shares issuable upon exercise of Class C Warrants, if and to the extent such warrants are issued pursuant to the Company's proposed agreement with Westport. See "Business--Marketing" and "Description of Shares--Warrants--Class C Warrants." If the Underwriters' over-allotment option is exercised in full, upon consummation of the Offering and the Direct Sales, 21,080,940 Ordinary Shares will be outstanding and the number of Ordinary Shares issuable upon exercise of options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering and the Direct Sales will increase to 1,208,500 Ordinary Shares. The number of Ordinary Shares issuable upon exercise of the Class A Warrants, the Class B Warrants and the Class C Warrants will not change if the Underwriters' over-allotment option is exercised. The Class A Warrants, Class B Warrants and options are not currently exercisable. See "Management--Stock Option Plan," "Description of Shares--Warrants" and "--Options," and "Direct Sales." 22 DILUTION Purchasers of the Ordinary Shares offered in the Offering will experience an immediate and substantial dilution in net tangible book value of their Ordinary Shares from the initial public offering price. After giving effect to the Offering and the Direct Sales, the pro forma net tangible book value of the Ordinary Shares (after deducting underwriting discounts and commissions, certain advisory fees and other estimated expenses related to the Offering) will be approximately $254.4 million, or approximately $13.70 per outstanding Ordinary Share. This represents an immediate and substantial dilution in net tangible book value to investors purchasing Ordinary Shares in the Offering of approximately $1.30 per Ordinary Share, without taking into account any Ordinary Shares issuable upon exercise of the Class A Warrants, the Class B Warrants, any Class C Warrants and options. Pro forma "net tangible book value" per outstanding Ordinary Share represents shareholders' equity divided by the number of outstanding Ordinary Shares, including the Ordinary Shares issued in the Offering and the Direct Sales. The following table illustrates the per outstanding Ordinary Share dilution to investors purchasing Ordinary Shares in the Offering: Initial public offering price................................ $15.00 Net tangible book value as of June 30, 1998 before giving effect to the Offering and the Direct Sales................. $ 0.05 Increase in net tangible book value attributable to the sale of the Ordinary Shares in the Offering and the Direct Sales(1).................................................... $13.65 Pro forma net tangible book value upon completion of the Offering and the Direct Sales(1)............................ 13.70 ------ Dilution to new investors in the Offering.................... $ 1.30 ======
- -------- (1) Ordinary Shares outstanding after the Offering and the Direct Sales excludes 2,850,000 Ordinary Shares issuable upon exercise of Class A Warrants, 200,000 Ordinary Shares issuable upon exercise of the Class B Warrants, 1,060,000 Ordinary Shares issuable upon exercise of options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering (1,208,500 Ordinary Shares if the Underwriters' over-allotment option is exercised in full) and 540,000 Ordinary Shares reserved for issuance upon exercise of options that may be granted in the future pursuant to the Stock Option Plan. In addition, Ordinary Shares outstanding after the Offering and the Direct Sales excludes 750,000 Ordinary Shares issuable upon exercise of Class C Warrants, if and to the extent such warrants are issued pursuant to the Company's proposed agreement with Westport. See "Business-- Marketing" and "Description of Shares--Warrants--Class C Warrants." The number of Ordinary Shares issuable upon exercise of the Class A Warrants, the Class B Warrants and Class C Warrants will not change if the Underwriters' over-allotment option is exercised. The Class A Warrants, Class B Warrants, and the options are not currently exercisable. The exercise of Class A Warrants, Class B Warrants and the options granted to management and to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering and the Direct Sales are not expected to be dilutive to purchasers of Ordinary Shares in the Offering because the exercise price per share of such warrants and options is equal to the initial public offering price. See "Management--Stock Option Plan," "Description of Shares--Warrants" and "--Options," and "Direct Sales." The following table summarizes the number of Ordinary Shares purchased from the Company, the total consideration paid and the average price per share paid in connection with Ordinary Shares issued prior to and in connection with the Offering and the Direct Sales:
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE ------------------ ----------------------- PER AMOUNT PERCENT AMOUNT PERCENT SHARE ---------- ------- ------------ ------- ------- Outstanding shares prior to the Offering and Direct Sales(1).......... 400,000 2.2% $ 500,000(2) 0.2% $ 1.25 Direct Sales.............. 1,418,440 7.6 20,000,000(3) 7.3 14.10(4) Offering.................. 16,750,000 90.2 251,250,000 92.5 15.00 ---------- ----- ------------ ----- ------ Total..................... 18,568,440 100.0% $271,750,000 100.0% $14.64 ========== ===== ============ ===== ======
- -------- (1) The Company issued 1,500,000 Ordinary Shares to Scottish Holdings, Ltd., a Cayman Islands company ("SHL"), upon formation of the Company. Effective June 24, 1998, SHL distributed such shares to its shareholders. On October 22, 1998, the Company redeemed 1,100,000 Ordinary Shares with shareholders participating in the redemption exchanging such shares for either Class A Warrants (exercisable for an aggregate of 900,000 Ordinary Shares) or nominal consideration. See "Certain Relationships and Related Party Transactions--Pre-Offering Equity Adjustment." (2) Represents amount paid by SHL for Ordinary Shares of the Company issued upon its formation but excludes $100,000 paid in the aggregate by Michael C. French, Michelle L. Boucher and certain companies wholly owned by certain shareholders of SHL for the 1,550,000 Class A Warrants issued in connection with the formation of the Company and $302,000 paid in the aggregate by The Roman Arch Fund L.P. and The Roman Arch Fund II L.P. for the Class B Warrants. (3) Represents amount paid in the aggregate for Ordinary Shares and Class A Warrants in the Direct Sales. (4) The average price per share is based on the number of Ordinary Shares purchased in the Direct Sales and does not take into account the Ordinary Shares underlying the Class A Warrants acquired in the Direct Sales. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS GENERAL Holdings is an insurance holding company, the principal asset of which is all of the shares in the capital of Scottish Insurance. Holdings and Scottish Insurance were formed on May 12, 1998 and June 3, 1998, respectively, under the laws of the Cayman Islands and neither has any operating history. The Company will commence operations as soon as practicable after the Offering. The Company intends principally to issue customized variable life insurance policies to high net worth qualified purchasers and reinsure in-force blocks of fixed annuity and similar contracts issued by other insurance companies. In addition to its primary focus, the Company may reinsure in-force blocks of other types of annuity contracts and life insurance products on an opportunistic basis. The Company's fiscal year will end on December 31. The Company's financial statements will be prepared in accordance with GAAP. The cash value of each of the Company's variable life insurance policies will be held in separate accounts managed by private independent money managers for the respective policyholders. The Company will not provide any investment management or advisory services. Policyholders may elect to remit premiums to their separate account from time to time, subject to underwriting limits and a minimum initial deposit of $1.0 million for single premium policies or $500,000 for multiple premium policies. The cash values and the death benefits with respect to each variable life insurance policy will fluctuate according to the investment experience of the assets in their respective separate account. In accordance with GAAP, variable life premiums received by Scottish Insurance will be recorded as an increase in liabilities for policyholders' separate accounts. The assets in the policyholders' separate accounts are not part of the Company's general funds and are not available to meet the general obligations of the Company. See "Business-- Regulation--Cayman Islands--Separate Accounts." The Company's reinsurance of various types of annuity contracts and life insurance products will typically be on a coinsurance or modified coinsurance basis, with the Company assuming all of the liability for such contracts. However, the Company may, in certain circumstances, require the ceding company to retain a portion of the risk related to such contracts. Such retention by the ceding company is not expected to exceed 10% of such risk. Substantially all of the Company's operating revenue related to its variable life insurance policies are expected to be derived from separate account fees attributable to its variable life insurance. These fees, typically called "Mortality and Expense" ("M&E") fees, are charged quarterly in advance based on a percentage of the cash values in the separate accounts. The Company may also charge relatively nominal set-up and supervisory fees with respect to its variable life insurance policies. In addition, a policyholder may be charged a fee upon a partial or total surrender of the policy. With respect to the Company's reinsurance business, the primary source of operating profit (loss) will be the net investment income from reserve accounts acquired from ceding companies after deducting the interest credited to the policyholder account values related to the underlying annuity or similar contracts and interest rate-sensitive life insurance products. To the extent the Company reinsures life insurance on a yearly renewable term basis, the primary source of operating profit (loss) will be the excess of the premium income associated with such life insurance over the claims paid with respect to such life insurance. In addition, the Company has entered into the Scottish Annuity Agreement with Scottish Annuity under which the Company has agreed to provide certain insurance administration, accounting and other services to Scottish Annuity in return for a fee based on the value of the separate account assets of Scottish Annuity and the referral of potential clients to Scottish Insurance. Based on the separate account assets of Scottish Annuity at June 30, 1998, the annual amount of such fee (assuming a twelve month period ending on such date) would have been $871,580. See "Business--Scottish Annuity Agreement." The Company's main operating costs will consist of employee related expenses, professional and third party fees and travel and promotional expenditures. Management will seek to limit personnel and other general and administrative expenses by retaining third party service providers, including IRM Cayman, Milliman & Robertson, PIMCO, General Re and Prudential Investment. The Company will not employ commissioned sales or 24 marketing personnel, but will rely primarily on referrals from, in the case of its variable life insurance business, financial advisors, investment managers, private bankers, attorneys and other intermediaries in the United States and, in the case of its reinsurance business, international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives with whom the Company's Senior Vice President and Chief Insurance Officer has a relationship. None of these intermediaries or other referral sources may receive any commission or other remuneration from the Company for activities undertaken in the U.S. or any other jurisdiction that imposes restrictions on the Company's activities similar to those which the Company is subject to in the U.S. For the period from June 9, 1998 through June 30, 1998, the Company received interest income of $1,501, which consisted of interest earned on the Company's cash on deposit. During such period, the Company incurred expenses of $22,579, which consisted primarily of professional fees related to the organization of Scottish Insurance and expenses related to the Company's recruitment of Henryk Sulikowski. Through the end of June 30, 1998, the Company recorded a net loss of $21,077, which also represented the Company's accumulated deficit at the end of such period. LIQUIDITY AND CAPITAL RESOURCES Holdings is an insurance holding company which conducts its principal operations through its subsidiary, Scottish Insurance. As a holding company, Holdings' assets consist primarily of the capital stock of Scottish Insurance. Accordingly, Holdings will rely primarily on cash dividends and other permissible payments from Scottish Insurance to pay its operating expenses and dividends. The Board of Directors of Holdings intends to declare and pay out of earnings a quarterly dividend of $0.05 per Ordinary Share beginning at the end of the first fiscal quarter following the consummation of the Offering. It will be Holdings' policy to retain all earnings in excess of such quarterly dividend to support the growth of its business. If Holdings' retained earnings do not support the payment of such quarterly dividend, the dividend may be reduced or eliminated. If Holdings makes a payment to shareholders in excess of its current and retained earnings, such payment would be treated as a return of capital to holders of the Ordinary Shares. The declaration and payment of dividends by Holdings will be at the discretion of its Board of Directors and will depend upon Holdings' results of operations and cash flows, the financial condition and capital requirements of Scottish Insurance, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant. Although Holdings is not itself subject to any significant legal prohibitions on the payment of dividends, Scottish Insurance is subject to Cayman Islands regulatory constraints which affect its ability to pay dividends to Holdings, including a minimum net worth requirement. Accordingly, there is no assurance that dividends will be declared or paid in the future. See "Dividend Policy" and "Business--Regulation--Cayman Islands." The principal sources of funds for Scottish Insurance's operations are expected to be substantially all of the net proceeds of the Offering and the Direct Sales, M&E and certain other policy fees, premium income, net investment income and fees received from Scottish Annuity under the Scottish Annuity Agreement. These funds are expected to be used primarily to pay policy benefits and operating expenses, and, subject to Cayman Islands law, to make dividend payments to Holdings. The Company believes that the net proceeds of the Offering will be sufficient to fund its planned growth and operating activities for the next several years. Policy reserves with respect to variable life insurance policies will be calculated in an effort to meet the Company's estimated future life insurance death benefit obligations. Policy reserves with respect to the Company's reinsurance business will be primarily based on historical experience and information provided by ceding companies together with the Company's estimate of future experience with respect to the risks being reinsured. The principal risk associated with the Company's variable life insurance policies will be mortality risk. Mortality risk tends to be more stable when spread across large numbers of insureds. The Company's variable life insurance policies are expected to be placed with a relatively small number of high net worth policyholders 25 and to provide substantial death benefits given expected initial premiums of $1.0 million for single premium policies and $500,000 for multiple premium policies. As a consequence, the Company's associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than that of an insurer with a broader risk pool. As a result, the Company intends to allocate a significant portion of its capital, in addition to any policy reserves required under GAAP and any additional Cayman Islands regulatory requirements, to cover possible volatility in mortality experience. Furthermore, the Company intends to reinsure a significant portion of the mortality risk associated with its variable life insurance business with the objective of limiting the net amount at risk to $500,000 per insured. The principal risk associated with the Company's fixed annuity reinsurance activities is investment risk. Specifically, the Company is subject to (i) asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value, (ii) reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less than expected, and (iii) disintermediation risk, which is the risk that the Company may have to sell assets at a loss to provide for policyholder withdrawals. The Company is also subject to mortality risk with respect to the life insurance and annuity contracts it reinsures, although the Company's exposure to such risk is expected to be more actuarially determinable in light of the broader risk pool underlying the blocks of business expected to be reinsured. The Company will also be subject to surrender risk with respect to all of its insurance and reinsurance products. The Company will determine whether to assume any particular reinsurance business by considering many factors, including the type of risks to be covered, actuarial evaluations, historical performance data for the cedent and the industry as a whole, the cedent's retention, the product to be reinsured, pricing assumptions, underwriting standards and reputation and financial strength of the cedent. Pricing of the Company's reinsurance products will be based on the Company's actuarial models which will incorporate a number of factors, including assumptions for mortality and surrender risks, expenses, demographics and investment returns. In addition, the Company will conduct a financial due diligence review in an effort to minimize the risk that the cedent will be unable to pay future amounts due to the Company because of financial difficulties. The development of policy reserves for the Company's variable life insurance and reinsurance products will require management to make estimates and assumptions regarding mortality, lapse, surrender, expense and investment experience. Actual results could differ materially from those estimates. Management will monitor actual experience and where circumstances warrant, will revise its assumptions and the related reserve estimates. When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future benefits and expenses for that product, a premium deficiency reserve will be established by a charge to income. The Company does not currently have any material commitments for any capital expenditures over the next twelve months. As of June 30, 1998, the Company had received an aggregate of $902,000 in connection with the issuance of 1,500,000 Ordinary Shares, Class A Warrants to purchase an aggregate of 1,550,000 Ordinary Shares and Class B Warrants to purchase an aggregate of 200,000 Ordinary Shares. As of June 30, 1998, the Company had recorded deferred offering costs of $968,907. These costs include $86,623 for amounts payable to Scottish Annuity for advances for travel and other general costs. Cash used for operating activities through June 30, 1998 amounted to $169,317, consisting principally of $968,907 in deferred offering costs, offset in part by such amounts advanced by Scottish Annuity and accounts payable and accrued expenses of $743,353. Subsequent to June 30, 1998, the Company redeemed 1,100,000 Ordinary Shares of the 1,500,000 Ordinary Shares issued in connection with the formation of the Company. Shareholders participating in the redemption exchanged such shares for either Class A Warrants (exercisable for an aggregate of 900,000 Ordinary Shares) or nominal consideration. See "Certain Relationships and Related Party Transactions--Pre- Offering Equity Adjustment." The Company expects that the net proceeds of the Offering and the Direct Sales will permit it to begin implementation of its business plan and, together with M&E and certain other policy fees, premium income, net investment income and fees received from Scottish Annuity under the Scottish Annuity Agreement, will provide sufficient sources of liquidity and capital to meet the Company's anticipated needs in the short-term and for the 26 next several years. The Company does not presently anticipate that it will incur any material indebtedness in the ordinary course of its business other than possibly obtaining letters of credit in connection with its reinsurance business. However, no assurance can be given that the Company will not be required to incur indebtedness in order to implement its business strategy. IMPACT OF INFLATION The effects of inflation will be implicitly considered in pricing the Company's products and in estimating the Company's underwriting reserves. CURRENCY The Company's functional currency is the United States dollar. However, because the Company expects that it may write a portion of its business and receive premiums in currencies other than United States dollars and may maintain a small portion of its investment portfolio in investments denominated in currencies other than United States dollars, the Company may experience exchange losses to the extent its foreign currency exposure is not properly managed or otherwise hedged, which in turn would adversely affect the Company's statement of operations and financial condition. The Company will attempt to manage its foreign currency risk by seeking to match its liabilities under reinsurance policies that are payable in foreign currencies with investments that are denominated in such currencies. Furthermore, the Company may use forward foreign currency exchange contracts in an effort to hedge against movements in the value of foreign currencies relative to the United States dollar. A forward foreign currency exchange contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Foreign currency exchange contracts will not eliminate fluctuations in the value of the Company's assets and liabilities denominated in foreign currencies but rather allow the Company to establish a rate of exchange for a future point in time. The Company does not expect that it will enter into such contracts with respect to a material amount of its assets. TAXATION Under current Cayman Islands law, neither Holdings nor Scottish Insurance is expected to be obligated to pay any taxes in the Cayman Islands on their income. Holdings and Scottish Insurance have received an undertaking from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended (1995 Revision), that until the year 2018 (i) no subsequently enacted law imposing any tax on profits, income, gains or appreciation shall apply to Holdings or Scottish Insurance, and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any shares, debentures or other obligations of Holdings or Scottish Insurance. Under current law no tax will be payable on the transfer or other disposition of the shares of Holdings. The Cayman Islands currently impose stamp duties on certain categories of documents. However, the current operations of Holdings do not involve the payment of stamp duties in any material amount. The Cayman Islands currently impose an annual corporate fee upon all exempted companies. At current rates, Holdings expects to pay a government fee of approximately $700 per annum and Scottish Insurance expects to pay fees (including its government fee and insurance license fee) of approximately $6,500 per annum. Because Holdings and Scottish Insurance are not expected to conduct business in the United States or any other jurisdiction except the Cayman Islands, it is not expected that Holdings or Scottish Insurance will be subject to United States taxes or taxes in other jurisdictions outside the U.S. See "Risk Factors--Income Tax Risk." The United States imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to Scottish Insurance is currently 1% of its insurance and reinsurance premiums. This excise tax is payable by the contract owner, although the Company will often file the tax form. In addition, Holdings may be subject to withholding tax on certain investment income from United States sources, but Holdings does not expect to incur such withholding taxes in any material amount. See "Material Tax Consequences." 27 YEAR 2000 RISK The Company has acquired certain computer hardware and software equipment from Scottish Annuity. Because most of the Company's computer hardware and software purchased from Scottish Annuity is less than two years old, the Company believes that its exposure with respect to its own computer systems to Year 2000-related problems is not significant. The Company has contracted to upgrade its fund accounting software from a DOS-based version which is not Year 2000 compliant to a Windows NT version which is certified Year 2000 compliant by the software vendor. The Company estimates that the total cost to upgrade its system will not exceed $50,000 and will be completed and tested by the end of 1998. In addition, the Company relies or expects to 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 whose respective systems the Company has confirmed, or is in the process of confirming, are Year 2000 compliant. The Company also intends 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 the Company's operations will not experience disruptions due to the failure of third parties, including reinsurance counterparties, to become fully Year 2000 compliant in a timely manner or that such failure will not otherwise have an adverse effect on the Company's business, results of operations or financial condition. In the event the Company's plans with respect to its Year 2000 readiness fail to protect its operations from disruptions or its business, results of operations or financial condition from adverse effect, the Company has no contingency plan other than the replacement of existing third party service providers which are not Year 2000 compliant with comparable third party service providers who are Year 2000 compliant. 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. The Company has not yet completed its evaluation of the effect this standard will have on the Company. 28 BUSINESS Holdings and Scottish Insurance were recently formed 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 provide reinsurance of in-force blocks of fixed annuities and similar contracts to insurers no longer actively offering such products or otherwise seeking to more efficiently manage capital allocated to existing businesses. In addition to its primary focus, the Company may reinsure in-force blocks of other types of annuities and life insurance products. The Company believes that the favorable regulatory environment in which it will operate, its planned low cost operating strategy and the absence of a corporate level tax in the Cayman Islands will enable it to become a leading offshore provider of variable life insurance and fixed annuity reinsurance products in target markets. Through its variable life insurance business, the Company seeks to respond to what it believes are increasing demands of high net worth individuals and families for customized life insurance products that can be utilized as part of sophisticated estate planning strategies. For the Company, high net worth means, at a minimum, individuals or family trusts who qualify as "qualified purchasers" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). The Company's variable life insurance business will, however, generally focus on individuals and families with a liquid net worth in excess of $10.0 million. Variable life insurance offers both a specified death benefit as well as 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 offering variable life insurance policies to high net worth qualified purchasers, the Company has the flexibility to offer policies that permit the use of private independent money managers to manage the policy's separate account utilizing investment strategies not typically available in variable life insurance policies issued to the general public. The Company will also seek to leverage its expertise with respect to variable life insurance products by offering structured life insurance products, such as corporate-owned life insurance ("COLI"), which target the deferred compensation market. The Company's reinsurance business seeks to focus on what the Company believes are meaningful opportunities to reinsure lines of business that are subject to significant reserve or risk capital requirements under rating agency requirements and applicable accounting standards. The Company believes that, in response to heightened regulatory and rating agency scrutiny, insurers are increasingly seeking reinsurance of in-force blocks of annuity and life business as a means to improve earnings or risk-based capital or other financial ratios. The Company's reinsurance business will target insurance companies that have discontinued writing such business or that seek relief from the reserve and capital requirements associated with such business. The Company's reinsurance activities will focus principally on opportunities in the U.S., although the Company also expects to target opportunities in the United Kingdom, Western Europe, Canada and Australia. The principal focus of the Company's reinsurance activities will be on blocks of existing fixed annuity contracts such as structured settlements, single premium deferred annuities, immediate annuities and similar contracts. The Company intends to focus on the reinsurance of these annuities because it believes that the reserve and capital requirements associated with fixed annuities has made reinsurance of such annuities an attractive option for issuers and reinsurers of these products and because the market for such reinsurance is not currently well-developed. In addition, the Company expects that it may also reinsure various forms of life insurance products, including universal, variable and whole life insurance, and variable annuity contracts if and when attractive opportunities become available. The Company believes that reinsurance of these products will enable it to more effectively capitalize on potential relationships with other insurers and reinsurers. BUSINESS STRATEGY In order to achieve its objective to become a leading offshore provider of variable life insurance and fixed annuity reinsurance products in its target markets, the Company intends to utilize a business strategy with the following principal components: 29 Leverage Management Expertise The Company was organized by the management and shareholders of Scottish Annuity. In 1994, the Company's Chief Executive Offer and President, Michael C. French founded Scottish Annuity, a privately held Cayman Islands insurance company, to provide to high net worth individuals and families variable annuity contracts that have the same cash value management features, and same target market, as the Company's variable life insurance policies. In addition, Mr. French was a founder of Maverick, an investment management company organized in 1993 with approximately $2.5 billion of assets under management as of October 1, 1998. Since 1995, Michelle L. Boucher, the Company's Senior Vice President, Chief Financial Officer and Secretary, has been Manager of Finance and Administration for Scottish Annuity. The Company intends to draw on Mr. French's and Ms. Boucher's experience in developing Scottish Annuity's variable annuity products and business to develop the Company's variable life insurance products and business. Also, the Company intends to build on the relationships with potential clients as well as with financial advisors, investment managers, private bankers, attorneys and other intermediaries and referral sources that Mr. French and Ms. Boucher have developed with Scottish Annuity. Henryk Sulikowski, the Company's Senior Vice President and Chief Insurance Officer, has over 17 years experience in the insurance and reinsurance industry. Prior to joining the Company, Mr. Sulikowski was a Director of Swiss Re New Markets, responsible for developing, structuring and marketing annuity and life reinsurance transactions. Prior to his tenure with Swiss Re New Markets, Mr. Sulikowski was Vice President in charge of annuity and life financial reinsurance activities at Cologne Re. Mr. Sulikowski has been an associate of the Society of Actuaries since 1986 and a member of the American Academy of Actuaries since 1987. The Company intends to draw on Mr. Sulikowski's experience and relationships with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives to implement its reinsurance business plan. See "Business--Management--Executive Officers and Directors." Utilize Third Party Service Providers The Company believes that prospective purchasers of variable life insurance products are price-sensitive and that insurers seeking reinsurance focus principally on price in selecting a reinsurer. As a result, the Company is pursuing a low cost operating strategy. In order to minimize its initial investment in systems and personnel and to create and maintain a low cost operating structure, the Company has entered into or expects to enter into agreements with a number of third party service providers to provide key services to the Company. The Company has retained IRM Cayman, a member of IRMG, an affiliate of Swiss Reinsurance, to act as the Company's licensed insurance manager in the Cayman Islands and to provide to the Company certain additional administrative services. According to IRM Cayman, IRMG is the largest independent captive insurance manager in the world today, operating out of 20 offices in North America, Europe, Australia, Africa and Asia. In addition, the Company has retained Milliman & Robertson, a leading actuarial consulting firm, to provide from time to time certain actuarial services including pricing and reinsurance analysis. The Company has also retained PIMCO, General Re and Prudential Investment to manage the Company's investment portfolio consistent with its Investment Guidelines. Prior to the consummation of the Offering, the Company expects to retain Westport, a developer and administrator of insurance products for international insurance brokers, insurance companies and corporations and an affiliate of Westport Worldwide, to provide non-exclusive distribution services for its variable life insurance business, as well as certain related administrative services from time to time, including monitoring tax law compliance and preparing policy illustrations. See "Business--Administration and Consulting Services," and "-- Investment Portfolio--Investment Managers." Build on Significant Capital Base Upon consummation of the Offering, the Company will have an equity capitalization of approximately $254.4 million. The Company believes that this level of capitalization will demonstrate a strong financial position and a high level of commitment to potential clients and the variable life insurance and fixed annuity reinsurance marketplace and is necessary in establishing it as a competitive insurance company. The Company does not anticipate that it will incur any material indebtedness in the ordinary course of its business other than possibly obtaining letters of credit in connection with its reinsurance agreements. The Company should also benefit from the fact that, as a recently formed entity, its capital is presently unencumbered by issues such as reserve 30 adequacy, unrealized losses in its investment portfolio and uncollectible reinsurance. In part because of the Company's expected capitalization following the Offering, Duff & Phelps has assigned Scottish Insurance a preliminary claims-paying ability rating of "A" and A.M. Best has assigned Scottish Insurance a preliminary 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 policy holders. The ratings assigned to Scottish Insurance by Duff & Phelps and A.M. Best are contingent on the Company raising gross proceeds of at least $200.0 million in the Offering. Each rating represents the respective rating agency's opinion of the Company's ability to meet its obligations to its policyholders. Apply Prudent Risk Management Policy The principal risk associated with the Company's variable life insurance policies is mortality risk. The death benefit provided to a policyholder by a variable life insurance policy issued by the Company will vary based on the investment return achieved on the underlying separate account by the private independent money manager managing the account. The difference between the value of the assets underlying a variable life insurance policy and the policy's stated death benefit, known as the "net amount at risk," represents a general liability of the Company. In accordance with GAAP and any additional Cayman Islands regulatory requirements, once the Company begins to issue variable life insurance policies, the Company will be required to establish and record policy reserves designed to meet the Company's estimated future life insurance death benefit obligations. Mortality risk tends to be more stable when spread across large numbers of insureds. The Company's variable life insurance policies are expected to be placed with a relatively small number of high net worth policyholders and provide for substantial death benefits given expected initial premiums of at least $1.0 million for single premium policies and $500,000 for multiple premium policies. As a consequence, the Company's associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than that of an insurer with a broader risk pool. As a result, the Company intends to allocate a significant portion of its capital, in addition to any policy reserves required under GAAP and any additional Cayman Islands regulatory requirements, to cover possible volatility in mortality experience. The Company has adopted Underwriting Guidelines with the objective of controlling, among other things, the Company's mortality risk under its variable life insurance policies. The Company's current Underwriting Guidelines limit the maximum aggregate net amount at risk the Company will initially assume on any one life to $500,000. In order to comply with this guideline, the Company intends to reinsure any liability for amounts in excess of $500,000 per insured. The principal risk associated with the Company's fixed annuity reinsurance activities is investment risk. Specifically, the Company is subject to (i) asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value, (ii) 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 (iii) disintermediation risk, which is the risk that the Company may have to sell assets at a loss to provide for policyholder withdrawals or to satisfy liabilities not otherwise properly matched. As part of its reinsurance activities, the Company may also reinsure in-force blocks of life insurance. The principal risk associated with the reinsurance of life insurance is mortality risk. The Company believes that one of the benefits to it resulting from the reinsurance of life insurance policies covering broad pools of insureds is that the Company's mortality risk will be spread over a larger insured population than will be the case with respect to its variable life insurance policies. To the extent the Company reinsures variable annuity contracts, the principal risk reinsured will be surrender risk, a risk which is also associated with the reinsurance of fixed annuities and life insurance. An additional risk associated with the Company's reinsurance business is the risk that the ceding insurer will be unable to pay amounts due the Company because of its own financial difficulties. The Company believes this risk can be mitigated by conducting an appropriate financial due diligence review of each cedent. In addition, most reinsurance agreements provide for the reinsurer to set off amounts it owes against amounts it is due, thus lessening the credit risk. 31 The Company will establish policy reserves and allocate risk capital in accordance with actuarial standards of practice, GAAP accounting requirements and any additional Cayman Islands regulatory requirements in an effort to reflect the level of investment, mortality, surrender and other risks associated with the annuities and life insurance it will reinsure. Employ Professional Investment Strategy The Company will seek to generate attractive levels of investment income through a professionally managed fixed income investment portfolio. The Company has entered into an investment advisory agreement with PIMCO, which is anticipated to manage initially approximately 50% of the Company's investment portfolio. The Company has also retained General Re and Prudential Investment to each manage a portion of the other 50% of the Company's investment portfolio. The Company may also retain other investment managers from time to time. Each Investment Manager will have discretionary authority over the portion of the Company's investment portfolio allocated to it, subject to the Investment Guidelines. The Company's investment portfolio (exclusive of assets transferred and invested as part of any coinsurance transaction) will principally consist of fixed income securities with a weighted average investment rating of "A." Consistent with the Investment Guidelines, no more than 15% of the Company's investment portfolio will be invested in below investment grade fixed income securities. INDUSTRY TRENDS The Company's business plan and product focus has been developed to respond to certain insurance and reinsurance industry trends affecting both policyholders and issuers of such policies. Variable Life Insurance Market The Company will target high net worth individuals and families for whom existing variable life insurance products do not meet their estate planning and investment objectives. The Company believes that such individuals and families prefer to have the cash values included in the separate accounts underlying their variable life insurance policies managed by private independent money managers in order to increase the returns on such cash values as well as to increase the death benefit provided by such policies, which is required under the Code to increase in proportion to any increase in such cash values. To date, the Company has received expressions of interest from potential customers with respect to its variable life insurance products, although no formal discussions or negotiations have occurred. See "Risk Factors--Ability to Implement its Business Plan." As a Cayman Islands company offering variable life insurance policies to high net worth qualified purchasers, the Company has the flexibility to offer policies that permit the use of private independent money managers to manage the policy's separate accounts utilizing investment strategies not typically available in variable life policies issued by domestic insurers to the general public. The Company believes that the demand for such products by its target market will increase as the "baby boomer" generation continues to age and places greater emphasis on minimizing the impact of the current 55% federal estate tax and/or utilizing sophisticated estate planning techniques designed to maximize wealth transfer from generation to generation. Through the use of the Company's variable life insurance policies and proper estate planning (e.g., use of insurance trusts), significant policy benefits can be transferred from one generation to the next on an estate tax-free basis. In addition, the death benefit provided by the Company's policies can be used to pay estate taxes and thereby avoid the necessity of liquidating other family assets. Under the Company's operating guidelines, its variable life insurance policies will be offered only to "qualified purchasers" within the meaning of the 1940 Act, that is individuals or family trusts that have over $5.0 million in investments (which is defined under the 1940 Act to include certain securities, real estate held for investment purposes, commodity interests and physical commodities held for investment purposes, financial contracts entered into for investment purposes, cash and cash equivalents). See "Glossary of Selected Life Insurance and Annuity Terms" for a reference to the complete definition of "qualified purchaser" under the 1940 Act. Based on an industry source, the number of U.S. households with a net worth of $5.0 million or more 32 totaled approximately 277,000 in 1997. The Company will focus primarily on the very high end of this market (i.e., individuals and families with liquid net worth in excess of $10.0 million). The Internal Revenue Service Statistics of Income Bulletin, dated Winter 1997-1998, estimates that as of 1995 (the latest year available) approximately 27,000 individuals in the U.S. had a net worth of between $10.0 million and $20.0 million, and in excess of 12,000 had a net worth of $20.0 million or more. The combined net worth of these two groups was estimated at approximately $1.1 trillion. The Company intends to leverage its expertise with respect to variable life insurance products by offering structured life insurance products, such as COLI, which target the deferred compensation market. The Company believes that the principal purchasers of COLI products are Fortune 1000 companies. Recent tax legislation has phased out the interest deduction for certain COLI policy loans through 1998 and eliminates it thereafter. The Company does not expect to issue any COLI products that would be affected by such legislation. Fixed Annuity and Other Reinsurance Markets The Company's reinsurance business will initially focus on reinsuring lines of business that are subject to significant reserve or risk capital requirements under rating agency requirements and applicable accounting standards. The Company believes that insurers seeking reinsurance focus principally on price and, to a lesser extent, on ratings, perceived financial strength and quality of service in deciding on a reinsurer. The Company believes the favorable regulatory environment in which it will operate, its planned low cost operating structure and the absence of a corporate level tax in the Cayman Islands will enable the Company to offer competitive pricing for its reinsurance products. The Company expects to focus its reinsurance activities on in-force blocks of existing annuities, such as structured settlements, single premium deferred annuities, immediate annuities and similar contracts which have been issued by insurers that are no longer actively writing such contracts or that are seeking relief from the reserve and capital requirements associated with such contracts. Fixed annuity contracts often require greater commitments of capital than other product lines, since the investment risk associated with such contracts is borne by the insurer, not the contract holder. In developing its business plan with respect to this niche market, the Company has analyzed publicly available information relating to the existence and size of such blocks of fixed annuity and other contracts. The Company has also reviewed transactions involving blocks of fixed annuities and other contracts which have already been consummated in order to evaluate the existing market for such transactions, including their structure and terms. The Company has engaged in preliminary discussions with reinsurance intermediaries regarding potential transactions and opportunities that the Company's Senior Vice President and Chief Insurance Officer is aware of based on his knowledge of the industry and relationships with industry participants. Through these efforts the Company has identified a number of potentially attractive fixed annuity reinsurance opportunities, but no formal discussions or negotiations regarding such opportunities have occurred to date. See "Risk Factors--Ability to Implement its Business Plan." For a description of certain reinsurance opportunities the Company is currently pursuing, see "Products Offered by Scottish Insurance--Reinsurance of Fixed Annuities and Similar Contracts; Other Reinsurance Opportunities." The Company believes that, in the past, reinsurers have not focused on the fixed annuity segment of the market. The Company believes, however, that there are a number of trends affecting the insurance industry in the U.S. that are increasing the demand for reinsurance by insurers in this market segment. The Company believes the primary trend is heightened regulatory and rating agency scrutiny on risk-based capital and other financial ratios and increased interest by insurers seeking to, among other things, manage risk-based capital and other financial ratios through reinsurance. By shifting mortality, investment and other risks to reinsurers, direct writing insurers are able to eliminate the assets and liabilities related to their non-core product lines from their financial statements and release capital reserves supporting such non-core product lines in order to pursue new business opportunities. The Company believes that reinsurance is particularly attractive to publicly- traded insurers that are focusing on stockholder value, stock performance and quarterly operating results. The Company believes that one of the most effective tools for achieving these objectives is reinsurance, particularly where the 33 reinsurer reinsures all of the risks associated with such non-core products. The other significant trend affecting the U.S. insurance industries is the demutualization of a significant number of insurance companies and consolidation of such insurance industries. The Company believes that the primary motivation to demutualize is to gain access to the capital markets. As a result, the Company believes that newly demutualized insurance companies will also focus on stock price and quarterly operating results and therefore will be likely to seek to reinsure as a means to enhance their stock price and quarterly operating results. Mutual insurance companies may also seek to utilize reinsurance in advance of announcing a conversion to a stock company structure in order to enhance their balance sheet in preparation for an initial public offering. The Company expects that these trends will also create opportunities to reinsure blocks of life insurance business or other forms of annuities, although it believes the reinsurance market for such other lines of business, particularly life insurance, is currently well developed and quite competitive. See "Business--Products Offered by Scottish Insurance-- Reinsurance of Fixed Annuities and Other Contracts; Other Reinsurance Opportunities." The Company's reinsurance activities will focus principally on opportunities in the U.S., although the Company expects to also target opportunities in the United Kingdom, Western Europe, Canada and Australia. The Company believes that the insurance industries in such countries have also been affected by certain of the trends noted above affecting U.S. insurers. 1998 PLAN OF OPERATION The Company's plan of operation for the remainder of fiscal 1998 is to begin full-scale implementation of its business plan, including establishing its variable life insurance business and pursuing transactions principally involving the reinsurance of fixed annuities. In addition to its primary focus, the Company may also pursue from time to time transactions involving the reinsurance of other types of annuity contracts and life insurance products. The Company believes that the net proceeds of the Offering and the Direct Sales will be sufficient to satisfy its cash requirements for the next several years and that, at a minimum, it will not be necessary during the six months immediately following the Offering to raise additional funds to meet the expenditures required to operate the Company's business. The Company's belief is based on, among other things, its anticipated low-cost operating structure, in which most costs are expected to be variable in nature based on the Company's revenues, and its use principally of referrals rather than a compensated distribution network to generate sales of its products. The Company's main operating costs will consist of employee related expenses, professional and third party fees and travel and promotional expenditures. Over the next six to nine months, the Company anticipates that it will hire a financial controller or other financial staff person and an actuary as well as one or two additional administrative staff persons. PRODUCTS OFFERED BY SCOTTISH INSURANCE Variable Life Insurance Variable life insurance is a "separate account" product under which the net premiums paid, after deduction of expenses, including the costs of insurance, are placed for the policyholder in a separate account that is not subject to claims of the insurance company's general creditors. See "Business-- Regulation--Cayman Islands--Separate Accounts." The cash values of this separate account are then invested for such policyholder by, in the case of the Company's policies, a private independent money manager. The Company will not provide any investment management or advisory services to any policyholder. Revenues from these policies will consist of amounts assessed during the period against policyholders' separate account balances for M&E fees and policy administration and surrender charges. In order to qualify as life insurance under the Code, a number of complex tests must be met by the variable life policy. The effect of these tests is to require the death benefit under the policy to be substantially greater than the cash value. The difference between the cash value and the death benefit is generally referred to as the "net amount at risk". 34 Under the Code, there are two types of variable life insurance contracts, referred to as modified endowment contracts and non-modified endowment contracts. Modified endowment contracts typically involve the payment of a single premium by the policy owner, while non-modified endowment contracts typically involve the payment of multiple premiums, generally five or more. While the death benefit for such contracts may be the same, the initial net amount at risk for a non-modified endowment contract will be larger than the initial net amount at risk for a modified endowment contract. For example, under a variable life insurance policy similar to the policies expected to be offered by the Company, a modified endowment contract with a single premium of $10.0 million written for a 60 year old male non-smoker would have an initial death benefit of approximately $25.3 million and a net amount at risk of approximately $15.3 million. In contrast, a non-modified endowment contract with the same initial death benefit would require five annual premiums, four of approximately $2.1 million each and a final premium of approximately $1.4 million, and would result in an initial net amount at risk of $23.1 million. The death benefits under both modified endowment contracts and non-modified endowment contracts are not subject to federal income tax upon receipt by the beneficiary of such death benefits. While the variable life insurance policy is in force, the policyholder may borrow against the cash values of a non- modified endowment contract without triggering adverse tax consequences, but cannot do so under a modified endowment contract without being deemed to have received a taxable distribution under the contract. Such a taxable distribution may also cause the contract to no longer qualify as life insurance. Variable life insurance contracts generally have no guaranteed rate of return on the cash values. The cash value varies based on the investment results of the separate account managed by the policy's private independent money manager. Because the Code requires the death benefit under a life insurance policy to bear a specified minimum ratio to the cash value, the death benefit under a variable policy may increase if the underlying cash value increases in order to comply with the Code and maintain the appropriate net amount at risk. Generally, if the cash value declines, either the policy owner must pay in additional premiums, or the death benefit must be reduced in order to maintain the appropriate net amount at risk. The net amount at risk under either type of policy to be issued by the Company will represent a general liability of the Company, and the Company will be required to establish and record policy reserves that will be designed to meet the Company's estimated future life insurance death benefit obligations. The Company intends to reinsure a significant portion of its exposure to each individual policyholder. See "--Underwriting--Variable Life Insurance." The Company's variable life insurance policies will be offered and sold only to qualified purchasers under the 1940 Act, that is individuals or family trusts that have over $5.0 million in investments (which is defined under the 1940 Act to include certain securities, real estate held for investment purposes, commodity interests and physical commodities held for investment purpose, financial contracts entered into for investment purposes, cash and cash equivalents). See "Glossary of Selected Life Insurance and Annuity Terms" for a reference to the complete definition of "qualified purchaser" under the 1940 Act. In addition to offering variable life insurance policies to high net worth individuals and families, the Company also expects to offer structured life insurance products which are targeted to the deferred compensation market. In connection with its arrangements with Westport, the Company expects to offer variable life insurance 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 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. The Company may also issue variable life insurance policies in which a large number of lives of employees are covered under a group policy that is owned by the employer and used to fund employee benefits. Although certain COLI products have been affected by recent changes in their tax treatment, the Company does not intend to offer the types of COLI products that have been the subject of such tax law changes. See "Risk Factors--Effect of Changes in U.S. Tax Laws on Variable Life Insurance Sales." 35 Reinsurance of Fixed Annuities and Similar Contracts; Other Reinsurance Opportunities The Company's reinsurance activities will focus principally on the reinsurance of the obligations of insurers under fixed annuity contracts. The Company expects to enter into reinsurance agreements with respect to cedents' obligations under their individual and group fixed annuity products, including structured settlements, single premium deferred annuities, immediate annuities and similar contracts. In addition to its primary focus, the Company may reinsure other types of annuity and life insurance products, such as individual life insurance products, including universal, variable and whole life insurance, and variable annuity contracts if and when attractive opportunities become available. The Company expects to write reinsurance both on a direct and brokered basis and to assume risks from both primary insurers as well as reinsurers. Reinsurance is an arrangement under which an insurance company (the "reinsurer") agrees to indemnify another insurance company (the "ceding company" or "cedent") for all or a portion of the insurance risks underwritten by the ceding company. It is standard industry practice for primary insurers to reinsure portions of their insurance risks with other insurance companies under indemnity reinsurance agreements. Such practice permits primary insurers to write policies in amounts larger than the risks they are willing to retain. Reinsurance is generally designed to (i) reduce the net liability of the ceding company on individual risks, thereby assisting the ceding company in increasing the volume of business it can underwrite, as well as increasing the maximum risk it can underwrite on a single life or risk; (ii) assist in stabilizing operating results by leveling fluctuations in the ceding company's loss experience; (iii) assist the ceding company in meeting applicable regulatory capital requirements; (iv) assist in reducing the short-term financial impact of sales and other acquisition costs; and (v) enhance the ceding company's financial strength and statutory capital. Ceding companies typically contract with more than one reinsurer to reinsure their business. Reinsurance may be written on an indemnity or an assumption basis. However, the Company presently expects to write only indemnity reinsurance. Indemnity reinsurance does not discharge a ceding company from liability to the policyholder; a ceding company is required to pay the full amount of its insurance obligations regardless of whether it is entitled or able to receive payments from its reinsurers. By contrast, reinsurance written on an assumption basis effectively transfers the ceding company's obligations to the reinsurer, and in some cases eliminates the cedent's further liability. Reinsurers also may themselves purchase reinsurance, known as retrocession reinsurance, to limit their own risk exposure. Reinsurance companies enter into retrocession agreements with other reinsurers ("retrocessionaires") for reasons similar to those that cause primary insurers to purchase reinsurance. The Company's business plan contemplates that its reinsurance activities will focus principally on the reinsurance of the obligations of insurers under existing fixed annuity contracts. Fixed annuities are a type of "general account" product because the assets backing fixed annuities are recorded as part of the insurer's general funds and are subject to the claims of its general creditors. Annuities are long-term savings vehicles that generally are marketed to customers over the age of 45 who are planning for retirement and seeking secure, tax-deferred savings products. United States annuity products generally enjoy an advantage over certain other retirement savings products because the payment of United States federal income taxes on the interest credited on annuity policies is deferred during the investment accumulation period. General account annuities, whether in the accumulation or the payout phase, generally have specified or minimum guaranteed performance levels and consequently involve a greater commitment of capital than separate account annuities. This is due to the fact that the investment risk associated with such policies is borne by the insurer, not the policyholder and therefore is more frequently reinsured. Insurance companies that issue annuities generally incorporate a number of features in their annuity products designed to reduce the early withdrawal or surrender of the policies and to partially compensate the insurer for lost investment opportunities and costs if policies are withdrawn early. Typically, the policyholder is permitted to withdraw all or part of the premium paid plus the amount credited to his or her account, less a penalty or surrender charge for withdrawals. Often, an insurer's deferred annuity contract provides for penalty-free partial withdrawals, typically up to 10% of the accumulation value annually. Annuity policies typically 36 impose some surrender charge during the period ranging from the first five years to the term of the policy. The initial surrender charge on annuity policies generally ranges from 5% to 10% of the premium and decreases over the surrender charge period. Surrender charges are set at levels intended to protect the insurance company from loss on early terminations and to reduce the likelihood of policyholders terminating their policies during periods of increasing interest rates, thereby lengthening the effective duration of policy liabilities and improving the ability to maintain profitability on such policies. The Company expects that it will also potentially reinsure various forms of life insurance products, including universal, variable and whole life insurance. The primary risk under life insurance policies is mortality risk. The Company's Underwriting Guidelines limit such risk to $500,000 per insured and the Company intends 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 the Company may also include investment risks similar to those for fixed annuities. As with annuities, all life insurance policies are subject to surrender risk. The Company intends to write its reinsurance principally as coinsurance or modified coinsurance, with the Company assuming all of the liability for the reinsured contracts. Under modified coinsurance arrangements, the ceding company retains ownership of the assets supporting the reserves, whereas in coinsurance ownership of the assets supporting the reserves is transferred to the reinsurer. The Company may, in certain circumstances, require the ceding company to retain a portion of the risks related to each such contract (often called "quota share" or "proportional reinsurance"). Such retention by the ceding company is not expected to exceed 10% of such risk. Under a coinsurance or modified coinsurance arrangement, the reinsurer will generally share in all material risks inherent in the underlying policies, including the risk of loss due to mortality, surrender and lapse, as well as investment performance. Current insurance regulations and accounting standards generally require that all of the risks associated with the ceding company's contracts (other than those reinsured on a yearly renewable term basis), or the portion thereof ceded, must be transferred under the terms of a reinsurance contract in order for the ceding company to take credit for reinsurance in its financial statements. While reinsured life insurance and annuity contracts are long-term policies, they may or may not involve long-term investment risk. Management believes that a significant amount of the fixed annuity contracts and interest-rate sensitive life insurance policies that the Company intends to reinsure will provide for an annual (or more frequent) reset of credited interest rates to market rates. Once a contract is reinsured, it typically cannot be unilaterally removed from the reinsurance agreement, except pursuant to a ceding company's recapture rights. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer after an agreed-upon period of time (generally 10 years) and subject to certain other conditions, including that the ceding company kept its full retention. Life reinsurance may also be written on a yearly renewable term basis. Under a yearly renewable term structure, the reinsurer assumes only the mortality risk associated with the underlying policies. Under the yearly renewable term structure, premium rates are generally adjusted annually based on the age and underwriting class of the insured and the age of the policy. The Company executed a binder with a U.S. reinsurer on September 18, 1998 to provide reinsurance, on a retrocession basis, for approximately 35,000 in- force universal life insurance policies with an aggregate face value of approximately $5.0 billion. The reinsurance will be structured on a monthly renewable term basis with the Company reinsuring only the mortality risk under such policies, up to $1.5 million per life. The Company intends to retrocede risks in excess of $500,000 per life; however, the Company does not have any retrocessional arrangements currently in place. The Company's binder is conditioned on the consummation of the Offering. MARKETING The Company's marketing plan with respect to its variable life insurance policies is to rely primarily on referrals by financial advisors, investment managers, private bankers, attorneys and other intermediaries in the 37 U.S. to generate clients. In order not to be subject to U.S. state insurance regulation, none of these intermediaries will represent the Company or receive any commissions or other remuneration from the Company for activities undertaken in the U.S. Such financial advisors, investment managers, private bankers, attorneys and other intermediaries are typically compensated by their respective clients. In addition, representatives of the Company will periodically attend conferences of financial advisors, investment managers and private bankers held outside the U.S., and provide exhibits and receptions and engage in other informational activities at the events to make potential intermediaries aware of the Company's variable life products. Company representatives are also expected to attend events of this type held in the U.S., but such representatives will not be permitted to engage in any promotional activities on behalf of the Company. The Company may also be subject to similar restrictions on its activities in jurisdictions outside the U.S. The Company will develop operating guidelines designed to facilitate the Company's compliance with such restrictions as and when the Company's operations involve any such jurisdictions. In addition, the Company has entered into the Scottish Annuity Agreement which provides, among other things, that Scottish Annuity will refer potential clients to the Company as partial consideration for the Company providing certain insurance administrative services to Scottish Annuity. The Company believes that this referral arrangement will be advantageous to the Company because Scottish Annuity sells customized variable annuities that have the same cash value management features, and the same target market, as the Company's variable life insurance policies. Scottish Annuity commenced operations in 1994. According to information supplied by Scottish Annuity, as of July 31, 1998, Scottish Annuity had issued 66 variable annuity contracts which had aggregate separate account assets of $181.0 million. See "Business-- Scottish Annuity Agreement." The Company's marketing plan with respect to its reinsurance business is to seek to capitalize on the relationships developed by its Senior Vice President and Chief Insurance Officer with international insurance brokers, insurance consultants, members of the actuarial profession and senior insurance company executives. To the extent that any such brokers, consultants or actuaries conduct such activities in the U.S., they will not conduct such activities on behalf of the Company or receive any commissions or other remuneration from the Company. Given the focus of the Company's proposed reinsurance business (i.e., blocks of in-force contracts), the Company expects to target a limited number of potential ceding insurers that the Company believes would benefit from its reinsurance products based on its analysis of publicly available information and other industry data. Management believes that in selecting a reinsurer such ceding insurers will focus principally on price and, to a lesser extent, on ratings, perceived financial strength and quality of service (i.e., the ability of the reinsurer to assess the insurer's products and financial situation and tailor a reinsurance product to help the insurer achieve its objectives). The Company believes that the favorable regulatory environment in which it will operate, its low cost structure and the absence of a corporate level tax in the Cayman Islands, will enable it to price its products competitively. Moreover, the Company believes that the experience of its Senior Vice President and Chief Insurance Officer, including his familiarity with U.S. state insurance regulations and accounting rules, will enable the Company to effectively and efficiently tailor reinsurance products that satisfy the objectives of ceding insurers. In an effort to facilitate its marketing efforts, the Company expects to retain Westport, 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 is expected to provide non-exclusive distribution services with respect to the Company's variable life insurance products, particularly COLI, BOLI and TOLI products. In addition, Westport may be retained to provide administration services for COLI, BOLI and TOLI products that the Company issues. See "Administration and Consulting Services--Variable Life Insurance." All of Westport's distribution activities are expected to be undertaken outside the United States and Westport will be required to comply with all of the Company's operating guidelines. For its distribution activities, the Company expects to issue to Westport Class C Warrants to purchase up to 750,000 Ordinary Shares at an exercise price equal to the price to the public in the Offering. The Class C Warrants are expected to be issuable over a four year period on January 1, 2000 and on each anniversary thereafter (to and including January 38 1, 2003) in an amount to be determined by a formula based on the Company's gross profits for the calendar year preceding the relevant anniversary date from variable life insurance policies issued by the Company to customers identified and referred by Westport. The Class C Warrants, if issued, will have a term expiring ten years from the date of the Offering. See "Description of Shares--Warrants--Class C Warrants." UNDERWRITING Variable Life Insurance The principal risk associated with the Company's variable life insurance policies is mortality risk. The death benefit provided by the Company's variable life insurance policies will vary based on the investment return of the underlying separate account of 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 of the Company. In accordance with GAAP and any additional Cayman Islands regulatory requirements, once the Company begins to issue variable life insurance policies, the Company will be required to establish and record policy reserves designed to meet the Company's estimated future life insurance death benefit obligations. Mortality risk tends to be more stable when spread across large numbers of insureds. The Company's variable life insurance policies are expected to be placed with a relatively small number of high net worth policyholders and to 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. As a consequence, the Company's associated mortality risk exposure is likely to be greater in the aggregate, and its probability of loss less predictable, than an insurer with a broader risk pool. As a result the Company intends to allocate a significant portion of its 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 its Underwriting Guidelines, the Company intends to reinsure a significant portion of the mortality risk associated with its variable life insurance business with the objective of limiting the net amount of risk to $500,000 per insured. On September 24, 1998, the Company received an expression of interest from a professional U.S. reinsurer to provide facultative reinsurance coverage for the Company's variable life insurance policies. Under such proposed arrangements, the Company will reinsure, on a yearly renewable term basis, all mortality risk in excess of its maximum retention of $500,000 per life as currently provided in its Underwriting Guidelines. Such reinsurer currently has a "AA" claims-paying ability rating from Standard & Poor's. The Company is pursuing additional facultative reinsurance arrangements and may potentially enter into one or more such arrangements in the future. It is the Company's objective that all reinsurers to whom the Company cedes business will have a claims-paying ability rating of "A" or higher. Reinsurance of Annuities and Life Insurance The principal risk associated with the Company's fixed annuity reinsurance activities is investment risk. Specifically, the Company is subject to (i) asset value risk, which is the risk that invested assets supporting the reinsured business will decrease in value, (ii) 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 (iii) disintermediation risk, which is the risk that the Company may have to sell assets at a loss to provide for policyholder withdrawals or to satisfy liabilities not otherwise properly matched. The Company will also be subject to mortality risk with respect to the fixed annuities it expects to reinsure, although the Company's exposure to such risk is expected to be more actuarially determinable in light of the broader risk pool underlying the blocks of business expected to be reinsured. The Company expects that it will also potentially reinsure various forms of life insurance products, including universal, variable and whole life insurance. The primary risk under life insurance policies is mortality risk. The Company's Underwriting Guidelines limit such risk to $500,000 per insured and the Company intends 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 39 risks reinsured by the Company may also include investment risks similar to those for fixed annuities. As with annuities, all life insurance policies are subject to surrender risk. To the extent the Company reinsures variable annuity contracts, the principal risk reinsured will be surrender risk, a risk which is also associated with the reinsurance of fixed annuities and life insurance. The Company will determine whether to assume any particular reinsurance business by considering many factors, including the type of risks to be covered, actuarial evaluations, historical performance data for the cedent and the industry as a whole, the cedent's retention, the product to be reinsured, pricing assumptions, underwriting standards and reputation and financial strength of the cedent. Pricing of the Company's reinsurance products will be based on the Company's actuarial models which will incorporate a number of factors, including assumptions for mortality, expenses, demographics, persistency and investment returns. In addition, the Company will conduct a financial due diligence review in an effort to minimize the risk that the cedent will be unable to pay future amounts due to the Company because of its own financial difficulties. The Company's Underwriting Guidelines with respect to its reinsurance business include the following policies: (i) the ceding company must, among other things, be domiciled in the United States, United Kingdom, Western Europe, Canada or Australia, and possess underwriting and claims practices consistent with industry practice; (ii) the ceding company must be financially sound in the view of the Board of Directors and must meet all of the financial requirements to which it is subject by U.S. state regulatory authorities or the regulatory authorities of applicable foreign jurisdictions; (iii) the ceding company may not exercise recapture rights for a period of ten years; and (iv) the Company's aggregate maximum net amount at risk per insured will be limited to $500,000 after giving effect to any retrocessional arrangements. The Company will generally assume all of the liabilities under the contracts it will reinsure, although, in certain circumstances, the Company may require the ceding company to retain a portion of such liabilities (typically not to exceed 10%). The Company expects to retrocede to professional reinsurers, on a case by case basis, certain risks associated with its reinsurance business, although no such arrangements are currently in place. General Any deviation from the Company's Underwriting Guidelines with respect to its variable life insurance policies and reinsurance products, as they may be amended from time to time, will require the approval of the Board of Directors. The Company expects to review regularly its Underwriting Guidelines in light of changing industry conditions, market developments and changes in technology. The Company reserves the right at all times to amend, modify or supplement its Underwriting Guidelines in response to such factors or for other reasons, including changing the approved domiciles for reinsurance clients. The Company also will endeavor to ensure that the Underwriting Guidelines for its ceding clients are compatible with those of the Company. Toward this end, the Company anticipates that it will periodically retain unaffiliated service providers to conduct reviews of the Company's ceding clients' underwriting and claims personnel and procedures. RESERVES The Company will establish and carry policy reserves which are designed to meet the Company's future financial obligations. Future policy benefits and policy claims are expected to comprise the majority of the Company's financial obligations and reserves therefor will be maintained in accordance with GAAP and any additional Cayman Islands regulatory requirements. Policy reserves with respect to variable life policies will be calculated to meet the Company's estimated future life insurance death benefit obligations. As variable life insurance policies are issued, the Company's associated mortality risk may tend to fluctuate more than would be expected than if the Company had a large pool of insureds. As a result, the Company will allocate a significant portion of its capital, in addition to any policy reserves required under GAAP or any additional Cayman Islands regulatory requirement, to cover possible volatility in mortality experience. For the Company's reinsurance business, policy reserves will be primarily based on historical experience and information provided by ceding companies together with the Company's estimate of future experience with respect to the risks being reinsured. 40 The development of policy reserves for the Company's variable life insurance and reinsurance products will require management to make estimates and assumptions regarding mortality, lapse, surrender, expense and investment experience. Actual results could differ materially from those estimates. Management will monitor actual experience and where circumstances warrant, will revise its assumptions and the related reserve estimates. When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future benefits and expenses for that product, a premium deficiency reserve will be established by a charge to income. SCOTTISH ANNUITY AGREEMENT Pursuant to the Scottish Annuity Agreement, Scottish Insurance will provide Scottish Annuity with a variety of insurance administration, accounting and other services, including (i) investment fund accounting reporting for variable annuity products, (ii) monitoring compliance with the diversification, investor control and certain other requirements of the Code, (iii) administrative services in the issuance by Scottish Annuity of variable annuity products and documents related thereto, (iv) servicing of variable annuity products after issuance by Scottish Annuity, (v) accounting for investment, capital and income and expense activities and maintenance of individual ledgers for investment funds in which each annuity product is invested, (vi) preparing financial statements of Scottish Annuity, (vii) controlling all disbursements from Scottish Annuity and authorizing such disbursements upon instructions from Scottish Annuity, (viii) preparing tax returns and similar filings for Scottish Annuity, (ix) preparing forms and reports required to be filed by Scottish Annuity with Cayman Islands governmental authorities and (x) keeping the books and records of accounts of Scottish Annuity. These services will be provided by Scottish Insurance personnel. Scottish Annuity personnel will conduct all other administrative and accounting services related to its variable annuity products. As compensation for the services rendered by Scottish Insurance during the term of the Scottish Annuity Agreement, Scottish Annuity will pay to 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. Management believes that such compensation is reasonable and adequately covers the costs to be incurred by the Company in providing such services. The amount of compensation to be received by the Company is not subject to adjustment for any referrals by or to Scottish Annuity. In addition, Scottish Annuity will reimburse Scottish Insurance for all out-of-pocket fees, costs and expenses incurred or advanced by Scottish Insurance on behalf of Scottish Annuity in connection with the Scottish Annuity Agreement. In addition, pursuant to the Scottish Annuity 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 annuity products. The Scottish Annuity Agreement provides that the foregoing limitations do not affect the Company's ability to reinsure life insurance or variable annuities. The Scottish Annuity 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 not less than 60 days prior to the commencement of a renewed term. In addition, the Scottish Annuity Agreement will 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. In addition, pursuant to separate agreements and as partial consideration for entering into the Scottish Annuity Agreement, Scottish Insurance subleases to Scottish Annuity a portion of its leased space at its executive offices in the Cayman Islands and Scottish Annuity has sold certain of its computer hardware and software to Scottish Insurance. 41 ADMINISTRATION AND CONSULTING SERVICES Variable Life Insurance As part of its strategy to enter into the variable life insurance business, the Company intends to develop the internal resources (i.e., the personnel and computer software) necessary to administer and operate all aspects of such business. The Company anticipates that it will have such capability by the end of 1999, although no assurances can be given. While the Company is in the process of developing such capability, the Company will utilize the services of third party service providers to complement its own administrative staff. The primary administrative services which the Company will initially outsource will be monitoring tax law compliance and preparing policy illustrations. The Company expects to use Westport and Milliman & Robertson to provide such services each of which will or is expected to charge for its services on an hourly basis and for its reimbursable expenses. The Company expects that with the commencement of its operations its administration staff will be responsible for most other administrative services related to the Company's variable life insurance business, including (i) billing premiums, (ii) preparing of policy account statements, (iii) processing policy loans, (iv) processing change of policy holders and beneficiary requests and (v) processing changes in private independent money managers and policy surrenders. The Company may also utilize IRM Cayman from time to time to provide certain administrative services. Reinsurance of Fixed Annuities and Similar Contracts and Other Reinsurance Business The Company anticipates that it will handle all aspects of its reinsurance activities principally through its Senior Vice President and Chief Insurance Officer and administrative staff. It is expected that they will identify potential blocks of business that appear to be attractive candidates for reinsurance, conduct all related financial and product due diligence, negotiate the relevant reinsurance agreements and monitor such reinsurance agreements and any related investment portfolio and investment manager performance. Under the Company's reinsurance agreements, it is expected that the cedent will retain responsibility for handling all administrative matters relating to the underlying life insurance policies or annuity contracts. The Company may from time to time utilize IRM Cayman to provide support for its reinsurance personnel. IRM Cayman The Company has retained IRM Cayman, a member company of IRMG, an affiliate of Swiss Reinsurance, to act as the Company's licensed insurance manager in the Cayman Islands and to supplement from time to time the Company's administrative staff in the Cayman Islands. According to IRM Cayman, IRMG is the largest independent captive insurance manager in the world today operating out of 20 offices in North America, Europe, Australia, Africa and Asia. As the Company's licensed insurance manager in the Cayman Islands, IRM Cayman will prepare the Company's annual report required to be filed with the Cayman Monetary Authority, submit any changes or amendments to the Company's business plan required to be filed with the Cayman Monetary Authority and annually certify as to the Company's compliance with all applicable requirements of the Cayman Monetary Authority. IRM Cayman will also act as a co-signatory on all contracts and bank transactions involving the Company and reconcile all of the Company's cash accounts on a monthly basis. The Company's agreement with IRM Cayman may be terminated by either party upon 90 days advance written notice (or upon shorter notice in specified circumstances). The Company pays IRM Cayman an annual retainer of $25,000, and IRM Cayman bills for its actual services on an hourly basis and for its reimbursable expenses. Scottish Insurance has agreed to indemnify IRM Cayman and its officers, employees and agents against certain liabilities. IRM Cayman has provided similar services to Scottish Annuity since it commenced operations in 1994. Milliman & Robertson The Company has entered into an agreement with Milliman & Robertson pursuant to which Milliman & Robertson will provide certain actuarial services to the Company, including pricing and reinsurance analysis, from time to time as requested by the Company. The Company has paid Milliman & Robertson an initial retainer of $25,000, and Milliman & Robertson bills for its actual services on an hourly basis and for its reimbursable expenses. 42 DC Planning 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 will provide certain consulting services to the Company, including with respect to the development and implementation of its business plan. DC Planning will be paid $180,000 a year for a term of three years under the agreement. Howard Shapiro, who will be a Director of Holdings, is the managing partner of DC Planning. See "Certain Relationships and Related Party Transactions." INVESTMENT PORTFOLIO General The Company will seek to generate attractive levels of investment income through a professionally managed investment portfolio. Following the Offering and the Direct Sales, the Company will have approximately $254.4 million of capital available for policy reserves and other corporate purposes. If the Company is unable to effectively manage its investment portfolio and the risks associated with such investments, the Company's ability to support its variable life insurance and reinsurance businesses, and its results of operations and financial condition, would be adversely affected. Investment Guidelines The Company's investment activities will be governed by the Investment Guidelines as approved by the Board of Directors. The Company's investment portfolio (exclusive of assets transferred and invested as part of any coinsurance transaction) will principally consist 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. The Company 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 Scottish Insurance 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 leveraged and that purchases of securities on margin and short sales may not be made without approval of the Board of Directors. The Company will be exposed to two primary sources of investment risk on its fixed income investments: credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest, and interest rate risk, relating to the market price and/or cash flow variability associated with changes in market interest rates. The Company will 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. The Company's investments in fixed income securities that are rated below investment grade are subject to greater risks than its investments in investment grade securities. The risk of loss of principal or interest through default is greater with such lower-rated securities because they are usually unsecured and are often subordinated to an issuer's other obligations. Additionally, the issuers of these securities frequently have high debt levels and are thus more sensitive to difficult economic conditions, individual corporate developments and rising interest rates which could impair an issuer's capacity or willingness to meet its financial commitment on such lower rated securities. 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 the Company's investment portfolio may be invested in fixed income securities that are rated below investment grade. 43 The Company will seek to manage the investment risks associated with any coinsurance transaction it enters into by structuring its investment of the assets transferred to it as part of such transaction in an effort to match its anticipated reinsurance liabilities with respect to such transaction. The Company expects to invest such assets principally in fixed income and, to a lesser extent, equity securities. The Company may invest in foreign denominated securities to manage currency risk if the coinsurance transaction has a foreign currency component. The Company may also enter into interest rate swap and other hedging transactions in an effort to manage interest rate risks associated with such transactions. The Company's use of derivatives to minimize interest rate risk is expected to be incidental to the Company's overall investment of the assets transferred to it in any coinsurance transaction. Any investment in equity securities (expected to be typically not more than 10% of the assets transferred to it in a coinsurance transaction ) would be made in an effort to enhance the Company's overall return on such assets. See "Risk Factors--Risks Associated with Investment Activities." The Company's Investment Guidelines prohibit investments in (i) direct real estate; (ii) oil and gas limited partnerships; (iii) direct commodities, (iv) venture capital investments, including private equity or its equivalent; and (v) U.S. investments consisting of (a) partnership interests, (b) residual interests in Real Estate Mortgage Investment Conduits, (c) any "pass through" certificate unless all underlying debt was issued on or after July 18, 1984, (d) cash settlement options and forwards if no U.S. exchange traded future on the same property exists, (e) options and forwards on indices which are not traded on United States exchanges, (f) collateralized mortgage obligations, unless issued with an opinion of counsel stating that such obligations will be considered debt for tax purposes, (g) real property interests, including equity in and convertible debt obligations of real property holding corporations the sale of which would be subject to tax, (h) any tangible property, (i) any debt obligation the interest on which does not qualify as "portfolio interest" or is otherwise subject to U.S. withholding tax and (j) any investment that does not qualify as a stock or security for purposes of Section 864(b)(2) of the Code. Investment Managers The Company has entered into investment advisory agreements with each of PIMCO, General Re and Prudential Investment to manage the Company's fixed income investment portfolio. The Company anticipates that PIMCO will manage approximately 50% of the Company's investment portfolio and General Re and Prudential Investment will each manage a portion of the other 50% of the Company's investment portfolio. PIMCO is one of the largest fixed income money managers in the U.S. According to information supplied by PIMCO, as of December 31, 1997, PIMCO had aggregate assets under management of approximately $118.0 billion of which approximately 90% consisted of fixed income assets and approximately 10% consisted of equity related assets. Under the agreement with PIMCO (the "PIMCO Agreement"), the Company will pay PIMCO an annual fee equal to 0.50% of the market value of the first $25.0 million of the Company's assets managed by PIMCO, 0.375% on the market value of the next $25.0 million of the Company's assets under management and 0.25% thereafter. The foregoing fees are payable quarterly in advance based on the market value of the Company's investment portfolio managed by PIMCO at the beginning of the billing period. The PIMCO Agreement will continue in effect on a month to month basis and may be terminated by either party effective at the end of the month upon 30 days advance notice. The Company may also terminate the PIMCO Agreement effective upon notice but will be obligated to pay the applicable fee for 30 days thereafter. Under the agreement with General Re (the "General Re Agreement"), the Company will pay General Re an annual fee equal to 0.20% of the market value of the first $50.0 million of the Company's assets under management, 0.15% of the market value of the next $50.0 million of the Company's assets under management and 0.12% of the market value of the Company's assets under management in excess of $100.0 million. The foregoing fees are payable at the end of each calendar quarter for services provided during the prior three months. The General Re Agreement may be terminated by either party upon 30 days written notice and will remain in effect until terminated. Under the agreement with Prudential Investment (the "Prudential Investment Agreement"), the Company will pay Prudential Investment an annual fee equal to 0.20% of the market value of the first $50.0 million of the 44 Company's assets under management and 0.15% of the market value of the Company's assets under management in excess of $50.0 million. The foregoing fees are payable quarterly in arrears. The Prudential Investment Agreement may be terminated by the Company at any time and by Prudential Investment upon forty-five days written notice and will remain in effect until terminated. The Company expects that the Investment Managers will manage the investment of assets transferred to the Company in any coinsurance transaction. Investment Oversight The Company's Board of Directors will continuously review the Company's investment portfolio and the performance of its investment managers. The Board of Directors can approve exceptions to the Company's Investment Guidelines and will periodically review the Company's Investment Guidelines in light of prevailing market conditions. The investment managers and the Company's Investment Guidelines may change from time to time as a result of such reviews. The Company may in the future create an investment committee of the Board of Directors to review the Company's Investment Guidelines, investment managers and investment performance. COMPETITION AND RATINGS The insurance and reinsurance industries are highly competitive and most of the companies in such industries are significantly larger and have operating histories and have access to significantly greater financial and other resources than does the Company. The Company has no experience competing with such companies and there can be no assurance that it will be successful. To the extent that the Company's variable life insurance policies provide for management of the underlying separate accounts by private independent money managers, the Company's variable life insurance policies compete with mutual funds and other investment or savings vehicles. The Company believes that the most important competitive factor affecting the marketability of its variable life insurance products is the degree to which it meets customer expectations, both in terms of returns (after fees and expenses) and service. In addition, competition in the reinsurance business that the Company intends to underwrite is based principally on price and, to a lesser extent, ratings, perceived financial strength and service. Because the Company expects to rely at least initially on a small number of clients in both its 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 preliminary rating of "A" and A.M. Best has assigned Scottish Insurance a preliminary Best Rating of "A-" (Excellent). These ratings are contingent on the Company raising gross proceeds of at least $200.0 million in the Offering. 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. Scottish Insurance is not licensed or admitted as an insurer in any jurisdiction other than the Cayman Islands. Because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are in place, it is anticipated that the Company's reinsurance clients will typically require it to post a letter of credit or provide other collateral through funds withheld or trust arrangements. If the Company is unable 45 to obtain a letter of credit facility on commercially acceptable terms or is unable to arrange for such other collateral, the Company's ability to operate its business will be severely limited. EMPLOYEES Cayman Islands immigration law mandates that the Company employ only Caymanians, Cayman status holders or residents with permission to work unless it can be determined that no such person is qualified to perform the job. Accordingly, subject to limited exceptions, the Company must advertise in a Cayman Islands newspaper all open job positions and interview all applicants. If the Company determines that no Caymanian, Cayman status holder or resident with permission to work is qualified to perform the job and the Cayman Islands governmental authority agrees, the Company may hire a non-Caymanian upon the Cayman Islands government's issuance of a work permit to such individual. Work permits are generally issued for a specified period of time and must be renewed upon expiration. The Company will initially employ three executives and two administrative staff persons. The two administrative staff persons are Caymanians, while Ms. Boucher currently holds a valid work permit in connection with her employment by Scottish Annuity, which expires July 24, 1999, and is currently seeking to have such work permit amended to cover her employment by Holdings and Scottish Insurance. Mr. French and Mr. Sulikowski were issued work permits for an initial one year period commencing on October 2, 1998 and September 14, 1998, respectively. Messrs. French's and Sulikowski's permits may be automatically renewed for an additional one year period upon payment of the applicable renewal fee. See "Risk Factors--Cayman Islands Work Permit." Over the next six to nine months, the Company anticipates that it will hire a financial controller or other financial staff person and an actuary as well as one or two additional administrative staff persons. PROPERTY The Company leases approximately 1,000 square feet of office space in George Town, Grand Cayman, Cayman Islands, British West Indies, at which the principal offices of Holdings and Scottish Insurance are located, pursuant to a lease with Queensgate Bank and Trust Company Limited. The lease has a one year term which will be 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. The Company's annual rent is $12,500, which is paid on a quarterly basis. The Company subleases a portion of its office space to Scottish Annuity in connection with the Scottish Annuity Agreement. See "Business--Scottish Annuity Agreement." LEGAL PROCEEDINGS The Company is not currently involved in any litigation or arbitration. Like other insurance and reinsurance companies, the Company anticipates that it will be subject to litigation and arbitration in the ordinary course of its business. REGULATION Cayman Islands The Company. The Company is a holding company owning all of the outstanding Ordinary Shares of Scottish Life. The Company is not itself subject to regulation by any authority in the Cayman Islands, either under insurance or mutual funds legislation. The Insurance Law, 1998 Revision. All persons carrying on or desiring to carry on an insurance (including reinsurance) business in or from within the Cayman Islands must be licensed under the Insurance Law (1998 Revision) (the "Insurance Law"). Insurance agents, brokers and those providing insurance management must also be licensed. Licences are granted by the Governor-in- Council and applications are reviewed by the Cayman Monetary Authority, which is generally responsible for the supervision and regulation of financial services. 46 Information filed with the Cayman Islands authorities pursuant to the Insurance Law is not generally a matter of public record. Application for an insurance license is made to the Cayman Monetary Authority by filing certain prescribed application forms together with supporting documentation regarding the suitability of the applicant to carry on an insurance business. A complete business plan must be filed, and the licensee is limited to conducting the business described in the plan. All changes in the nature of the business to be conducted require prior approval of the Cayman Monetary Authority. License applications must include lists of all shareholders, directors and officers of the applicant and the Cayman Monetary Authority must be notified of any subsequent changes therein. Types of Licenses. There are two broad classes of insurer's license--the Class A and the Class B license (the latter of which may be restricted or unrestricted). The Class A license permits the holder to carry on a general insurance business including the underwriting and reinsurance of Cayman Islands domestic risks. Persons intending to engage in an insurance business from within the Cayman Islands, but not to engage in the underwriting of Cayman Islands insurance risks, may obtain a Class B license. Scottish Insurance holds an unrestricted Class B insurance license and may therefore carry on an insurance business from within the Cayman Islands, but may not engage in any Cayman Islands domestic insurance business. Scottish Insurance's business plan filed with the Cayman Monetary Authority specifically contemplates the writing of variable life insurance policies and the reinsurance of fixed annuities, variable annuities and life insurance. Although information filed with the Cayman Monetary Authority pursuant to the Insurance Law is generally not a matter of public record, the Cayman Monetary Authority has the power to disclose information necessary to enable foreign regulators to exercise similar functions to those exercised by the Cayman Monetary Authority. Before doing so, the Cayman Monetary Authority is required to satisfy itself that the regulator is subject to adequate legal restrictions on further disclosure and may ask for a suitable undertaking in this respect. Any such disclosure by the Cayman Monetary Authority must not relate to customers or policyholders. Minimum Net Worth. Scottish Insurance is currently required by the Cayman Monetary Authority to maintain a minimum net worth of $240,000, but a higher net worth requirement may be imposed by the Cayman Monetary Authority under certain circumstances. Net worth is defined as the "excess of assets (including any contingent or reserve fund secured to the satisfaction of the Governor-in-Council) over liabilities, other than liabilities to partners or shareholders." The initial net worth must generally consist solely of cash, although a mix of cash, other assets, guarantees or letters of credit may be acceptable. Scottish Insurance has initially met this requirement with cash. Insurance Manager. 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. The insurance manager must employ a person who is either qualified by examination as a fellow or associate of the Chartered Insurance Institute of London, or who is a member of either the Society of Chartered Property and Casualty Underwriters or the American Society of Chartered Life Underwriters or is a person of good standing with such insurance expertise as has been approved by the Governor- in-Council. Such person must be a member in good standing of the applicable professional body or of some other professional insurance association recognized by the Cayman Monetary Authority for the purposes of the Insurance Law and in good standing with the Cayman Monetary Authority. The insurance manager must use its best efforts to carry on an insurance and reinsurance business only with insurers of sound reputation and must comply with certain reporting requirements imposed by the Cayman Monetary Authority. The insurance manager must report to the Cayman Monetary Authority with respect to any concerns it has with respect to any insurance companies with whom it is doing business. Sixty days written notice must be given to the Cayman Monetary Authority of any intention to terminate a relationship between an insurer and a licensed insurance manger. A licensed insurance manager must furnish to the Cayman Monetary Authority, within six months of the end of its fiscal year, a list of all insurers for whom the insurance manager performs services and a written confirmation indicating that the information set out in its licence application is correct. Scottish Insurance has engaged IRM Cayman as its licensed insurance manager in the Cayman Islands. See "Business-- Administration." 47 Separate Accounts. Under the Insurance Law, Cayman Islands insurance companies carrying on long term business (which will include the writing of life insurance policies) shall 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 shall not be made directly or indirectly for any purpose other than those of the insurer's long-term business; provided, however, that such payments can be made with any surplus disclosed on an actuarial valuation and certified by an actuary to be distributable otherwise than to policy holders. 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. Auditors and Annual Compliance. Cayman Islands insurance companies are required to have their financial statements audited on an annual basis. Scottish Insurance has engaged Ernst & Young to perform its annual audit. The auditors must file with the Cayman Monetary Authority a written statement indicating that the insurer's financial statements have been prepared in accordance with GAAP or a written statement indicating any deviations therefrom. In addition, the auditors, the licensed insurance manager or another approved person must sign and file an annual compliance certificate to the effect that the insurer has carried on its business in accordance with the information set out in its license application and that any changes in the nature of the business have been approved by the Cayman Monetary Authority. Scottish Insurance has engaged IRM Cayman to file its annual compliance certificate. Powers of Supervision of Investments. The Cayman Monetary Authority has the power to prescribe that specified classes of investments made by a Cayman Islands insurance company be approved and that any investments in such class already made be realized within a specified period. Although no assurance can be given as to the future, to date as far as the Company is aware, this power has never been exercised by the Cayman Monetary Authority. The Cayman Monetary Authority also has the power to prescribe, establish and vary required capital and liquidity margins and ratios. Powers of Inspection and Intervention. The Cayman Monetary Authority conducts a general review of insurance practices in the Cayman Islands and, among other things, may examine the affairs of any licensee for the purpose of determining whether the provisions of the Insurance Law have been or are being complied with, that the licensee is in a sound financial position and that it is carrying on its business in a satisfactory manner. The Cayman Monetary Authority may obtain access to such books, records, documents, policies, contracts and securities, and call upon the insurance manager for such information or explanation, as the Cayman Monetary Authority may reasonably require for purposes of enabling the Cayman Monetary Authority to perform its functions under the Insurance Law. Where the Governor-in-Council is of the opinion that a licensee is carrying on its business in a manner likely to be detrimental to the public interest or to the interest of insurers, creditors or policyholders, or in contravention of the Insurance Law, the Governor-in-Council may require the licensee to take steps necessary to rectify the matter, suspend the license pending a full inquiry into the licensee's affairs or, without compensation to the licensee, revoke the license. Confidentiality and the Proceeds of Criminal Conduct Law. Under the Cayman Islands confidentiality laws, it is an offense for a person to divulge confidential information maintained in the Cayman Islands. However, similar to initiatives taken in major onshore financial centers, the Cayman Islands has recently become the first offshore financial center to enact specific legislation designed to prevent money laundering. Under the new Proceeds of Criminal Conduct Law, professionals in the Cayman Islands may report to the authorities in the Cayman Islands transactions they suspect may involve the proceeds of criminal conduct. 48 United States and Other Neither Holdings nor Scottish Insurance will be 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 is expected to conduct its insurance and reinsurance business through its executive offices in the Cayman Islands and will 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 are expected to be negotiated, executed, and issued, and all premiums are expected to be 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. The Company has received an opinion from its state insurance regulatory counsel, The Bernstein Law Firm, that Scottish Insurance will not be subject to the insurance laws of any state of the United States. Many states impose a premium tax (typically 2%-4% of gross premiums) on insureds obtaining insurance from unlicensed foreign insurers, such as Scottish Insurance. The premiums charged by Scottish Insurance do not include any state premium tax. Each insured is responsible for determining whether it is subject to pay such tax and for paying such taxes as may be due. In addition, the United States imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to Scottish Insurance is 1% of its insurance and reinsurance premiums. This excise tax is payable by the contract owner, although the Company will often file the tax form. In addition, because many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security measures are in place, it is anticipated that the Company's reinsurance clients will typically require it to post a letter of credit or provide other collateral through a funds withheld or trust arrangement. 49 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth the names, ages and titles of the directors (including those who will become directors) of Holdings and executive officers of Holdings and Scottish Insurance. After consummation of the Offering, the Company intends to appoint an additional outside director who is not affiliated with the Company's shareholders or the Underwriters.
NAME AGE POSITION ---- --- -------- Sam Wyly................ 63 Chairman of the Board and Director Michael C. French....... 55 Chief Executive Officer, President and Director Michelle L. Boucher..... 31 Senior Vice President, Chief Financial Officer and Secretary Henryk Sulikowski....... 39 Senior Vice President and Chief Insurance Officer Michael Austin.......... 62 Director R. Duke Buchan III...... 35 Director Robert M. Chmely........ 64 Director David Matthews.......... 35 Director Howard Shapiro.......... 52 Director Charles J. Wyly, Jr..... 64 Director
SAM WYLY will be elected a director of Holdings prior to the consummation of the Offering. Mr. Wyly will also serve as Chairman of the Board of Holdings. 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 Holdings' Chairman of the Board and Chief Executive Officer upon its formation. Mr. French is currently Holdings' 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 also a director of SHL, which currently owns all of the outstanding stock of Holdings. Mr. French is a founder and a director of Scottish Annuity and provides legal services to Scottish Annuity pursuant to a legal services agreement, which will be terminated upon consummation of the Offering. 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 Michaels Stores, Inc., a national specialty retail chain. He received a B.B.A. and a J.D. (cum laude) from Baylor University. MICHELLE L. BOUCHER was elected Holdings' Senior Vice President and Chief Financial Officer upon its formation. Ms. Boucher was also elected as Scottish Insurance's Senior Vice President, Chief Financial Officer and Secretary upon its formation. Ms. Boucher is a director of Scottish Insurance. Ms. Boucher has served as Manager of Finance and Administration and Secretary of Scottish Annuity since July 1995. Ms. Boucher, a Canadian national, has resided in the Cayman Islands since 1992. From April 1992 until October 1993, Ms. Boucher was an auditor with Price Waterhouse. From October 1993 through June 1995, she was a Senior Client Accountant in the mutual fund department of MeesPierson (Cayman) Limited, where she was responsible for administering mutual funds, trusts and other foreign corporate entities, including calculation of net asset values and provision of shareholder services. Ms. Boucher is a Chartered Accountant and holds a BMath from the University of Waterloo. 50 HENRYK SULIKOWSKI became Senior Vice President and Chief Insurance Officer of 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 ("ACLI") and the National Alliance of Life Companies ("NALC"). He has served as a member of the State Activities Task Force of the ACLI's Reinsurance Committee and was instrumental in establishing the NALC's Reinsurance Committee, 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 will be elected a director of Holdings prior to the consummation of the Offering. 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 will be elected a director of Holdings prior to the consummation of the Offering. 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. ROBERT M. CHMELY will be elected a Director of Holdings prior to the consummation of the Offering. 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 will be elected a director of Holdings prior to the consummation of the Offering. 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 will be elected a director of Holdings prior to the consummation of the Offering. 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. will be elected a director of Holdings prior to the consummation of the Offering. 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 51 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. PROVISIONS GOVERNING THE COMPANY'S BOARD OF DIRECTORS Number and Terms of Directors The Company currently has one director. Prior to consummating the Offering, it is anticipated that the Company's shareholders will elect seven additional directors, currently contemplated to be Messrs. Austin, Chmely, Buchan, Matthews, Shapiro, Charles J. Wyly, Jr. and Sam Wyly. At the time such additional directors are elected, the Board of Directors will be divided into three classes in accordance with the Company's Articles of Association. Following their initial terms, all classes of directors shall be elected to three-year terms. Committees of the Board Audit Committee. At the time additional directors are elected, the Board will establish an Audit Committee, which committee will report to the Board. The Audit Committee will review the Company's internal administrative and accounting controls and recommend to the Board the appointment of independent auditors. The Audit Committee will also review the performance of corporate officers and the Company's compensation policies and procedures, make recommendations to the Board with respect to such policies and procedures, and may administer stock option plans and incentive compensation plans of the Company. The Audit Committee will be comprised of a majority of independent directors. It is expected that Messrs. Austin, Chmely and Buchan will serve on the Audit Committee after the consummation of the Offering. Investment Committee. It is expected that the entire Board of Directors of the Company will initially serve as the Investment Committee after consummation of the Offering. The Company may in the future create an investment committee of the Board of Directors. Compensation of Directors Directors who are employees of the Company will not be paid any fees or additional compensation for services as members of the Company's Board of Directors or any committee thereof. Non-employee Directors will receive cash in the amount of $20,000 per annum and $1,000 per board or committee meeting attended. Each non-employee Director will be granted an option to purchase 10,000 Ordinary Shares pursuant to the Stock Option Plan at or prior to the date the Offering is consummated with an exercise price equal to the initial public offering price. In addition, 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 AGREEMENTS Michael C. French. Pursuant to an employment agreement with the Company, Mr. French has agreed to serve as Chief Executive Officer and President of the Company for an initial term ending on June 18, 2001 which term will be automatically increased on June 18, 1999 and each anniversary thereafter for an additional year, subject to 90 days advance notice before June 18, 1999 or any subsequent anniversary by either the Company or Mr. French of an intention not to renew. After the Offering, Mr. French will receive an annual salary of $450,000 and will be eligible to participate in all employee benefit programs sponsored by the Company. Mr. French will also be eligible to receive an annual performance-based bonus in an amount to be determined by the Company's 52 Board of Directors. Mr. French will also be entitled to a gross-up of certain excise taxes and to the payment or reimbursement by the Company of any legal fees or related expenses incurred by Mr. French with respect to the interpretation, enforcement or defense of his rights under his Employment Agreement. Upon execution of the employment agreement, Mr. French received stock options exerciseable for 400,000 Ordinary Shares (or, if the Underwriters' over-allotment option is exercised in full, 460,000 Ordinary Shares). See "--Stock Option Plan." Mr. French's Employment Agreement also provides that he will maintain in confidence all confidential matters that relate to the Company or any affiliate of the Company and that he will not (i) during his employment or, if he receives severance compensation from the Company upon termination of his employment, for one year thereafter, participate in the management of any business enterprise that engages in substantial and direct competition with the Company or (ii) 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 of the Company or any subsidiary thereof to give up employment or a business relationship with the Company or any such subsidiary. In addition, pursuant to Mr. French's Employment Agreement, Mr. French will be entitled to severance compensation if (i) the Company terminates his employment in any case other than death, disability or cause or (ii) (a) Mr. French terminates his employment upon the Company's failure to maintain him in his office or position (or a substantially equivalent office or position) with the Company; (b) an adverse change affecting the authorities, powers, functions, responsibilities or duties attaching to his position with the Company; (c) a reduction in his compensation; (d) the failure of any successor to the Company to assume the Company's duties and obligations under Mr. French's Employment Agreement; (e) a relocation of the principal location of Mr. French's work in excess of 25 miles from its original location; (f) a change in control of the Company (provided Mr. French terminates his employment within one year of such change in control); or (g) an unremedied breach of Mr. French's Employment Agreement by the Company or any successor. The severance compensation that Mr. French will be entitled to upon any such termination 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 and the transportation expenses of relocating Mr. French and his family to the United States. Michelle L. Boucher. Pursuant to an employment agreement with the Company, Ms. Boucher has agreed to serve as Senior Vice President and Chief Financial Officer of the Company for an initial term ending on June 18, 2001, which term will be automatically increased on June 18, 1999 and each anniversary thereafter for an additional year, subject to 90 days advance notice before June 18, 1999 or any subsequent anniversary by either the Company or Ms. Boucher of an intention not to renew. After the Offering, Ms. Boucher will receive an annual salary of $175,000 and will be eligible to participate in all employee benefit programs sponsored by the Company. Ms. Boucher will also be eligible to receive an annual performance-based bonus to be determined by the Company's Board of Directors and will receive a monthly housing and travel allowance of $7,500. In addition, during the term of Ms. Boucher's employment, the Company will fund a retirement account for Ms. Boucher in an amount not less than 10% of Ms. Boucher's annual salary for each year during the term of her employment. The Company will also pay or reimburse Ms. Boucher for any legal fees or related expenses incurred by Ms. Boucher with respect to the interpretation, enforcement or defense of her rights under her Employment Agreement. Upon execution of the employment agreement, Ms. Boucher received stock options exercisable for 200,000 Ordinary Shares (or, if the Underwriters' over-allotment option is exercised in full, 230,000 Ordinary Shares). See "--Stock Option Plan." Ms. Boucher's Employment Agreement also provides that she will maintain in confidence all confidential matters that relate to the Company or any affiliate of the Company and that she will not (i) during her employment or, if she receives severance compensation from the Company upon termination of her employment, for one year thereafter, participate in the management of any business enterprise that engages in substantial and direct competition with the Company or (ii) during her employment or for one year thereafter, attempt to influence, persuade or induce (or assist any other person in so persuading or inducing) any employee of the Company or any subsidiary thereof to give up employment or a business relationship with the Company or any such subsidiary. Ms. Boucher will be entitled to severance compensation if (i) the Company terminates her 53 employment in any case other than death, disability or cause or (ii)(a) Ms. Boucher terminates her employment upon the Company's failure to maintain Ms. Boucher in her office or position (or a substantially equivalent office or position) with the Company; (b) an adverse change affecting the authorities, powers, functions, responsibilities or duties attaching to her position with the Company; (c) a reduction in her compensation; (d) the failure of any successor to the Company to assume the Company's duties and obligations under Ms. Boucher's Employment Agreement; (e) a relocation of the principal location of Ms. Boucher's work in excess of 25 miles from its original location; (f) a change in control of the Company (provided Ms. Boucher terminates her employment within one year of such change in control); or (g) an unremedied breach of Ms. Boucher's Employment Agreement by the Company or any successor. The severance compensation that Ms. Boucher will be entitled to upon any such termination includes a lump sum payment equal to three times the sum of her annual base salary and incentive compensation at the highest respective rates in effect for any year prior to the termination. Ms. Boucher will not be paid by the Company or Scottish Annuity for any service she renders to Scottish Annuity. Henryk Sulikowski. Pursuant to an employment agreement with the Company, Mr. Sulikowski has agreed to serve as Senior Vice President and Chief Insurance Officer of the Company for an initial term ending on July 20, 2001, which term will be automatically increased 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 the Company or Mr. Sulikowski of an intention not to renew. Mr. Sulikowski will receive an annual salary of $200,000 and will be eligible to participate in all employee benefit programs sponsored by the Company. Mr. Sulikowski will also receive a one-time cash bonus of $75,000 at the earlier of the consummation of the Offering or December 31, 1998. Mr. Sulikowski will also be eligible to receive an annual performance-based bonus in an amount to be determined by the Company's Board of Directors and will receive a monthly housing and travel allowance of $9,000. The Company will also pay all expenses relating to the relocation of Mr. Sulikowski and his immediate family to the Cayman Islands. In addition, during the term of Mr. Sulikowski's employment, the Company will 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. The Company will 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 (or, if the Underwriters' over-allotment option is exercised in full, 345,000 Ordinary Shares). See "--Stock Option Plan." Mr. Sulikowski's Employment Agreement also provides that he will maintain in confidence all confidential matters that relate to the Company or any affiliate of the Company and that he will not (i) during his employment or, if he receives severance compensation from the Company upon termination of his employment, for one year thereafter, participate in the management of any business enterprise that engages in substantial and direct competition with the Company or (ii) 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 of the Company or any subsidiary thereof to give up employment or a business relationship with the Company or any such subsidiary. In addition, pursuant to Mr. Sulikowski's Employment Agreement, Mr. Sulikowski will be entitled to severance compensation (i) if the Company terminates his employment in any case other than death, disability or cause, (ii)(a) if Mr. Sulikowski terminates his employment upon the Company's failure to maintain him in his office or position (or a substantially equivalent office or position) with the Company; (b) an adverse change affecting the authorities, powers, functions, responsibilities or duties attaching to his position with the Company; (c) a reduction in his compensation; (d) the failure of any successor the Company to assume the Company's duties and obligations under Mr. Sulikowski's Employment Agreement; (e) a relocation of the principal location of Mr. Sulikowski's work to any location other than the Cayman Islands; (f) a change in control of the Company (provided Mr. Sulikowski terminates his employment within one year of such change in control); or (g) an unremedied breach of Mr. Sulikowski's Employment Agreement by the Company or any successor, or (iii) if the Company notifies Mr. Sulikowski of its intent not to renew the Employment Agreement at the expiration of its initial term or any anniversary thereafter. The severance compensation that Mr. Sulikowski will be entitled to 54 upon any such termination includes a lump sum payment equal to the sum of (i) the greater of (A) any amounts of Mr. Sulikowski's annual base salary relating to the first three years of the term of his employment not paid prior to the termination of his employment, and (B) his annual base salary at the highest rate in effect for any year prior to the termination, (ii) the annual incentive compensation at the highest rate in effect for any year prior to the termination, and (iii) the transportation expenses for relocating Mr. Sulikowski and his immediate family to the United States. STOCK OPTION PLAN The Stock Option Plan authorizes grants of nonqualified stock options to directors, officers and other key employees of, and consultants and advisors to, Holdings and its subsidiaries. The Stock Option Plan authorizes the granting of stock options for up to 1,600,000 Ordinary Shares, subject to adjustments upon the occurrence of certain events to prevent dilution. Stock options may be exercisable for up to ten years at such exercise price (provided the exercise price is no lower than the fair market value of the Ordinary Shares on the date of grant) and upon such terms and conditions as the Board of Directors or a committee thereof may determine at the time of the grant. Unless otherwise provided in the option agreement evidencing a stock option grant, a grant will become exercisable in three equal annual installments commencing with the first anniversary of the date of grant. The stock option grant may provide for the earlier exercise of the stock options upon a change in control, and the Board of Directors may accelerate the date on which any stock option may be exercised. The Board of Directors may also specify in the stock option grant that part or all of the exercise price may be payable through deferred payment from the proceeds of the sale of some or all of the Ordinary Shares purchased upon such exercise. As of the date of this Prospectus, stock options have been granted under the Stock Option Plan to Mr. French, Ms. Boucher and Mr. Sulikowski exercisable for 400,000 Ordinary Shares, 200,000 Ordinary Shares, and 300,000 Ordinary Shares, respectively; if the Underwriters' over-allotment option is exercised in full, Mr. French's, Ms. Boucher's and Mr. Sulikowski's options will increase to 460,000, 230,000 and 345,000, respectively. The stock options were issued to each upon the execution of their respective employment agreements with the Company. The stock option agreements shall be terminated, and the stock options shall not be exercisable, if the consummation of the Offering does not occur by December 31, 1998. Such stock options have an exercise price equal to the initial public offering price, and, unless terminated, become exercisable in three equal installments commencing with the first anniversary of the closing of the Offering. Notwithstanding the foregoing, such stock options will become immediately exercisable in full upon a change of control. Such stock options expire on the earliest of the following dates: (i) immediately upon the termination of employment for cause, (ii) two years after the termination of employment resulting from death or disability, (iii) except as provided on a case-by-case basis, sixty days after the termination of employment for any reason other than cause, death or disability, or (iv) the tenth anniversary of the consummation of the Offering. If such stock options are terminated as a result of termination of employment, such stock options will be exercisable only to the extent such stock options were exercisable on the date such employment was terminated. At or prior to the consummation of the Offering, the Company will grant to Howard Shapiro in his capacity as a consultant for the Company, stock options exercisable for 90,000 Ordinary Shares (which if the Underwriters' over allotment is exercised in full, will increase to 103,500 Ordinary Shares) contingent upon execution of the Company's proposed agreement with Westport. Such options will have an exercise price equal to the initial public offering price, and will become exercisable in three equal installments commencing with the first anniversary of the closing of the Offering. In addition, each person who becomes a non-employee Director, as defined in the Stock Option Plan, at or prior to the consummation of the Offering will be granted an option to purchase 10,000 Ordinary Shares with an exercise price equal to the initial public offering price. Such stock options will be exercisable in three equal installments commencing with the first anniversary of the grant date. In addition, subject to certain conditions, each non- employee Director shall be granted an option to purchase 2,000 Ordinary Shares at each successive annual general meeting after December 31, 1998. These options will have an exercise price equal to the fair market value of the Ordinary Shares on the date of grant and shall be immediately exercisable if granted after the first anniversary of the consummation of the Offering. If such options are granted prior to the first anniversary of the consummation of the Offering, such options shall become exercisable on such anniversary. 55 The following table sets forth information concerning the stock options granted or to be granted upon consummation of the Offering by the Company to its executive officers under the Stock Option Plan. INITIAL OPTION GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATE OF ORDINARY SHARE PRICE INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(4) ------------------------------------------------------- -------------------------------- NUMBER OF ORDINARY SHARES PERCENT OF TOTAL EXERCISE UNDERLYING OPTIONS GRANTED TO PRICE EXPIRATION NAME OPTIONS GRANTED EMPLOYEES PER SHARE DATE 5% 10% - ---- --------------- ------------------ --------- ---------- --------------- ---------------- Michael C. French....... 400,000(1) 44.5% $15.00(2) (3) $ 3,773,368 $ 9,562,455 Henryk Sulikowski....... 300,000(1) 33.3 15.00(2) (3) 2,830,026 7,171,841 Michelle L. Boucher..... 200,000(1) 22.2 15.00(2) (3) 1,886,684 4,781,227
- -------- (1) If the Underwriters' over-allotment option is exercised in full, the number of Ordinary Shares underlying Mr. French's, Mr. Sulikowski's and Ms. Boucher's options will increase to 460,000, 345,000 and 230,000 Ordinary Shares, respectively. (2) The initial public offering price per Ordinary Share. The stock options become exercisable in three equal installments commencing with the first anniversary of the consummation of the Offering. (3) The options expire on the tenth anniversary of the consummation of the Offering. (4) 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. 56 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of Ordinary Shares of Holdings by all persons who are expected to beneficially own 5% or more of the Ordinary Shares upon consummation of the Offering and by each director and executive officer of Holdings and by all directors and executive officers as a group.
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) NUMBER OF SHARES PERCENT OF CLASS ---------------------------------------- ---------------- ---------------- Michael C. French(2)(5)(6)................... 152,000 * Michelle L. Boucher(5)(6).................... 12,000 * Henryk Sulikowski(6)......................... -- -- Michael Austin(6)............................ -- -- R. Duke Buchan(6)............................ -- -- Robert M. Chmely(6).......................... -- -- David Matthews(6)............................ -- -- Howard Shapiro(6)............................ -- -- Charles J. Wyly, Jr.(3)(6)................... 312,407 1.68% Sam Wyly(4)(6)............................... 632,013 3.40% All directors and executive officers as a group (ten persons)......................... 1,108,420 5.97%
- -------- *Less than 1%. (1) The address for each beneficial owner is c/o Scottish Annuity & Life Holdings, Ltd., Ugland House, P.O. Box 10657APO, George Town, Grand Cayman, Cayman Islands, British West Indies. (2) All 152,000 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) 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. (4) 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. (5) Does not include Ordinary Shares issuable upon exercise of the Class A Warrants not exercisable within 60 days. (6) Does not include Ordinary Shares issuable upon exercise of stock options not exercisable within 60 days. 57 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS SCOTTISH ANNUITY RELATIONSHIPS The Company has entered into the Scottish Annuity Agreement with Scottish Annuity. See "Business--Scottish Annuity Agreement" for a summary of the terms of the Scottish Annuity Agreement. Michael C. French, Chief Executive Officer, President and a Director of Holdings is a director of Scottish Annuity. Ms. Boucher, Senior Vice President and Chief Financial Officer of Holdings, is the Manager of Finance and Administration of Scottish Annuity. See "Management-- Executive Officers and Directors." DC PLANNING RELATIONSHIPS The Company has also 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 will provide certain consulting services to the Company, including with respect to the development and implementation of its business plan. DC Planning will be paid $180,000 a year for a term of three years under the agreement. Howard Shapiro, who will be a Director of Holdings, is the managing partner of DC Planning. See "Business--Administration and Consulting Services--DC Planning." At or prior to consummation of the Offering, Mr. Shapiro, in his capacity as a consultant for the Company, will be granted stock options exercisable for 90,000 Ordinary Shares (up to 103,500 Ordinary Shares if the Underwriters' over-allotment option is exercised in full) contingent upon execution of the Company's proposed agreement with Westport. Such 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. See "Management--Stock Option Plan." DIRECT INVESTORS RELATIONSHIP The Shareholder Investors, two trusts which are beneficial owners of outstanding Ordinary Shares of the Company, have agreed to purchase Ordinary Shares in the Direct Sales and have also received Class A Warrants in connection with a redemption of outstanding Ordinary Shares. See "--Pre- Offering Equity Adjustment" and "Direct Sales." 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 will become the Chairman of the Board and a Director of the Company) and Charles J. Wyly, Jr. (who will become a Director of the Company) both disclaim beneficial ownership of such Ordinary Shares and Class A Warrants. PRE-OFFERING EQUITY ADJUSTMENT On October 22, 1998, the Company redeemed 1,100,000 Ordinary Shares of the 1,500,000 Ordinary Shares issued upon formation of the Company. Shareholders participating in the redemption exchanged such shares for either Class A Warrants (exercisable for an aggregate 900,000 Ordinary Shares) or nominal consideration. The shareholders which received Class A Warrants in the redemption are three irrevocable trusts of which, respectively, Sam Wyly (who will become the Chairman of the Board and a Director of the Company), Charles J. Wyly, Jr. (who will become a Director of the Company) and Michael C. French (the Chief Executive Officer, President and a Director of the Company) 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 at the initial public offering price and otherwise have the same terms as other Class A Warrants. See "Description of Shares--Class A Warrants." The shareholders which 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 Senior Vice President, Chief Financial Officer and Secretary of the Company). See Note 9 to the Consolidated Balance Sheet of the Company. 58 DESCRIPTION OF SHARES The following summarizes certain provisions of the Memorandum of Association (the "Memorandum") and the Articles of Association (the "Articles") of the Company. Such summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Memorandum and the Articles, including the definitions therein of certain terms. Copies of the Memorandum and Articles are filed as exhibits to the Registration Statement of which this Prospectus is a part. GENERAL Effective immediately prior to the consummation of the Offering, the authorized share capital of the Company will consist of 100,000,000 Ordinary Shares, of which 400,000 Ordinary Shares were outstanding at October 23, 1998, and 50,000,000 Preferred Shares, par value $0.01 per share, none of which were outstanding at October 23, 1998. ORDINARY SHARES The Ordinary Shares offered hereby, upon receipt of payment therefor, will be validly issued, fully paid and nonassessable. There are no provisions of Cayman Islands law, the Memorandum or the Articles which impose any limitation on the rights of shareholders to hold or vote Ordinary Shares by reason of them not being residents of the Cayman Islands. The Ordinary Shares will be subject to the express terms of the Preferred Shares and any series thereof. Holders of the Ordinary Shares have no pre-emptive, redemption, conversion or sinking fund rights. Dividend Rights. Holders of Ordinary Shares are entitled to receive dividends ratably when and as declared by the Board of Directors out of funds legally available therefor subject to prior payment of Preferred Shares or any other class or series of shares with special rights to dividends or distributions, if any. Liquidation. In the event of any dissolution, liquidation or winding-up of the Company, whether voluntary or involuntary, after there are paid or set aside for payment to creditors and the holders of any Preferred Shares or any other outstanding shares ranking senior to the Ordinary Shares as to distribution on liquidation, the full amounts to which they are entitled, the holders of the then outstanding Ordinary Shares shall be entitled to receive, pro rata according to the number of Ordinary Shares registered in the names of such shareholders, any remaining assets of the Company available for distribution to its shareholders. Voting Rights. The Articles provide that the quorum required for a general meeting or extraordinary general meeting of the shareholders is presence in person or by proxy of persons holding at least 50% of the issued and outstanding voting shares entitled to vote at such meeting (without giving effect to the limitation on voting rights described below). A quorum for considering a "special resolution" is presence in person or by proxy of persons holding at least 66 2/3% of the issued and outstanding voting shares entitled to vote at such meeting. Subject to applicable law and any provision of the Articles requiring a greater majority, the Company may from time to time by special resolution alter or amend the Memorandum or Articles; voluntarily liquidate, dissolve or wind-up the affairs of the Company; increase its share capital; consolidate and divide all or any of its share capital; subdivide the whole or any part of its share capital; reduce its share capital, any capital redemption reserve fund, or any share premium account; or change its name or alter its purposes. Each holder of Ordinary Shares is entitled to one vote per share on all matters submitted to a vote of shareholders at any such meeting (subject to the limitation on voting rights described below). All matters, including the election of Directors, voted upon at any duly held shareholders' meeting at which a quorum is present will be carried by a majority of the votes cast at the meeting by shareholders represented in person or by proxy, except (i) approval of a merger, consolidation, amalgamation or court-sanctioned reorganization, or the sale, lease or exchange of all or substantially all of the assets of the Company (except in the case of a transaction between the Company and any entity which the Company directly or indirectly controls), which requires (in 59 addition to any regulatory or court approvals) the approval of the holders of at least 66 2/3% of the outstanding voting shares, voting together as a single class at a duly convened meeting; (ii) approval of a special resolution which requires the approval of at least 66 2/3% of the votes cast by such shareholders represented in person or by proxy at a duly convened meeting; (iii) amendment of the Articles, which requires the approval of at least 66 2/3% of the outstanding voting shares, voting together as a single class at a duly convened meeting; and (iv) as otherwise provided in the Articles. Voting rights with respect to the Ordinary Shares are noncumulative. The Articles provide that, except as otherwise required by law and subject to the terms of any class or series of shares issued by the Company having a preference over the Ordinary Shares as to dividends or upon liquidation to elect directors in specified circumstances, extraordinary general meetings of the shareholders of the Company may be called only by (i) a majority of the Board of Directors; or (ii) at the request in writing of shareholders owning at least 50% of the outstanding shares generally entitled to vote, provided such shareholders deposit at the registered office of the Company a notice stating the objects of the meeting and signed by such holders. The Articles provide that shareholders may remove one or more or all of the Directors from office prior to the expiration of the term of such Director or Directors, but they may do so only with cause and only by approval of a special resolution. Limitation on Voting Rights. Each Ordinary Share has one vote, except that if and for so long as the number of issued Controlled Shares (as defined below) of any person would constitute 10% or more of the combined voting power of the issued voting shares of the Company (after giving effect to any prior reduction in voting power as described below), each such issued Controlled Share, regardless of the identity of the registered holder thereof, will confer only a fraction of a vote as determined by the following formula (the "Formula"): (T - C) / (9.1 X C) Where: "T" is the aggregate number of votes conferred by all the issued shares immediately prior to the application of the Formula with respect to any particular shareholder, adjusted to take into account any prior reduction taken with respect to any other shareholder pursuant to the "sequencing provision" described below; and "C" is the number of issued Controlled Shares attributable to such person. "Controlled Shares" of any person refers to all shares of the Company owned by such person, whether (i) directly, indirectly or constructively within the meaning of Section 958 of the Code, or (ii) directly, indirectly or beneficially within the meaning of Section 13(d) of the Exchange Act (including any shares beneficially owned by any group of persons as so defined and including any shares that would otherwise be excluded by the provisions of Section 13(d)(6) thereof) and the rules and regulations thereunder, as amended from time to time (including any shares that would otherwise be excluded by the provisions of Rule 13d-4 thereof). The Formula will be applied successively as many times as may be necessary to ensure that no person will be a 10% Shareholder (as defined below) at any time (the "sequencing provision"). For the purposes of determining the votes exercisable by shareholders as of any date, the Formula will be applied to the shares of each shareholder in declining order based on the respective numbers of total Controlled Shares attributable to each shareholder. Thus, the Formula will be applied first to the votes of shares held by the shareholder to whom the largest number of total Controlled Shares is attributable and thereafter sequentially with respect to the shareholder with the next largest number of total Controlled Shares. In each case, calculations are made on the basis of the aggregate number of votes conferred by the issued voting shares as of such date, as reduced by the application of the Formula to any issued voting shares of any shareholder with a larger number of total Controlled Shares as of such date. The defined term "10% Shareholder" means a person who owns, in aggregate, (i) directly, indirectly or constructively within the meaning of Section 958 of the Code, or (ii) directly, indirectly or beneficially within the meaning of Section 13(d) of the Exchange Act (including any shares beneficially owned by any group of persons as so defined and including any shares that would otherwise be 60 excluded by the provisions of Section 13(d)(6) thereof) and the rules and regulations thereunder, as amended from time to time (including any shares that would otherwise by excluded by the provisions of Rule 13d-4 thereof), issued shares of the Company representing 10% or more of the total combined voting rights attaching to the issued shares of the Company. The Directors are empowered to require any shareholder to provide information as to that shareholder's beneficial share ownership, the names of persons having beneficial ownership of the shares in respect of which such shareholder is the registered holder, relationships with other shareholders or other persons or any other facts the directors may deem relevant to a determination of the number of Controlled Shares attributable to any person. The Directors may disregard the votes attached to shares of any holder failing to respond to such a request or submitting incomplete or untrue information. The directors retain certain discretion to make such final adjustments to the aggregate number of votes attaching to the voting shares of any shareholder that they consider fair and reasonable in all the circumstances to ensure that no person will be a 10% Shareholder at any time. Restrictions on Transfer. The Articles contain several provisions restricting the transferability of Ordinary Shares. Except as described below with respect to transfers of Ordinary Shares executed on the Nasdaq National Market, the Directors (or their designee) are required to decline to register a transfer of shares if they have reason to believe that the result of such transfer would be to increase the number of total Controlled Shares of any person to 10% or more of a class of the Company's shares. Similarly, the Company is restricted from issuing or repurchasing Ordinary Shares if such issuance or repurchase would increase the number of total Controlled Shares of any person to 10% or more of a class of the Company's shares. The Directors (or their designee) also may, in their absolute discretion, decline to register the transfer of any Ordinary Shares, except for transfers executed on the Nasdaq National Market, if they have reason to believe (i) that such transfer may expose the Company, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured by the Company or any such subsidiary to adverse tax or regulatory treatment in any jurisdiction or (ii) that registration of such transfer under the Securities Act or under any United States state securities laws or under the laws of any other jurisdiction is required and such registration has not been duly effected. The Company's Directors will not decline to register any transfer of Ordinary Shares executed on the Nasdaq National Market for the reasons described above. However, if any such transfer results in the transferee (or any group of which such transferee is a member) beneficially owning, directly or indirectly, 10% or more of any class of the Company's shares or causes the Company's Directors (or their designee) to have reason to believe that such transfer may expose the Company, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured by the Company or any such subsidiary, to adverse tax or regulatory treatment in any jurisdiction, under the Company's Articles, the Directors (or their designee) are empowered to deliver a notice to the transferee demanding that such transferee surrender to an agent designated by the Directors (the "Agent") certificates representing the shares and any dividends or distributions that the transferee has received as a result of owning the shares. A transferee who has resold the shares before receiving such notice will be required to transfer to the Agent the proceeds of the sale, to the extent such proceeds exceed the amount that the transferee paid for the shares, together with any dividends or distributions that the transferee received from the Company. As soon as practicable after receiving the shares and any dividends or distributions that the transferee received, the Agent will use its best efforts to sell such shares and any non-cash dividends or distributions to the extent tradeable as marketable 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 the shares, the Agent will pay any remaining proceeds and any cash dividends and distributions to organizations described in Section 501(c)(3) of the Code that the Directors designate. The proceeds of any such sale by the Agent or the surrender of dividends or distributions will not inure to the benefit of the Company or the Agent, but such amounts may be used to reimburse expenses incurred by the Agent in performing its duties. 61 The Directors are empowered to require any shareholder or any person proposing to acquire shares of the Company to provide information as to such matters as the Directors may require for the purpose of giving effect to the foregoing restrictions on transfer, issuance and repurchase of shares. The Directors may decline to register any transfer or to effect any issuance or repurchase of shares if any such shareholder or proposed acquirer fails to respond to such a request or submits incomplete or untrue information. Maples and Calder, Cayman Islands counsel to the Company, has advised the Company that while the precise form of the restrictions on transfers contained in the Articles is untested, as a matter of general principle, restrictions on transfers are enforceable under Cayman Islands law and are not uncommon. The transferor of such Ordinary Shares will be deemed to own such Ordinary Shares for dividend, voting and reporting purposes until a transfer of such Ordinary Shares has been registered on the Register of Members of the Company. The restrictions on voting, transfer and ownership of 10% or more of a class of the Company's shares described above, as well as the provisions discussed below under "Anti-Takeover Effects of Articles of Association," may have the effect of discouraging an attempt to obtain control of the Company through certain actions other than negotiating with the Board of Directors. The Articles also provide that the Board may suspend the registration of transfer of Ordinary Shares for such periods as the Board may determine, but shall not suspend the registration of transfer for more than 45 days in any year. Lien on Shares. The Articles provide that the Company will have a first and paramount lien on all shares (whether fully paid-up or not) registered in the name of a shareholder for all debts, liabilities or engagements to or with the Company (whether presently payable or not) by such shareholder or such shareholder's estate and that upon notice, the Company may sell any shares on which the Company has a lien to the extent any sum in respect of which the lien exists is presently payable. Registration of a transfer of any shares subject to the Company's lien will operate as a waiver of such lien. Unilateral Repurchase Right. The Articles provide that if the Company's Directors determine that beneficial ownership of the Company's issued shares by any shareholder may result in adverse tax, regulatory or legal consequences to the Company, any subsidiary or shareholder thereof or any person insured or reinsured or proposing to be insured or reinsured by the Company or any such subsidiary, they may, in their absolute discretion, repurchase all or part of the shares held by such shareholder or direct such shareholder to sell and transfer all or part of such shares to one or more designated third parties. The price to be paid for such shares will be the fair market value of such shares as determined in accordance with the Articles. Preferred Shares The Articles authorize the Directors to create and issue one or more class or series of Preferred Shares and determine the rights and preferences of each such class or series, to the extent permitted by the Articles and applicable law. Among other rights, the Directors may determine: (i) the number of shares of that series and the distinctive designation thereof; (ii) the voting powers, full or limited, if any, of the shares of that series (subject to the restrictions on voting described above); (iii) the rights in respect of dividends on the shares of that class or series, whether dividends shall be cumulative and, if so, from which date or dates and the relative rights or priority, if any, of payment of dividends on shares of that class or series and any limitations, restrictions or conditions on the payment of dividends; (iv) the relative amounts, and the relative rights or priority, if any, of payment in respect of shares of that class or series, which the holders of the shares of that class or series shall be entitled to receive upon any liquidation, dissolution or winding up of the Company; (v) the terms and conditions (including the price or prices, which may vary under different conditions and at different redemption dates), if any, upon which all or any part of the shares of that class or series may be redeemed, and any limitations, restrictions or conditions on such redemption; (vi) the terms, if any, of any purchase, retirement or sinking fund to be provided for the shares of that class or series; (vii) the terms, if any, upon which the shares of that class or series shall be convertible into or exchangeable for shares of any other class or series, or other securities, whether 62 or not issued by the Company; (viii) the restrictions, limitations and conditions, if any, upon issuance of indebtedness of the Company so long as any shares of that class or series are outstanding; (ix) restrictions on the issuance of shares of the same series or any other series; and (x) any other preferences and relative, participating, optional or other rights and limitations as the Board of Directors determines which are not inconsistent with applicable law or the Articles. The Company has no current intention to issue any Preferred Shares. WARRANTS Class A Warrants. Upon completion of the Offering and the Direct Sales, Class A Warrants to purchase an aggregate of 2,850,000 Ordinary Shares will be outstanding. The exercise price of the Class A Warrants is equal to the initial public offering price per share, subject to customary anti-dilution adjustments for certain events, including stock splits. The Class A Warrants become exercisable in three equal annual installments commencing on the first anniversary of the consummation of the Offering. In the event of a change of control of the Company, the Class A Warrants then outstanding will become immediately exercisable. The Class A Warrants expire on the tenth anniversary of the consummation of the Offering. The Class A Warrant holders have been granted certain registration rights with respect to the sale of the Ordinary Shares underlying the Class A Warrants, and have entered into lock-up agreements with the Underwriters and the Company for a one-year period (or six months with respect to the Class A Warrants to be received by the Non-Shareholder Investors in the Direct Sales) from the date of this Prospectus. See "Shares Eligible for Future Sale" and "Underwriting." Class B Warrants. Upon completion of the Offering and the Direct Sales, Class B Warrants to purchase an aggregate of 200,000 Ordinary Shares will be outstanding. The exercise price of the Class B Warrants is equal to the initial public offering price, subject to adjustment as provided in the Class B Warrants. The Class B Warrants become exercisable in three equal annual installments commencing on the first anniversary of the consummation of the Offering. In the event of a change of control of the Company, the Class B Warrants then outstanding will become immediately exercisable. The Class B Warrants will expire on the fifth anniversary of the consummation of the Offering. The Class B Warrant holders have been granted certain registration rights with respect to the sale of the Ordinary Shares underlying the Class B Warrants, and have entered into lock-up agreements with the Underwriters for a one-year period from the date of this Prospectus. See "Shares Eligible for Future Sale" and "Underwriting." Class C Warrants. The Company's proposed agreement with Westport currently provides that the Class C Warrants to purchase up to an aggregate of 750,000 Ordinary Shares will be issuable to Westport annually beginning on or about January 1, 2000 and each January 1 thereafter for a four-year period. The exercise price of the Class C Warrants will be the initial public offering price per share, subject to the same adjustment as provided in the Class A Warrants. The number of Class C Warrants, if any, issued to Westport will be based upon the amount of annualized "gross profit" to the Company from the variable life insurance policies issued by the Company during the preceding 12 calendar months (or, in the case of the first year, from the date of the Offering to January 1, 2000) to customers identified and referred by Westport. In general, the number of Class C Warrants to be issued to Westport on January 1, 2000 and each subsequent anniversary to and including January 1, 2003 shall be based on the following formula: 25% of the annualized "gross profit" for the prior year divided by 1/15th of the "warrant value" on the applicable anniversary date. The warrant values will be arbitrarily determined by adding $2.50 to the spread between the exercise price of the Class C Warrants and the market price of the Ordinary Shares on the applicable anniversary date. By way of example, if the gross profits to the Company for a given year is $350,000 and the market price of the Ordinary Shares on the applicable anniversary date is $20 (solely for purposes of illustration and not as a projection as to the future market value of the Ordinary Shares), the warrant value will equal $7.50 ($2.50 plus the difference between the $20 market price and the $15 exercise price) divided by 15, which is $.50, and, thus, the number of Class C Warrants to be issued will be 25% of $350,000 divided by $.50, which equals 175,000 Class C Warrants. The arrangement will terminate at January 63 1, 2001 if the annualized "gross profit" for business identified and referred by Westport in the preceding two years is less than $200,000 per year, and at January 1, 2002, if such "gross profit" for the preceding two calendar years is less than $250,000. At any termination date the Class C Warrants not yet issued will be canceled. "Gross profits" will be the amount of annualized revenues (determined in accordance with GAAP) attributable to business identified and referred by Westport, less any amortization of deferred acquisition costs payable to third parties in connection with such business. The Company's proposed agreement with Westport also provides that Westport will be granted certain registration rights with respect to the sale of the Ordinary Shares underlying the Class C Warrants. OPTIONS The Company has issued options to purchase an aggregate of 900,000 Ordinary Shares pursuant to the Stock Option Plan and will issue an additional 160,000 options to non-employee Directors and a consultant of the Company upon consummation of the Offering. An additional 540,000 Ordinary Shares are reserved for issuance upon exercise of options that may be granted in the future under the Stock Option Plan. If the Underwriters' over-allotment option is exercised in full, the number of Ordinary Shares issuable upon the exercise of options granted to management and options to be granted to non-employee Directors and a consultant of the Company upon consummation of the Offering will increase to 1,208,500 Ordinary Shares and the number of Ordinary Shares reserved for issuance upon exercise of options that may be granted in the future under the Stock Option Plan will decrease to 391,500. See "Management-- Stock Option Plan." TRANSFER AGENT The Company's registrar and transfer agent for all Ordinary Shares and Preferred Shares is Harris Trust and Savings Bank. DIFFERENCES IN CORPORATE LAW The Companies Law of the Cayman Islands is modeled after that of England, and differs in certain respects from such laws generally applicable to United States corporations and their shareholders. Set forth below is a summary of certain significant provisions of the Companies Law (including any modifications adopted pursuant to the Articles) applicable to the Company which differ from provisions generally applicable to United States corporations and their shareholders. These statements are a brief summary of certain significant provisions of Cayman Islands Companies Law, and as such, do not deal with all aspects of every law that may be relevant to corporations and their shareholders. Interested Directors. The Articles provide that any transaction entered into by the Company in which a director has an interest is not voidable by the Company nor can such director be liable to the Company for any profit realized pursuant to such transaction. A director having an interest in a transaction is entitled to vote in respect of such transaction provided that the nature of the interest is disclosed at or prior to the vote on such transaction. Mergers and Similar Arrangements. The Company may acquire the business of another company and carry on such business when it is within the objects of the Memorandum. Except as provided below, the approval of the holders of at least 66 2/3% of the outstanding shares entitled to vote, voting together as a single class, at a meeting called for such purpose is required for the Company to (i) merge, consolidate or amalgamate with another company; (ii) reorganize or reconstruct itself pursuant to a plan sanctioned by the Cayman Islands courts; or (iii) sell, lease or exchange all or substantially all of its assets. In order to merge or amalgamate with another company or to reorganize and reconstruct itself, as a general rule, the relevant plan would need to be approved in accordance with the provisions of the Companies Law by the holders of not less than 75% of the votes cast at a general meeting called for that purpose and thereafter sanctioned by the Cayman Islands court. In respect of such a court-sanctioned reorganization, while a dissenting shareholder may have the right to express to a Cayman Islands court his view that the transaction sought to be approved would not provide the shareholders with the fair value of their shares, (i) the court ordinarily would not disapprove the transaction on that ground absent other 64 evidence of fraud or bad faith; and (ii) if the transaction were approved and consummated, the dissenting shareholder would have no rights comparable to the appraisal rights (as here defined, rights to receive payments in cash for the judicially determined value of their shares) ordinarily available to dissenting shareholders of United States corporations. Takeovers. Cayman Islands law also provides that where an offer is made by a company for shares of another company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer accept, the offeror may by notice require the dissenting shareholders to transfer their shares on the terms of the offer. A dissenting shareholder may apply to the court within one month of the notice objecting to the transfer. The burden is on the dissenting shareholders to show that the court should exercise its discretion to prevent the requirement of such transfer, which the court will be unlikely to do unless there is evidence of fraud or bad faith or collusion as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders. Shareholders' Suits. With respect to shareholders' suits, the Cayman Islands courts ordinarily would be expected to follow English precedent, which would permit a minority shareholder to commence an action against or a derivative action in the name of the corporation only (i) where the act complained of is alleged to be beyond the corporate power of the corporation or illegal; (ii) where the act complained of is alleged to constitute a fraud against the minority perpetrated by those in control of the corporation; (iii) where the act requires approval by a greater percentage of the corporation's shareholders than actually approved it; or (iv) where there is an absolute necessity to waive the general rule that a shareholder may not bring such an action in order that there not be a denial of justice or a violation of the corporation's memorandum of association. Indemnification; Exculpation. Cayman Islands law permits a company's articles of association to provide for the indemnification of officers and directors, except to the extent that such provision may be held by the Cayman Islands courts to be contrary to public policy (for instance, for purporting to provide indemnification against the consequences of committing a crime). In addition, an officer or director may not be indemnified for his own dishonesty or wilful neglect or default. The Articles contain provisions providing for the indemnity by the Company of an officer, director, employee or agent of the Company, or any person serving at the request of the Company as an officer, director, employee or agent of any other company, for threatened, pending or contemplated actions, suits or proceedings, whether civil, criminal, administrative or investigative, brought against such indemnified person by reason of the fact that such person was an officer, director, employee or agent of the Company or serving in such requested capacity. In addition, the Board of Directors may authorize the Company to purchase and maintain insurance on behalf of any such person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of the Articles. The Company plans to purchase directors and officers liability insurance from third parties for its directors and executive officers. The Company also plans to enter into indemnity agreements with each of its executive officers and directors. The Articles provide that directors of the Company shall have no personal liability to the Company or its shareholders for monetary damages for breach of fiduciary or other duties as a director, except (i) for any breach of a director's duty of loyalty to the Company or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) a payment of a dividend on stock of the Company or a purchase or redemption of stock of the Company in violation of law; or (iv) for any transaction from which a director derived an improper personal benefit. Inspection of Books and Records. Shareholders of a Cayman Islands corporation have no general rights to inspect or obtain copies of the list of shareholders or corporate records of a corporation. 65 ANTI-TAKEOVER EFFECTS OF ARTICLES OF ASSOCIATION The Articles contain certain provisions that make more difficult the acquisition of control of the Company by means of a tender offer, open market purchase, proxy fight or otherwise. These provisions are designed to encourage persons seeking to acquire control of the Company to negotiate with the Board of Directors. The Board of Directors believe that, as a general rule, the interests of the Company's shareholders would be best served if any change in control results from negotiations with the Board of Directors. The Board of Directors would negotiate based upon careful consideration of the proposed terms, such as the price to be paid to shareholders, the form of consideration to be paid and the anticipated tax effects of the transaction. However, these provisions could have the effect of discouraging a prospective acquiror from making a tender offer or otherwise attempting to obtain control of the Company. In addition, the Company's Articles of Association provide that voting rights with respect to Ordinary Shares directly or indirectly beneficially owned by any person or group of persons directly or indirectly beneficially owning 10% or more of the outstanding combined voting power of the issued shares of the Company will be limited to a voting power of less than 10%, which significantly limits the ability of a prospective acquiror to effect a takeover of the Company. To the extent these provisions discourage takeover attempts, they could deprive shareholders of opportunities to realize takeover premiums for their shares or could depress the market price of the Ordinary Shares. In addition to those provisions of the Articles discussed above, set forth below is a description of other relevant provisions of the Articles. The descriptions are intended as a summary only and are qualified in their entirety by reference to the Articles, which are filed as an exhibit to the Registration Statement of which this Prospectus is a part. No Shareholder Action by Written Consent. The Articles provide that any action required or permitted to be taken by the shareholders of the Company must be taken at a duly called annual general or extraordinary general meeting of the shareholders of the Company and may not be taken by consent in writing or otherwise. The affirmative vote of the holders of at least 66 2/3% of the outstanding shares generally entitled to vote, voting together as a single class, is required to amend or repeal, or adopt any provision inconsistent with, the foregoing provisions of the Articles. Availability of Shares for Future Issuance. The availability for issue of shares by the Directors of the Company without further action by shareholders (except as may be required by Nasdaq National Market requirements) could be viewed as enabling the Board of Directors to make more difficult a change in control of the Company, including by issuing Preferred Shares convertible into Ordinary Shares, warrants or rights to acquire Ordinary Shares to discourage or defeat unsolicited stock accumulation programs and acquisition proposals and by issuing shares in a private placement or public offering to dilute or deter stock ownership of persons seeking to obtain control of the Company. The Company has no plans to issue any shares other than possibly pursuant to employee benefit plans. Shareholder Proposals. The Articles provide that if a shareholder desires to submit a proposal for consideration at an annual general meeting or extraordinary general meeting, or to nominate persons for election as directors, written notice of such shareholder's intent to make such a proposal or nomination must be given and received by the Secretary of the Company at the principal executive offices of the Company not later than (i) with respect to an annual general meeting, 60 days prior to the anniversary date of the immediately preceding annual general meeting; and (ii) with respect to an extraordinary general meeting, the close of business on the tenth day following the date on which notice of such meeting is first sent or given to shareholders. The notice must describe the proposal or nomination in sufficient detail for a proposal or nomination to be summarized on the agenda for the meeting and must set forth (i) the name and address of the shareholder; (ii) a representation that the shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such proposal or nomination; and (iii) the class and number of shares of the Company which are beneficially owned by the shareholder. In addition, the notice must set forth the reasons for conducting such proposed business at the meeting and any material interest of the shareholder in such business. In the case of a nomination of any person for election as a director, the notice shall 66 set forth: (i) the name and address of any person to be nominated; (ii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons; (iii) such other information regarding such nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to Regulation 14A under the Exchange Act, whether or not the Company is then subject to such Regulation; and (iv) the consent of each nominee to serve as a director of the Company, if so elected. The presiding officer of the annual general meeting or extraordinary general meeting shall, if the facts warrant, refuse to acknowledge a proposal or nomination not made in compliance with the foregoing procedure. The affirmative vote of the holders of at least 66 2/3% of the outstanding shares entitled to vote, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, the foregoing provision of the Articles. The advance notice requirements regulating shareholder nominations and proposals may have the effect of precluding a contest for the election of directors or the introduction of a shareholder proposal if the procedures summarized above are not followed and may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to introduce a proposal. 67 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering and the Direct Sales, the Company will have outstanding 18,568,440 Ordinary Shares, Class A Warrants to purchase an aggregate of 2,850,000 Ordinary Shares, Class B Warrants to purchase an aggregate of 200,000 Ordinary Shares and options to purchase an aggregate of 1,060,000 Ordinary Shares. If the Underwriters' over-allotment option is exercised in full, 21,080,940 Ordinary Shares will be outstanding and the number of Ordinary Shares issuable upon exercise of outstanding options will increase to 1,208,500 Ordinary Shares. The number of Ordinary Shares issuable upon exercise of the Class A Warrants and Class B Warrants will not change if the Underwriters' over-allotment option is exercised. The Class A Warrants, Class B Warrants and the options are not currently exercisable. In addition, Class C Warrants exercisable for up to 750,000 Ordinary Shares may be issued pursuant to the Company's proposed agreement with Westport beginning January 1, 2000. See "Management -- Stock Option Plan," "Description of Shares -- Warrants" and "--Options," and "Direct Sales." Except as disclosed in "Description of Shares -- Restrictions on Transfer" and as discussed below with respect to the lock-up agreements, the Ordinary Shares sold in the Offering will be freely transferable without restriction or further registration under the Securities Act, except for any of those Ordinary Shares owned at any time by an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act (which sales will be subject to the volume limitations and certain other restrictions of such rule). The 400,000 Ordinary Shares currently outstanding which were issued upon formation of the Company, the Ordinary Shares to be sold to the Direct Investors in the Direct Sales and the Ordinary Shares underlying the Class A Warrants, Class B Warrants, any Class C Warrants and the options are, or upon issuance will be, "restricted securities" as defined in Rule 144 under the Securities Act and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from registration, including such rule. The Company, its officers, directors and shareholders, the Shareholder Investors, the Non-Shareholder Investors and the holders of the Class A Warrants and Class B Warrants have executed agreements (the "lock-up agreements") pursuant to which each has agreed that they will not, for a period of one year (or six months with respect to the Ordinary Shares and the Class A Warrants to be purchased by the Non-Shareholder Investors in the Direct Sales) from the date of this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, transfer, assign, hypothecate, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, transfer, assignment, hypothecation, grant of any option to purchase or other sale or disposition) of any Ordinary Shares or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any Ordinary Shares or other capital stock of the Company without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, and (other than with respect to the Company and the holders of the Class B Warrants) the Company, provided that in the case of holders of the Class B Warrants, consent to waiver of such restrictions may be granted during such period only with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. Such agreements do not prevent the Company from granting additional options under the Stock Option Plan so long as such options do not become exercisable until one year from the date of the Prospectus. The Company also has agreed not to file any registration statement on Form S-8 with respect to, or otherwise register for resale with the Commission, Ordinary Shares underlying stock options for a period of one year from the date of this Prospectus. Prudential Securities Incorporated and the Company may, in their sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements, except that in the case of holders of the Class B Warrants, such release may be granted only with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. Prior to the Offering, there has not been any public market for the Ordinary Shares. No prediction can be made as to the effect, if any, future sales of Ordinary Shares, or the availability of Ordinary Shares for future sale, will have on the market price of the Ordinary Shares prevailing from time to time. Sales of substantial amounts of Ordinary Shares in the public market could adversely affect the prevailing market prices and impair the Company's ability to raise capital through the sale of equity securities. The holders of the Class A Warrants and the Class B Warrants have been granted certain registration rights with respect to the sale of the Ordinary Shares underlying such warrants, which rights are not exercisable prior 68 to the first anniversary of the consummation of the Offering. The Direct Investors with respect to the Ordinary Shares to be purchased in the Direct Sales and the Ordinary Shares underlying Class A Warrants to be purchased in the Direct Sales have also been granted such registration rights. The Company has agreed not to permit the acceleration of the vesting of such rights to register such securities (the "Registrable Securities") without the prior written consent of Prudential Securities Incorporated on behalf of the Underwriters. The holders of the Registrable Securities have the right to require the registration under the Securities Act of all or a portion of the Registrable Securities for sale in an underwritten public offering if, at any time on or after the first anniversary of the consummation of the Offering and before the tenth anniversary thereof (or with respect to the Class B Warrants, the fifth anniversary thereof), holders of 20% or more of the Registrable Securities give written notice to the Company requesting such registration. The Company is currently negotiating with the holders of the Class A Warrants and the Class B Warrants and the Direct Investors to reduce such percentage. The holders of the Registrable Securities also have the right to require the registration under the Securities Act of all or a portion of the Registrable Securities for sale in open market transactions or negotiated block trades if, at any time on or after the first anniversary of the consummation of the Offering and before the tenth anniversary thereof (or with respect to the Class B Warrants, the fifth anniversary thereof), any holder or holders of the Registrable Securities give written notice to the Company requesting such registration. In addition, if at any time after the first anniversary of the consummation of the Offering and before the tenth anniversary thereof (or with respect to the Class B Warrants, the fifth anniversary thereof), the Company proposes, other than pursuant to the two methods mentioned immediately above, to file a registration statement under the Securities Act to register any of its Ordinary Shares for public sale under the Securities Act (whether proposed to be offered for sale by the Company or by any other person), the holders of the Registrable Securities have the right to request the inclusion of all or a portion of their Ordinary Shares underlying such warrants in the registration statement, and the Company is required to use commercially reasonable efforts to include such shares in the registration statement. In any such registration undertaken pursuant to the registration rights of the holders of the Registrable Securities, the Company is required to bear all expenses incident to the performance of its registration obligations, including the fees and expenses of its counsel, accountants and experts incurred in connection with such registration, printing expenses, registration filing fees, securities exchange listing or quotation fees and other similar registration expenses. The Company has also agreed to indemnify the holders of the Registrable Securities and any underwriters participating in any such registration and contribute to any losses arising out of certain liabilities incurred in connection with such registration, including liabilities under the Securities Act. If the Company enters into the Westport Agreement and issues the Class C Warrants in connection therewith, the Company will grant to the holders of such Class C Warrants registration rights on substantially similar terms as those granted to the holders of Class A Warrants and the Class B Warrants and the Direct Investors. No prediction can be made as to the effect, if any, that future sales of Ordinary Shares, or the availability of Ordinary Shares for future sale, will have on the market price of the Ordinary Shares prevailing from time to time. Sales of substantial amounts of Ordinary Shares in the public market following the Offering, or the perception that such sales could occur, could adversely affect the market price of the Ordinary Shares and may make it more difficult for the Company to sell its equity securities in the future at a time and a price which it deems appropriate. If the persons holding the outstanding Class A Warrants, Class B Warrants or options cause a large number of the Ordinary Shares underlying such securities to be sold in the market, such sales could have an adverse effect on the market price for the Ordinary Shares. 69 DIRECT SALES In transactions directly with the Company, the Direct Investors have agreed to purchase for investment an aggregate of 1,418,440 Ordinary Shares and Class A Warrants exercisable for an aggregate of 400,000 Ordinary Shares. The aggregate purchase price of $20.0 million to be paid by the Direct Investors is based on a price of $14.10 (the initial public offering price per Ordinary Share less the underwriting discounts and commissions in the Offering) for (i) one Ordinary Share and (ii) the right to purchase 0.282 of an Ordinary Share under the Class A Warrants. The Direct Sales will be consummated simultaneously with the consummation of the Offering. The issuance of the Ordinary Shares and the Class A Warrants in the Direct Sales is subject to a number of conditions precedent customary in transactions of this nature, including the accuracy of the parties' respective representations and warranties and compliance with the parties' respective covenants set forth in the relevant securities purchase agreement. The Ordinary Shares and Class A Warrants obtained by the Direct Investors in the Direct Sales are subject to lock-up agreements for a period of one year in the case of the Shareholder Investors and six months in the case of the Non-Shareholder Investors. The Company has granted the Direct Investors rights to require the Company to register the Ordinary Shares they purchase in the Direct Sales and upon exercise of the Class A Warrants. Such rights become exercisable on the first anniversary of the consummation of the Offering. The Company has agreed not to permit the acceleration of the vesting of such rights without the prior written consent of Prudential Securities Incorporated on behalf of the Underwriters. See "Shares Eligible for Future Sales" and "Underwriting." 70 MATERIAL TAX CONSEQUENCES The following summary of the taxation of Holdings and Scottish Insurance and the taxation of Holdings' shareholders is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could affect this summary. In the opinion of Jones, Day, Reavis & Pogue, United States tax counsel to the Company, the discussion of United States tax matters set forth below states the material United States federal income tax considerations relevant to an investment in the Ordinary Shares, subject to the qualifications and assumptions set forth in such discussion. In the opinion of Maples and Calder, Cayman Islands counsel to the Company, the discussion of Cayman Islands tax matters set forth below states the material Cayman Islands tax considerations relevant to an investment in the Ordinary Shares, subject to the qualifications and assumptions set forth in such discussion. The statements as to factual matters and the Company's beliefs and intentions as to factual matters represent the views of the Company's management and do not represent legal opinions of its counsel. TAXATION OF HOLDINGS AND SCOTTISH INSURANCE Cayman Islands There are no income, corporation, capital gains or other taxes in effect in the Cayman Islands on the basis of the present legislation. Holdings and Scottish Insurance have received an undertaking from the Governor-in-Council of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended (1995 Revision), that until the year 2018 (i) no subsequently enacted law imposing any tax on profits, income, gains or appreciation shall apply to Holdings or Scottish Insurance, and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any shares, debentures or other obligations of Holdings or Scottish Insurance. No capital or stamp duties are levied in the Cayman Islands on the issue, transfer or redemption of Ordinary Shares. The only taxes or fees which will be chargeable on Holdings in the Cayman Islands are (i) an annual charge calculated on the nominal amount of the authorized share capital of Holdings, which is currently $700 per annum and (ii) an annual licensing fee payable in respect of Scottish Insurance's unrestricted Class B insurance license and a government fee totaling approximately $6,500. The Board of Directors of Holdings intend to conduct the affairs and business of Holdings so that, save for any tax which may be withheld in certain countries in respect of income or gains, Holdings will not be liable to tax in any jurisdiction on the income or gains (including gains arising in the form of discounts or premiums) derived from its investments. The investments of Holdings will be made with a view of minimizing any such withholding tax. However, there can be no guarantee that the tax position of Holdings will not be challenged by the revenue authorities of one or more countries. The foregoing is based on current law and practice in the Cayman Islands and is subject to changes therein. United States Holdings' Board of Directors has adopted operating guidelines, developed in consultation with its United States counsel, that prescribe how Holdings and Scottish Insurance are to conduct their businesses in a manner consistent with their intent not to be engaged in a trade or business within the United States. Accordingly, Holdings and Scottish Insurance do not currently plan to file United States income tax returns. However, because definitive identification of activities that constitute being engaged in a trade or business in the United States is not provided by the Code or regulations or court decisions, there can be no assurance that the IRS will not contend that Holdings and/or Scottish Insurance is engaged in a trade or business in the United States. A foreign corporation deemed to be so engaged would be subject to United States income tax, as well as branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business. Section 842 of the Code requires that foreign insurance companies carrying on an insurance business within the United States have a certain minimum amount of effectively connected net investment income even if they have no United States source investment income. Otherwise, the income tax, if imposed, would be based on effectively 71 connected income computed in a manner generally analogous to that applied to the income of a domestic corporation, except that a foreign corporation can anticipate an allowance of deductions and credits only if it files a United States income tax return. Under regulations, the foreign corporation would be entitled to deductions and credits for the taxable year only if the return for that year is timely filed under rules set forth therein. Penalties may be assessed for failure to file tax returns. The federal income tax rates currently are a maximum of 35% for a corporation's effectively connected income and 30% for branch profits tax. The branch profits tax is imposed on net income after subtracting the regular corporate tax and making certain other adjustments. Foreign corporations not engaged in a trade or business in the United States are nonetheless subject to United States income tax at a rate of 30% of the gross amount of certain "fixed or determinable annual or periodical gains, profits, and income" derived from sources within the United States as enumerated in Section 881(a) of the Code (such as dividends and interest on certain investments). Scottish Insurance will be subject to such taxes on dividends from United States companies in which it makes portfolio investments. The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rate of tax applicable to premiums paid to Scottish Insurance is currently 1%. Other Countries Scottish Insurance may be subject to taxes imposed by other countries on dividends or interest received from payors located in those countries. TAXATION OF SHAREHOLDERS Cayman Islands Taxation There is no tax treaty between the Cayman Islands and the U.S. regarding withholding. Currently, there is no Cayman Islands withholding tax on dividends paid by Holdings or Scottish Insurance. United States Taxation--United States Shareholders General. The following discussion summarizes certain United States federal income tax consequences relating to the acquisition, ownership and disposition of Ordinary Shares by a beneficial owner who is (i) a citizen or resident of the United States, (ii) a United States domestic corporation or (iii) otherwise subject to United States federal income taxation on a net income basis in respect of the Ordinary Shares. This summary deals only with Ordinary Shares acquired by purchasers in the Offering and held as capital assets and does not deal with the tax consequences applicable to all categories of investors, some of which (such as broker-dealers who hold Ordinary Shares as part of hedging or conversion transactions and investors whose functional currency is not the United States dollar) may be subject to special rules. Prospective purchasers of the Ordinary Shares are advised to consult their own tax advisers with respect to their particular circumstances and with respect to the effects of United States federal, state, local or other laws to which they may be subject. Dividends. Distributions with respect to the Ordinary Shares will be treated as ordinary dividend income to the extent of Holdings' current or accumulated earnings and profits as determined for United States federal income tax purposes, subject to the discussion below relating to the potential application of the "controlled foreign corporation" or "passive foreign investment company" rules. Such dividends will not be eligible for the dividends-received deduction allowed to United States corporations under Section 243 of the Code. The amount of any distribution in excess of Holdings' current and accumulated earnings and profits will first be applied to reduce the holder's tax basis in the Ordinary Shares, and any amount in excess of tax basis will be treated as gain from the sale or exchange of the Ordinary Shares. Classification of Holdings and Scottish Insurance as Controlled Foreign Corporations. Under Section 951(a) of the Code, each "United States shareholder" of a foreign corporation that is a "controlled foreign 72 corporation" (a "CFC") for an uninterrupted period of 30 days or more during a taxable year who owns shares in the CFC directly or indirectly through foreign entities on the last day during such taxable year on which the corporation is a CFC must include in its gross income for United States federal income tax purposes his or her pro-rata share of the CFC's "subpart F income," even if the subpart F income is not distributed. Subpart F income includes, among other things, "insurance income," which is generally defined as income (including premium and investment income) attributable to the issuing (or reinsuring) of any insurance or annuity contract in connection with risks located in, or liabilities arising out of, activities in or lives or health of residents of a country other than the country under the laws of which the insurance company is organized. Accordingly, it is anticipated that substantially all of the income of Scottish Insurance will be subpart F income. Under Section 951(b) of the Code, any United States corporation, citizen, resident or other United States person who owns, directly or indirectly through foreign entities, or is considered to own (by application of the rules of constructive ownership set forth in Section 958(b) of the Code, generally applying to family members, partnerships, estates, trusts, controlled corporations or holders of certain options), 10% or more of the total combined voting power of all classes of stock of the foreign corporation will be considered to be a "United States shareholder." In general, a foreign insurance company such as Scottish Insurance is treated as a CFC only if such "United States shareholders" collectively own more than 25% of the total combined voting power or total value of the corporation's stock. Because of the expected dispersion of Holdings' share ownership following the Offering and the restrictions on transfer, issuance or repurchase of Ordinary Shares, and because Holdings' Articles of Association provide that no single shareholder is permitted to hold 10% or more of the total combined voting power of Holdings, shareholders of Holdings should not be viewed as United States shareholders of a CFC for purposes of these rules. However, there can be no assurance that the IRS will not successfully take a contrary position. RPII Companies. Different definitions of "United States shareholder" and "controlled foreign corporation" are applicable in the case of a foreign corporation which earns "related person insurance income" ("RPII"). RPII is defined in Section 953(c)(2) of the Code as any "insurance income" of a foreign corporation attributable to policies of insurance or reinsurance with respect to which the person (directly or indirectly) insured is a "United States shareholder" of such corporation or a "related person" to such a shareholder. In general, "insurance income" is income (including underwriting premium and investment income) attributable to the issuing of any insurance or reinsurance contract in connection with risks located in a country other than the country under the laws of which the CFC is created or organized and which would be taxed under the provisions of the Code relating to insurance companies if the income were the income of a domestic insurance company. Generally, the term "related person" for this purpose means someone who controls or is controlled by the United States shareholder or someone who is controlled by the same person or persons who control the United States shareholder. "Control" is measured by either more than 50% in value or more than 50% in voting power of stock, applying constructive ownership principles similar to the rules of Section 958 of the Code. For purposes of inclusion of Scottish Insurance's RPII in the income of United States shareholders, unless an exception applies, the term "United States shareholder" includes all United States persons who own, directly or indirectly, any amount (rather than 10% or more) of Scottish Insurance's stock. Scottish Insurance will be subject to the CFC provisions for RPII purposes if such persons collectively own directly, indirectly or constructively 25% or more of the stock of Scottish Insurance by vote or value for an uninterrupted period of at least 30 days during any taxable year. Holdings anticipates that United States persons will own directly, indirectly or constructively, 25% or more of the stock of Scottish Insurance by vote or value for the requisite period; accordingly, the RPII rules of the Code will apply to Scottish Insurance unless one of several exceptions (discussed below) applies to Scottish Insurance. RPII Exceptions. The special RPII rules do not apply if (i) direct or indirect insureds and persons related to such insureds, whether or not United States persons, are treated at all times during the taxable year as owning less than 20% of the voting power and less than 20% of the value of the stock of Scottish Insurance, (ii) RPII, determined on a gross basis, is less than 20% of Scottish Insurance's gross insurance income for the taxable year, (iii) Scottish Insurance elects to be taxed on its RPII as if the RPII were effectively connected with the 73 conduct of a United States trade or business and to waive all treaty benefits with respect to RPII or (iv) Scottish Insurance elects to be treated as a United States corporation. Scottish Insurance does not intend to make either of the described elections. Thus, only exceptions (i) and (ii) may be available. Holdings does not expect that Scottish Insurance will knowingly enter into variable life insurance or reinsurance arrangements in which, in the aggregate, the direct or indirect insureds are, or are related to, owners of 20% or more of the Ordinary Shares. If this expectation is correct, exception (i) will, and exception (ii) may, apply to Scottish Insurance. There can be no assurance, however, that this will be the case. If neither of these exceptions were to apply, each United States person owning, directly or indirectly, stock in Holdings (and therefore, indirectly in Scottish Insurance) at the end of any taxable year would generally be required to include in its gross income for United States federal income tax purposes its share of the RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to such United States shareholders at that date, but limited to Scottish Insurance's current-year earnings and profits reduced by the shareholder's pro-rata share, if any, of certain prior-year deficits in earnings and profits. Computation of RPII. In order to determine how much RPII Scottish Insurance has earned in each taxable year, Holdings intends to obtain and rely upon information from its insureds to determine whether any of the insureds or persons related to such insureds own shares of Holdings and are United States persons. Scottish Insurance intends to include in its insurance application and renewal forms, or related documents, a provision requesting information as to whether the policyholders (or a related person) are or have been, and a notice if they should become, a shareholder of Holdings. In addition, Scottish Insurance will send a letter after each taxable year to each person who was a policyholder requesting such policyholder to represent whether it was a shareholder of Holdings or related to a shareholder during the year. For any taxable year in which Scottish Insurance's gross RPII is 20% or more of its gross insurance income for the year, Holdings may also seek information from its shareholders as to whether direct or indirect owners of its shares at the end of the year are United States persons so that the RPII may be determined and apportioned among such persons. To the extent Holdings is unable to determine whether a direct or indirect owner of shares is a United States person, Holdings may assume that such owner is not a United States person, thereby increasing the per share RPII amount for all United States shareholders. Although Scottish Insurance intends to operate in a manner that would minimize RPII, there can be no assurance that an investor will not be required to include amounts in its income in respect of RPII in any taxable year. Apportionment of RPII to United States Shareholders. If direct or indirect insureds and persons related to such insureds were to own more than 20% of the voting power or value of Scottish Insurance's Ordinary Shares and Scottish Insurance's RPII determined on a gross basis for any future taxable year were to be 20% or more of its gross insurance income, every United States person who owns directly or indirectly Ordinary Shares on the last day of that year would be required to include in its gross income its share of Scottish Insurance's RPII for such year, whether or not distributed. A United States person who owns Ordinary Shares during the Company's taxable year but not on the last day of the taxable year on which Scottish Insurance is a CFC within the meaning of the RPII provision of the Code, which would normally be December 31, would not be required to include in its gross income any part of Scottish Insurance's RPII. Correspondingly, a United States person who owns directly or indirectly, Ordinary Shares on the last day of the taxable year on which Scottish Insurance is a CFC for purposes of those provisions would be required to include in its income its share of the RPII for the entire year even though such holder does not own the Ordinary Shares for the entire year. Uncertainty as to Application of RPII. Regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes might ultimately be made thereto or whether any such changes, as well as any interpretation or application of the RPII rules by the IRS, the courts or otherwise, might have retroactive effect. The description of RPII herein is therefore qualified. Accordingly, the meaning of the RPII provisions and the application thereof to Holdings and Scottish Insurance is uncertain. These provisions include the grant of authority to the United States Treasury Department to prescribe "such regulations as may be necessary to carry out the purpose of this subsection including . . . regulations preventing the avoidance of this subsection through cross insurance 74 arrangements or otherwise." In addition, there can be no assurance that the IRS will not challenge any determinations by Holdings or Scottish Insurance as to the amount, if any, of RPII that should be includable in the income of a holder of Ordinary Shares or that the amounts of the RPII inclusions will not be subject to adjustment based upon subsequent IRS examination. Each United States person who is considering an investment in Ordinary Shares should consult his tax advisor as to the effects of these uncertainties. Information Reporting. Each United States person who is a direct or indirect shareholder of the Company on the last day of Holdings' taxable year would be required to attach to the income tax or information return such holder would normally file for the period which includes that date a Form 5471 if Scottish Insurance were a CFC for RPII purposes for any continuous thirty-day period during its taxable year whether or not any net RPII income is required to be reported. Scottish Insurance will not be considered to be a CFC for this purpose and, therefore, Form 5471 will not be required, for any taxable year in which (i) Scottish Insurance's gross RPII constitutes less than 20% of its gross insurance income or (ii) less than 20% of the voting power or value of Scottish Insurance's Ordinary Shares is owned by direct or indirect insureds and persons related to such insureds. For any year in which Scottish Insurance's gross RPII constitutes 20% or more of its gross insurance income and its direct or indirect insureds and persons related to such insureds own more than 20% of the voting power or value of Scottish Insurance's Ordinary Shares, Holdings intends to provide Form 5471 to its direct or indirect United States shareholders for attachment to the returns of shareholders. The amounts of the RPII inclusions may be subject to adjustment based upon subsequent IRS examination. A tax-exempt organization would be required to attach Form 5471 to its information return in the circumstances described above. Failure to file Form 5471 may result in penalties. In addition, United States persons who at any time own 10% or more of the shares of the Company may have an independent obligation to file certain information returns. Tax-Exempt Shareholders. United States tax-exempt organizations would generally be required to treat subpart F insurance income, including RPII, that is includable in income by the tax-exempt entity, as unrelated business taxable income within the meaning of Section 512 of the Code. Dividend; Basis; Exclusion of Dividends from Gross Income. A United States shareholder's tax basis in his Ordinary Shares would be increased by the amount of any RPII that the shareholder includes in his income. The shareholder could exclude from income the amount of any distribution by Holdings to the extent of the RPII included in such shareholder's income for the year in which the distribution was paid or for any prior year. A shareholder's tax basis in his Ordinary Shares would be reduced by the amount of such distributions that are excluded from his income. Although, in certain circumstances, a United States shareholder might be able to exclude from his income distributions with respect to RPII that a prior shareholder included in his income, that exclusion would not generally be available to holders who purchase Ordinary Shares in the public trading markets and are therefore unable to identify the previous shareholder and demonstrate that such shareholder had previously included the RPII in his income. Dispositions of Ordinary Shares. Subject to the discussion below relating to the potential application of Section 1248 of the Code or the passive foreign investment company rules, a United States shareholder will, upon the sale or exchange of any Ordinary Shares, recognize a gain or loss for United States income tax purposes equal to the difference between the amount realized upon such sale or exchange and the shareholder's basis in the Ordinary Shares. If the shareholder's holding period for such Ordinary Shares is more than eighteen months, any gain will be subject to tax at a current maximum marginal tax rate of 20% for individuals and 35% for corporations. Section 1248 of the Code provides that if a United States person disposes of stock in a foreign corporation and such person owned directly, indirectly or constructively 10% or more of the voting shares of the corporation at any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale or exchange of the shares may be treated as ordinary income to the extent of the CFC's previously untaxed earnings and profits during the period that the shareholder held the shares (with certain adjustments). A 10% United States shareholder may in certain circumstances be required to report a disposition 75 of shares of a CFC by attaching IRS Form 5471 to the United States income tax or information return that the shareholder would normally file for the taxable year in which the disposition occurs. Section 953(c)(7) of the Code generally provides that Section 1248 will also apply to any sale or exchange of shares in a foreign corporation that earns RPII if the foreign corporation would be taxed as an insurance company if it were a domestic corporation, regardless of whether the selling shareholder is or was a 10% shareholder or whether RPII constitutes 20% or more of the corporation's gross insurance income. Existing Treasury regulations do not address whether Section 1248 of the Code and the requirement to file Form 5471 would apply if the foreign corporation is not a CFC but the foreign corporation has a subsidiary that is a CFC or that would be taxed as an insurance company if it were a domestic corporation (although, as discussed above, shareholders of 10% or more of the shares of Holdings may have an independent obligation to file Form 5471). Section 1248 of the Code and the requirement to file Form 5471 should not apply to dispositions of Ordinary Shares because Holdings does not intend to directly engage in the insurance business and, under proposed regulations, these provisions appear to be applicable only in the case of shares of corporations that are directly engaged in the insurance business. There can be no assurance, however, that the IRS will interpret the proposed regulations in this manner or that the proposed regulations will not be amended or promulgated in final form so as to provide that Section 1248 of the Code and the requirement to file Form 5471 will apply to dispositions of Ordinary Shares. In that event, Holdings would notify shareholders that Section 1248 of the Code and the requirement to file Form 5471 will apply to dispositions of Ordinary Shares. Thereafter, Holdings would send a notice after the end of each calendar year to all persons who were shareholders during the year notifying them that Section 1248 of the Code and the requirement to file Form 5471 apply to dispositions of Ordinary Shares. Holdings would attach to this notice a copy of Form 5471 completed with all Holdings information and instructions for completing the shareholder information. Foreign Tax Credit. Because it is anticipated that United States persons will own a majority of Holdings' shares, only a portion of the current income inclusions under the CFC, RPII and passive foreign investment company rules, if any, and of dividends paid by Holdings (including any gain from the sale of Ordinary Shares that is treated as a dividend under Section 1248 of the Code) will be treated as foreign source income for purposes of computing a shareholder's United States foreign tax credit limitations. Holdings will consider providing shareholders with information regarding the portion of such amounts constituting foreign source income to the extent such information is reasonably available. It is also likely that substantially all of the RPII and dividends that are foreign source income will constitute either "passive" or "financial services" income for foreign tax credit limitation purposes. Thus, it may not be possible for most United States shareholders to utilize excess foreign tax credits to reduce United States tax on such income. Passive Foreign Investment Companies. Sections 1291 through 1298 of the Code contain special rules applicable to foreign corporations that are "passive foreign investment companies" ("PFICs"). In general, a foreign corporation will be a PFIC if 75% or more of its income constitutes "passive income" or 50% or more of its assets produce passive income. If Holdings were to be characterized as a PFIC, its United States shareholders would be subject to a penalty tax at the time of their sale of, or receipt of an "excess distribution" with respect to, their Ordinary Shares, unless such shareholders (i) elected from the outset to be taxed on their pro-rata share of the Company's earnings whether or not such earnings were distributed or (ii) elected to mark their Ordinary Shares to market as of the end of each taxable year and to treat as ordinary income (or loss) the annual appreciation (or depreciation) in the value of such shares. In general, a shareholder receives an "excess distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the stock during the three preceding taxable years (or shorter period during which the taxpayer held the stock). In general, the penalty tax is computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the shares was taxed in equal annual portions at the highest applicable ordinary income tax rate throughout the holder's period of ownership, and that interest accrued on each tax amount for each prior year from the due date of such prior year's return. The interest charge is equal to the applicable rate imposed on underpayments of United States federal income tax for such period. 76 For the above purposes, passive income is defined to include income of the kind which would be foreign personal holding company income under Section 954(c) of the Code, and generally includes interest, dividends, annuities and other investment income. However, the PFIC statutory provisions contain an express exception for income "derived in the active conduct of an insurance business by a corporation which is predominately engaged in an insurance business." This exception is intended to ensure that income derived by a bona fide insurance company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the reasonable needs of the insurance business. Scottish Insurance expects to be primarily and predominantly engaged in an insurance business and does not expect to have financial reserves in excess of the reasonable needs of its insurance business. The PFIC statutory provisions (unlike the RPII provisions of the Code) contain a look-through rule that states that, for purposes of determining whether a foreign corporation is a PFIC, such foreign corporation shall be treated as if it received "directly its proportionate share of the income," and as if it "held its proportionate share of the assets," of any other corporation in which it owns at least 25% by value of the stock. While no explicit guidance is provided by the statutory language, under the look- through rule Holdings should be deemed to own the assets and to have received the income of Scottish Insurance directly for purposes of determining whether Holdings qualifies for the aforementioned insurance exception. This interpretation of the look-through rule is consistent with the legislative intention generally to exclude bona fide insurance companies from the application of PFIC provisions. There can be no assurance, however, as to what positions the IRS or a court might take in the future on whether Holdings or Scottish Insurance is predominantly engaged in an insurance business and does not have financial reserves in excess of the reasonable needs of such business. United States persons who are considering an investment in Ordinary Shares should consult their tax advisors as to the effects of the PFIC rules. Other. Information reporting to the IRS by paying agents and custodians located in the United States will be required with respect to payments of dividends on the Ordinary Shares to United States persons. Thus, a holder of Ordinary Shares may be subject to backup withholding at the rate of 31% with respect to dividends paid to such persons, unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. Backup withholding is not an additional tax and may be credited against a holder's regular federal income tax liability. United States Taxation--Non-United States Shareholders Subject to certain exceptions, non-United States persons will be subject to United States federal income tax on dividend distributions with respect to, and gain realized from the sale or exchange of, Ordinary Shares only if such dividends or gains are effectively connected with the conduct of a trade or business within the United States. Nonresident alien individuals will not be subject to United States estate tax with respect to Ordinary Shares of Holdings. * * * The foregoing discussion is based upon current law. The tax treatment of an owner of Ordinary Shares, or a person treated as an owner of Ordinary Shares for United States federal income, state, local or non-United States tax purposes, may vary depending on the owner's particular tax situation. Legislative, judicial or administrative changes or interpretations may be forthcoming that could be retroactive and could affect the tax consequences to owners of Ordinary Shares. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF THE ORDINARY SHARES. 77 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Prudential Securities Incorporated, CIBC Oppenheimer Corp., ING Baring Furman Selz LLC and Warburg Dillon Read LLC are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the underwriting agreement (the "Underwriting Agreement"), to purchase from the Company the number of Ordinary Shares set forth below opposite their respective names:
NUMBER OF UNDERWRITER ORDINARY SHARES ----------- --------------- Prudential Securities Incorporated......................... CIBC Oppenheimer Corp. .................................... ING Baring Furman Selz LLC................................. Warburg Dillon Read LLC.................................... ---------- Total...................................................... 16,750,000 ==========
The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the Ordinary Shares set forth above if any are purchased. The closing of the Offering made hereby is conditioned upon the simultaneous closing of the Direct Sales by the Company. The Underwriters, through the Representatives, have advised the Company that they propose to offer the Ordinary Shares set forth above initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per Ordinary Share; and that such dealers may reallow a concession of $ per Ordinary Share to certain other dealers. After the Offering, the initial public offering price and the concessions may be changed by the Representatives. The Company has granted to the Underwriters an over-allotment option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 2,512,500 Ordinary Shares at the initial public offering price per share, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering any over-allotments incurred in the sale of the Ordinary Shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional Ordinary Shares as the number set forth next to such Underwriter's name in the preceding table bears to 16,750,000. The Company, its directors, officers and shareholders, the Shareholder Investors, the Non-Shareholder Investors and the holders of Class A Warrants and Class B Warrants have executed lock-up agreements pursuant to which each has agreed that they will not, for a period of one year (or six months with respect to the Ordinary Shares and Class A Warrants to be purchased by the Non-Shareholder Investors in the Direct Sales) after the date of this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, transfer, assign, hypothecate, grant any option to purchase, or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, transfer, assignment, hypothecation, grant of any option to purchase or other sale or disposition) of any Ordinary Shares or other capital stock of the Company or any other securities convertible into, or exercisable or exchangeable for, any Ordinary Shares or other capital stock of the Company, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, and (other than with respect to the Company and the holders of the Class B Warrants) the Company, provided that in the case of holders of the Class B Warrants, consent to waiver of such restrictions may be granted during such period only 78 with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. Such agreements do not prevent the Company from granting options under the Stock Option Plan so long as such options do not become exercisable for one year from the date of the Prospectus. The Company also has agreed not to file any registration statement on Form S-8 with respect to, or otherwise register for resale with the Commission, Ordinary Shares underlying stock options for a period of one year from the date of this Prospectus. Prudential Securities Incorporated and the Company may, in their sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements, except that in the case of holders of the Class B Warrants, such release may be granted only with respect to transactions with certain holders of interests in the limited partnerships holding such warrants. The Company has agreed to indemnify the several Underwriters and contribute to any losses arising out of certain liabilities, including liabilities under the Securities Act. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Ordinary Shares. The initial public offering price was determined by the Company and the Representatives as an appropriate per share price in light of the Company's desired capitalization. Upon consummation of the Offering and out of the net proceeds received therefrom, the Company will pay Prudential Securities Incorporated an advisory fee equal to $800,000 (plus reimbursement of related out-of-pocket expenses) for investment banking and financial advisory services in connection with the Offering. The Company has entered into an investment advisory agreement with Prudential Investment, as one of the Investment Managers. See "Business-- Investment Managers." Prudential Securities Incorporated and Prudential Investment are wholly owned subsidiaries of The Prudential Insurance Company of America. The Roman Arch Fund L.P. and The Roman Arch Fund II L.P., each of which is a limited partnership and an affiliate of Prudential Securities Incorporated and makes investments for the benefit of limited partners who are employees of Prudential Securities Incorporated, purchased, respectively, 120,000 and 80,000 Class B Warrants for respective aggregate purchase prices of $181,200 and $120,800. The exercise price of the Class B Warrants is equal to the initial public offering price, subject to adjustment as provided in the Class B Warrants. The Class B Warrants become exercisable in three equal annual installments commencing on the first anniversary of the consummation of the Offering. Each of The Roman Arch Fund L.P. and The Roman Arch Fund II L.P., as a holder of the Class B Warrants, has executed a lock-up agreement for a period of one year after the date of this Prospectus as described above. In connection with the Offering, certain Underwriters (and selling group members, if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Ordinary Shares. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Ordinary Shares for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Ordinary Shares in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Ordinary Shares in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 2,512,500 Ordinary Shares, by exercising the Underwriters' over-allotment option referred to previously. In addition, the Representatives, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby they may reclaim from an Underwriter (or any dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Ordinary Shares that are distributed in the Offering but subsequently purchased by the Representatives for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Ordinary Shares at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required and, if they are undertaken, they may be discontinued at any time. 79 LEGAL MATTERS The validity of the Ordinary Shares under Cayman Islands law will be passed upon for the Company by Maples and Calder, Cayman Islands. Certain matters as to United States law in connection with the Offering will be passed upon for the Company by Jones, Day, Reavis & Pogue, Dallas, Texas. Michael C. French, Chief Executive Officer, President and a Director of the Company, serves as a consultant to Jones, Day, Reavis & Pogue. Certain matters as to state insurance regulatory laws will be passed upon for the Company by The Bernstein Law Firm, Washington, D.C. Certain matters as to United States law in connection with the Offering will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. EXPERTS The consolidated balance sheet of the Company as of June 9, 1998, included in this Prospectus and in the Registration Statement has been audited by Ernst & Young, independent auditors, as set forth in their report thereon appearing elsewhere herein, and is included herein in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 80 GLOSSARY OF SELECTED LIFE INSURANCE AND ANNUITY TERMS Account value........................ The amount held in either the general account or a separate account of an insurance company to maintain policyholder assets and support liabilities. Acquisition costs.................... Commission and brokerage fees paid for the production of premiums written and certain other acquisition and underwriting expenses. The person on whose life or life Annuitant............................ expectancy the annuity payouts are based. Annuity.............................. A periodic payment contract purchased from an insurance company that typically offers tax-deferred growth of the investment until earnings are withdrawn. Annuity payouts...................... An amount paid at regular intervals under one of several plans available to the annuity owner and/or any other payee. This amount may be paid on a variable or fixed basis or a combination of both. Automatic reinsurance treaty......... Reinsurance of a specified type or category of risk defined in a reinsurance agreement (a "treaty") between a ceding company and a reinsurer. Typically, in automatic reinsurance the ceding company is obligated to offer and the reinsurer is obligated to accept a specified portion of all such type or category of risks originally insured or reinsured by the ceding company. Also known as treaty reinsurance. Beneficiary.......................... The person designated to receive variable life death benefits or annuity benefits in case of the policyholder's or annuitant's death. Broker............................... One who negotiates contracts of insurance or reinsurance, receiving a commission for placement and other services rendered, between (1) a policy-holder and a primary insurer, on behalf of the insured party, (2) a primary insurer and reinsurer, on behalf of the primary insurer, or (3) a reinsurer and a retrocessionaire, on behalf of the reinsurer. Ceding............................... The reinsurance by a primary insurer or reinsurer of all or a portion of its risk with a reinsurer or retrocessionaire. In doing so, the party "cedes" business and is referred to as the "cedent" or "ceding" company. A form of reinsurance with respect to which the risk generally is reinsured Coinsurance.......................... on the same plan as that of the original policy. The reinsurer receives the gross 81 premium charged to the policyholder on the reinsured part of the policy less expense allowances granted the ceding company by the reinsurer. The reinsurer maintains policy reserves and is liable for its share of policy benefits. Corporate owned life insurance An individual or group life insurance ("COLI")............................. policy owned by a company or a trust sponsored by a company. The proceeds from such a policy may be used to help fund general corporate liabilities, such as the cost of employee benefit programs. Credited rates....................... Interest rates applied to annuity and life insurance policies, whether contractually guaranteed or currently declared for a specified period, as outlined in the policy or contract. Duff & Phelps rating................. Duff & Phelps Credit Rating Co.'s claims paying ability ratings provide an overall opinion of an insurance company's ability to meet its obligations to policyholders. Duff & Phelps maintains a letter scale rating system consisting of 18 different ratings ranging from "AAA" to "DD." An "A" rating is assigned by Duff & Phelps to companies that have, in Duff & Phelps' opinion, high claims paying ability, average protection factors and an expectation of variability in risk over time due to economic and/or underwriting conditions. Duration............................. A measure, expressed in years, of the price sensitivity of a financial instrument to changes in interest rates. Facultative reinsurance.............. A type of reinsurance whereby the ceding company is not obligated to offer, and the reinsurer is not obligated to accept, all or a portion of each risk originally insured by the ceding company. Facultative risks are typically underwritten on a case-by- case basis. Fixed annuities...................... General account annuities which guarantee a contract holder that a specific sum of money will be paid in the future, either as a lump sum or as periodic income. General account...................... The main account of an insurer through which premiums are collected and the insurer's liabilities are incurred where the insurer bears the relevant risks. Indemnity reinsurance................ An arrangement in which an insurance company, the reinsurer, in consideration of a premium, agrees to indemnify another insurance or reinsurance company, known as the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. 82 Indemnity reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured. Modified coinsurance................. A form of reinsurance that differs from coinsurance only in that reserves are retained by the ceding company while all risks remain with the reinsurer. The ceding company normally pays interest to replace the interest the reinsurer would have earned if it had held the assets corresponding to the reserves in its own investment portfolio. Mortality............................ The relative incidence of death. Net amount at risk................... The difference between the cash value of a variable life insurance policy and the death benefit provided by such policy. Persistency.......................... The rate which insurance policies or annuity contracts remain in force, expressed as a percentage of the number of policies remaining in force over the previous year. Policy............................... The printed document issued by an insurance or reinsurance company that states the terms of the insurance or reinsurance contract. Policy reserves...................... Liabilities established by insurers that generally represent the estimated discounted present value of the net cost of claims, repayments or contract liabilities and the related expenses that the insurer will ultimately be required to pay in respect of reinsurance or insurance it has written or reinsured. Premiums written..................... Premiums written for a given period. Primary insurer...................... An insurance company that contracts with the consumer to provide insurance coverage. Such primary insurer may then cede a portion of its business to reinsurers. Qualified purchaser.................. As defined in Section 2(a)(51) of the 1940 Act and related rules and regulations. Quota share reinsurance.............. A term describing all forms of reinsurance in which the reinsurer shares a pro-rata part of the original premiums and losses of the ceding company under a quota share. (Also known as proportional reinsurance, "pro-rata contract" reinsurance or participating reinsurance.) Recapture right...................... The ceding company's right to cancel reinsurance under certain conditions. A recapture occurs when a ceding company cancels an in force reinsurance cession to increase the risk it retains. 83 Reinsurance; Reinsurer............... An arrangement under which an insurance company (the "reinsurer") agrees to indemnify or assume the obligations of another insurance company (the "ceding company" or "cedent") for all or a portion of the insurance risks underwritten by the ceding company. The amount or portion of insurance Retention............................ risk that a ceding insurer retains for its own account. Any insurance issued in excess of the retention is reinsured. In proportional treaties, the retention may be a percentage of the original policy's limit. Retrocessional reinsurance; A transaction whereby a reinsurer Retrocessionaire..................... cedes to another reinsurer, the retrocessionaire, all or part of the reinsurance that the first reinsurer has assumed. Retrocessional reinsurance does not legally discharge the ceding reinsurer from its liability with respect to its obligations to the reinsured. A segregated account established by an Separate account..................... insurance company to hold policyholder or contract holder assets and liabilities on behalf of such policyholder or contract holder. The funds in a separate account are maintained separately from those in other separate accounts and the general account and are not subject to the claims of the insurer's general creditors. Structured settlement contracts...... Contracts providing for periodic payments for a determinable number of years or for life, typically in settlement of an injury claim or a lottery award. Surplus relief reinsurance........... A type of reinsurance which is primarily designed to increase temporarily a ceding company's statutory capital. Surrender charge..................... A deferred sales charge to be applied if an annuity or life insurance policy is surrendered for its cash value prior to a specified date. Such a charge is intended to recover all or a portion of the policy acquisition costs and act as a deterrent to early surrender. The insurer's or reinsurer's process Underwriting......................... of reviewing contracts submitted for insurance or reinsurance coverage, deciding whether to accept all or part of the coverage requested and determining the applicable premiums. Underwriting capacity................ The maximum amount that an insurance or reinsurance company can underwrite. Reinsurance serves to increase an insurer's underwriting capacity by reducing its exposure from particular risks. 84 Underwriting expenses................ The aggregate of policy acquisition costs, including commissions, and the portion of administrative, general and other expenses attributable to underwriting operations. Unearned premiums.................... Premiums written but not yet earned, as they are attributable to the unexpired portion of the related contract or policy term. Universal life insurance............. A form of life insurance that combines term insurance and a cash value savings component. Premium payments and coverage usually can vary. An annuity which includes a provision Variable annuity..................... for benefit payments to vary according to the investment experience of the separate account in which the amounts paid to provide for this annuity are allocated. Variable life insurance.............. A form of life insurance that offers fixed or flexible premiums and a minimum death benefit as well as providing a return linked to an underlying portfolio of securities that are held in a separate account of the insurer. Whole life insurance................. A form of life insurance which provides guaranteed death benefits and a guaranteed cash value to policy holders. 85 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. INDEX TO CONSOLIDATED BALANCE SHEET Report of Independent Auditors............................................. F-2 Consolidated Balance Sheet as of June 30, 1998 (unaudited) and June 9, 1998...................................................................... F-3 Consolidated Statement of Operations and Accumulated Deficit for the period from June 9, 1998 (date of inception) through June 30, 1998 (unaudited)..................... F-4 Consolidated Statement of Cash Flows for the period from June 9, 1998 (date of inception) through June 30, 1998 (unaudited)................................................. F-5 Notes to Consolidated Balance Sheet........................................ F-6
F-1 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 June 9, 1998. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet 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 balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated balance sheet referred to above presents fairly, in all material respects, the consolidated financial position of Scottish Annuity & Life Holdings, Ltd. at June 9, 1998 in conformity with accounting principles generally accepted in the United States of America. Ernst & Young George Town, Grand Cayman British West Indies October 7, 1998 Except for Notes 5, 7 and 8 as to which the date is October 26, 1998 F-2 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. CONSOLIDATED BALANCE SHEET (STATED IN UNITED STATES DOLLARS)
JUNE 30, JUNE 9, 1998 1998 ----------- -------- (UNAUDITED) ASSETS Cash and cash equivalents................................ $ 732,683 $600,000 Deferred offering costs.................................. 968,907 -- Other assets............................................. 9,309 -- ---------- -------- Total assets............................................. $1,710,899 $600,000 ========== ======== LIABILITIES Due to related party..................................... $ 86,623 -- Accounts payable and accrued expenses.................... 743,353 -- ---------- -------- Total liabilities........................................ $ 829,976 -- ========== ======== SHAREHOLDER'S EQUITY Share capital, par value $0.01 per share: Issued and fully paid: 1,500,000 Ordinary Shares....... $ 15,000 $ 15,000 Additional paid in capital............................. 887,000 585,000 Accumulated deficit...................................... (21,077) -- ---------- -------- Total shareholder's equity............................... $ 880,923 $600,000 ---------- -------- Total liabilities and shareholder's equity............... $1,710,899 $600,000 ========== ========
See accompanying notes. F-3 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT (UNAUDITED) (STATED IN UNITED STATES DOLLARS) PERIOD FROM JUNE 9, 1998 (DATE OF INCEPTION) THROUGH JUNE 30, 1998
PERIOD ENDED JUNE 30, 1998 ------------- (UNAUDITED) INCOME Interest income................................................... $ 1,501 ---------- EXPENSES Professional fees................................................. 12,772 Recruitment expenses.............................................. 9,384 Miscellaneous expenses............................................ 422 ---------- Total expenses.................................................... 22,578 ---------- Net loss, being accumulated deficit at end of period.............. $ (21,077) ========== Loss per Ordinary Share........................................... $ (.01) ========== Diluted loss per Ordinary Share................................... $ (.01) ========== Weighted average number of Ordinary Shares outstanding............ 1,500,000 ========== Diluted weighted average number of Ordinary Shares outstanding.... 1,500,000 ==========
See accompanying notes. F-4 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (STATED IN UNITED STATES DOLLARS) PERIOD FROM JUNE 9, 1998 (DATE OF INCEPTION) THROUGH JUNE 30, 1998
PERIOD ENDED JUNE 30, 1998 ------------- (UNAUDITED) OPERATING ACTIVITIES Net loss......................................................... $ (21,077) Adjustment to reconcile net loss to net cash used in operating activities Changes in assets and liabilities: Deferred offering costs...................................... (968,907) Other assets................................................. (9,309) Due to related party......................................... 86,623 Accounts payable and accrued expenses........................ 743,353 --------- Net cash used in operating activities............................ (169,317) ========= FINANCING ACTIVITIES Issuance of share capital........................................ 500,000 Issuance of Class A Warrants..................................... 100,000 Issuance of Class B Warrants..................................... 302,000 --------- Net cash provided by financing activities........................ 902,000 --------- Net increase in cash and cash equivalents, being cash and cash equivalents at the end of the period............................ $ 732,683 =========
See accompanying notes. F-5 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET JUNE 9, 1998 1. ORGANIZATION Scottish Annuity & Life Holdings, Ltd. (formerly, Scottish 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 customized variable life insurance policies and reinsurance of in-force blocks of fixed annuities and similar contracts through its wholly-owned subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. (formerly, Scottish Life Assurance (Cayman) Ltd.) ("Scottish Insurance", and together with Holdings, the "Company"). In addition, Holdings may reinsure in-force blocks of other types of annuity contracts and life insurance policies through Scottish Insurance. On July 8, 1998, Scottish Insurance received an unrestricted Class "B' insurer's license under the insurance laws of the Cayman Islands. The Company's fiscal year end is December 31. Holdings is planning an initial public offering of its Ordinary Shares (the "Offering"). All Ordinary Shares of Holdings are owned by Scottish Holdings, Ltd., a Cayman Islands company (the "Parent"). The Company executed a binder with a United States reinsurer on September 18, 1998 to assume reinsurance, on a retrocession basis, for approximately 35,000 in-force universal life insurance policies with an aggregate face value of approximately $5.0 billion. The reinsurance will be structured on a monthly renewable term basis with the Company reinsuring only the mortality risk under such policies, up to $1.5 million per life. The Company intends to retrocede risks in excess of $500,000 per life. The Company's binder is conditioned on the consummation of the Offering. During the period from its incorporation to June 9, 1998, the Company did not incur any income or expenses that are required to be reported in a statement of income or a statement of cash flows under United States generally accepted accounting principles. Therefore, the consolidated statements of income and cash flows have not been presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying balance sheet is prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results could differ from those estimates. The following are the significant accounting and reporting policies adopted by the Company. PREMIUM INCOME AND RELATED EXPENSES The variable life insurance policies are considered universal life-type contracts and, along with reinsured variable annuity contracts, will be accounted for under Financial Accounting Standards Board's ("FASB") Statement No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long- Duration Contracts and for Realized Gains and Losses from the Sale of Investments." Premiums from variable life insurance policies and reinsured variable annuity contracts will be reported as deposits to policyholders' account balances which will be maintained in separate accounts. Revenues from these policies will consist of amounts assessed and recognized in income on a quarterly basis during the period against policyholders' account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense will include benefit claims incurred in the period in excess of related policyholders' account balances and interest credited to policyholders' account balances. Premiums from reinsured fixed annuity policies and reinsured traditional life insurance contracts will be recognized generally as revenue when due from policyholders. Benefits and expenses are matched with such F-6 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 income so as to result in the recognition of profits over the life of the contracts. This is achieved by means of the provision for liabilities for future policy benefits and deferral and subsequent amortization of policy acquisition costs. Premiums from reinsurance of investment type fixed annuity contracts will be reported as deposits. Revenues from these contracts will consist of amounts assessed quarterly during the period against policyholders' account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense will include benefit claims incurred in the period in excess of related policyholders' account balances. ADMINISTRATIVE SERVICES FEES The Company charges administrative services fees to The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity") quarterly in advance (see Note 7). Such fees are recognized into income ratably. DEFERRED POLICY ACQUISITION COSTS For variable life insurance and reinsurance of investment type fixed annuity contracts and reinsured variable annuity contracts, deferred policy acquisition costs, consisting of commissions, underwriting and policy issue expenses, 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 shall accrue to the unamortized balance of capitalized acquisition costs at the rate used to discount expected gross profit. 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 fixed annuity reinsurance policies and reinsured traditional life insurance contracts, deferred policy acquisition costs, consisting of ceding commissions, 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 life of the policy. POLICYHOLDERS' ACCOUNT BALANCES AND FUTURE POLICY BENEFITS The development of policy reserves for the Company's policies will require management to make estimates and assumptions regarding mortality, lapse, expense and investment experience. Actual results could differ materially from those estimates. Management will monitor actual experience and where circumstances warrant, will revise its assumptions and the related reserve estimates. Future benefit liabilities of variable life insurance policies will be estimated using actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on anticipated experience. Policy reserves will be established to meet the Company's estimated future benefit liabilities. Future benefit liabilities of reinsured traditional life insurance contracts will be estimated using actuarial assumptions as to mortality, morbidity, terminations, investment yields and expenses applicable at the time the insurance contracts are made. As variable life insurance policies are issued, the Company's associated mortality risk may tend to fluctuate more than would be expected than if the Company had a larger pool of insureds. The Company will allocate a portion of its capital to further provide for potential fluctuations in volatility of mortality experience. For the Company's reinsured fixed annuity business, such estimates will be primarily based on historical experience and information provided by ceding companies. F-7 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 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. Benefit liabilities for fixed annuities during the accumulation period are equal to the accumulated present value of expected future payments. Premiums for variable life insurance policies and reinsured variable annuity contracts will be reported as deposits to policyholders' account balances which will be maintained in separate accounts. The funds in these separate accounts will be managed by private independent money managers for the benefit of such policyholders. The Company will not provide any investment management or advisory services to any policyholder. Revenues from these contracts will consist of amounts assessed during the period against policyholders' separate account balances for mortality charges, policy administration and surrender charges. Policy benefits and claims that are charged to expense will include benefit claims incurred in the period in excess of related policyholders' separate account balances and interest credited to policyholders' separate account balances. INVESTMENTS The Company intends to categorize all investments in marketable securities as available-for-sale and, accordingly, such securities will be carried at fair value. Realized gains and losses are determined on a specific identification method. The cost of fixed income securities will be adjusted for amortization of premiums and discounts. Realized gains and losses will be recorded in the statement of operations and included in investment income. Unrealized gains and losses will be reported as a separate component of shareholder's equity. Other than temporary declines in value will be charged to income and a new cost basis will be established for the securities. SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate accounts will be recorded at the fair value of the underlying investments less mortality charges, policy administration charges and surrender charges. The funds in the separate accounts will not be part of the Company's general funds and 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. TRANSLATION OF FOREIGN CURRENCIES The Company's functional currency is the United States dollar. Premiums written and receivable in foreign currencies, if any, will be recorded at exchange rates prevailing on the effective date of the contract and liabilities for future benefits payable in foreign currencies at the time such liabilities are first recorded. Exchange gains or losses resulting from the periodic revaluation and settlement of such assets and liabilities will be recorded in the Company's statement of operations. DEFERRED OFFERING COSTS Deferred offering costs incurred in connection with the Offering, including certain amounts payable for investment banking and financial advisory services, will be deducted from the gross proceeds of the Offering. Deferred offering costs incurred through October 7, 1998, amount to approximately US$1.9 million. F-8 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 DUE TO RELATED PARTY (UNAUDITED) Due to a related party is comprised of expenses incurred for travel and other general costs that are payable to Scottish Annuity, a wholly owned subsidiary of the Parent. EARNINGS PER ORDINARY SHARE (UNAUDITED) The Company will calculate earnings per Ordinary Share based upon the guidance provided in FASB Statement No. 128 "Earnings per Share". This statement requires the presentation of two amounts of earnings per share when the company has a complex capital structure. These amounts are earnings per Ordinary Share and earnings per Ordinary Share assuming dilution. Basic earnings per Ordinary Share will be calculated by dividing net income attributable to holders of Ordinary Shares by the weighted average number of Ordinary Shares outstanding during the period. Diluted earnings per Ordinary Share will be calculated by dividing the net income attributable to holders of Ordinary Shares by the weighted average number of Ordinary Shares outstanding during the period, plus dilutive potential Ordinary Shares. Options and warrants issued by the Company will be considered dilutive potential Ordinary Shares and will be included in the calculation using the treasury stock method. CONSOLIDATION The Company's balance sheet includes the accounts of Holdings and Scottish Insurance after the elimination of intercompany balances. 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 STANDARDS The Financial Accounting Standards Board has issued the following accounting standard that will affect the Company. 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. The Company has not yet completed its evaluation of the effect this standard will have on the Company. F-9 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 3. SHAREHOLDER'S EQUITY PREFERRED SHARES The Company is 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. ORDINARY SHARES The Company is authorized to issue 100,000,000 Ordinary Shares of par value $0.01 each. At the balance sheet date 1,500,000 Ordinary Shares were outstanding. WARRANTS In connection with its initial capitalization, the Company issued Class A Warrants to purchase an aggregate of 1,550,000 Ordinary Shares to Michael C. French, Michelle L. Boucher and certain companies wholly owned by certain shareholders of the Parent. The aggregate consideration paid for these warrants of $100,000 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 the Company's business plan when the feasibility of proceeding with the offering was uncertain. 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 consideration paid for the Class A Warrants was determined to be fair value in the judgment of the Company in light of such uncertainty. The exercise price of the Class A Warrants will be equal to the initial public offering price per share of the Company's 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. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for warrants issued to employees because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing warrants issued to employees. Under APB 25, because the exercise price of the Class A Warrants issued to employees equals the initial public offering price of the underlying stock on the date of issuance, no compensation expense is recognized. The Class B Warrants, discussed in Note 8 below, were issued on June 18, 1998 after the Company's business plan had undergone further development and the Company was 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. The Class C Warrants, discussed in Note 7 below, are issuable to Westport Worldwide Bermuda, Ltd. ("Westport") annually over the four year term of the proposed agreement with Westport based on the achievement of certain revenues attributable to business identified or referred by Westport. 4. STOCK OPTION PLAN On June 18, 1998, the Board of Directors adopted a Stock Option Plan (the "Plan") under which it may grant, subject to certain restrictions, nonstatutory stock options ("Options"). The aggregate number of Ordinary Shares for which Options may be granted under the Plan is limited to 1,500,000 shares and no individual shall F-10 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 be granted Options for more than 1,000,000 shares under the Plan. Effective September 2, 1998, the Amended and Restated 1998 Stock Option Plan increased the aggregate number of Ordinary Shares for which options may be granted from 1,500,000 to 2,000,000 shares. Options may be granted to eligible employees, non-employee Directors, advisors and consultants. Each grant will specify the required time of continuing service by the Participant (as defined in the Plan) with the Company or any other conditions to be satisfied before the Option, or installments thereof will become exercisable. The Plan will be administered by the Board of Directors. The Board of Directors has the authority to select the parties to be granted Options and to set the date of grant and other terms of the Options granted under the Plan. The minimum exercise price of the Options will be equal to the fair market value, as defined in the Plan, of the Company's 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. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 5. 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. The Company intends to operate in a manner such that it will owe no United States tax other than premium excise taxes and withholding taxes on certain investments. 6. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS Under the Insurance Law of the Cayman Islands (1998 Revision), Scottish Insurance must maintain a net capital worth of US$240,000. Holdings' ability to pay dividends depends on the ability of Scottish Insurance to pay dividends to Holdings. While Holdings itself is 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 to Holdings. Scottish Insurance is prohibited from declaring or paying a dividend if such payment would reduce its net capital worth below US$240,000. 7. MATERIAL AGREEMENTS SCOTTISH ANNUITY AGREEMENT Scottish Insurance has entered into an Insurance Administration, Services and Referral Agreement (the "Scottish Annuity Agreement") with Scottish Annuity dated as of July 1, 1998, and effective October 1, 1998, pursuant to which Scottish Insurance will provide Scottish Annuity with a variety of insurance administration, F-11 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 accounting and other services, including (i) investment fund accounting reporting for variable annuity products, (ii) monitoring compliance with the diversification, investor control and certain other requirements of the Internal Revenue Code of 1986, as amended (the "Code"), (iii) administrative services in the issuance by Scottish Annuity of variable annuity products and documents related thereto, (iv) servicing of variable annuity products after issuance by Scottish Annuity, (v) accounting for investment, capital and income and expense activities and maintenance of individual ledgers for investment funds in which each annuity product is invested, (vi) preparing financial statements of Scottish Annuity and (vii) controlling all disbursements from Scottish Annuity and authorizing such disbursements upon instructions from Scottish Annuity. These services will be provided by Scottish Insurance personnel. Scottish Annuity personnel will conduct all other administrative and accounting services related to its variable annuity products. As compensation for the services rendered by Scottish Insurance during the term of the Scottish Annuity Agreement, Scottish Annuity will pay to Scottish Insurance an amount equal to 0.50% of the quarterly separate account value of each annuity contract issued by Scottish Annuity subject to a minimum of U.S.$25,000 per year. In addition, Scottish Annuity will reimburse Scottish Insurance for all out-of-pocket fees, costs and expenses incurred or advanced by Scottish Insurance on behalf of Scottish Annuity in connection with the Scottish Annuity Agreement. In addition, pursuant to the Scottish Annuity 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 Scottish Annuity 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 renewed term. In addition, the Scottish Annuity Agreement will 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. In addition, pursuant to separate agreements and as partial consideration for entering into the Scottish Annuity Agreement, Scottish Insurance will sublease to Scottish Annuity a portion of its leased space at its executive offices in the Cayman Islands and Scottish Annuity has sold certain of its computer hardware and software to Scottish Insurance. AGREEMENT WITH IRM CAYMAN Scottish Insurance retained IRM Cayman, a member company of International Risk Management Group, Inc. ("IRMG"), an affiliate of Swiss Reinsurance, as of June 30, 1998, to act as the Company's licensed insurance manager in the Cayman Islands and to supplement from time to time the Company's administrative staff in the Cayman Islands. As the Company's licensed insurance manager in the Cayman Islands, IRM Cayman will prepare the Company's annual report required to be filed with the Cayman Islands Monetary Authority, submit any changes or amendments to the Company's business plan required to be filed with the Cayman Islands Monetary Authority and annually certify as to the Company's compliance with all applicable requirements of the Cayman Islands Monetary Authority. The Company's agreement with IRM Cayman may be terminated by either party upon 90 days advance written notice. The Company pays IRM Cayman an annual retainer of $25,000, and IRM Cayman bills for its actual services on an hourly basis. F-12 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 WESTPORT AGREEMENT In an effort to facilitate its marketing efforts, the Company is involved in negotiations to enter into an agreement with Westport, 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 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. All of Westport's distribution activities will be undertaken outside the United States and Westport has agreed to comply with all of the Company's operating guidelines. For its distribution activities, the Company will issue to Westport up to 750,000 Class C Warrants to purchase up to 750,000 Ordinary Shares at an exercise price equal to the initial public offering price per Ordinary Share. The Class C Warrants are issuable over a four year period on January 1, 2000 and on each anniversary thereafter (to and including January 1, 2003) in an amount to be determined by a formula based on the revenue for the preceding calendar year from variable life insurance policies issued by the Company to customers identified and referred by Westport. The Class C Warrants, if issued, will be for a term expiring ten years from the date of the Offering. These warrants will be accounted for under the fair value method, when issued, in accordance with FASB 123. MILLIMAN & ROBERTSON AGREEMENT The Company has entered into an agreement with Milliman & Robertson pursuant to which Milliman & Robertson will provide certain actuarial services to the Company, including pricing and reinsurance analysis, from time to time as requested by the Company. The Company has paid Milliman & Robertson an initial retainer of $25,000, and Milliman & Robertson bills for its actual services on an hourly basis and for its reimbursable expenses. DC PLANNING AGREEMENT The Company has entered into a consulting services agreement with DC Planning subject to the consummation of the Offering. DC Planning is 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 will provide certain consulting services to the Company, including with respect to the development and implementation of its business plan. DC Planning will be paid $180,000 a year for a term of three years under the agreement. Howard Shapiro, who will be a Director of Holdings, is the managing partner of DC Planning. PIMCO AGREEMENT The Company has entered into an investment advisory agreement (the "PIMCO Agreement") with Pacific Investment Management Company ("PIMCO") pursuant to which PIMCO will manage a portion of the Company's investment portfolio. Under the terms of the PIMCO Agreement, the Company will pay PIMCO an annual fee equal to 0.50% of the market value of the first $25 million of the Company's assets managed by PIMCO, 0.375% of the market value on the next $25 million of the Company's assets under management and 0.25% thereafter. The foregoing fees are payable quarterly in advance based on the market value of the Company's investment portfolio managed by PIMCO at the beginning of the billing period. The PIMCO Agreement will continue in effect on a month to month basis and may be terminated by either party effective at the end of the month upon 30 days advance notice. The Company may also terminate the PIMCO Agreement effective upon notice but will be obligated to pay the applicable fee for 30 days thereafter. F-13 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 GENERAL RE AGREEMENT The Company has entered into an investment advisory agreement (the "General Re Agreement") with General Re-New England Asset Management, Inc. ("General Re") pursuant to which General Re will manage a portion of the Company's investment portfolio. Under the terms of the General Re Agreement, the Company will pay General Re an annual fee equal to 0.20% of the market value of the first $50 million of the Company's assets under management, 0.15% on the market value of the next $50 million of the Company's assets under management and 0.12% on the market value of the Company's assets under management in excess of $100 million. The foregoing fees are payable at the end of each calendar quarter for services provided during the prior three months. The General Re Agreement may be terminated by either party upon thirty days written notice and will remain in effect until terminated. PRUDENTIAL INVESTMENT AGREEMENT The Company has entered into an investment advisory agreement (the "Prudential Agreement") with The Prudential Investment Corporation ("Prudential") pursuant to which Prudential will manage a portion of the Company's investment portfolio. Under the terms of the Prudential Agreement, the Company will pay Prudential an annual fee equal to 0.20% of the market value of the first $50 million of the Company's assets under management and 0.15% on the market value of the next $50 million of the Company's assets under management. The foregoing fees will be payable at the end of each calendar quarter for services provided during the prior three months. The Prudential Agreement may be terminated at any time by the Company or with 45 days advance notice by Prudential. OTHER AGREEMENTS The Company had previously entered into a series of other agreements with respect to its planned operations. As a result of changing market conditions certain of those agreements have been terminated and replaced with the agreements described herein. 8. SUBSEQUENT EVENTS The Company 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. The exercise price of the Class B Warrants will be equal to the initial public offering price per Ordinary Share, and such Class B Warrants become exercisable in equal amounts over a three year period commencing one year after the Offering and expire five 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 Offering, and make investments for the benefit of limited partners who are employees of Prudential Securities Incorporated. The Company has agreed to pay, upon consummation of the Offering, a fee of $800,000 (plus reimbursement of related out-of-pocket expenses) to Prudential Securities Incorporated for investment banking and financial advisory services in connection with the Offering. Effective June 24, 1998, the Parent transferred to its shareholders all of its Ordinary Shares in Holdings by way of a distribution. Effective September 9, 1998, Holdings changed its name from Scottish Life Holdings, Ltd. to Scottish Annuity & Life Holdings, Ltd. and Scottish Insurance changed its name from Scottish Life Assurance (Cayman) Ltd. to Scottish Annuity & Life Insurance Company (Cayman) Ltd. F-14 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED JUNE 9, 1998 On October 22, 1998, two shareholders of the Company (the "Shareholder Investors") and Maverick Fund USA, Ltd., Maverick Fund, L.D.C. and Maverick Fund II, Ltd. (collectively, the "Non-Shareholder Investors," and together with the Shareholder Investors, the "Direct Investors") have agreed to purchase for investment an aggregate of 1,418,440 Ordinary Shares and Class A Warrants exercisable for an aggregate of 400,000 Ordinary Shares. The aggregate purchase price of $20.0 million to be paid by the Direct Investors is based on a price of $14.10 (the initial public offering price per Ordinary Share less the underwriting discounts and commissions in the Offering) for (i) one Ordinary Share and (ii) the right to purchase 0.282 of an Ordinary Share under the Class A Warrants. Such purchases by the Direct Investors will be consummated simultaneously with the consummation of the Offering. On October 23, 1998, in consideration of $9,677.42, Michael C. French transferred 150,000 Class A warrants to two investors. On October 22, 1998, the Company paid nominal consideration and issued 900,000 Class A Warrants (see also Note 3) in order to reacquire and cancel on a pro-rata basis, 1,100,000 of its issued and outstanding Ordinary Shares. On October 22, 1998, the Company further amended its Stock Option Plan to reduce the aggregate number of Ordinary Shares for which Options can be granted from 2,000,000 to 1,600,000 shares. In addition, a provision was added relating to the granting of options to eligible non-employee directors. As of October 22, 1998, Options for 900,000 Ordinary Shares had been granted to Participants in the Plan. Options for an additional 160,000 Ordinary Shares will be granted to certain Participants in the Plan prior to consummation of the Offering. 9. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. All such adjustments are, in the opinion of management, of a normal recurring nature. All significant intercompany balances and transactions have been eliminated. Results of operations for the period ended June 30, 1998 are not necessarily indicative of results to be expected for the full year. F-15 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE ORDINARY SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE ORDINARY SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Enforceability of Civil Liabilities under United States Federal Securities Laws..................................................................... 2 Additional Information.................................................... 3 Prospectus Summary........................................................ 4 Risk Factors.............................................................. 9 Use of Proceeds........................................................... 21 Dividend Policy........................................................... 21 Capitalization............................................................ 22 Dilution.................................................................. 23 Management's Discussion and Analysis of Financial Condition and Plan of Operations............................................................ 24 Business.................................................................. 29 Management................................................................ 50 Principal Stockholders.................................................... 57 Certain Relationships and Related Party Transactions...................... 58 Description of Shares..................................................... 59 Shares Eligible for Future Sale........................................... 68 Direct Sales.............................................................. 70 Material Tax Consequences................................................. 71 Underwriting.............................................................. 78 Legal Matters............................................................. 80 Experts................................................................... 80 Glossary of Selected Life Insurance and Annuity Terms..................... 81 Index to Consolidated Balance Sheet....................................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 16,750,000 Shares SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Ordinary Shares ------------- PROSPECTUS ------------- PRUDENTIAL SECURITIES INCORPORATED CIBC OPPENHEIMER ING BARING FURMAN SELZ LLC WARBURG DILLON READ LLC , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses payable by the Company in connection with the issuance and distribution of the Ordinary Shares being registered hereby. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and the Nasdaq National Market. Securities and Exchange Commission registration fee................. $ 85,237 National Association of Securities Dealers, Inc. filing fee......... 29,394 Nasdaq National Market quotation fee................................ 95,000 Advisory fee........................................................ 800,000 Printing costs...................................................... 650,000 Accounting fees and expenses........................................ 175,000 Legal fees and expenses (not including Blue Sky).................... 750,000 Blue Sky fees and expenses.......................................... 2,000 Miscellaneous expenses.............................................. 113,369 ---------- Total............................................................. $2,700,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Cayman Islands law permits a company's articles of association to provide for the indemnification of officers and directors, except to the extent that such provision may be held by the Cayman Islands courts to be contrary to public policy (for instance, for purporting to provide indemnification against the consequences of committing a crime). In addition, an officer or director may not be indemnified for his own dishonesty, wilful neglect or default. The Articles contain provisions providing for the indemnification by the Company of an officer, director, employee or agent of the Company, or any person serving at the request of the Company as an officer, director, employee or agent of any other company, for threatened, pending or contemplated actions, suits or proceedings, whether civil, criminal, administrative or investigative, brought against such indemnified person by reason of the fact that such person was an officer, director, employee or agent of the Company or serving in such capacity. In addition, the Board of Directors may authorize the Company to purchase and maintain insurance on behalf of any such person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of the Articles. The Company plans to purchase directors and officers liability insurance from third parties for its directors and executive officers. The Company also plans to enter into indemnity agreements with each of its executive officers and directors. The Articles provide that directors of the Company shall have no personal liability to the Company or its shareholders for monetary damages for breach of fiduciary or other duties as a director, except (i) for any breach of a director's duty of loyalty to the Company or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) a payment of a dividend on stock of the Company or a purchase or redemption of stock of the Company in violation of law; or (iv) for any transaction from which a director derived an improper personal benefit. Reference is made to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto for provisions providing that the Underwriters are obligated, under certain circumstances, to indemnify the directors, certain officers and controlling persons of the Company against liabilities under the Securities Act of 1933, as amended (the "Securities Act"). II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since its formation, the Company issued the following securities that were not registered under the Securities Act: (a) On May 12, 1998, the Company sold 1,500,000 Ordinary Shares to Scottish Holdings, Ltd., for an aggregate purchase price of $500,000. (b) On June 9, 1998, the Company 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, the Company 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, the Company issued Class A Warrants to purchase an aggregate of 900,000 Ordinary Shares to Audubon Asset, Limited, Soulieana Limited and South Madison Trust in exchange for 1,045,000 Ordinary Shares. (e) On October 27, 1998, the Company 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. (the "Direct Investors"), pursuant to which the Company will sell to the Direct Investors an aggregate of 1,418,440 Ordinary Shares and Class A Warrants to purchase an aggregate of 400,000 Ordinary Shares. No underwriters were or will be involved in the foregoing sales of securities. Such sales were or will be made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving a public offering. All of the foregoing securities are or will be deemed restricted securities for purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) 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. 3.1+ Articles of Association of the Company. 3.2+ Memorandum of Association of the Company. 4.1* Specimen Ordinary Share Certificate. 4.2** Form of Amended and Restated Class A Warrant. 4.3** Form of Amended and Restated Class B Warrant. 4.4** Form of Securities Purchase Agreement for the Class A Warrants. 4.5** Form of Warrant Purchase Agreement for the Class B Warrants. 4.6** Form of Registration Rights Agreement for the Class A Warrants. 4.7** Form of Registration Rights Agreement for the Class B Warrants. 4.10* Form of Securities Purchase Agreement between the Company and the Shareholder Investors 4.11* Form of Registration Rights Agreement between the Company and the Shareholder Investors 4.12* Form of Securities Purchase Agreement between the Company and the Non- Shareholder Investors 4.13* Form of Registration Rights Agreement between the Company and the Non- Shareholder Investors 5.1* Opinion of Maples and Calder as to the validity of the securities being offered. 8.1** Opinion of Maples and Calder.
II-2
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 8.2** Opinion of Jones, Day, Reavis & Pogue. Employment Agreement dated June 18, 1998 between the Company and 10.1** Michael C. French. Employment Agreement dated June 18, 1998 between the Company and 10.2** Michelle L. Boucher. Second Amended and Restated 1998 Stock Option Plan effective October 10.3* 22, 1998. Form of Stock Option Agreement in connection with 1998 Stock Option 10.4** Plan. 10.8** Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. 10.9+ Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October , 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. 10.10** Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski. 10.12** Form of Indemnification Agreement between the Company and each of its directors and officers. 10.13* Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company. 10.14* Investment Management Agreement dated October 22, 1998 between the Company and General Re--New England Asset Management, Inc. 10.15+ Agreement dated , 1998 between the Company and Westport Worldwide Bermuda, Ltd. 10.16* Investment Management Agreement dated October 22, 1998 between the Company and The Prudential Investment Corporation. 21.1** Subsidiaries of Registrant. 23.1* Consent of Maples and Calder (contained in Exhibit 5.1). 23.2** Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 8.2). 23.3* Consent of Ernst & Young. 23.4** Consent of The Bernstein Law Firm. 99.1** Consent of Michael Austin. 99.3** Consent of Howard Shapiro. 99.4** Form F-N. 99.5* Consent of Sam Wyly. 99.6* Consent of Charles J. Wyly, Jr. 99.7* Consent of David Matthews. 99.8* Consent of R. Duke Buchan III. 99.9* Consent of Robert M. Chmely. Opinion of The Bernstein Law Firm with respect to certain state 99.10* insurance regulatory matters.
- -------- * Filed herewith. ** Previously filed. + To be filed by amendment. (b) 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. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-3 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 4 to Registration Statement No. 333-57227 to be signed on its behalf by the undersigned, thereunto duly authorized, in Dallas, Texas, on October 27, 1998. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. /s/ Michael C. French By: ___________________________________ Michael C. French Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 to Registration Statement No. 333-57227 has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Michael C. French Chief Executive Officer, October 27, 1998 ____________________________________ President and Director Michael C. French (Principal Executive Officer) /s/ Michelle L. Boucher Senior Vice President, Chief October 27, 1998 ____________________________________ Financial Officer and Michelle L. Boucher Secretary (Principal Financial Officer and Principal Accounting Officer) /s/ Donald J. Puglisi Authorized Representative in October 27, 1998 ____________________________________ the United States Donald J. Puglisi
II-5 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER PAGE NO. DESCRIPTION OF DOCUMENT ---------- ----------------------- 1.1+ Form of Underwriting Agreement between the Company and the Underwriters. 3.1+ Articles of Association of the Company. 3.2+ Memorandum of Association of the Company. 4.1* Specimen Ordinary Share Certificate. 4.2** Form of Amended and Restated Class A Warrant. 4.3** Form of Amended and Restated Class B Warrant. 4.4** Form of Securities Purchase Agreement for the Class A Warrants. 4.5** Form of Warrant Purchase Agreement for the Class B Warrants. 4.6** Form of Registration Rights Agreement for the Class A Warrants. 4.7** Form of Registration Rights Agreement for the Class B Warrants. 4.10* Form of Securities Purchase Agreement between the Company and the Shareholder Investors. 4.11* Form of Registration Rights Agreement between the Company and the Shareholder Investors. 4.12* Form of Securities Purchase Agreement between the Company and the Non-Shareholder Investors. 4.13* Form of Registration Rights Agreement between the Company and the Non-Shareholder Investors. 5.1* Opinion of Maples and Calder as to the validity of the securities being offered. 8.1** Opinion of Maples and Calder. 8.2** Opinion of Jones, Day, Reavis & Pogue. 10.1** Employment Agreement dated June 18, 1998 between the Company and Michael C. French. 10.2** Employment Agreement dated June 18, 1998 between the Company and Michelle L. Boucher. 10.3* Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998. 10.4** Form of Stock Option Agreement in connection with 1998 Stock Option Plan. 10.8** Agreement dated June 30, 1998 between the Company and International Risk Management (Cayman) Ltd. 10.9+ Amended and Restated Insurance Administration, Services and Referral Agreement dated as of October , 1998 between the Company and The Scottish Annuity Company (Cayman) Ltd. 10.10** Employment Agreement dated July 20, 1998 between the Company and Henryk Sulikowski. 10.12** Form of Indemnification Agreement between the Company and each of its directors and officers. 10.13* Investment Management Agreement dated October 22, 1998 between the Company and Pacific Investment Management Company. 10.14* Investment Management Agreement dated October 22, 1998 between the Company and General Re--New England Asset Management, Inc. 10.15+ Agreement dated , 1998 between the Company and Westport Worldwide Bermuda, Ltd. 10.16* Investment Management Agreement dated October 22, 1998 between the Company and Prudential Investment Corporation. 21.1** Subsidiaries of Registrant. 23.1* Consent of Maples and Calder (contained in Exhibit 5.1). 23.2** Consent of Jones, Day, Reavis & Pogue (contained in Exhibit 8.2). 23.3* Consent of Ernst & Young. 23.4** Consent of The Bernstein Law Firm. 99.1** Consent of Michael Austin. 99.3** Consent of Howard Shapiro. 99.4** Form F-N. 99.5* Consent of Sam Wyly. 99.6* Consent of Charles J. Wyly, Jr. 99.7* Consent of David Matthews. 99.8* Consent of R. Duke Buchan III. 99.9* Consent of Robert M. Chmely. 99.10* Opinion of The Bernstein Law Firm with respect to certain state insurance regulatory matters.
- -------- *Filed herewith. **Previously filed. +To be filed by amendment. EX-4.1 2 SPECIMEN ORDINARY SHARE CERTIFICATE EXHIBIT 4.1 FRONT SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. SCT INCORPORATED UNDER THE LAWS OF THE CAYMAN ISLANDS ORDINARY SHARES PAR VALUE ONE CENT (U.S. $.01) THIS CERTIFICATE IS TRANSFERABLE IN CHICAGO, ILLINOIS OR NEW YORK, NEW YORK LOGO SHARES CUSIP G7885T 10 4 SEE REVERSE SIDE FOR CERTAIN DEFINITIONS This Certifies that is the registered owner of FULLY PAID AND NON-ASSESSABLE ORDINARY SHARES OF SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. transferable on the books of the Company by the registered holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. In Witness Whereof, the Company has caused this Certificate to be signed by its duly authorized officers by the use of their facsimile signatures and its facsimile seal to be hereunto affixed. Dated President and Chief Executive Officer Senior Vice President, Chief Financial Officer and Secretary SEAL COUNTERSIGNED AND REGISTERED: HARRIS TRUST AND SAVINGS BANK TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE BACK SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. The Company will furnish to any shareholder, upon request and without charge, a full statement of the powers, designations, preferences, and relative, participating, optional or other special rights of each class of shares of the Company authorized to be issued, or series thereof, and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Company or to the Transfer Agent. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ................. Custodian ............... (Cust) (Minor) under Uniform Gifts to Minors Act ................................. (State) Additional abbreviations may also be used though not in the above list. For value received, _________________ hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said shares on the books of the within named Company with full power of substitution in the premises. Dated _____________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR EN- LARGEMENT OR ANY CHANGE WHATEVER. X ________________________________ (SIGNATURE) X ________________________________ (SIGNATURE) THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. SIGNATURE(S) GUARANTEED BY: EX-4.10 3 FORM OF SECURITIES PURCHASE AGREEMENT Exhibit 4.10 ------------ ================================================================================ SECURITIES PURCHASE AGREEMENT between [INVESTOR] and SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. _________,1998 ================================================================================
TABLE OF CONTENTS Page SECTION 1. AUTHORIZATION OF SECURITIES.................................... 1 SECTION 2. PURCHASE AND SALE OF SECURITIES................................ 1 2.1. Issuance of Securities.......................................... 1 2.2. Closing of Issuance............................................. 1 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 1 3.1. Corporate Organization.......................................... 1 3.2. Subsidiaries.................................................... 2 3.3. Authorization................................................... 2 3.4. Capitalization.................................................. 2 3.5. Proceedings..................................................... 3 3.6. Consents........................................................ 3 3.7. Financial Statements............................................ 3 3.8. Compliance with Law............................................. 3 3.9. Certain Events.................................................. 3 3.10. Payments by Subsidiary......................................... 4 3.11. Accounting..................................................... 4 3.12. No Violations.................................................. 4 3.13. Share Certificates............................................. 4 3.14. Exchange Controls.............................................. 5 3.15. Certain Insurance Regulations.................................. 5 3.16. Stamp Tax...................................................... 5 3.17. Securities Laws................................................ 5 3.18. Disclosure..................................................... 6 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR................. 6 SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES............................ 7 5.1. Resale of Securities............................................ 7 5.2. Covenants Pending Closing....................................... 7 5.3. Further Assurance............................................... 8 SECTION 6. INVESTOR'S CLOSING CONDITIONS.................................. 8 6.1. Representations and Warranties.................................. 8 6.2. Compliance with Agreement....................................... 8 6.3. Secretary's Certificate......................................... 8 6.4. Delivery of Shares and Warrants................................. 8 6.5. Injunction...................................................... 8 6.6. Consummation of Public Offering................................. 8 6.7. Registration Rights Agreement................................... 8
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Page ---- SECTION 7. COMPANY CLOSING CONDITIONS...................................... 8 7.1. Representations and Warranties................................... 9 7.2. Compliance with Agreement........................................ 9 7.3. Injunction....................................................... 9 7.4. Payment of Purchase Price........................................ 9 7.5. Consummation of Public Offering.................................. 9 SECTION 8. LIMITATION OF DISPOSITION....................................... 9 SECTION 9. COVENANTS....................................................... 9 9.1. Inspection....................................................... 9 9.2. Keeping of Books................................................. 10 9.3. Lost, etc. Certificates Evidencing Shares (or Ordinary Shares); Exchange................................................ 10 9.4. Confidential Information......................................... 10 SECTION 10. INTERPRETATION OF THIS AGREEMENT................................ 10 10.1. Terms Defined.................................................... 10 10.2. Directly or Indirectly........................................... 11 20.3. Section Headings................................................. 12 SECTION 11. MISCELLANEOUS................................................... 12 11.1. Notices.......................................................... 12 11.2. Expenses and Taxes............................................... 12 11.3. Reproduction of Documents........................................ 12 11.4. Termination and Survival......................................... 13 11.5. Successors and Assigns........................................... 13 11.6. Entire Agreement; Amendment and Waiver........................... 13 11.7. Severability..................................................... 13 11.8. Governing Law, Submission to Jurisdiction........................ 13 11.9. Counterparts..................................................... 14
EXHIBIT A Form of Class A Warrants EXHIBIT B Form of Registration Rights Agreement ii SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is entered into as of this _____ day of _____________, 1998, by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and _________________, a corporation organized and existing under the laws of ________________ (the "Investor"). NOW THEREFORE, in consideration of the mutual covenants herein contained and of other good and valuable consideration, the parties hereto hereby agree as follows: SECTION 1. AUTHORIZATION OF SECURITIES The Company has duly authorized the issuance, sale and delivery of its ordinary shares, par value $.01 per share (the "Ordinary Shares") and Class A Warrants to purchase its Ordinary Shares, the form of which is attached hereto as Exhibit A (the "Class A Warrants"), as set forth herein. SECTION 2. PURCHASE AND SALE OF SECURITIES 2.1. Issuance of Securities. Subject to the terms and conditions set forth ---------------------- in this Agreement and in reliance upon the Company's and the Investor's representations set forth below, on the Closing Date (as defined below) the Company shall sell to the Investor, and the Investor shall purchase from the Company, _____________ Ordinary Shares (the "Shares") and Class A Warrants (the "Warrants") to purchase __________ Ordinary Shares at an aggregate cash purchase price equal to the product of (i) _______ and (ii) the price per Ordinary Share to the public of the Ordinary Shares offered and sold by the Company in the Public Offering, less the per share underwriting discount (the "Purchase Price"). Such sale and purchase shall be effected on the Closing Date by the Company executing and delivering to the Investor, duly registered in its name (or that of its nominee), one or more duly executed stock certificates and warrant certificates evidencing the Shares and the Warrants being purchased by it, against delivery by the Investor to the Company of the Purchase Price by wire transfer of immediately available funds to such account as the Company shall designate, not less than three Business Days prior to the Closing Date. 2.2. Closing of Issuance. The closing of such sale and purchase (the ------------------- "Closing") shall take place 10:00 A.M., New York City time, on the IPO Closing Date or such other date as the Investor and the Company agree in writing (the "Closing Date"), at the offices of Jones, Day, Reavis & Pogue, 32nd Floor, 599 Lexington Avenue, New York, New York 10022, or such other location as the Investor and the Company shall mutually select. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investor that: 3.1. Corporate Organization. Each of the Company and Scottish Annuity & ---------------------- Life Insurance Company (Cayman), Ltd., a Cayman Islands, British West Indies company (the "Subsidiary"), has been duly organized and is validly existing as a company in good standing under the laws of the Cayman Islands, British West Indies and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the owenership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its Subsidiary, taken as a whole. 3.2. Subsidiaries. The Company has no subsidiary other than the ------------ Subsidiary. The issued shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. 3.3. Authorization. The Company has all requisite corporate power and ------------- authority to execute and deliver the Transaction Documents, and to carry out its obligations thereunder. The execution and delivery of the Transaction Documents and the performance by the Company of its obligations thereunder have been duly authorized by the Company, and no other corporate proceeding therefor on the part of the Company or its stockholders is required. The Transaction Documents have been duly executed and delivered by the Company and are the valid and binding obligations of the Company, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditor's rights and remedies or other equitable principles of general application. Each of the Company and its Subsidiary has full corporate power to own or lease its properties and to conduct its business as described in the draft S-1 Registration Statement of the Company dated the date hereof (the "Information Materials"). 3.4. Capitalization. -------------- (a) The capital stock of the Company conforms to the description thereof contained in the Information Material. (b) All the outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and non-assessable, and were issued in accordance with the registration or qualification requirements of the Securities Act and any other relevant securities laws or pursuant to valid exemptions therefrom. The Company has authorized (or as of the Closing Date will have authorized) the issuance, sale and delivery of the Shares and Warrants in accordance with this Agreement, and subject to the issuance of the Warrants, the Company has reserved (or as of the Closing Date will have reserved) for issuance Ordinary Shares initially issuable upon conversion of the Warrants. Upon issuance, sale and delivery as contemplated by this Agreement, the Shares will be duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company, free of all preemptive or similar rights, and entitled to the rights described in the Organizational Documents. Upon their issuance in accordance with the terms of the Warrants, the Ordinary Shares issuable upon exercise of the Warrants will be duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company, free of all preemptive or similar rights, and entitled to the rights described in the Organizational Documents. (c) Except as disclosed in the Information Materials, there are no outstanding (A) securities or obligations of the Company or its Subsidiary convertible into or exchangeable for 2 any shares or capital stock of the Company or its Subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or its Subsidiary any such shares or capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or its Subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. 3.5 Proceedings. Except as set forth in the Information Materials, there ----------- are no legal or governmental proceedings pending to which the Company or its Subsidiary is a party or to which the property of the Company or its Subsidiary is subject, and no such proceedings have been threatened against the Company or its Subsidiary or with respect to any of their respective properties; and except as set forth in the Information Materials, neither the Company nor the Subsidiary is party to any material contract or other document. 3.6 Consents. The issuance, offering and sale of the Shares and the -------- Warrants to the Investor by the Company pursuant to this Agreement and the Issuance of Ordinary Shares issuable upon the exercise of the Warrants and the compliance by the Company with the other provisions of this Agreement and the Warrants and the consummation of the other transactions herein and therein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority other than notification to the Cayman Islands Monetary Authority, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its Subsidiary is a party or by which the Company or its Subsidiary or any of their respective properties are bound, or the Memorandum of Association or Articles of Association of the Company or its Subsidiary, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or its Subsidiary. 3.7 Financial Statements. The consolidated balance sheet of the Company -------------------- and its Subsidiary included in the Information Materials fairly present the financial position of the Company and its Subsidiary as of the date therein specified. Such balance sheet has been prepared in accordance with United States generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). 3.8 Compliance with Law. The Company and the Subsidiary have all licenses, ------------------- permits (other than certain employee work permits), franchises or other governmental authorizations necessary to the ownership of their property or to the conduct of their respective businesses as presently contemplated, all to the extent necessary to avoid a material adverse effect on the business, property, prospects, profits or condition (financial or otherwise) of the Company and the Subsidiary taken as a whole (a "Material Adverse Effect"). Neither the Company nor the Subsidiary has finally been denied any application for any such licenses, permits, franchises or other governmental authorizations necessary to its business. 3.9 Certain Events. Subsequent to the respective dates as of which -------------- information is given in the Information Materials, (1) the Company and its Subsidiary have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital 3 stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its Subsidiary, except in each case as described in or contemplated by the Information Materials. 3.10. Payments by Subsidiary. The Company's Subsidiary is not currently ---------------------- prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on its capital stock, from repaying to the Company any loans or advances to it from the Company or from transferring any of its property or assets to the Company, except as described in or contemplated by the Information Materials. 3.11. Accounting. The Company and its Subsidiary maintain a system of ---------- internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.12. No Violations. Neither the Company nor the Subsidiary is (i) in ------------- violation of its Memorandum of Association or Articles of Association or other organizational documents, (ii) in violation of any law, ordinance, administrative or governmental rule or regulation applicable to it or any of its properties, except where any such violation or violations in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole, (iii) in violation of any judgment, injunction, order or decree of any court, governmental agency or body (including, without limitation, any insurance regulatory agency or body) or arbitrator having jurisdiction over it, except where any such violation or violations in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole, and (iv) no default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its Subsidiary is a party or by which the Company or its Subsidiary or any of their respective properties is bound or may be affected, except where any such default or event or defaults or events in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole. 3.13. Share Certificates. The forms of certificates for the Shares and the ------------------ Warrants conform to the requirements of the Companies Law (1998 Revision) of the Cayman Islands, British West Indies. 4 3.14. Exchange Controls. No currency exchange control laws or withholding ----------------- taxes of the Cayman Islands, British West Indies or elsewhere apply to the payment of dividends (i) on the Ordinary Shares by the Company or (ii) by the Subsidiary to the Company, except in each case as described in or contemplated by the Information Materials. 3.15. Certain Insurance Regulations. The Subsidiary has made application ----------------------------- to be duly licensed by the Governor-in-Council as an unrestricted Class "B" insurer under the Insurance Law (1998 Revision) of the Cayman Islands, British West Indies (the "Insurance Law") and is in compliance with the requirements of the Insurance Law and any applicable rules and regulations thereunder and will file all statutory financial returns, reports, documents or other information required to be filed thereunder, except where the failure to comply or to file would not have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company and its Subsidiary, taken as a whole. The Company is a holding company and is not subject to Cayman Islands insurance regulations. The Company and its Subsidiary are in compliance with all other insurance laws and regulations of the jurisdictions that apply to them, including laws that relate to companies that control insurance companies, except where the failure to comply would not have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company and its Subsidiary, taken as a whole. Neither the Company nor its Subsidiary has received any notification from any insurance authority, commission or other insurance regulatory body in the Cayman Islands or elsewhere to the effect that the Subsidiary is not in compliance with any insurance law or regulation. 3.16. Stamp Tax. The Investor will not be subject to any excise or similar --------- tax imposed in the Cayman Islands, British West Indies in connection with the offering, sale or purchase of the Shares, the Class A Warrants or the exercise thereunder for the Ordinary Shares. 3.17. Securities Laws. --------------- (a) It is not necessary in connection with the offer, sale and issuance of the Shares in the manner contemplated by this Agreement, or the issuance of the Ordinary Shares upon exercise of the Warrants in the manner contemplated thereby, to register the Shares, the Warrants or the underlying Ordinary Shares under the Securities Act, or any applicable state securities or blue sky laws. (b) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D ("Regulation D") under the Securities Act) of the Company has directly or through any agent (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Shares or the Warrants or the underlying Ordinary Shares in a manner that would require the registration of the Shares under the Securities Act or (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offering of the Shares or the Warrants. 5 3.18. Disclosure. ----------- (a) No representation or warranty of the Company in this Agreement and no statement in the Information Materials omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. (b) No notice given pursuant to Section 5.2 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading. (c) There is no fact known to the Company that has specific application to either the Company or the Subsidiary (other than general economic or industry conditions) and that materially adversely affects the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and the Subsidiary, taken as a whole, that has not been set forth in this Agreement or the Information Materials. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR The Investor represents and warrants to the Company as follows: (a) It is a corporation duly formed and validly existing under the laws of ___________________________________. (b) It has all requisite corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the performance by the Investor of its obligations hereunder, have been duly authorized by the Investor, and no other proceeding therefor on the part of the Investor or any of its shareholders is required. This Agreement has been duly executed and delivered by the Investor and is the valid and binding obligation of the Investor, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) It is acquiring the Shares and Warrants (and will acquire the Ordinary Shares issued upon exercise of the Warrants) for its own account for investment and not with a view towards the distribution thereof, nor with any present intention of distributing the Shares or Warrants (or the Ordinary Shares acquired upon exercise of the Warrants), but subject, nevertheless, to any requirement of law that the disposition of the Investor's property shall at all times be within the Investor's control, and without prejudice to the Investor's right at all times to sell or otherwise dispose of all or any part of such securities under a registration under the Securities Act or under an exemption from said registration available under the Securities Act to the extent permitted by the Transaction Documents. 6 (d) It is (i) an institutional buyer and (ii) an "accredited investor" within the meaning of Rule 501(a)(3) under the Securities Act, being a corporation not formed for the specific purpose of acquiring the Shares and Warrants, with the total assets in excess of $5,000,000. (e) It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Company as contemplated by this Agreement, and is able to bear the economic risk of such investment for an indefinite period of time. It has been furnished access to such information and documents as it has requested and has been afforded an opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Agreement and the purchase of the Shares and Warrants contemplated hereby. SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES 5.1. Resale of Securities. -------------------- (a) The Investor covenants that it will not sell or otherwise transfer the Shares or Warrants (or any Ordinary Shares acquired upon exercise of the Warrants) except pursuant to an effective registration under the Securities Act or in a transaction which, in the opinion of counsel (which may be in-house counsel to the Investor), qualifies as an exempt transaction under the Securities Act and the rules and regulations promulgated thereunder and subject to the provisions of the Transaction Documents. (b) The certificates evidencing the Shares, Warranties and Ordinary Shares issuable upon exercise of the Warrants will bear the following legend reflecting the foregoing restrictions on the transfer of such securities." "The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be transferred except pursuant to an effective registration under the Act or in a transaction which, in the opinion of counsel, qualifies as an exempt transaction under the Act and the rules and regulations promulgated thereunder." 5.2. Covenants Pending Closing. Pending the Closing the Company will not, ------------------------- without the Investor's prior written consent, take any action which would result in any of the representations or warranties contained in this Agreement not being true in all respects at and as of the time immediately after such action, or in any of the covenants contained in this Agreement becoming incapable of performance in all respects. The Company will promptly advise the Investor in writing of any action or event of which it becomes aware which has the effect of making incorrect any of such representations or warranties in any respect or which has the effect of rendering any of such covenants incapable of performance. 7 5.3. Further Assurance. Each of the parties shall execute such documents ----------------- and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. Each such party shall use its reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. SECTION 6. INVESTOR'S CLOSING CONDITIONS The obligation of the Investor to purchase and pay for the Shares and Warrants on the Closing Date, as provided in Section 2 hereof, shall be subject to the performance by the Company of its agreements theretofore to be performed hereunder and to the satisfaction, prior thereto or concurrently therewith, of the following further conditions: 6.1. Representations and Warranties. The representations and warranties of ------------------------------ the Company contained in this Agreement shall be true in all respects on and as of the Closing Date as though such warranties and representations were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 6.2. Compliance with Agreement. The Company shall have performed and ------------------------- complied in all respects with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by the Company prior to or on the Closing Date. 6.3. Secretary's Certificate. The Investor shall have received a ----------------------- certificate, dated the Closing Date, signed by the Secretary of the Company, certifying that the conditions specified in the foregoing Section 6.1 and 6.2 hereof have been fulfilled. 6.4. Delivery of Shares and Warrants. The Company shall have delivered to ------------------------------- the Investor the certificates evidencing the Shares and Warrants being purchased by it hereunder as provided in Section 2.1. 6.5. Injunction. There shall be no injunction, writ, preliminary ---------- restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 6.6. Consummation of Public Offering. The Company shall have consummated ------------------------------- the Public Offering as contemplated by the Registration Statement. 6.7. Registration Rights Agreement. The Company shall have executed the ----------------------------- Registration Rights Agreement, the form of which is attached as Exhibit B hereto (the "Registration Rights Agreement"). SECTION 7. COMPANY CLOSING CONDITIONS The obligation of the Company to issue and deliver the Shares and Warrants on the Closing Date, as provided in Section 2 hereof, shall be subject to the performance by the Investor 8 of its agreements therefore to be performed hereunder and to the satisfaction, prior thereto or concurrently therewith, of the following further conditions: 7.1. Representations and Warranties. The representations and warranties of ------------------------------ the Investor contained in this Agreement shall be true on and as of the Closing Date as though such warranties and representations were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 7.2. Compliance with Agreement. The Investor shall have performed and ------------------------- complied with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by it prior to or on the Closing Date. 7.3. Injunction. There shall be no injunction, writ, preliminary ---------- restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 7.4. Payment of Purchase Price. The Investor shall have delivered to the ------------------------- Company the Purchase Price as provided in Section 2.1. 7.5. Consummation of Public Offering. The Company shall have consummated ------------------------------- the Public Offering as contemplated by the Registration Statement. SECTION 8. LIMITATION ON DISPOSITION The Investor will not, without the consent of the Company, sell, transfer or otherwise dispose of the Shares or Warrants for a period of one year after the Closing Date except (i) to one or more of its Affiliates, or (ii) to any institutional investor purchasing all of the Shares and Warrants then held by the Investor (or if not all such Shares and Warrants, Shares and/or Warrants representing at least 20,000 Ordinary Shares (assuming exercise of the Warrants)); provided that any such transferee, as a condition to such transfer, shall agree to be bound by the provisions of this Section 8. SECTION 9. COVENANTS 9.1. Inspection. As long as an Investor owns beneficially (within the ---------- meaning of Rule 13d-3 under the Exchange Act) at least two percent (2%) of the total outstanding Ordinary Shares of the Company, the company shall permit such Investor, its nominee, assignee, and its representative during normal business hours and upon reasonable notice to visit and inspect any of the properties of the Company and the Subsidiaries, to examine all its books of account, records, reports and other papers not contractually required of the Company to be confidential or secret, to make copies and extracts therefrom, and to discuss its affairs, finances and accounts with its officers, directors, key employees and independent public accountants or any of them (and by this provision the Company authorizes said accountants to discuss with such Investor, its nominees, assignees and representatives the finances and affairs of the Company and the Subsidiary), all at such reasonable times and as often as may be reasonably requested. 9 9.2. Keeping of Books. The Company will keep proper books of record and ---------------- account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and the Subsidiary in accordance with GAAP. 9.3. Lost, etc. Certificates Evidencing Shares (or Ordinary Shares): --------------------------------------------------------------- Exchange. Upon receipt by the Company of evidence reasonably satisfactory to it - -------- of the loss, theft, destruction or mutilation of any certificate evidencing any Shares or Warrants (or Ordinary Shares issuable upon exercise of Warrants) owned by one of the Investors, and (in the case of loss, theft or destruction) of an unsecured indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such certificate, if mutilated, the Company will make and deliver in lieu of such certificate a new certificate of like tenor and for the number of Ordinary Shares evidenced by such certificate which remain outstanding. Such Investor's agreement of indemnity shall constitute indemnity satisfactory to the Company for purposes of this Section 9.3. Upon surrender of any certificate representing any Shares (or Ordinary Shares issuable upon exercise of the Warrants) for exchange at the office of the Company, the Company at its expense will cause to be issued in exchange therefor new certificates in such denomination or denominations as may be requested for the same aggregate number of Shares, Warrants or Ordinary shares, as the case may be, represented by the certificate so surrendered and registered as such holder may request. The Company will also pay the cost of all deliveries of certificates for such securities to the office of such Investor (including the cost of insurance against loss or theft in an amount satisfactory to the holders) upon any exchange provided for in this Section 9.3. 9.4. Confidential Information. The Investor acknowledges that its receipt ------------------------ of material non-public information as a consequence of its exercise of its rights under Section 9.1 may obligate it not to trade in securities of the Company which it may hold so long as such information is not publicly disclosed by the Company. SECTION 10. INTERPRETATION OF THIS AGREEMENT 10.1. Terms Defined. As used in this Agreement, the following terms have ------------- the respective meanings set forth below or set forth in the Section hereof following such term: Affiliate: means any Person or entity, directly or indirectly, controlling, controlled by or under common control with such Person or entity. Business Day: shall mean a day other than a Saturday, Sunday or other day on which banks in New York, New York and George Town, Grand Cayman, Cayman Islands are not required or authorized by law to close. Closing: shall have the meaning set forth in Section 2.2. Closing Date: shall have the meaning set forth in Section 2.2. Exchange Act: shall mean the Securities Exchange Act of 1934, as amended. 10 GAAP: at any time shall mean United States generally accepted accounting principles at the time in effect. Investor: shall mean the Person executing this Agreement on the signature page hereof and its successors and assigns as the holder of Shares, Warrants or Ordinary Shares issuable upon exercise of the Warrants. IPO Closing Date: shall mean the date of the consummation of the Public Offering. Material Adverse Effect: shall have the meaning set forth in Section 3.9. Ordinary Shares: shall have the meaning set forth in Section 1. Organizational Documents: shall mean the Company's Articles of Association, Memorandum of Association and other constructive document as amended through the date hereof. Person: shall mean an individual, partnership, joint-stock company, corporation, limited liability company, trust or unincorporated organization, and a government or agency or political subdivision thereof. Public Offering: shall mean the sale by the Company of its Ordinary Shares to the underwriters as contemplated by the Registration Statement. Registration Rights Agreement: shall have the meaning set forth in Section 6.7. Registration Statement: shall mean the Registration Statement filed by the Company with the SEC on Form S-1 (No. 333-57227) on June 19, 1998, as amended, in the form it becomes effective under the Securities Act. SEC: shall mean the Securities and Exchange Commission. Securities Act: shall mean the Securities Act of 1933, as amended. Shares: shall have the meaning set forth in Section 2.1. Transaction Documents: shall mean this Agreement and the Registration Rights Agreement and the Class A Warrants. Warrants: shall have the meaning set forth in Section 1. 10.2. Directly or Indirectly. Where any provision in this Agreement ---------------------- refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 11 10.3. Section Headings. The headings of the sections and subsections ---------------- of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. SECTION 11. MISCELLANEOUS 11.1. Notices. ------- (a) All communications under this Agreement shall be in writing and shall be delivered by hand or facsimile or mailed by overnight courier or by registered mail or certified mail, postage prepaid: (1) if to the Investor, at: _______________________________, Facsimile: _____________________________________, or (2) if to the Company, at: P.O.Box 10657 APO Ugland House, George Town, Grand Cayman, Cayman Islands, British West Indies (facsimile: (345)949-2519), marked for the attention of Michael C. French, or at such other address as it may have furnished the Investor in writing. (b) Any notice so addressed shall be deemed to be given: if delivered by hand or facsimile, on the date of such delivery; if mailed by courier, on the first day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing. 11.2. Expenses and Taxes. The Company will pay, and save and hold the ------------------ Investor harmless from, any and all claims arising out of or relating to the transactions contemplated by the Transaction Documents or the performance thereof and all liabilities (including interest and penalties) with respect to, or resulting from any delay or failure in paying, stamp and other taxes (other than income taxes), if any, which may be payable or determined to be payable on the execution and delivery or acquisition of the Shares, Warrants or the Ordinary Shares issuable upon exercise of the Warrants. 11.3. Reproduction of Documents. This Agreement and all documents ------------------------- relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by the Investors on the Closing Date (except for certificates evidencing the Shares themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to the Investors, may be reproduced by the Investors by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and either Investor may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by an Investor in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 12 11.4. Termination and Survival. Unless the Closing has occurred prior ------------------------ thereto, this Agreement and, except as herein provided, all the rights of the parties hereto, shall terminate on December 31, 1998 (unless such date is extended by mutual written consent). Notwithstanding the foregoing, Section 11.2 hereof shall survive the termination of this Agreement. All warranties, representations, and covenants made by the Investor and the Company herein or in any certificate or other instrument delivered by the Investor or the Company under this Agreement shall be considered to have been relied upon by the Company or the Investor, as the case may be, regardless of any investigation made by the Investor and shall survive the Closing, all deliveries to the Investor of the Shares and Warrants, or payment to the Company for such Shares and Warrants, regardless of any investigation made by the Company or the Investor, as the case may be, or on the Company's or the Investor's behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Company hereunder, except that the Investor shall be not be required to purchase Shares or Warrants from any Person other than the Company. 11.5. Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- and be binding upon the successors and permitted assigns of each of the parties. 11.6. Entire Agreement: Amendment and Waiver. This Agreement and the -------------------------------------- agreements attached as Exhibits hereto constitute the entire understandings of the parties hereto and supersede all prior agreements or understandings with respect to the subject matter hereof among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company and the Investor. 11.7. Severability. In the event that any part or parts of this Agreement ------------ shall be held illegal or unenforceable by any court or administrative body of competent jurisdiction, such determination shall not affect the remaining provisions of this Agreement which shall remain in full force and effect. 11.8. Governing Law: Submission to Jurisdiction. ----------------------------------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. (b) Each of the Company and the Investor (each a "Party") irrevocably submits to the non-exclusive in personam jurisdiction of any New York State or United States federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to the Transaction Documents. To the full extent it may effectively do so under applicable law, each Party irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the in personam jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 13 (c) Each Party agrees, to the full extent it may effectively do so under applicable law, that a final judgment in any suit, action or proceeding of the nature referred to in paragraph (b) of this Section 11.8 brought in any such court shall be conclusive and binding upon such Party, subject to rights of appeal, and may be enforced in the courts of the United States or the State of New York (or any other courts to the jurisdiction of which such Party is or may be subject) by a suit upon such judgment. (d) Each Party consents to process being served in any suit, action or proceeding of the nature referred to in paragraph (b) of this Section 11.8 by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of such Party specified in Section 11.1 or at such other address of which the other Party shall then have been notified pursuant to said Section. Without limiting the foregoing, the Company hereby appoints, in the case of any such suit, action or proceeding brought in the courts of or in the State of New York, CT Corporation, 1633 Broadway, New York, NY 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto. Each Party agrees that such service upon receipt by it or its agent, as the case may be, (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the full extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to such Party. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service. (e) Nothing in this Section 11.8 shall affect the right of any Party to serve process in any manner permitted by law, or limit any right that such Party may have to bring proceedings against the other Party in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgement obtained in one jurisdiction in any other jurisdiction. (f) Each Party waives trial by jury in any action brought on or with respect to the Transaction Documents or any other document executed in connection therewith. 11.9. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. 14 IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By____________________________ Name:_______________________ Title:______________________ [INVESTOR] By____________________________ Name:_______________________ Title:______________________ 15 EX-4.11 4 FORM OF REGISTRATION RIGHTS AGREEMENT Exhibit 4.11 ------------ REGISTRATION RIGHTS AGREEMENT ----------------------------- This REGISTRATION RIGHTS AGREEMENT dated __________, 1998, is made and entered into by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and __________________, a _______________ (the "Initial Holder"). WHEREAS, the Company has issued its Ordinary Shares, par value $.01 per share ("Ordinary Shares") and its Class A Warrants to purchase Ordinary Shares to the Initial Holder pursuant to the terms of that certain Securities Purchase Agreement, dated as of the date hereof, by and between the Company and the Initial Holder (the "Securities Purchase Agreement"); and WHEREAS, pursuant to the Securities Purchase Agreement, the Company has agreed to register Ordinary Shares held by the Initial Holder, the Ordinary Shares issued to the Initial Holder and the Ordinary Shares for which the Class A Warrants are exercisable for sale under the Securities Act of 1933, as amended; NOW, THEREFORE, in consideration of the completion of the transactions contemplated by the Securities Purchase Agreement and of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows, intending to be legally bound. Section 1. Definitions. As used in this Agreement, the following terms ----------- have the following meanings: "Business Day" means any day on which the Company's Ordinary Shares are available for trading on the principal stock exchange or market upon which they are traded. "Closing Date" means the date on which is consummated the transactions contemplated by the Securities Purchase Agreement. "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Holders" means the Initial Holder and purchasers from the Company of Class A Warrants of the Company ("Class A Warrants"), Class B Warrants of the Company ("Class B Warrants"), Class C Warrants (if any are issued) of the Company ("Class C Warrants") or Ordinary Shares issued by the Company pursuant to those certain Securities Purchase Agreements, dated ___________, 1998, by and between the Company and certain investors (the "Direct Purchase Agreements") and the permitted successors or assignees of the Initial Holder and such purchasers, for so long as (and to the extent that) such Persons own or have the right to acquire any Registrable Securities. "Holder Agreements" means this Agreement and any other Agreement between the Company and one of the Other Investors which is substantially similar to this Agreement. "IPO Date" means the date of the consummation of the Company's initial public offering of its Ordinary Shares. "Ordinary Shares" means the Company's Ordinary Shares, par value $.01 per share. "Other Investors" means Holders of Class A Warrants, Class B Warrants, Class C Warrants (if any are issued) and Ordinary Shares issued by the Company pursuant to the Direct Purchase Agreements. "Person" means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi- governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. "Registrable Securities" means (1) "Registrable Securities" as defined in Holder Agreements with Other Investors; (2) the Ordinary Shares issued to the Initial Holder prior to issuance of the Ordinary Shares and Class A Warrants pursuant to the Securities Purchase Agreement and held by the Initial Holder and permitted transferees of such Ordinary Shares; (3) the Ordinary Shares issued pursuant to the terms of the Securities Purchase Agreement; (4) the Ordinary Shares issuable upon exercise of Class A Warrants issued pursuant to the terms of the Securities Purchase Agreement; and (5) any additional Ordinary Shares or other equity securities of the Company issued or issuable in respect of such Ordinary Shares (or other equity securities issued in respect thereof) by way of a stock dividend or stock split, in connection with a combination, exchange, reorganization, recapitalization or reclassification of Company securities, or pursuant to a merger, division, consolidation or other similar business transaction or combination involving the Company; provided that as to any particular Registrable Securities, such securities shall cease to constitute Registrable Securities (a) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder, (b) when such securities shall have been disposed of pursuant to Rule 144 (or any successor provision to such Rule) under the Securities Act, or (c) when such securities shall have ceased to be outstanding. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (a) the fees, disbursements and expenses of the Company's counsel, accountants, and experts in connection with the registration under the Securities Act of Registrable Securities; (b) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto, and the mailing and delivering of copies thereof to underwriters and dealers, if any; (c) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal 2 investment memoranda, any selling agreements, and any other documents in connection with the offering, sale or delivery of Registrable Securities to be disposed of in an underwritten offering; (d) the fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange on which Company securities of the same class are then listed or with the Nasdaq National Market System; (e) any SEC or blue sky registration or filing fee attributable to Registrable Securities; (f) any other expenses in connection with the Registrable Securities for offer and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; and (h) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities to be disposed of. "Registration Statement" means a registration statement under the Securities Act filed by the Company pursuant to this Agreement, including all amendments thereto, all preliminary and final prospectuses included therein and all exhibits thereto. "SEC" means the United States Securities and Exchange Commission, or such other federal agency at the time having the principal responsibility for administering the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Warrant" means the Class A Warrants, the Class B Warrants and the Class C Warrants, if any are issued, of the Company. Section 2. Underwritten Demand Registration. -------------------------------- (a) At any time on or after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date the Holder or Holders of twenty (20) percent or more of the Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities may (by written notice delivered to the Company) require registration of all or any portion of such Registrable Securities for sale in an underwritten public offering. In each such case, such notice shall specify the number of Registrable Securities for which such underwritten offering is to be made. Within ten Business Days after its receipt of any such notice, the Company shall give written notice of such request to all other Holders, and all such Holders shall have the right to have any or all Registrable Securities owned by them included in the requested underwritten offering as they shall specify in a written notice received by the Company within ten Business Days after the Company's notice is given. Within ten Business Days after the expiration of such ten Business Day period, the Company shall notify all Holders requesting inclusion of Registrable Securities in the proposed underwriting of (1) the aggregate number of Registrable Securities proposed to be included by all Holders in the offering, and (2) the proposed commencement date of the offering, which shall be a date not more than thirty days after the Company gives such notice. The managing underwriter for such offering shall be chosen by the Holders of a majority of the Registrable Securities being included therein and shall be satisfactory to the Company. 3 (b) If any request for an underwriting shall have been made pursuant to subsection (a), the Company shall prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within 45 days after the managing underwriter's request therefor. (c) The Company shall not have any obligation to permit or participate in more than two underwritten public offerings pursuant to this Section, or to file a Registration Statement pursuant to this Section with respect to less than the greater of (i) twenty (20) percent of the Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities or (ii) 250,000 Ordinary Shares which are Registrable Securities. (d) The Company shall have the right to defer the filing or effectiveness of a Registration Statement relating to any registration requested under this Section for a reasonable period of time not to exceed 180 days if (1) the Company is, at such time, working on an underwritten public offering of its securities for the account of the Company and is advised by its managing underwriter that such offering would in its opinion be materially adversely affected by such filing; or (2) the Company in good faith determines that any such filing or the offering of any Registrable Securities would (A) materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving the Company or (B) require the disclosure of material non- public information, the disclosure of which would materially and adversely affect the Company. (e) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 180 days after the effective date of a prior registration statement of the Company covering an underwritten public offering for the account of the Company the effective date of which is after the first anniversary of the Closing Date if (1) the Company shall have offered pursuant to Section 4 to include the Holders' Registrable Securities in such Registration Statement; and (2) no Registrable Securities requested to be included in such registration statement shall have been excluded therefrom pursuant to Section 4(c). (f) The Holders of a majority of Registrable Securities requested to be included in any offering pursuant to this Section may elect by written notice to the Company not to proceed with the offering, in which case the Company shall not be obligated to proceed with such offering. If the Holders so elect, the Holders that shall have requested Registrable Securities to be included in the offering shall pay all Registration Expenses incurred by the Company in connection with such offering prior to receipt of such notice. (g) Neither the Company nor any other Person shall be entitled to include any securities held by it in any underwritten offering pursuant to this Section, unless all Registrable Securities for which inclusion has been requested are also included. (h) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities pursuant to Sections 3 and 4. 4 Section 3. Shelf Registrations. ------------------- (a) At any time on or after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date, the Holder or Holders of Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities may (by written notice to the Company) require registration of all or any portion of such Registrable Securities for sale in open market transactions or negotiated block trades. Within ten Business Days after its receipt of such notice, the Company shall give written notice of such request to all other Holders, and all such Holders shall have the right to have any or all Registrable Securities owned by them included in the requested registration as they shall specify in a written notice received by the Company within ten Business Days after the Company's notice is given. Within ten Business Days after the expiration of such ten Business Day period, the Company shall notify all Holders requesting inclusion of Registrable Securities in the requested registration of the aggregate number of Registrable Securities proposed to be included by all Holders in this registration. (b) If any request for registration shall have been made pursuant to subsection (a) the Company shall prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within 45 days after the expiration of the ten Business Day period within which the Holders may request inclusion in the registration. (c) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 180 days after the effective date of any earlier Registration Statement filed pursuant to this Agreement. (d) The Holders of a majority of Registrable Securities requested to be included in any registration pursuant to this Section may elect by written notice to the Company not to proceed with such registration, in which case the Company will not be obligated to proceed therewith. If the Holders so elect, the Holders that shall have requested Registrable Securities to be included in the registration shall pay all Registration Expenses incurred by the Company in connection with such offering prior to receipt of such notice. (e) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities under Sections 2 and 4. Section 4. Incidental Registration. ----------------------- (a) From and after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date, if the Company proposes, other than pursuant to Section 2 or 3 of this Agreement, to file a Registration Statement under the Securities Act to register any of its Ordinary Shares for public sale under the Securities Act (whether proposed to be offered for sale by the Company or by any other Person), it will give prompt written notice (which notice shall specify the intended method or methods of disposition) to the Holders of its intention to do so, and upon the written request of any Holder delivered to the Company within ten Business Days after any such notice (which request shall specify the number of Registrable Securities intended to be disposed of by such Holder), the Company will use commercially reasonable efforts to include 5 in such Registration Statement all Registrable Securities which the Company has been so requested to register by the Holders. (b) If at any time prior to the effective date of any Registration Statement described in subsection (a), the Company shall determine for any reason not to proceed with such registration, the Company may, at its election, give written notice of such determination to the Holders requesting registration and thereupon the Company shall be relieved of its obligation to register such Registrable Securities in connection with such registration. (c) The Company will not be required to effect any registration of Registrable Securities pursuant to this Section in connection with an offering of Ordinary Shares solely for the account of the Company if the Company shall have been advised in writing (with a copy to the Holders requesting registration) by a U.S. nationally recognized investment banking firm (which may be the managing underwriter for the offering) selected by the Company that, in such firm's opinion, registration of Registrable Securities and of any other securities requested to be included in such registration by Persons having rights to include securities therein at that time may interfere with an orderly sale and distribution of the securities being sold by the Company in such offering or adversely affect the price of such securities; but if an offering of less than all of the Registrable Securities requested to be registered by the Holders and other securities requested to be included in such registration by such other Persons would not, in the opinion of such firm, adversely affect the distribution or price of the securities to be sold by the Company in the offering, the aggregate number of Registrable Securities requested to be included in such offering by the Holders shall be reduced pro rata in accordance with the proportion that the number of shares proposed to be included in such registration by the Holders bears to the number of shares proposed to be included in such registration by the Holders and all other such Persons. (d) The Company shall not be required to give notice of, or effect any registration of Registrable Securities under this Section incidental to, the registration of any of its securities in connection with mergers, consolidations, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or stock options or other employee benefit or compensation plans. (e) No registration of Registrable Securities effected under this Section shall relieve the Company of its obligations to effect registrations of Registrable Securities pursuant to Sections 2 and 3. Section 5. Holdbacks and Other Transfer Restrictions. ----------------------------------------- (a) No Holder shall, if requested by the managing underwriter in an underwritten offering: (1) that includes such Holder's Registrable Securities, effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act or effect (except as part of such underwritten registration) any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act during the ten day period prior to, and during the 180-day period beginning on the closing date of each underwritten 6 offering made pursuant to such registration statement, to the extent timely notified in writing by the Company or the managing underwriter; and (2) in the event of an offering for the account of the Company, to the extent Holder does not elect (or is not permitted under Section 4(c)) to sell such securities in connection with such offering, effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act during the period of distribution of the Company's securities in such offering and during the period in which the underwriting syndicate, if any, participates in the aftermarket. In any such case the Company shall require the managing underwriter to notify the Company and the Company, in turn, shall notify all Holders of Registrable Securities included in the offering promptly after such participation ceases. If the Company or such managing underwriter so requests, each Holder shall enter into an agreement reflecting such restrictions. (b) No Holder shall, during any period in which any of its Registrable Securities are included in any effective Registration Statement, (1) effect any stabilization transactions or engage in any stabilization activity in connection with the Ordinary Shares or other equity securities of the Company in contravention of Regulation M under the Exchange Act; (2) permit any Affiliated Purchaser (as that term is defined in Rule 100(b) of Regulation M under the Exchange Act) to bid for or purchase for any account in which such Holder has a beneficial interest, or attempt to induce any other person to purchase, any Ordinary Shares or Registrable Securities in contravention of Regulation M under the Exchange Act; or (3) offer or agree to pay, directly or indirectly, to anyone any compensation for soliciting another to purchase, or for purchasing (other than for such Holder's own account), any securities of the Company on a national securities exchange in contravention of Regulation M under the Exchange Act. (c) Each Holder shall, in the case of a registration including Registrable Securities to be offered by it for sale through brokers transactions, furnish each broker through whom such Holder offers Registrable Securities such number of copies of the prospectus as the broker may require and otherwise comply with the prospectus delivery requirements under the Securities Act. Section 6. Registration Procedures. If and whenever the Company is ----------------------- required by the provisions of this Agreement to effect a registration of Registrable Securities: (a) The Company will use commercially reasonable efforts to prepare and file with the SEC, within the time periods specified herein, a Registration Statement on Form S-3 or its equivalent (or on such other registration form available to the Company that permits the greatest extent of incorporation by reference of materials filed by the Company, under the Exchange Act) and will use commercially reasonable efforts to cause such registration statement to become effective as promptly as practicable thereafter and to remain effective under the Securities Act until (1) the earlier of such time as all securities covered thereby have been disposed of pursuant to such Registration Statement or 180 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 2, or (2) 90 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 3, in every case as any such period may be extended pursuant to subsection (h) or Section 8. 7 (b) The Company will prepare and file with the SEC such amendments, post- effective amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for such period of time required by subsection (a), as such period may be extended pursuant to subsection (h) or Section 8. (c) The Company will comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the period during which any such Registration Statement is required to be effective. (d) The Company will furnish to any Holder and any underwriter of Registrable Securities (1) such number of copies (including manually executed and conformed copies) of such Registration Statement and of each amendment thereof and supplement thereto (including all annexes, appendices, schedules and exhibits), (2) such number of copies of the prospectus used in connection with such Registration Statement (including each preliminary prospectus, any summary prospectus and the final prospectus and including prospectus supplements), and (3) such number of copies of other documents, in each case as the Holder or such underwriter may reasonably request. (e) The Company will use commercially reasonable efforts to register or qualify all Registrable Securities covered by such Registration Statement under the securities or "blue sky" laws of states of the United States and any other jurisdiction as any Holder or any underwriter shall reasonably request, and do any and all other acts and things which may be reasonably requested by such Holder or such underwriter to consummate the offering and disposition of Registrable Securities in such jurisdictions; but the Company shall not be required to qualify generally to do business as a foreign corporation or as a dealer in securities, subject itself to taxation, or consent to general service of process in any jurisdiction wherein it is not then so qualified or subject. (f) The Company will use, as soon as practicable after the effectiveness of the Registration Statement, commercially reasonable efforts to cause the Registrable Securities covered by such Registration Statement to be registered with, or approved by, such other United States and Cayman Islands public, governmental or regulatory authorities, if any, as may be required in connection with the disposition of such Registrable Securities. (g) The Company will use commercially reasonable efforts to list the Registrable Securities covered by such Registration Statement on any securities exchange (or if applicable, the Nasdaq National Market System) on which any securities of the Company are then listed, if the listing of such Registrable Securities is then permitted under the applicable rules of such exchange (or if applicable, the Nasdaq National Market System). (h) The Company will notify each Holder as promptly as practicable and, if requested by any Holder, confirm such notification in writing, (1) when a prospectus or any prospectus supplement has been filed with the SEC, and when a Registration Statement or any post-effective amendment thereto has been filed with and declared effective by the SEC, (2) of the issuance by the SEC of any stop order or the coming to its knowledge of the initiation of any 8 proceedings for that purpose, (3) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (4) of the occurrence of any event which requires the making of any changes to a Registration Statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to each Holder a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (5) of the Company's determination that the filing of a post-effective amendment to a Registration Statement is necessary or appropriate. Upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (4), the Holders shall forthwith discontinue any offer and disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until all Holders shall have received copies of a supplemented or amended prospectus which is no longer defective and, if so directed by the Company, shall deliver to the Company all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in the Holders' possession. If the Company shall provide any notice of the type referred to in the preceding sentence, the period during which the Registration Statement is required by subsection (a) to be effective shall be extended by the number of days from and including the date such notice is provided, to and including the date when the Holders shall have received copies of the corrected prospectus. (i) The Company will enter into such agreements and take such other appropriate actions as are customary and reasonably necessary to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, making its management available to the extent reasonably requested by the Holders to participate in marketing presentations to potential investors in connection with any underwritten offering), and in that regard, will deliver to the Holders such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold or, as applicable, the managing underwriters, to evidence the Company's compliance with this Agreement, including, in the case of any underwritten offering, using commercially reasonable efforts to cause its independent accountants to deliver to the managing underwriters an accountants' comfort letter substantially similar to that in scope delivered in an underwritten public offering and covering audited and interim financial statements included in the registration statement, or if such letter can not be obtained through the exercise of commercially reasonable efforts, cause its independent accountants to deliver to the managing underwriters a comfort letter based on negotiated procedures providing comfort with respect to the Company's financial statements included or incorporated by reference in the registration statement at the highest level permitted to be given by such accountants under the then applicable standards of the American Institute of Certified Public Accountants with respect to such Registration Statement. 9 Section 7. Underwriting. ------------ (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration under Section 2, the Company will enter into and perform its obligations under an underwriting agreement with the underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, customary provisions relating to indemnitees and contribution and the provision of opinions of counsel and accountants' comfort letters. If Registrable Securities are to be distributed by such underwriters on behalf of any Holder, such Holder shall also be a party to any such underwriting agreement. (b) If any registration pursuant to Section 4 shall involve an underwritten offering, the Company may require Registrable Securities requested to be registered pursuant to Section 4 to be included in such underwriting on the same terms and conditions as shall be applicable to the securities being sold through underwriters under such registration. In such case, each Holder requesting registration shall be a party to any such underwriting agreement. Such agreement shall contain such representations and warranties by the Holders requesting registration and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnitees and contribution (it being understood that each Holder shall not be required to make any representation concerning the Company or its business or to indemnify or contribute for any liabilities, losses or expenses related to any omission or misstatements in any registration statement or prospectus except to the extent based upon information provided in writing by the Holder expressly for use therein). (c) In any offering of Registrable Securities pursuant to a registration hereunder, each Holder requesting registration shall also enter into such additional or other agreements as may be customary in such transactions, which agreements may contain, among other provisions, such representations and warranties as the Company or the underwriters of such offering may reasonably request (including, without limitation, those concerning such Holder, its Registrable Securities, such Holder's intended plan of distribution and any other information supplied by it to the Company for use in such registration statement), and customary provisions relating to indemnitees and contribution (it being understood that each Holder shall not be required to make any representation concerning the Company or its business or to indemnify or contribute for any liabilities, losses or expenses related to any omission or misstatements in any registration statement or prospectus except to the extent based upon information provided in writing by the Holder expressly for use therein). Section 8. Information Blackout. -------------------- (a) At any time when a Registration Statement is effective, upon written notice from the Company to the Holders that the Company has determined in good faith that sale of Registrable Securities pursuant to the Registration Statement would require disclosure of non-public material information, the disclosure of which would have a material adverse effect on the Company, all Holders shall suspend sales of Registrable Securities pursuant to such Registration Statement until the earlier of (1) 20 days after the Company notifies the Holders of such good 10 faith determination, and (2) such time as the Company notifies the Holders that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such Registration Statement may otherwise be resumed (the number of days from such suspension of sales by the Holders until the day when such sales may be resumed hereunder is hereinafter called a "Sales Blackout Period"). (b) The time period set forth in Section 6(a)(1) or (2) shall be extended for a number of days equal to the number of days in the Sales Blackout Period. (c) No Sales Blackout Period shall be commenced by the Company within 90 days after the end of a Sales Blackout Period. Section 9. Rule 144. After the IPO Date, the Company shall take all -------- actions reasonably necessary to comply with the filing requirements described in Rule 144(c)(1) under the Securities Act so as to enable the Holders to sell Registrable Securities without registration under the Securities Act. Upon the written request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with the filing requirements under such Rule 144(c)(1). Section 10. Preparation; Reasonable Investigation; Information. In -------------------------------------------------- connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act, (a) the Company will give the Holders and the underwriters, if any, and their respective counsel and accountants, drafts of such registration statement for their review and comment prior to filing and (during normal business hours and subject to such reasonable limitations as the Company may impose to prevent disruption of its business) such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of the Holders of a majority of the Registrable Securities being registered and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act and (b) as a condition precedent to including any Registrable Securities of any Holder in any such registration, the Company may require such Holder to furnish the Company such information regarding such Holder and the distribution of such securities as the Company may from time to time reasonably request in writing or as shall be required by law or the SEC in connection with any registration. Section 11. Indemnification and Contribution. -------------------------------- (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company shall, to the extent permitted by applicable law, indemnify and hold harmless each Holder, its officers and directors, each underwriter of Registrable Securities so offered and each Person, if any, who controls any of the foregoing persons within the meaning of the Securities Act ("Holder Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation or 11 alleged violation by the Company of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered, and relating to action taken or action or inaction required of the Company in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; but the Company shall not be liable to any Holder Indemnitee in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission or alleged omission, if such statement or omission shall have been made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Holder specifically for use in the preparation of the Registration Statement (or in any preliminary or final prospectus included therein), or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Holder Indemnitee. (b) In the case of each offering of Registrable Securities made pursuant to this Agreement, each Holder participating in such offering, shall, to the extent permitted by applicable law, indemnify and hold harmless the Company, its officers and directors and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (the "Company Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation by such Holder of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered and relating to action taken or action or inaction required of such Holder in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities or any amendment thereof or supplement thereto, or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement is contained in, or such fact is omitted from, information furnished in writing to the Company by or on behalf of such Holder specifically for use in the preparation of such Registration Statement (or in any preliminary or final prospectus included therein). Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Company Indemnitee. In no event shall the liability of a Holder hereunder or under Section 11(d) be greater in amount than the dollar amount of the net proceeds received by it upon the sale of Registrable Securities pursuant to such offering. The foregoing indemnity is in addition to any liability which Holder may otherwise have to any Company Indemnitee. 12 (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 11, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party. In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party, if the Company, shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than two separate firms, one for the Ordinary Shares issued pursuant to the Securities Purchase Agreement, the Class B Warrants or Ordinary Shares for which the Class B Warrants have been exercised (the "Class B Holder Indemnitees") and one for all other Holder Indemnitees (the "Other Holder Indemnitees"). Such firm for the Class B Holder Indemnitees shall be designated in writing by Holders of a majority of the Registrable Securities held by the Class B Holder Indemnitees and disposed of under the applicable Registration Statements. Such firm for the Other Holder Indemnitees shall be designated in writing by the Holders of a majority of the Registrable Securities held by the Other Holder Indemnitees and disposed of under the applicable Registration Statement. The indemnifying party, if other than the Company, shall not, in connection with any proceeding or related proceedings in the same jurisdiction be liable for the reasonable fees and expenses of more than one separate firm for the Company Indemnitee, which firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgement for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested the indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by this Section, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without the indemnifying party's written consent if (i) such settlement is entered into more than thirty (30) days after receipt by the indemnifying party of the aforesaid request, and (ii) the indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the consent of the indemnified party, which consent shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. 13 (d) If the indemnification provided for in this Section 11 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, or if the indemnified party failed to give the notice required under subsection (c) and the indemnified party is actually prejudiced by such failure, then each indemnifying party shall, to the extent permitted by applicable law, contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative fault of all parties in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Notwithstanding any other provision of this Section 11, the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement of any material fact contained in any such registration statement, preliminary prospectus, final prospectus or summary prospectus contained therein or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading in a prospectus or prospectus supplement, if such untrue statement or omission is completely corrected in an amendment or supplement to such prospectus or prospectus supplement, the seller of the Registrable Securities has an obligation under the Securities Act to deliver a prospectus or prospectus supplement in connection with such sale of Registrable Securities and the seller of Registrable Securities thereafter fails to deliver such prospectus or prospectus supplement as so amended or supplemented prior to or concurrently with the sale of Registrable Securities to the person asserting such loss, claim, damage or liability after the Company has furnished such seller with a sufficient number of copies of the same. Section 12. Expenses. In connection with any registration under this -------- Agreement the Company shall pay all Registration Expenses (to the extent not borne by underwriters or others), except as provided in Section 2(f) or 3(d). Each Holder shall pay its pro rata share of all other expenses of such registration, including underwriters' discounts and compensation, broker's commission or similar selling expenses, and each Holder shall pay its own transfer taxes, if any, applicable to Registrable Securities. 14 Section 13. Notices. Except as otherwise provided below, whenever it is ------- provided in this Agreement that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties hereto, or whenever any of the parties hereto, wishes to provide to or serve upon the other party any other communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in person or sent by telecopy, as follows: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 13, and with respect to all other holders is as set forth in the register for the Registrable Securities; and (b) if to the Company, initially at the Company's principal address and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 13. The furnishing of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly furnished or served on the party to which it is addressed, in the case of delivery in person or by telecopy, on the date when sent (with receipt personally acknowledged in the case of telecopied notice), and in all other cases, five business days after it is sent. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. Section 14. Entire Agreement. This Agreement represents the entire ---------------- agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes any and all prior oral and written agreements, arrangements and understandings among the parties hereto with respect to such subject matter; and this Agreement can be amended, supplemented or changed, and any provision hereof can be waived or a departure from any provision hereof can be consented to, only by a written instrument making specific reference to this Agreement signed by the Company and the Holder. Section 15. Term. This Agreement shall become effective upon the IPO ---- Date and shall have a term of ten years, expiring at 5:00 P.M. (United States Eastern Time) on the tenth anniversary of the IPO Date. Section 16. Headings. The section headings contained in this Agreement -------- are for general reference purposes only and shall not affect in any manner the meaning, interpretation or construction of the terms or other provisions of this Agreement. Section 17. Applicable Law. This Agreement shall be governed by, -------------- construed and enforced in accordance with the laws of the State of New York, applicable without regard to the conflicts of law provisions thereof. Section 18. Severability. If any provision of this Agreement shall be ------------ held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 15 Section 19. No Waiver. The failure of any party at any time or times to --------- require performance of any provision hereof shall not affect the right at a later time to enforce the same. No waiver by any party of any condition, and no breach of any provision, term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be construed as a further or continuing waiver of any such condition or of the breach of any other provision, term, covenant, representation or warranty of this Agreement. Section 20. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same original instrument. Not all parties need sign the same counterpart. Delivery by facsimile of a signature page to this Agreement shall have the same effect or delivery of an original executed counterpart. Section 21. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; but nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of applicable law. If any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Holder shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement, and such Holder shall be entitled to receive the benefits hereof. Section 22. Consent to Jurisdiction and Service of Process. All judicial ---------------------------------------------- proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, the Company accepts the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens. The Company designates and appoints CT Corporation System, 1633 Broadway, New York, New York, and such other persons as may hereafter be selected by the Company irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Company to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company at Ugland House, 113 South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies; provided, however, that, unless otherwise provided -------- ------- by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company refuses to accept service, the Company hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company under this Agreement in the State of New York may be made by registered or certified mail, return receipt requested, to the Company at its address set forth above, and the Company hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of the Investor to bring proceedings against the Company in the courts of any other jurisdiction. 16 IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: ------------------------------------ Name: Title: [INITIAL HOLDER] By: ------------------------------------ Name: Title: 17 EX-4.12 5 FORM OF SECURITIES PURCHASE AGREEMENT Exhibit 4.12 ------------ ================================================================================ SECURITIES PURCHASE AGREEMENT between [INVESTOR] and SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. _____________, 1998 ================================================================================ TABLE OF CONTENTS
Page SECTION 1. AUTHORIZATION OF SECURITIES............................................... 1 SECTION 2. PURCHASE AND SALE OF SECURITIES........................................... 1 2.1. Issuance of Securities..................................................... 1 2.2. Closing of Issuance........................................................ 1 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. 1 3.1. Corporate Organization..................................................... 1 3.2. Subsidiaries............................................................... 2 3.3. Authorization.............................................................. 2 3.4. Capitalization............................................................. 2 3.5. Proceedings................................................................ 3 3.6. Consents................................................................... 3 3.7. Financial Statements....................................................... 3 3.8. Compliance with Law........................................................ 3 3.9. Certain Events............................................................. 3 3.10. Payments by Subsidiary.................................................... 4 3.11. Accounting................................................................ 4 3.12. No Violations............................................................. 4 3.13. Share Certificates........................................................ 4 3.14. Exchange Controls......................................................... 5 3.15. Certain Insurance Regulations............................................. 5 3.16. Stamp Tax................................................................. 5 3.17. Securities Laws........................................................... 5 3.18. Disclosure................................................................ 6 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR............................ 6 SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES....................................... 7 5.1. Resale of Securities....................................................... 7 5.2. Covenants Pending Closing.................................................. 7 5.3. Further Assurance.......................................................... 8 SECTION 6. INVESTOR'S CLOSING CONDITIONS............................................. 8 6.1. Representations and Warranties............................................. 8 6.2. Compliance with Agreement.................................................. 8 6.3. Secretary's Certificate.................................................... 8 6.4. Delivery of Shares and Warrants............................................ 8 6.5. Injunction................................................................. 8 6.6. Consummation of Public Offering............................................ 8 6.7. Registration Rights Agreement.............................................. 8
i ................................................................................... SECTION 7. COMPANY CLOSING CONDITIONS................................................ 8 7.1. Representations and Warranties............................................. 9 7.2. Compliance with Agreement.................................................. 9 7.3. Injunction................................................................. 9 7.4. Payment of Purchase Price.................................................. 9 7.5. Consummation of Public Offering............................................ 9 SECTION 8. LIMITATION ON DISPOSITION................................................. 9 SECTION 9. COVENANTS................................................................. 9 9.1. Inspection................................................................. 9 9.2. Keeping of Books...........................................................10 9.3. Lost, etc. Certificates Evidencing Shares (or Ordinary Shares); Exchange...10 9.4. Confidential Information...................................................10 SECTION 10. INTERPRETATION OF THIS AGREEMENT.........................................10 10.1. Terms Defined.............................................................10 10.2. Directly or Indirectly....................................................11 10.3. Section Headings..........................................................12 SECTION 11. MISCELLANEOUS............................................................12 11.1. Notices...................................................................12 11.2. Expenses and Taxes........................................................12 11.3. Reproduction of Documents.................................................12 11.4. Termination and Survival..................................................13 11.5. Successors and Assigns....................................................13 11.6. Entire Agreement; Amendment and Waiver....................................13 11.7. Severability..............................................................13 11.8. Governing Law; Submission to Jurisdiction.................................13 11.9. Counterparts..............................................................14
EXHIBIT A Form of Class A Warrants EXHIBIT B Form of Registration Rights Agreement ii SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is entered into as of this 22nd day of October, 1998, by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and ______________, a ____________ (the "Investor"). NOW, THEREFORE, in consideration of the mutual covenants herein contained and of other good and valuable consideration, the parties hereto hereby agree as follows: SECTION 1. AUTHORIZATION OF SECURITIES The Company has duly authorized the issuance, sale and delivery of its ordinary shares, par value $.01 per share (the "Ordinary Shares") and its Class A Warrants to purchase its Ordinary Shares, the form of which is attached hereto as Exhibit A (the "Class A Warrants"), as set forth herein. SECTION 2. PURCHASE AND SALE OF SECURITIES 2.1. Issuance of Securities. Subject to the terms and conditions set ---------------------- forth in this Agreement and in reliance upon the Company's and the Investor's representations set forth below, on the Closing Date (as defined below) the Company shall sell to the Investor, and the Investor shall purchase from the Company, _______ Ordinary Shares (the "Shares") and Class A Warrants (the "Warrants") to purchase _______ Ordinary Shares, at an aggregate cash purchase price equal to the product of (i) _______ and (ii) the price per Ordinary Share to the public of the Ordinary Shares offered and sold by the Company in the Public Offering, less the per share underwriting discount (the "Purchase Price"). Such sale and purchase shall be effected on the Closing Date by the Company executing and delivering to the Investor, duly registered in its name (or that of its nominee), one or more duly executed stock certificates and warrant certificates evidencing the Shares and Warrants being purchased by it, against delivery by the Investor to the Company of the Purchase Price by wire transfer of immediately available funds to such account as the Company shall designate, not less than three Business Days prior to the Closing Date. 2.2. Closing of Issuance. The closing of such sale and purchase (the ------------------- "Closing") shall take place at 10:00 A.M., New York City time, on the IPO Closing Date or such other date as the Investor and the Company agree in writing (the "Closing Date"), at the offices of Jones, Day, Reavis & Pogue, 32nd Floor, 599 Lexington Avenue, New York, New York 10022, or such other location as the Investor and the Company shall mutually select. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investor that: 3.1. Corporate Organization. Each of the Company and Scottish Annuity & ---------------------- Life Insurance Company (Cayman), Ltd., a Cayman Islands, British West Indies company (the "Subsidiary"), has been duly organized and is validly existing as a company in good standing under the laws of the Cayman Islands, British West Indies and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company and its Subsidiary, taken as a whole. 3.2. Subsidiaries. The Company has no subsidiary other than the ------------ Subsidiary. The issued shares of capital stock of the Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims. 3.3. Authorization. The Company has all requisite corporate power and ------------- authority to execute and deliver the Transaction Documents, and to carry out its obligations thereunder. The execution and delivery of the Transaction Documents and the performance by the Company of its obligations thereunder have been duly authorized by the Company, and no other corporate proceeding therefor on the part of the Company or its stockholders is required. The Transaction Documents have been duly executed and delivered by the Company and are the valid and binding obligations of the Company, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditors' rights and remedies or other equitable principles of general application. Each of the Company and its Subsidiary has full corporate power to own or lease its properties and to conduct its business as described in the draft S-1 Registration Statement of the Company dated the date hereof (the "Information Materials"). 3.4. Capitalization. -------------- (a) The capital stock of the Company conforms to the description thereof contained in the Information Material. (b) All the outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and non-assessable, and were issued in accordance with the registration or qualification requirements of the Securities Act and any other relevant securities laws or pursuant to valid exemptions therefrom. The Company has authorized (or as of the Closing Date will have authorized) the issuance, sale and delivery of the Shares and Warrants in accordance with this Agreement, and subject to the issuance of the Warrants, the Company has reserved (or as of the Closing Date will have reserved) for issuance Ordinary Shares initially issuable upon conversion of the Warrants. Upon issuance, sale and delivery as contemplated by this Agreement, the Shares will be duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company, free of all preemptive or similar rights, and entitled to the rights described in the Organizational Documents. Upon their issuance in accordance with the terms of the Warrants, the Ordinary Shares issuable upon exercise of the Warrants will be duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company, free of all preemptive or similar rights, and entitled to the rights described in the Organizational Documents. (c) Except as disclosed in the Information Materials, there are no outstanding (A) securities or obligations of the Company or its Subsidiary convertible into or exchangeable for any shares or capital stock of the Company or its Subsidiary, (B) warrants, rights or options to 2 subscribe for or purchase from the Company or its Subsidiary any such shares or capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or its Subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. 3.5. Proceedings. Except as set forth in the Information Materials, ----------- there are no legal or governmental proceedings pending to which the Company or its Subsidiary is a party or to which the property of the Company or its Subsidiary is subject, and no such proceedings have been threatened against the Company or its Subsidiary or with respect to any of their respective properties; and except as set forth in the Information Materials, neither the Company nor the Subsidiary is party to any material contract or other document. 3.6. Consents. The issuance, offering and sale of the Shares and the -------- Warrants to the Investor by the Company pursuant to this Agreement and the issuance of Ordinary Shares issuable upon the exercise of the Warrants and the compliance by the Company with the other provisions of this Agreement and the Warrants and the consummation of the other transactions herein and therein contemplated do not (i) require the consent, approval, authorization, registration or qualification of or with any governmental authority other than notification to the Cayman Islands Monetary Authority, or (ii) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its Subsidiary is a party or by which the Company or its Subsidiary or any of their respective properties are bound, or the Memorandum of Association or Articles of Association of the Company or its Subsidiary, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or its Subsidiary. 3.7. Financial Statements. The consolidated balance sheet of the Company -------------------- and its Subsidiary included in the Information Materials fairly present the financial position of the Company and its Subsidiary as of the date therein specified. Such balance sheet has been prepared in accordance with United States generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein). 3.8. Compliance with Law. The Company and the Subsidiary have all ------------------- licenses, permits (other than certain employee work permits), franchises or other governmental authorizations necessary to the ownership of their property or to the conduct of their respective businesses as presently contemplated, all to the extent necessary to avoid a material adverse effect on the business, property, prospects, profits or condition (financial or otherwise) of the Company and the Subsidiary taken as a whole (a "Material Adverse Effect"). Neither the Company nor the Subsidiary has finally been denied any application for any such licenses, permits, franchises or other governmental authorizations necessary to its business. 3.9. Certain Events. Subsequent to the respective dates as of which -------------- information is given in the Information Materials, (1) the Company and its Subsidiary have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (2) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital 3 stock; and (3) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its Subsidiary, except in each case as described in or contemplated by the Information Materials. 3.10. Payments by Subsidiary. The Company's Subsidiary is not currently ---------------------- prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on its capital stock, from repaying to the Company any loans or advances to it from the Company or from transferring any of its property or assets to the Company, except as described in or contemplated by the Information Materials. 3.11. Accounting. The Company and its Subsidiary maintain a system of ---------- internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.12. No Violations. Neither the Company nor the Subsidiary is (i) in ------------- violation of its Memorandum of Association or Articles of Association or other organizational documents, (ii) in violation of any law, ordinance, administrative or governmental rule or regulation applicable to it or any of its properties, except where any such violation or violations in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole, (iii) in violation of any judgment, injunction, order or decree of any court, governmental agency or body (including, without limitation, any insurance regulatory agency or body) or arbitrator having jurisdiction over it, except where any such violation or violations in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole, and (iv) no default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its Subsidiary is a party or by which the Company or its Subsidiary or any of their respective properties is bound or may be affected, except where any such default or event or defaults or events in the aggregate could not reasonably be expected to have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and its Subsidiary, taken as a whole. 3.13. Share Certificates. The forms of certificates for the Shares and ------------------ the Warrants conform to the requirements of the Companies Law (1998 Revision) of the Cayman Islands, British West Indies. 3.14. Exchange Controls. No currency exchange control laws or ----------------- withholding taxes of the Cayman Islands, British West Indies or elsewhere apply to the payment of dividends (i) on the 4 Ordinary Shares by the Company or (ii) by the Subsidiary to the Company, except in each case as described in or contemplated by the Information Materials. 3.15. Certain Insurance Regulations. The Subsidiary has made application ----------------------------- to be duly licensed by the Governor-in-Council as an unrestricted Class "B" insurer under the Insurance Law (1998 Revision) of the Cayman Islands, British West Indies (the "Insurance Law") and is in compliance with the requirements of the Insurance Law and any applicable rules and regulations thereunder and will file all statutory financial returns, reports, documents or other information required to be filed thereunder, except where the failure to comply or to file would not have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company and its Subsidiary, taken as a whole. The Company is a holding company and is not subject to Cayman Islands insurance regulations. The Company and its Subsidiary are in compliance with all other insurance laws and regulations of the jurisdictions that apply to them, including laws that relate to companies that control insurance companies, except where the failure to comply would not have a material adverse effect on the condition (financial or otherwise), management, business prospects, net worth, or results of the operations of the Company and its Subsidiary, taken as a whole. Neither the Company nor its Subsidiary has received any notification from any insurance authority, commission or other insurance regulatory body in the Cayman Islands or elsewhere to the effect that the Subsidiary is not in compliance with any insurance law or regulation. 3.16. Stamp Tax. The Investor will not be subject to any excise or --------- similar tax imposed in the Cayman Islands, British West Indies in connection with the offering, sale or purchase of the Shares, the Class A Warrants or the exercise thereunder for the Ordinary Shares. 3.17. Securities Laws. --------------- (a) It is not necessary in connection with the offer, sale and issuance of the Shares in the manner contemplated by this Agreement, or the issuance of the Ordinary Shares upon exercise of the Warrants in the manner contemplated thereby, to register the Shares, the Warrants or the underlying Ordinary Shares under the Securities Act, or any applicable state securities or blue sky laws. (b) Neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D ("Regulation D") under the Securities Act) of the Company has directly or through any agent (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Shares or the Warrants or the underlying Ordinary Shares in a manner that would require the registration of the Shares under the Securities Act or (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offering of the Shares or the Warrants. 3.18. Disclosure. ---------- (a) No representation or warranty of the Company in this Agreement and no statement in the Information Materials omits to state a material fact necessary to make the 5 statements herein or therein, in light of the circumstances in which they were made, not misleading. (b) No notice given pursuant to Section 5.2 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading. (c) There is no fact known to the Company that has specific application to either the Company or the Subsidiary (other than general economic or industry conditions) and that materially adversely affects the condition (financial or otherwise), management, business prospects, net worth or results of the operations of the Company and the Subsidiary, taken as a whole, that has not been set forth in this Agreement or the Information Materials. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR The Investor represents and warrants to the Company as follows: (a) It is a _________________ duly formed and validly existing under the laws of __________________. (b) It has all requisite ____________________ power and authority to execute and deliver this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the performance by the Investor of its obligations hereunder, have been duly authorized by the Investor, and no other proceeding therefor on the part of the Investor or any of its _____________ is required. This Agreement has been duly executed and delivered by the Investor and is the valid and binding obligation of the Investor, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to the enforcement of creditors' rights and remedies or by other equitable principles of general application. (c) It is acquiring the Shares and Warrants (and will acquire the Ordinary Shares issued upon exercise of the Warrants) for its own account for investment and not with a view towards the distribution thereof, nor with any present intention of distributing the Shares or Warrants (or the Ordinary Shares acquired upon exercise of the Warrants), but subject, nevertheless, to any requirement of law that the disposition of the Investor's property shall at all times be within the Investor's control, and without prejudice to the Investor's right at all times to sell or otherwise dispose of all or any part of such securities under a registration under the Securities Act or under an exemption from said registration available under the Securities Act to the extent permitted by the Transaction Documents. (d) It is (i) a "qualified institutional buyer" as defined in Rule 144A under the Securities Act and (ii) an institutional buyer and an "accredited investor" within the meaning of Rule 501(a)(3) under the Securities Act, being a _______________ not formed for the specific purpose of acquiring the Shares and Warrants, with the total assets in excess of $5,000,000. 6 (e) It has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Company as contemplated by this Agreement, and is able to bear the economic risk of such investment for an indefinite period of time. It has been furnished access to such information and documents as it has requested and has been afforded an opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Agreement and the purchase of the Shares and Warrants contemplated hereby. SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES 5.1. Resale of Securities. -------------------- (a) The Investor covenants that it will not sell or otherwise transfer the Shares or Warrants (or any Ordinary Shares acquired upon exercise of the Warrants) except pursuant to an effective registration under the Securities Act or in a transaction which, in the opinion of counsel (which may be in-house counsel to the Investor), qualifies as an exempt transaction under the Securities Act and the rules and regulations promulgated thereunder and subject to the provisions of the Transaction Documents. (b) The certificates evidencing the Shares, Warrants and Ordinary Shares issuable upon exercise of the Warrants will bear the following legend reflecting the foregoing restrictions on the transfer of such securities: "The securities evidenced hereby have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be transferred except pursuant to an effective registration under the Act or in a transaction which, in the opinion of counsel, qualifies as an exempt transaction under the Act and the rules and regulations promulgated thereunder." 5.2. Covenants Pending Closing. Pending the Closing the Company will ------------------------- not, without the Investor's prior written consent, take any action which would result in any of the representations or warranties contained in this Agreement not being true in all respects at and as of the time immediately after such action, or in any of the covenants contained in this Agreement becoming incapable of performance in all respects. The Company will promptly advise the Investor in writing of any action or event of which it becomes aware which has the effect of making incorrect any of such representations or warranties in any respect or which has the effect of rendering any of such covenants incapable of performance. 5.3. Further Assurance. Each of the parties shall execute such documents ----------------- and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. Each such party shall use its reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing as promptly as practicable. 7 SECTION 6. INVESTOR'S CLOSING CONDITIONS The obligation of the Investor to purchase and pay for the Shares and Warrants on the Closing Date, as provided in Section 2 hereof, shall be subject to the performance by the Company of its agreements theretofore to be performed hereunder and to the satisfaction, prior thereto or concurrently therewith, of the following further conditions: 6.1. Representations and Warranties. The representations and warranties ------------------------------ of the Company contained in this Agreement shall be true in all respects on and as of the Closing Date as though such warranties and representations were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 6.2. Compliance with Agreement. The Company shall have performed and ------------------------- complied in all respects with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by the Company prior to or on the Closing Date. 6.3. Secretary's Certificate. The Investor shall have received a ----------------------- certificate, dated the Closing Date, signed by the Secretary of the Company, certifying that the conditions specified in the foregoing Sections 6.1 and 6.2 hereof have been fulfilled. 6.4. Delivery of Shares and Warrants. The Company shall have delivered ------------------------------- to the Investor the certificates evidencing the Shares and Warrants being purchased by it hereunder as provided in Section 2.1. 6.5. Injunction. There shall be no injunction, writ, preliminary ---------- restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 6.6. Consummation of Public Offering. The Company shall have consummated ------------------------------- the Public Offering as contemplated by the Registration Statement. 6.7. Registration Rights Agreement. The Company shall have executed the ----------------------------- Registration Rights Agreement, the form of which is attached as Exhibit B hereto (the "Registration Rights Agreement"). SECTION 7. COMPANY CLOSING CONDITIONS The obligation of the Company to issue and deliver the Shares and Warrants on the Closing Date, as provided in Section 2 hereof, shall be subject to the performance by the Investor of its agreements theretofore to be performed hereunder and to the satisfaction, prior thereto or concurrently therewith, of the following further conditions: 8 7.1. Representations and Warranties. The representations and warranties ------------------------------ of the Investor contained in this Agreement shall be true on and as of the Closing Date as though such warranties and representations were made at and as of such date, except as otherwise affected by the transactions contemplated hereby. 7.2. Compliance with Agreement. The Investor shall have performed and ------------------------- complied with all agreements, covenants and conditions contained in this Agreement which are required to be performed or complied with by it prior to or on the Closing Date. 7.3. Injunction. There shall be no injunction, writ, preliminary ---------- restraining order or any order of any nature issued by a court of competent jurisdiction directing that the transactions provided for herein or any of them not be consummated as herein provided. 7.4. Payment of Purchase Price. The Investor shall have delivered to the ------------------------- Company the Purchase Price as provided in Section 2.1. 7.5. Consummation of Public Offering. The Company shall have consummated ------------------------------- the Public Offering as contemplated by the Registration Statement. SECTION 8. LIMITATION ON DISPOSITION The Investor will not, without the consent of the Company, sell, transfer or otherwise dispose of the Shares or Warrants for a period of six months after the Closing Date except (i) to one or more of its Affiliates, or (ii) to any institutional investor purchasing all of the Shares and Warrants then held by the Investor (or if not all such Shares and Warrants, Shares and/or Warrants representing at least 20,000 Ordinary Shares (assuming exercise of the Warrants)); provided that any such transferee, as a condition to such transfer, shall agree to be bound by the provisions of this Section 8. SECTION 9. COVENANTS 9.1. Inspection. As long as an Investor owns beneficially (within the ---------- meaning of Rule 13d-3 under the Exchange Act) at least two percent (2%) of the total outstanding Ordinary Shares of the Company, the Company shall permit such Investor, its nominee, assignee, and its representative during normal business hours and upon reasonable advance notice to visit and inspect any of the properties of the Company and the Subsidiaries, to examine all its books of account, records, reports and other papers not contractually required of the Company to be confidential or secret, to make copies and extracts therefrom, and to discuss its affairs, finances and accounts with its officers, directors, key employees and independent public accountants or any of them (and by this provision the Company authorizes said accountants to discuss with such Investor, its nominees, assignees and representatives the finances and affairs of the Company and the Subsidiary), all at such reasonable times and as often as may be reasonably requested. 9.2. Keeping of Books. The Company will keep proper books of record and ---------------- account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and the Subsidiary in accordance with GAAP. 9 9.3. Lost, etc. Certificates Evidencing Shares (or Ordinary Shares); --------------------------------------------------------------- Exchange. Upon receipt by the Company of evidence reasonably satisfactory to it - -------- of the loss, theft, destruction or mutilation of any certificate evidencing any Shares or Warrants (or Ordinary Shares issuable upon exercise of Warrants) owned by one of the Investors, and (in the case of loss, theft or destruction) of an unsecured indemnity satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such certificate, if mutilated, the Company will make and deliver in lieu of such certificate a new certificate of like tenor and for the number of Ordinary Shares evidenced by such certificate which remain outstanding. Such Investor's agreement of indemnity shall constitute indemnity satisfactory to the Company for purposes of this Section 9.3. Upon surrender of any certificate representing any Shares (or Ordinary Shares issuable upon exercise of the Warrants) for exchange at the office of the Company, the Company at its expense will cause to be issued in exchange therefor new certificates in such denomination or denominations as may be requested for the same aggregate number of Shares, Warrants or Ordinary Shares, as the case may be, represented by the certificate so surrendered and registered as such holder may request. The Company will also pay the cost of all deliveries of certificates for such securities to the office of such Investor (including the cost of insurance against loss or theft in an amount satisfactory to the holders) upon any exchange provided for in this Section 9.3. 9.4. Confidential Information. The Investor acknowledges that its ------------------------ receipt of material non-public information as a consequence of its exercise of its rights under Section 9.1 may obligate it not to trade in securities of the Company which it may hold so long as such information is not publicly disclosed by the Company. SECTION 10. INTERPRETATION OF THIS AGREEMENT 10.1. Terms Defined. As used in this Agreement, the following terms have ------------- the respective meanings set forth below or set forth in the Section hereof following such term: Affiliate: means any Person or entity, directly or indirectly, controlling, controlled by or under common control with such Person or entity. Business Day: shall mean a day other than a Saturday, Sunday or other day on which banks in New York, New York and George Town, Grand Cayman, Cayman Islands are not required or authorized by law to close. Closing: shall have the meaning set forth in Section 2.2. Closing Date: shall have the meaning set forth in Section 2.2. Exchange Act: shall mean the Securities Exchange Act of 1934, as amended. GAAP: at any time shall mean United States generally accepted accounting principles at the time in effect. 10 Investor: shall mean the Person executing this Agreement on the signature page hereof and its successors and assigns as the holder of Shares, Warrants or Ordinary Shares issuable upon exercise of the Warrants. IPO Closing Date: shall mean the date of the consummation of the Public Offering. Material Adverse Effect: shall have the meaning set forth in Section 3.9. Ordinary Shares: shall have the meaning set forth in Section 1. Organizational Documents: shall mean the Company's Articles of Association, Memorandum of Association and other constructive document as amended through the date hereof. Person: shall mean an individual, partnership, joint-stock company, corporation, limited liability company, trust or unincorporated organization, and a government or agency or political subdivision thereof. Public Offering: shall mean the sale by the Company of its Ordinary Shares to the underwriters as contemplated by the Registration Statement. Registration Rights Agreement: shall have the meaning set forth in Section 6.7. Registration Statement: shall mean the Registration Statement filed by the Company with the SEC on Form S-1 (No. 333-57227) on June 19, 1998, as amended, in the form it becomes effective under the Securities Act. SEC: shall mean the Securities and Exchange Commission. Securities Act: shall mean the Securities Act of 1933, as amended. Shares: shall have the meaning set forth in Section 2.1. Transaction Documents: shall mean this Agreement, the Registration Rights Agreement and the Class A Warrants. Warrants: shall have the meaning set forth in Section 1. 10.2. Directly or Indirectly. Where any provision in this Agreement ---------------------- refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 10.3. Section Headings. The headings of the sections and subsections of ---------------- this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof. 11 SECTION 11. MISCELLANEOUS 11.1. Notices. ------- (a) All communications under this Agreement shall be in writing and shall be delivered by hand or facsimile or mailed by overnight courier or by registered mail or certified mail, postage prepaid: (1) if to the Investor, at: __________________________, Facsimile: _________________, or (2) if to the Company, at: P.O. Box 10657APO Ugland House, George Town, Grand Cayman, Cayman Islands, British West Indies (facsimile: (345) 949-2519), marked for the attention of Michael C. French, or at such other address as it may have furnished the Investor in writing. (b) Any notice so addressed shall be deemed to be given: if delivered by hand or facsimile, on the date of such delivery; if mailed by courier, on the first business day following the date of such mailing; and if mailed by registered or certified mail, on the third business day after the date of such mailing. 11.2. Expenses and Taxes. The Company will pay, and save and hold the ------------------ Investor harmless from, any and all claims arising out of or relating to the transactions contemplated by the Transaction Documents or the performance thereof and all liabilities (including interest and penalties) with respect to, or resulting from any delay or failure in paying, stamp and other taxes (other than income taxes), if any, which may be payable or determined to be payable on the execution and delivery or acquisition of the Shares, Warrants or the Ordinary Shares issuable upon exercise of the Warrants. 11.3. Reproduction of Documents. This Agreement and all documents ------------------------- relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by the Investors on the Closing Date (except for certificates evidencing the Shares themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to the Investors, may be reproduced by the Investors by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and either Investor may destroy any original document so reproduced. All parties hereto agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by an Investor in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 11.4. Termination and Survival. Unless the Closing has occurred prior ------------------------ thereto, this Agreement and, except as herein provided, all the rights of the parties hereto, shall terminate on December 31, 1998 (unless such date is extended by mutual written consent). Notwithstanding the foregoing, Section 11.2 hereof shall survive the termination of this Agreement. All warranties, 12 representations, and covenants made by the Investor and the Company herein or in any certificate or other instrument delivered by the Investor or the Company under this Agreement shall be considered to have been relied upon by the Company or the Investor, as the case may be, regardless of any investigation made by the Investor and shall survive the Closing, all deliveries to the Investor of the Shares and Warrants, or payment to the Company for such Shares and Warrants, regardless of any investigation made by the Company or the Investor, as the case may be, or on the Company's or the Investor's behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Company hereunder, except that the Investor shall not be required to purchase Shares or Warrants from any Person other than the Company. 11.5. Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors and permitted assigns of each of the parties. 11.6. Entire Agreement; Amendment and Waiver. This Agreement and the -------------------------------------- agreements attached as Exhibits hereto constitute the entire understandings of the parties hereto and supersede all prior agreements or understandings with respect to the subject matter hereof among such parties. This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company and the Investor. 11.7. Severability. In the event that any part or parts of this ------------ Agreement shall be held illegal or unenforceable by any court or administrative body of competent jurisdiction, such determination shall not affect the remaining provisions of this Agreement which shall remain in full force and effect. 11.8. Governing Law; Submission to Jurisdiction. ----------------------------------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. (b) Each of the Company and the Investor (each a "Party") irrevocably submits to the non-exclusive in personam jurisdiction of any New York State or United States federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to the Transaction Documents. To the full extent it may effectively do so under applicable law, each Party irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the in personam jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each Party agrees, to the full extent it may effectively do so under applicable law, that a final judgment in any suit, action or proceeding of the nature referred to in paragraph (b) of this Section 11.8 brought in any such court shall be conclusive and binding upon such Party, subject to rights of appeal, and may be enforced in the courts of the United States or 13 the State of New York (or any other courts to the jurisdiction of which such Party is or may be subject) by a suit upon such judgment. (d) Each Party consents to process being served in any suit, action or proceeding of the nature referred to in paragraph (b) of this Section 11.8 by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of such Party specified in Section 11.1 or at such other address of which the other Party shall then have been notified pursuant to said Section. Without limiting the foregoing, the Company hereby appoints, in the case of any such suit, action or proceeding brought in the courts of or in the State of New York, CT Corporation, 1633 Broadway, New York, NY 10019, to receive, for it and on its behalf, service of process in the State of New York with respect thereto. Each Party agrees that such service upon receipt by it or its agent, as the case may be, (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the full extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to such Party. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service. (e) Nothing in this Section 11.8 shall affect the right of any Party to serve process in any manner permitted by law, or limit any right that such Party may have to bring proceedings against the other Party in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. (f) Each Party waives trial by jury in any action brought on or with respect to the Transaction Documents or any other document executed in connection therewith. 11.9. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. 14 IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: ________________________________________ Name: __________________________________ Title: _________________________________ [INVESTOR] By: ________________________________________ Name: __________________________________ Title: _________________________________ 15 EX-4.13 6 FORM OF REGISTRATION RIGHTS AGREEMENT Exhibit 4.13 ------------ REGISTRATION RIGHTS AGREEMENT ----------------------------- This REGISTRATION RIGHTS AGREEMENT dated ________, 1998, is made and entered into by and between Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), and ________________, a ___________________ (the "Initial Holder"). WHEREAS, the Company has issued its Ordinary Shares, par value $.01 per share ("Ordinary Shares") and its Class A Warrants to purchase Ordinary Shares to the Initial Holder pursuant to the terms of that certain Securities Purchase Agreement, dated as of the date hereof, by and between the Company and the Initial Holder (the "Securities Purchase Agreement"); and WHEREAS, pursuant to the Securities Purchase Agreement, the Company has agreed to register the Ordinary Shares held by the Initial Holder, the Ordinary Shares issued to the Initial Holder and the Ordinary Shares for which the Class A Warrants are exercisable for sale under the Securities Act of 1933, as amended; NOW, THEREFORE, in consideration of the completion of the transactions contemplated by the Securities Purchase Agreement and of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows, intending to be legally bound. Section 1. Definitions. As used in this Agreement, the following terms ----------- have the following meanings: "Business Day" means any day on which the Company's Ordinary Shares are available for trading on the principal stock exchange or market upon which they are traded. "Closing Date" means the date on which is consummated the transactions contemplated by the Securities Purchase Agreement. "Exchange Act" means the Securities Exchange Act of 1934, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Holders" means the Initial Holder and purchasers from the Company of Class A Warrants of the Company ("Class A Warrants"), Class B Warrants of the Company ("Class B Warrants"), Class C Warrants (if any are issued) of the Company ("Class C Warrants") or Ordinary Shares issued by the Company pursuant to those certain Securities Purchase Agreements, dated _____________, 1998, by and between the Company and certain investors (the "Direct Purchase Agreements") and the permitted successors or assignees of the Initial Holder and such purchasers, for so long as (and to the extent that) such Persons own or have the right to acquire any Registrable Securities. "Holder Agreements" means this Agreement and any other Agreement between the Company and one of the Other Investors which is substantially similar to this Agreement. "IPO Date" means the date of the consummation of the Company's initial public offering of its Ordinary Shares. "Ordinary Shares" means the Company's Ordinary Shares, par value $.01 per share. "Other Investors" means Holders of Class A Warrants, Class B Warrants, Class C Warrants (if any are issued) and Ordinary Shares issued by the Company pursuant to the Direct Purchase Agreements. "Person" means an individual, a partnership (general or limited), corporation, limited liability company, joint venture, business trust, cooperative, association or other form of business organization, whether or not regarded as a legal entity under applicable law, a trust (inter vivos or testamentary), an estate of a deceased, insane or incompetent person, a quasi- governmental entity, a government or any agency, authority, political subdivision or other instrumentality thereof, or any other entity. "Registrable Securities" means (1) "Registrable Securities" as defined in Holder Agreements with Other Investors; (2) the Ordinary Shares issued to the Initial Holder prior to issuance of the Ordinary Shares and Class A Warrants pursuant to the Securities Purchase Agreement and held by the Initial Holder and permitted transferees of such Ordinary Shares; (3) the Ordinary Shares issued pursuant to the terms of the Securities Purchase Agreement; (4) the Ordinary Shares issuable upon exercise of Class A Warrants issued pursuant to the terms of the Securities Purchase Agreement; and (5) any additional Ordinary Shares or other equity securities of the Company issued or issuable in respect of such Ordinary Shares (or other equity securities issued in respect thereof) by way of a stock dividend or stock split, in connection with a combination, exchange, reorganization, recapitalization or reclassification of Company securities, or pursuant to a merger, division, consolidation or other similar business transaction or combination involving the Company; provided that as to any particular Registrable Securities, such securities shall cease to constitute Registrable Securities (a) when a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of thereunder, (b) when such securities shall have been disposed of pursuant to Rule 144 (or any successor provision to such Rule) under the Securities Act, or (c) when such securities shall have ceased to be outstanding. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with the registration requirements set forth in this Agreement including, without limitation, the following: (a) the fees, disbursements and expenses of the Company's counsel, accountants, and experts in connection with the registration under the Securities Act of Registrable Securities; (b) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto, and the mailing and delivering of copies thereof to underwriters and dealers, if any; (c) the cost of printing or producing any agreement(s) among underwriters, underwriting agreement(s) and blue sky or legal 2 investment memoranda, any selling agreements, and any other documents in connection with the offering, sale or delivery of Registrable Securities to be disposed of in an underwritten offering; (d) the fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange on which Company securities of the same class are then listed or with the Nasdaq National Market System; (e) any SEC or blue sky registration or filing fee attributable to Registrable Securities; (f) any other expenses in connection with the Registrable Securities for offer and sale under state securities laws, including the fees and disbursements of counsel for the underwriters in connection with such qualification and in connection with any blue sky and legal investment surveys; and (h) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities to be disposed of. "Registration Statement" means a registration statement under the Securities Act filed by the Company pursuant to this Agreement, including all amendments thereto, all preliminary and final prospectuses included therein and all exhibits thereto. "SEC" means the United States Securities and Exchange Commission, or such other federal agency at the time having the principal responsibility for administering the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the relevant time. "Warrant" means the Class A Warrants, the Class B Warrants and the Class C Warrants, if any are issued, of the Company. Section 2. Underwritten Demand Registration. -------------------------------- (a) At any time on or after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date the Holder or Holders of twenty (20) percent or more of the Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities may (by written notice delivered to the Company) require registration of all or any portion of such Registrable Securities for sale in an underwritten public offering. In each such case, such notice shall specify the number of Registrable Securities for which such underwritten offering is to be made. Within ten Business Days after its receipt of any such notice, the Company shall give written notice of such request to all other Holders, and all such Holders shall have the right to have any or all Registrable Securities owned by them included in the requested underwritten offering as they shall specify in a written notice received by the Company within ten Business Days after the Company's notice is given. Within ten Business Days after the expiration of such ten Business Day period, the Company shall notify all Holders requesting inclusion of Registrable Securities in the proposed underwriting of (1) the aggregate number of Registrable Securities proposed to be included by all Holders in the offering, and (2) the proposed commencement date of the offering, which shall be a date not more than thirty days after the Company gives such notice. The managing underwriter for such offering shall be chosen by the Holders of a majority of the Registrable Securities being included therein and shall be satisfactory to the Company. 3 (b) If any request for an underwriting shall have been made pursuant to subsection (a), the Company shall prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within 45 days after the managing underwriter's request therefor. (c) The Company shall not have any obligation to permit or participate in more than two underwritten public offerings pursuant to this Section, or to file a Registration Statement pursuant to this Section with respect to less than the greater of (i) twenty (20) percent of the Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities or (ii) 250,000 Ordinary Shares which are Registrable Securities. (d) The Company shall have the right to defer the filing or effectiveness of a Registration Statement relating to any registration requested under this Section for a reasonable period of time not to exceed 180 days if (1) the Company is, at such time, working on an underwritten public offering of its securities for the account of the Company and is advised by its managing underwriter that such offering would in its opinion be materially adversely affected by such filing; or (2) the Company in good faith determines that any such filing or the offering of any Registrable Securities would (A) materially impede, delay or interfere with any proposed financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving the Company or (B) require the disclosure of material non- public information, the disclosure of which would materially and adversely affect the Company. (e) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 180 days after the effective date of a prior registration statement of the Company covering an underwritten public offering for the account of the Company the effective date of which is after the first anniversary of the Closing Date if (1) the Company shall have offered pursuant to Section 4 to include the Holders' Registrable Securities in such Registration Statement; and (2) no Registrable Securities requested to be included in such registration statement shall have been excluded therefrom pursuant to Section 4(c). (f) The Holders of a majority of Registrable Securities requested to be included in any offering pursuant to this Section may elect by written notice to the Company not to proceed with the offering, in which case the Company shall not be obligated to proceed with such offering. If the Holders so elect, the Holders that shall have requested Registrable Securities to be included in the offering shall pay all Registration Expenses incurred by the Company in connection with such offering prior to receipt of such notice. (g) Neither the Company nor any other Person shall be entitled to include any securities held by it in any underwritten offering pursuant to this Section, unless all Registrable Securities for which inclusion has been requested are also included. (h) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities pursuant to Sections 3 and 4. 4 Section 3. Shelf Registrations. ------------------- (a) At any time on or after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date, the Holder or Holders of Ordinary Shares which are, or would be upon exercise of Class A Warrants, Class B Warrants or Class C Warrants, if any are issued, Registrable Securities may (by written notice to the Company) require registration of all or any portion of such Registrable Securities for sale in open market transactions or negotiated block trades. Within ten Business Days after its receipt of such notice, the Company shall give written notice of such request to all other Holders, and all such Holders shall have the right to have any or all Registrable Securities owned by them included in the requested registration as they shall specify in a written notice received by the Company within ten Business Days after the Company's notice is given. Within ten Business Days after the expiration of such ten Business Day period, the Company shall notify all Holders requesting inclusion of Registrable Securities in the requested registration of the aggregate number of Registrable Securities proposed to be included by all Holders in this registration. (b) If any request for registration shall have been made pursuant to subsection (a) the Company shall prepare and file a Registration Statement with the SEC as promptly as reasonably practicable, but in any event within 45 days after the expiration of the ten Business Day period within which the Holders may request inclusion in the registration. (c) The Company shall have no obligation to file a Registration Statement pursuant to this Section earlier than 180 days after the effective date of any earlier Registration Statement filed pursuant to this Agreement. (d) The Holders of a majority of Registrable Securities requested to be included in any registration pursuant to this Section may elect by written notice to the Company not to proceed with such registration, in which case the Company will not be obligated to proceed therewith. If the Holders so elect, the Holders that shall have requested Registrable Securities to be included in the registration shall pay all Registration Expenses incurred by the Company in connection with such offering prior to receipt of such notice. (e) No registration of Registrable Securities under this Section shall relieve the Company of its obligation to effect registrations of Registrable Securities under Sections 2 and 4. Section 4. Incidental Registration. ----------------------- (a) From and after the first anniversary of the IPO Date, and before the tenth anniversary of the IPO Date, if the Company proposes, other than pursuant to Section 2 or 3 of this Agreement, to file a Registration Statement under the Securities Act to register any of its Ordinary Shares for public sale under the Securities Act (whether proposed to be offered for sale by the Company or by any other Person), it will give prompt written notice (which notice shall specify the intended method or methods of disposition) to the Holders of its intention to do so, and upon the written request of any Holder delivered to the Company within ten Business Days after any such notice (which request shall specify the number of Registrable Securities intended to be disposed of by such Holder), the Company will use commercially reasonable efforts to include 5 in such Registration Statement all Registrable Securities which the Company has been so requested to register by the Holders. (b) If at any time prior to the effective date of any Registration Statement described in subsection (a), the Company shall determine for any reason not to proceed with such registration, the Company may, at its election, give written notice of such determination to the Holders requesting registration and thereupon the Company shall be relieved of its obligation to register such Registrable Securities in connection with such registration. (c) The Company will not be required to effect any registration of Registrable Securities pursuant to this Section in connection with an offering of Ordinary Shares solely for the account of the Company if the Company shall have been advised in writing (with a copy to the Holders requesting registration) by a U.S. nationally recognized investment banking firm (which may be the managing underwriter for the offering) selected by the Company that, in such firm's opinion, registration of Registrable Securities and of any other securities requested to be included in such registration by Persons having rights to include securities therein at that time may interfere with an orderly sale and distribution of the securities being sold by the Company in such offering or adversely affect the price of such securities; but if an offering of less than all of the Registrable Securities requested to be registered by the Holders and other securities requested to be included in such registration by such other Persons would not, in the opinion of such firm, adversely affect the distribution or price of the securities to be sold by the Company in the offering, the aggregate number of Registrable Securities requested to be included in such offering by the Holders shall be reduced pro rata in accordance with the proportion that the number of shares proposed to be included in such registration by the Holders bears to the number of shares proposed to be included in such registration by the Holders and all other such Persons. (d) The Company shall not be required to give notice of, or effect any registration of Registrable Securities under this Section incidental to, the registration of any of its securities in connection with mergers, consolidations, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or stock options or other employee benefit or compensation plans. (e) No registration of Registrable Securities effected under this Section shall relieve the Company of its obligations to effect registrations of Registrable Securities pursuant to Sections 2 and 3. Section 5. Holdbacks and Other Transfer Restrictions. ----------------------------------------- (a) No Holder shall, if requested by the managing underwriter in an underwritten offering: (1) that includes such Holder's Registrable Securities, effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act or effect (except as part of such underwritten registration) any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act during the ten day period prior to, and during the 180-day period beginning on the closing date of each underwritten 6 offering made pursuant to such registration statement, to the extent timely notified in writing by the Company or the managing underwriter; and (2) in the event of an offering for the account of the Company, to the extent Holder does not elect (or is not permitted under Section 4(c)) to sell such securities in connection with such offering, effect any public sale or distribution of securities of the Company of the same class as the securities included in such Registration Statement (or convertible into or exercisable for such class), including a sale pursuant to Rule 144(k) under the Securities Act during the period of distribution of the Company's securities in such offering and during the period in which the underwriting syndicate, if any, participates in the aftermarket. In any such case the Company shall require the managing underwriter to notify the Company and the Company, in turn, shall notify all Holders of Registrable Securities included in the offering promptly after such participation ceases. If the Company or such managing underwriter so requests, each Holder shall enter into an agreement reflecting such restrictions. (b) No Holder shall, during any period in which any of its Registrable Securities are included in any effective Registration Statement, (1) effect any stabilization transactions or engage in any stabilization activity in connection with the Ordinary Shares or other equity securities of the Company in contravention of Regulation M under the Exchange Act; (2) permit any Affiliated Purchaser (as that term is defined in Rule 100(b) of Regulation M under the Exchange Act) to bid for or purchase for any account in which such Holder has a beneficial interest, or attempt to induce any other person to purchase, any Ordinary Shares or Registrable Securities in contravention of Regulation M under the Exchange Act; or (3) offer or agree to pay, directly or indirectly, to anyone any compensation for soliciting another to purchase, or for purchasing (other than for such Holder's own account), any securities of the Company on a national securities exchange in contravention of Regulation M under the Exchange Act. (c) Each Holder shall, in the case of a registration including Registrable Securities to be offered by it for sale through brokers transactions, furnish each broker through whom such Holder offers Registrable Securities such number of copies of the prospectus as the broker may require and otherwise comply with the prospectus delivery requirements under the Securities Act. Section 6. Registration Procedures. If and whenever the Company is ----------------------- required by the provisions of this Agreement to effect a registration of Registrable Securities: (a) The Company will use commercially reasonable efforts to prepare and file with the SEC, within the time periods specified herein, a Registration Statement on Form S-3 or its equivalent (or on such other registration form available to the Company that permits the greatest extent of incorporation by reference of materials filed by the Company, under the Exchange Act) and will use commercially reasonable efforts to cause such registration statement to become effective as promptly as practicable thereafter and to remain effective under the Securities Act until (1) the earlier of such time as all securities covered thereby have been disposed of pursuant to such Registration Statement or 180 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 2, or (2) 90 days after such Registration Statement becomes effective, in the case of registrations pursuant to Section 3, in every case as any such period may be extended pursuant to subsection (h) or Section 8. 7 (b) The Company will prepare and file with the SEC such amendments, post- effective amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for such period of time required by subsection (a), as such period may be extended pursuant to subsection (h) or Section 8. (c) The Company will comply in all material respects with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the period during which any such Registration Statement is required to be effective. (d) The Company will furnish to any Holder and any underwriter of Registrable Securities (1) such number of copies (including manually executed and conformed copies) of such Registration Statement and of each amendment thereof and supplement thereto (including all annexes, appendices, schedules and exhibits), (2) such number of copies of the prospectus used in connection with such Registration Statement (including each preliminary prospectus, any summary prospectus and the final prospectus and including prospectus supplements), and (3) such number of copies of other documents, in each case as the Holder or such underwriter may reasonably request. (e) The Company will use commercially reasonable efforts to register or qualify all Registrable Securities covered by such Registration Statement under the securities or "blue sky" laws of states of the United States and any other jurisdiction as any Holder or any underwriter shall reasonably request, and do any and all other acts and things which may be reasonably requested by such Holder or such underwriter to consummate the offering and disposition of Registrable Securities in such jurisdictions; but the Company shall not be required to qualify generally to do business as a foreign corporation or as a dealer in securities, subject itself to taxation, or consent to general service of process in any jurisdiction wherein it is not then so qualified or subject. (f) The Company will use, as soon as practicable after the effectiveness of the Registration Statement, commercially reasonable efforts to cause the Registrable Securities covered by such Registration Statement to be registered with, or approved by, such other United States and Cayman Islands public, governmental or regulatory authorities, if any, as may be required in connection with the disposition of such Registrable Securities. (g) The Company will use commercially reasonable efforts to list the Registrable Securities covered by such Registration Statement on any securities exchange (or if applicable, the Nasdaq National Market System) on which any securities of the Company are then listed, if the listing of such Registrable Securities is then permitted under the applicable rules of such exchange (or if applicable, the Nasdaq National Market System). (h) The Company will notify each Holder as promptly as practicable and, if requested by any Holder, confirm such notification in writing, (1) when a prospectus or any prospectus supplement has been filed with the SEC, and when a Registration Statement or any post-effective amendment thereto has been filed with and declared effective by the SEC, (2) of the issuance by the SEC of any stop order or the coming to its knowledge of the initiation of any 8 proceedings for that purpose, (3) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (4) of the occurrence of any event which requires the making of any changes to a Registration Statement or related prospectus so that such documents will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to each Holder a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (5) of the Company's determination that the filing of a post-effective amendment to a Registration Statement is necessary or appropriate. Upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (4), the Holders shall forthwith discontinue any offer and disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until all Holders shall have received copies of a supplemented or amended prospectus which is no longer defective and, if so directed by the Company, shall deliver to the Company all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in the Holders' possession. If the Company shall provide any notice of the type referred to in the preceding sentence, the period during which the Registration Statement is required by subsection (a) to be effective shall be extended by the number of days from and including the date such notice is provided, to and including the date when the Holders shall have received copies of the corrected prospectus. (i) The Company will enter into such agreements and take such other appropriate actions as are customary and reasonably necessary to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, making its management available to the extent reasonably requested by the Holders to participate in marketing presentations to potential investors in connection with any underwritten offering), and in that regard, will deliver to the Holders such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold or, as applicable, the managing underwriters, to evidence the Company's compliance with this Agreement, including, in the case of any underwritten offering, using commercially reasonable efforts to cause its independent accountants to deliver to the managing underwriters an accountants' comfort letter substantially similar to that in scope delivered in an underwritten public offering and covering audited and interim financial statements included in the registration statement, or if such letter can not be obtained through the exercise of commercially reasonable efforts, cause its independent accountants to deliver to the managing underwriters a comfort letter based on negotiated procedures providing comfort with respect to the Company's financial statements included or incorporated by reference in the registration statement at the highest level permitted to be given by such accountants under the then applicable standards of the American Institute of Certified Public Accountants with respect to such Registration Statement. 9 Section 7. Underwriting. ------------ (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration under Section 2, the Company will enter into and perform its obligations under an underwriting agreement with the underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, customary provisions relating to indemnitees and contribution and the provision of opinions of counsel and accountants' comfort letters. If Registrable Securities are to be distributed by such underwriters on behalf of any Holder, such Holder shall also be a party to any such underwriting agreement. (b) If any registration pursuant to Section 4 shall involve an underwritten offering, the Company may require Registrable Securities requested to be registered pursuant to Section 4 to be included in such underwriting on the same terms and conditions as shall be applicable to the securities being sold through underwriters under such registration. In such case, each Holder requesting registration shall be a party to any such underwriting agreement. Such agreement shall contain such representations and warranties by the Holders requesting registration and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnitees and contribution (it being understood that each Holder shall not be required to make any representation concerning the Company or its business or to indemnify or contribute for any liabilities, losses or expenses related to any omission or misstatements in any registration statement or prospectus except to the extent based upon information provided in writing by the Holder expressly for use therein). (c) In any offering of Registrable Securities pursuant to a registration hereunder, each Holder requesting registration shall also enter into such additional or other agreements as may be customary in such transactions, which agreements may contain, among other provisions, such representations and warranties as the Company or the underwriters of such offering may reasonably request (including, without limitation, those concerning such Holder, its Registrable Securities, such Holder's intended plan of distribution and any other information supplied by it to the Company for use in such registration statement), and customary provisions relating to indemnitees and contribution (it being understood that each Holder shall not be required to make any representation concerning the Company or its business or to indemnify or contribute for any liabilities, losses or expenses related to any omission or misstatements in any registration statement or prospectus except to the extent based upon information provided in writing by the Holder expressly for use therein). Section 8. Information Blackout. -------------------- (a) At any time when a Registration Statement is effective, upon written notice from the Company to the Holders that the Company has determined in good faith that sale of Registrable Securities pursuant to the Registration Statement would require disclosure of non-public material information, the disclosure of which would have a material adverse effect on the Company, all Holders shall suspend sales of Registrable Securities pursuant to such Registration Statement until the earlier of (1) 20 days after the Company notifies the Holders of such good 10 faith determination, and (2) such time as the Company notifies the Holders that such material information has been disclosed to the public or has ceased to be material or that sales pursuant to such Registration Statement may otherwise be resumed (the number of days from such suspension of sales by the Holders until the day when such sales may be resumed hereunder is hereinafter called a "Sales Blackout Period"). (b) The time period set forth in Section 6(a)(1) or (2) shall be extended for a number of days equal to the number of days in the Sales Blackout Period. (c) No Sales Blackout Period shall be commenced by the Company within 90 days after the end of a Sales Blackout Period. Section 9. Rule 144. After the IPO Date, the Company shall take all -------- actions reasonably necessary to comply with the filing requirements described in Rule 144(c)(1) under the Securities Act so as to enable the Holders to sell Registrable Securities without registration under the Securities Act. Upon the written request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with the filing requirements under such Rule 144(c)(1). Section 10. Preparation; Reasonable Investigation; Information. In -------------------------------------------------- connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act, (a) the Company will give the Holders and the underwriters, if any, and their respective counsel and accountants, drafts of such registration statement for their review and comment prior to filing and (during normal business hours and subject to such reasonable limitations as the Company may impose to prevent disruption of its business) such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of the Holders of a majority of the Registrable Securities being registered and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act and (b) as a condition precedent to including any Registrable Securities of any Holder in any such registration, the Company may require such Holder to furnish the Company such information regarding such Holder and the distribution of such securities as the Company may from time to time reasonably request in writing or as shall be required by law or the SEC in connection with any registration. Section 11. Indemnification and Contribution. -------------------------------- (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company shall, to the extent permitted by applicable law, indemnify and hold harmless each Holder, its officers and directors, each underwriter of Registrable Securities so offered and each Person, if any, who controls any of the foregoing persons within the meaning of the Securities Act ("Holder Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation or 11 alleged violation by the Company of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered, and relating to action taken or action or inaction required of the Company in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities, or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; but the Company shall not be liable to any Holder Indemnitee in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission or alleged omission, if such statement or omission shall have been made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Holder specifically for use in the preparation of the Registration Statement (or in any preliminary or final prospectus included therein), or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Holder Indemnitee. (b) In the case of each offering of Registrable Securities made pursuant to this Agreement, each Holder participating in such offering, shall, to the extent permitted by applicable law, indemnify and hold harmless the Company, its officers and directors and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (the "Company Indemnitees"), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any violation by such Holder of the Securities Act, any blue sky laws, securities laws or other applicable laws of any state or country in which the Registrable Securities are offered and relating to action taken or action or inaction required of such Holder in connection with such offering, or shall arise out of, or shall be based upon, any untrue statement of a material fact contained in the Registration Statement (or in any preliminary or final prospectus included therein) relating to the offering and sale of such Registrable Securities or any amendment thereof or supplement thereto, or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement is contained in, or such fact is omitted from, information furnished in writing to the Company by or on behalf of such Holder specifically for use in the preparation of such Registration Statement (or in any preliminary or final prospectus included therein). Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Company Indemnitee. In no event shall the liability of a Holder hereunder or under Section 11(d) be greater in amount than the dollar amount of the net proceeds received by it upon the sale of Registrable Securities pursuant to such offering. The foregoing indemnity is in addition to any liability which Holder may otherwise have to any Company Indemnitee. 12 (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 11, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party. In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party, if the Company, shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than two separate firms, one for the Ordinary Shares issued pursuant to the Securities Purchase Agreement, the Class B Warrants or Ordinary Shares for which the Class B Warrants have been exercised (the "Class B Holder Indemnitees") and one for all other Holder Indemnitees (the "Other Holder Indemnitees"). Such firm for the Class B Holder Indemnitees shall be designated in writing by Holders of a majority of the Registrable Securities held by the Class B Holder Indemnitees and disposed of under the applicable Registration Statements. Such firm for the Other Holder Indemnitees shall be designated in writing by the Holders of a majority of the Registrable Securities held by the Other Holder Indemnitees and disposed of under the applicable Registration Statement. The indemnifying party, if other than the Company, shall not, in connection with any proceeding or related proceedings in the same jurisdiction be liable for the reasonable fees and expenses of more than one separate firm for the Company Indemnitee, which firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgement for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested the indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by this Section, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without the indemnifying party's written consent if (i) such settlement is entered into more than thirty (30) days after receipt by the indemnifying party of the aforesaid request, and (ii) the indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the consent of the indemnified party, which consent shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. 13 (d) If the indemnification provided for in this Section 11 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, or if the indemnified party failed to give the notice required under subsection (c) and the indemnified party is actually prejudiced by such failure, then each indemnifying party shall, to the extent permitted by applicable law, contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative fault of all parties in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Notwithstanding any other provision of this Section 11, the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement of any material fact contained in any such registration statement, preliminary prospectus, final prospectus or summary prospectus contained therein or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading in a prospectus or prospectus supplement, if such untrue statement or omission is completely corrected in an amendment or supplement to such prospectus or prospectus supplement, the seller of the Registrable Securities has an obligation under the Securities Act to deliver a prospectus or prospectus supplement in connection with such sale of Registrable Securities and the seller of Registrable Securities thereafter fails to deliver such prospectus or prospectus supplement as so amended or supplemented prior to or concurrently with the sale of Registrable Securities to the person asserting such loss, claim, damage or liability after the Company has furnished such seller with a sufficient number of copies of the same. Section 12. Expenses. In connection with any registration under this -------- Agreement the Company shall pay all Registration Expenses (to the extent not borne by underwriters or others), except as provided in Section 2(f) or 3(d). Each Holder shall pay its pro rata share of all other expenses of such registration, including underwriters' discounts and compensation, broker's commission or similar selling expenses, and each Holder shall pay its own transfer taxes, if any, applicable to Registrable Securities. 14 Section 13. Notices. Except as otherwise provided below, whenever it is ------- provided in this Agreement that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties hereto, or whenever any of the parties hereto, wishes to provide to or serve upon the other party any other communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in person or sent by telecopy, as follows: (a) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 13, and with respect to all other holders is as set forth in the register for the Registrable Securities; and (b) if to the Company, initially at the Company's principal address and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 13. The furnishing of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly furnished or served on the party to which it is addressed, in the case of delivery in person or by telecopy, on the date when sent (with receipt personally acknowledged in the case of telecopied notice), and in all other cases, five business days after it is sent. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. Section 14. Entire Agreement. This Agreement represents the entire ---------------- agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes any and all prior oral and written agreements, arrangements and understandings among the parties hereto with respect to such subject matter; and this Agreement can be amended, supplemented or changed, and any provision hereof can be waived or a departure from any provision hereof can be consented to, only by a written instrument making specific reference to this Agreement signed by the Company and the Holder. Section 15. Term. This Agreement shall become effective upon the IPO ---- Date and shall have a term of ten years, expiring at 5:00 P.M. (United States Eastern Time) on the tenth anniversary of the IPO Date. Section 16. Headings. The section headings contained in this Agreement -------- are for general reference purposes only and shall not affect in any manner the meaning, interpretation or construction of the terms or other provisions of this Agreement. Section 17. Applicable Law. This Agreement shall be governed by, -------------- construed and enforced in accordance with the laws of the State of New York, applicable without regard to the conflicts of law provisions thereof. Section 18. Severability. If any provision of this Agreement shall be ------------ held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 15 Section 19. No Waiver. The failure of any party at any time or times to --------- require performance of any provision hereof shall not affect the right at a later time to enforce the same. No waiver by any party of any condition, and no breach of any provision, term, covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be construed as a further or continuing waiver of any such condition or of the breach of any other provision, term, covenant, representation or warranty of this Agreement. Section 20. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same original instrument. Not all parties need sign the same counterpart. Delivery by facsimile of a signature page to this Agreement shall have the same effect or delivery of an original executed counterpart. Section 21. Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; but nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of applicable law. If any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Holder shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement, and such Holder shall be entitled to receive the benefits hereof. Section 22. Consent to Jurisdiction and Service of Process. All judicial ---------------------------------------------- proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York, and by execution and delivery of this Agreement, the Company accepts the nonexclusive jurisdiction of the aforesaid courts and waives any defense of forum non conveniens. The Company designates and appoints CT Corporation System, 1633 Broadway, New York, New York, and such other persons as may hereafter be selected by the Company irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Company to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company at Ugland House, 113 South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies; provided, however, that, unless otherwise provided -------- ------- by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company refuses to accept service, the Company hereby agrees that service of process sufficient for personal jurisdiction in any action against the Company under this Agreement in the State of New York may be made by registered or certified mail, return receipt requested, to the Company at its address set forth above, and the Company hereby acknowledges that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of the Investor to bring proceedings against the Company in the courts of any other jurisdiction. 16 IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first above written. SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. By: ----------------------------------- Name: Title: [INITIAL HOLDER] By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- 17 EX-5.1 7 OPINION OF MAPLES & CALDER EXHIBIT 5.1 [MAPLES AND CALDER LETTERHEAD] To: Scottish Annuity & Life Holdings, Ltd. Ugland House 26th October, 1998 113 South Church Street George Town, Grand Cayman Cayman Islands Dear Sirs, Re: Underwritten Offering of up to 19,262,500 Ordinary Shares, par value $.01 - ------------------------------------------------------------------------------ per share (the "Ordinary Shares"), of Scottish Annuity & Life Holdings, Ltd. - ---------------------------------------------------------------------------- We have acted as counsel as to Cayman Islands law to Scottish Annuity & Life Holdings, Ltd. (the "Company") in connection with transaction agreements referred to below and we issue this opinion at the request of the Company. We have reviewed, inter alia, originals or final drafts of the following document: (A) the Certificate of Incorporation and Memorandum and Articles of Association of the Company as adopted on 4th June, 1998; (B) the Resolutions of the Director of the Company dated 9th June, and 18th June, 1998, 2nd September, 1998 and 7th October, 1998 and the corporate records of the Company maintained at its registered office in the Cayman Islands; (C) the draft Underwriting Agreement to be entered into between the Company and the Underwriters (the "Underwriting Agreement") as sent to us by Cleary Gottlieb Steen & Hamilton by fax on 7th October, 1998; (D) the Registration Statement on Form S-1 filed by the Company (the "Registration Statement"); and (E) a Director's Certificate from a Director of the Company (the "Director's Certificate"). The following opinion is given only as to circumstances existing on the date hereof and known to us and as to the laws of the Cayman Islands as the same are in force at the date hereof. In giving this opinion, we have relied upon the accuracy of the Director's Certificate without further verification and have relied upon the following assumptions, which we have not independently verified: 2 (a) the Underwriting Agreement has been or, as the case may be, will be duly authorised, executed and delivered by or on behalf of all relevant parties (other than the Company) and is, or will be legal, valid, binding and enforceable against all relevant parties in accordance with their respective terms under the laws of the State of New York ("New York") and all other relevant laws (other than the laws of the Cayman Islands); (b) the choice of New York law as the governing law of the Underwriting Agreement has been made in good faith and would be regarded as a valid and binding selection which will be upheld by the courts of the New York as a matter of New York law and all other relevant laws (other than the laws of the Cayman Islands); (c) copy documents or the forms of documents provided to us are true copies of, or in the final forms of, the originals; (d) the genuineness of all signatures; (e) the power, authority and legal right of all parties under all relevant laws and regulations (other than the Company under the laws of the Cayman Islands) to enter into, execute and perform their respective obligations under the Underwriting Agreement; (f) that all preconditions to the obligations of the parties to the Agreement have been satisfied or duly waived and there has been no breach of the terms of the said Underwriting Agreement; (g) no exceptional circumstances exist which give rise to the lifting of the corporate veil; (h) there is nothing under any law (other than the laws of the Cayman Islands) which would or might affect the opinions hereinafter appearing, specifically, we have made no independent investigation of the laws of New York. Based upon and subject to the foregoing and having regard to such legal considerations as we deem relevant, we are of the opinion that the issue of the Ordinary Shares is duly authorized and, when the Registration Statement filed by the Company to effect the registration of the Ordinary Shares under the Securities Act of 1933, as amended, has been declared effective by the Securities and Exchange Commission and the Ordinary Shares are issued and delivered to the Underwriters in accordance with the Underwriting Agreement against payment of the consideration therefor as provided therein and as contemplated by the Registration Statement, the Ordinary Shares will be duly authorized, validly issued, fully paid and nonassessable. 3 Except as specifically stated herein, we make no comment with regard to any representations which may be made by the Company in any of the documents referred to above or otherwise or with regard to the commercial terms of the said documents. This opinion is furnished by us, as counsel for the Company, to you solely for the benefit of the Company and solely with respect to the Registration Statement and the Prospectus, upon the understanding that we are not hereby assuming any professional responsibility to any other person whatsoever. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and the reference to us under caption "Legal Matters" in the Prospectus constituting part of the Registration Statement. Yours faithfully, /s/ Maples and Calder MAPLES AND CALDER - ----------------- EX-10.3 8 SECOND AMENDED AND RESTATED STOCK OPTION PLAN EXHIBIT 10.3 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. SECOND AMENDED AND RESTATED 1998 STOCK OPTION PLAN ---------------------- 1. PURPOSE. The purpose of this Plan is to attract and retain the best available talent and encourage the highest level of performance by executive officers, key employees, directors, advisors and consultants, and to provide them with incentives to put forth maximum efforts for the success of Scottish Annuity & Life Holdings, Ltd.'s business, in order to serve the best interests of Scottish Annuity & Life Holdings, Ltd. and its stockholders. All options granted under the Plan are intended to be nonstatutory stock options. 2. DEFINITIONS. The following terms, when used in the Plan with initial capital letters, shall have the following meanings: (a) "Act" means the Securities Exchange Act of 1934, as in effect from time to time. (b) "Board" means the Board of Directors of the Company and, to the extent of any delegation by the Board to a committee (or subcommittee thereof) pursuant to Paragraph 9 of this Plan, such committee (or subcommittee). (c) "Change in Control" shall have the meaning provided in Paragraph 11 of this Plan. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (e) "Company" means Scottish Annuity & Life Holdings, Ltd., a Cayman Islands limited liability company. (f) "Date of Grant" means the date specified by the Board on which a grant of Stock Options shall become effective (which date shall not be earlier than the date on which the Board takes action with respect thereto). (g) "Director" means a member of the Board of Directors of the Company. (h) "Eligible Non-Employee Director" means any person, not an employee of the Company or any Subsidiary, who, prior to the consummation of the Company's Initial Public Offering, is a Director or who has consented to become a Director. (i) "Immediate Family" has the meaning ascribed thereto in Rule 16a- 1(e) under the Act (or any successor rule to the same effect) as in effect from time to time. (j) "Initial Public Offering" means the offering to the public by the Company of Ordinary Shares registered with the Securities and Exchange Commission of the United States. (k) "Market Value Per Share" means, as of any given day, the closing price of an Ordinary Share on a national securities exchange on which the Ordinary Shares are listed or admitted to trading on the day preceding the day such determination is being made or, if there was no closing price reported on such day, on the most recently preceding day on which such a closing price was reported; or if the Ordinary Shares are not listed or admitted to trading on a national securities exchange on the day as of which the determination is being made, the amount determined by the Board to be the fair market value of an Ordinary Share on such day; provided, -------- however, that Market Value Per Share with respect to the initial grant of ------- options to officers and Non-Employee Directors prior to consummation of the Company's Initial Public Offering means the public offering price per share of the Ordinary Shares in the Initial Public Offering. (l) "Option Price" means the purchase price per Ordinary Share payable on exercise of a Stock Option. (m) "Optionee" means the optionee named in an agreement evidencing an outstanding Stock Option or a permitted transferee of a Stock Option. (n) "Ordinary Shares" means the ordinary shares, par value $0.01 per share, of the Company or any security into which such Ordinary Shares may be changed by reason of any transaction or event of the type described in Paragraph 7 of this Plan. (o) "Participant" means a person who is selected by the Board to receive Stock Options under Paragraph 5 of this Plan and who is at that time (i) an executive officer or other key employee of the Company or any Subsidiary, (ii) an advisor or consultant to the Company or any Subsidiary, or (iii) a member of the Board. (p) "Plan" means this 1998 Stock Option Plan of the Company, as amended from time to time. (q) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act (or any successor rule to the same effect) as in effect from time to time. (r) "Stock Option" means the right to purchase Ordinary Shares upon exercise of an option granted pursuant to Paragraph 5 of this Plan. (s) "Subsidiary" means any corporation, partnership, joint venture or other entity in which the Company owns or controls, directly or indirectly, not less than 50% of the total combined voting power or equity interests represented by all classes of stock issued by such corporation, partnership, joint venture or other entity. -2- 3. SHARES AVAILABLE UNDER PLAN. The Ordinary Shares which may be issued under the Plan shall not exceed in the aggregate 1,600,000 shares, subject to adjustment as provided in this Paragraph 3. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. (a) Any Ordinary Shares which are subject to Stock Options that are terminated unexercised, forfeited or surrendered or that expire for any reason shall again be available for issuance under the Plan. (b) The shares available for issuance under the Plan also shall be subject to adjustment as provided in Paragraph 7 of this Plan. 4. INDIVIDUAL LIMITATION ON STOCK OPTIONS. Notwithstanding anything in this Plan to the contrary, and subject to adjustment as provided in Paragraph 7 of this Plan, no individual Participant shall be granted Stock Options under this Plan, during the term of this Plan, for more than 1,000,000 Ordinary Shares. 5. GRANTS OF STOCK OPTIONS TO PARTICIPANTS. The Board may from time to time authorize grants to any Participant of Stock Options upon such terms and conditions as the Board may determine in accordance with the provisions set forth below. (a) Each grant shall specify the number of Ordinary Shares to which it pertains, subject to the limitations set forth in Paragraphs 3 and 4 of this Plan. (b) Each grant shall specify the Option Price, which shall not be less than 100% of the Market Value Per Share on the Date of Grant. (c) Each grant shall specify whether the Option Price shall be payable (i) in cash or by check acceptable to the Company or (ii) deferred payment of the Option Price from the proceeds of sale through a bank or broker of some or all of the shares to which such exercise relates or (iii) by a combination of methods (i) or (ii). (d) Successive grants may be made to the same Participant whether or not any Stock Options previously granted to such Participant remain unexercised. (e) Each grant shall specify the required period or periods (if any) of continuous service by the Participant with the Company or any Subsidiary and/or any other conditions to be satisfied before the Stock Options or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Stock Options in the event of a Change in Control of the Company or in the event of any other similar transaction or event. Unless otherwise provided in the option agreement evidencing a grant, a grant shall become exercisable in three equal annual installments, commencing on the first anniversary of the grant. (f) Each grant shall specify whether or not a Stock Option is transferable, and the conditions, if any, of such transferability. -3- (g) No Stock Option shall be exercisable more than 10 years from the Date of Grant. (h) An Optionee may exercise a Stock Option in whole or in part at any time and from time to time during the period within which the Stock Option may be exercised. To exercise a Stock Option, an Optionee shall give written notice to the Company specifying the number of Ordinary Shares to be purchased and provide payment of the Option Price and any other documentation that may be required by the Company. (i) An Optionee shall be treated for all purposes as the owner of record of the number of Ordinary Shares purchased pursuant to exercise of the Stock Option (in whole or in part) as of the date the conditions set forth in Paragraph 5(h) of this Plan are satisfied. (j) The Board may permit Optionees to elect to defer the issuance of Ordinary Shares under this Plan pursuant to such rules, procedures or programs as it may establish for purposes of this Plan. The Board may also provide that deferred issuances and settlements include the payment or crediting of dividend equivalents or interest on the deferred amounts. (k) Each grant shall be evidenced by a stock option agreement executed on behalf of the Company by the Chief Executive Officer (or another officer designated by the Board) and delivered to the Participant and containing such further terms and provisions, consistent with the Plan, as the Board may approve. 6. GRANTS OF STOCK OPTIONS TO ELIGIBLE NON-EMPLOYEE DIRECTORS. Each Eligible Non-Employee Director at or on the consummation of the Initial Public Offering will be granted a Stock Option to purchase 10,000 Ordinary Shares with an exercise price equal to the price per Ordinary Share to the public of the Ordinary Shares offered and sold by the Company in the Initial Public Offering, exercisable in three equal installments commencing with the first anniversary of the grant date. In addition, each Eligible Non-Employee Director will be granted a Stock Option to purchase 2,000 Ordinary Shares at each successive annual general meeting after December 31, 1998, provided that such individual continues to be an Eligible Non-Employee Director at the close of business of each such annual general meeting. The additional Stock Options will have an exercise price equal to the fair market value of the Ordinary Shares on the date of grant and shall be immediately exercisable if granted after the first anniversary of the consummation of the Initial Public Offering and, if granted prior to the first anniversary of the consummation of the Initial Public Offering, shall be exercisable on such anniversary. For purposes of this Paragraph 6, the date of an annual general meeting is the date on which the meeting is convened or, if later, the date of the last adjournment thereof. 7. ADJUSTMENTS. The Board may make or provide for such adjustments in the maximum number of shares specified in Paragraphs 3 or 4 of this Plan, in the number of Ordinary Shares covered by outstanding Stock Options granted hereunder, in the Option Price applicable to any such Stock Options, and/or in the kind of shares covered thereby (including shares of another issuer), as the Board in its sole discretion, exercised in good faith, may determine is equitably -4- required to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, spin-off, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. Any fractional shares resulting from the foregoing adjustments shall be eliminated. 8. WITHHOLDING OF TAXES. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any benefit realized by an Optionee under the Plan, or is requested by an Optionee to withhold additional amounts with respect to such taxes, and the amounts available to the Company for such withholding are insufficient, it shall be a condition to the realization of such benefit that the Optionee make arrangements satisfactory to the Company for payment of the balance of such taxes required or requested to be withheld. In addition, if permitted by the Board, an Optionee may elect to have any withholding obligation of the Company satisfied with Ordinary Shares that would otherwise be transferred to the Optionee on exercise of the Stock Option. 9. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the Board, which from time to time may delegate all or any part of its authority under this Plan to a committee (the "Stock Option Committee") of not less than two Directors appointed by the Board. The members of the Stock Option Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 and "outside directors" within the meaning of Section 162(m) of the Code. To the extent of any such delegation, references in this Plan to the Board shall also refer to the Stock Option Committee. A majority of the members of the Stock Option Committee shall constitute a quorum, and any action taken by a majority of the members of the Stock Option Committee who are present at any meeting of the Stock Option Committee at which a quorum is present, or any actions of the Stock Option Committee that are unanimously approved by the members of the Stock Option Committee in writing, shall be the acts of the Stock Option Committee. The Board shall have the authority to delegate responsibility and authority for the operation and administration of this Plan, appoint employees and officers of the Company and Subsidiaries to act on its behalf, and employ persons to assist in fulfilling its responsibilities under this Plan. (b) The Board has the full authority and discretion to interpret and construe any provision of this Plan or of any agreement, notification or document evidencing the grant of a Stock Option. The interpretation and construction by the Board of any such provision and any determination by the Board pursuant to any provision of the Plan or of any such agreement, notification or document shall be final and conclusive. No member of the Board shall be liable for any such action or determination made in good faith. 10. AMENDMENTS, ETC. (a) The Board may, without the consent of the Optionee, amend any agreement evidencing a Stock Option granted under the Plan, or otherwise take action, to accelerate the time or times at which the Stock Option may be exercised, to extend the expiration date of the Stock Option, to waive any other condition or restriction applicable to such Stock Option or to the exercise of such Stock Option and to reduce the exercise price of such -5- Stock Option and may amend any such agreement in any other respect with the consent of the Optionee. (b) The Plan may be amended from time to time by the Board or any duly authorized committee thereof. In the event any law, or any rule or regulation issued or promulgated by the Internal Revenue Service, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., any stock exchange upon which the Ordinary Shares are listed for trading, or any other governmental or quasi-governmental agency having jurisdiction over the Company, the Common Stock or the Plan, requires the Plan to be amended, or in the event Rule 16b-3 is amended or supplemented (e.g., by addition of --- alternative rules) or any of the rules under Section 16 of the Act are amended or supplemented, in either event to permit the Company to remove or lessen any restrictions on or with respect to Stock Options, the Board reserves the right to amend the Plan to the extent of any such requirement, amendment or supplement, and all Stock Options then outstanding shall be subject to such amendment. (c) The Plan may be terminated at any time by action of the Board. The termination of the Plan shall not adversely affect the terms of any outstanding Stock Option. (d) The Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor shall it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate a Participant's employment or other service at any time. (e) This Plan shall be effective as of June 18, 1998. (f) No Stock Option shall be granted pursuant to this Plan on or after the tenth anniversary of the date of effectiveness of this Plan, but awards granted prior to such tenth anniversary may extend beyond that date. 11. CHANGE IN CONTROL. For purposes of this Plan, a "Change in Control" shall mean the occurrence of any of the following events shall have occurred: (a) 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; (b) 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; (c) 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 -6- (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 (d) If during any period of two consecutive years after December 31, 1998, 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 11(c) above, a "Change in Control" shall not be deemed to have occurred for purposes of this Plan (i) by reason of any action taken by the Company, including changed in beneficial ownership of equity securities of the Company occurring in connection with the Company's Initial Public Offering; (ii) 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, 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 (iii) solely because of a change in control of any Subsidiary other than Scottish Annuity & Life Insurance Company (Cayman), Ltd. -7- EX-10.13 9 INVESTMENT MANAGEMENT AGREEMENT DATED 10/22/98 EXHIBIT 10.13 INVESTMENT MANAGEMENT AGREEMENT This Investment Management Agreement ("Agreement") is entered into this 22nd day of October, 1998, between Scottish Annuity and Life Holdings, Ltd. ("Company") and Pacific Investment Management Company, a Delaware general partnership ("Manager"), with reference to the following facts: WHEREAS, the Company has an investment portfolio consisting of certain securities which, together with all additions, substitutions and changes, is referred to in this Agreement as the "Account;" and WHEREAS, the Company desires to retain the Manager as its investment counsel and to grant to the Manager the authority to manage the Account and the Manager is agreeable to managing the Account, upon the terms and conditions herinafter set forth. NOW, THEREFORE, it is agreed as follows: 1. Retention as Manager -------------------- The Company hereby retains the Manager to provide investment management services with respect to the Account's assets described in Exhibit "A" attached ----------- hereto and those other assets which may from time to time be transferred to the Manager's control upon the terms and conditions set forth herein, and the Manager hereby accepts the retention and agrees to provide such investment management services. 2. Assets Transferred to the Account --------------------------------- The Company will determine what assets will be transferred to or from the Account from time to time. The Company shall notify the Manager, in writing, of its determinations in this regard. 3. Management of Assets -------------------- The Manager shall manage all assets held in the Account. For this purpose, and subject only to the specific limitations made part of this Agreement from time to time, the Manager shall have full investment authority and discretion and may purchase, sell, generally deal in or exchange assets (including securities, shares of open-end investment companies and other property relating to the Account) for the Account as it shall determine; however, the Manager shall not act as custodian of the assets held in the Account. Section I: ---------- [X] Yes, Futures & Options authority has been granted in accordance with Appendix A, and Appendix A is hereby incorporated into this ---------- Agreement (defined terms used therein shall have their respective meanings set forth herein). or [ ] No, Futures & Options authority has not been granted. Section II: ----------- [ ] Yes, In-Kind Securities will be transferred into the Account in accordance with Appendix B, and Appendix B is hereby ---------- incorporated into this Agreement (defined terms used therein shall have their respective meanings set forth herein). or [ ] No, the Account will be funded solely with cash. Section III: ------------ [X] Yes, authority to invest in PIMCO Funds has been granted in accordance with Appendix C, and Appendix C is hereby ---------- incorporated into this Agreement (defined terms used therein shall have their respective meanings set forth herein). or [ ] No, authority to invest in PIMCO Funds has not been granted. The Manager further shall have authority to instruct the custodian to: (i) pay cash for securities and other property delivered the custodian for the Account, (ii) deliver securities and other property against payment for such Account, and (iii) transfer assets and funds to such brokerage accounts as the Manager may designate. The Manager shall not have the authority to cause the Company to deliver securities and other property, or pay cash to the Manager other than payment of the management fee provided for in this Agreement. The Company agrees that Manager shall be solely responsible for voting all proxies related to assets in the Account. The Manager shall maintain a record of how the Manager voted and such record shall be available to the Company upon its request. It is further understood that Manager need not and is not required to accept any direction concerning the voting of proxies from the Company. The right of Manager to vote proxies shall continue until the earlier of the termination of the Agreement or such time as the Company specifically revokes Manager's authority to vote proxies and specifically reserves such right to the Company or to another. 4. Investment Guidelines --------------------- The Company shall supply the Manager with such information as the Manager shall reqsonably require concerning the Account's tax position, liquidity requirements and other information useful in developing investment objectives. The investment guidelines agreed to by Manager and the Company as of the date of this Agreement are set forth on Exhibit "B" hereto. The ----------- guidelines may be changed by the written agreement of the parties. The Manager shall be entitled to rely upon oral and written clarifications, supplements and modifications to the investment guidelines from the Company. Reasonable interpretations of the Investment Guidelines made in good faith by the Manager shall be binding upon the parties. The Manager shall use its best efforts in managing the Account to attain such objectives. The Company understands and agrees that the Manager does not guarantee or represent that any investment objectives will be achieved. PAGE 2 5. Title and use of Custodian Bank ------------------------------- Title to all investments shall be held in the name of the Company, provided that for convenience in buying, selling and exchanging securities (stocks, bonds, commercial paper, etc.), title to such securities may be held in the name of the Account's custodian bank, or its nominee, which bank shall be selected by the Company. Neither the Manager nor any parent, subsidiary or related firm shall take custody or possession of or handle any cash, securities, mortgages or deeds of trust, or other indicia of ownership of the Account's investments, or otherwise act as custodian of such investments. All cash and the indicia of ownership of all other investments shall be held by the Account's custodian bank. The Manager shall not be liable for any act or omission of such custodian bank. The Company shall instruct the Account's custodian bank to (a) periodically advise the Manager as to the amount of cash or cash equivalents available for investment in the Account; (b) carry out all investment transactions as may be directed, in writing, by the Manager; and (c) confirm all completed transactions, in writing, to the Manager. The custodian bank shall collect the interest and dividends on the Account's investments in its custody and the Manager shall have no responsibility in this regard. 6. Use of Securities Broker ------------------------ Neither the Manager nor any parent, subsidiary or related firm shall act as a securities broker with respect to any purchases or sales of securities which may be made on behalf of the Account, provided that this limitation shall not prevent the Manager from utilizing the services of a securities broker which is a parent, subsidiary or related firm provided such broker effects transactions on a "cost only" or "nonprofit" basis to itself and provides competitive execution. Unless otherwise directed by the Company in writing, the Manager may utilize the service of whatever independent securities brokerage firm or firms it deems appropriate to the extent that such firms are competitive with respect to price of services and execution. The Manager shall not be liable for any act or omission of any securities brokerage firm or firms designated by the Company or chosen with reasonable care. The Manager shall maintain a log of all transactions placed through all securities brokerage firms, including the name of the firm, a description of each transaction (including the amount and the securities involved), the date of each transaction, and the amount of fees or commissions paid. 7. Access to Records and Documents ------------------------------- All records and documents relating to the Account's investments directed by the Manager shall be made available for inspection or audit by the Company or by a qualified public accountant acting on its behalf, at the Manager's business offices at any time during normal business hours upon reasonable prior notice. PAGE 3 8. Reports by Manager ------------------ The Manager shall make such written quarterly and annual reports concerning its investment management activities as may be requested by the Company. 9. Attendance at Meetings ---------------------- A representative of the Merger shall personally meet with the Company's representatives to explain the investment management activities, and any reports related thereto, as may reasonably be requested by the Company. 10. Aggregation of Orders --------------------- Provided the investment objectives of the Account are adhered to, the Company agrees that the Manager may aggregate sales and purchase orders of securities, commodities and other investments held in the Account with similar orders being made simultaneously for other accounts managed by the Manager or with accounts of the affiliates of Manager, if in the Manager's reasonable judgment such aggregation shall result in an overall economic benefit to the Account taking into consideration the advantageous selling or purchase price, brokerage commission and other expenses. The Company acknowledges that the determination of such economic benefit to the Account by the Manager represents the Manager's evaluation that the Account is benefited by relatively better purchase or sales prices, lower commission expenses and beneficial timing of transactions or a combination of these and other factors. 11. Unrelated Transactions ---------------------- The Manager shall devote such part of its time as is reasonably needed for the services contemplated under this Agreement; provided, however, that this Agreement shall not prevent the Manager from rendering similar services to other persons, trusts, corporations or other entities. Nothing in this Agreement shall limit or restrict the Manager or any of its officers, affiliates or employees from, as permitted by law, buying, selling or trading in any securities for its own or their own accounts. The Company acknowledges that the Manager and its officers, affiliates and employees, and the Manager's other clients may as permitted by law at any time have, acquire, increase, decrease, or dispose of positions in investments which are at the same time being acquired for or disposed of from the Account. As permitted by law, the Manager shall have no obligation to acquire for the Account a position in any investment which the Manager, its officers, affiliates or employees may acquire for its or their own accounts or for the account of another client, if in the sole discretion of the Manager, it is not feasible or desirable to acquire a position in such investment for the Account. 12. Fees ---- For the services specified in this Agreement, the Company agrees to pay fees as set forth in Exhibit "C" hereto and made a part hereof, for each ----------- calendar quarter during the term hereof commencing on _______________________, 1998, and continuing thereafter for each such calendar quarter based on a statement for such fees submitted to the Company, and the Company agrees to remit payment promptly. PAGE 4 13. Assignment ---------- In accordance with Section 205(2) and 205(3) of the Investment Advisers Act of 1940, no assignment of this Agreement shall be made by the Manager without the written consent of the Company. Furthermore, if there is a change in the partners of Pacific Investment Management Company, a Delaware general partnership, the Manager will notify the Company of such change. 14. Notices ------- Any written notice required by or pertaining to this Agreement shall be personally delivered to the party for whom it is intended, at the address stated below, or shall be sent to such party by prepaid first class mail or facsimile. If to the Company: Scottish Annuity and Life Holdings, Ltd. Fax: Attention: If to the Manager: Pacific Investment Management Company 840 Newport Center Drive, Suite 300 Newport Beach, CA 92660 Fax: 949-720-1376 Attention: David Hinman, Vice President cc: Chief Administrative Officer 15. Term ---- This Agreement shall be effective as of the date hereof, and shall continue on a month-to-month basis thereafter until terminated. Either party may terminate this Agreement at the end of a particular month by giving thirty (30) days' advance notice to the other party. Notwithstanding the foregoing, the Company may terminate the authority of the Manager to manage the Account at any time, such termination to be effective as of the effective date of notice thereof to the Manager, but the Manager shall be entitled to the fees payable hereunder for thirty (30) days thereafter. 16. Liability --------- The Manager shall not be liable to the Company for the acts or omissions of any other fiduciary or other person respecting the Account or for anything done or omitted by the Manager under the terms of this Agreement if the Manager shall have acted in good faith and shall have exercised the degree of prudence, competence and expertise customarily exhibited by managers of institutional portfolios. Nothing in this Agreement shall in any way constitute a waiver or limitation of any rights which may not be so limited or waived in accordance with applicable law. The Manager is expressly authorized to rely upon any and all instructions, approvals and notices given on behalf of the Company by any one or more of those persons designated as representatives of the Company whose names, titles and specimen signatures appear in Exhibit "D" attached hereto. The ----------- Company may amend such Exhibit D from time to time by written notice to PAGE 5 the Manager. The Manager shall continue to rely upon these instructions until notified by the Company to the contrary. 17. Confidential Information ------------------------ The Manager shall maintain the strictest confidence regarding the business affairs of the Account. Written reports furnished by the Manager to the Company shall be treated by the Company and the Manager as confidential and for the exclusive use and benefit of the Company except as disclosure may be required by applicable law. 18. Representations and Agreements of the Company --------------------------------------------- The Company represents to the Manager that the Company has all necessary power and authority to execute, deliver and perform this Agreement and all transactions contemplated hereby, and such execution, delivery and performance will not violate any applicable law, rule, regulation, governing document (e.g., Certificate of Incorporation or Bylaws), contract or other material agreement binding upon the Company. If Appendix A is applicable, the Company makes such representations and warranties as are set forth therein. 19. Delivery of Part II of Form ADV ------------------------------- Concurrently with the execution of this Agreement, the Manager is delivering to the Company a copy of Part II of its Form ADV, as revised, on file with the Securities and Exchange Commission. The Company acknowledges receipt of such copy. 20. Special Termination Rights -------------------------- Notwithstanding anything in Paragraph 15 to the contrary, the Company may terminate this Agreement without penalty within five (5) business days of its execution of this Agreement by giving written notice to such effect to the Manager within such five (5) business day period. 21. Miscellaneous ------------- The Company agrees that it shall promptly notify the Manager (i) of any changes regarding the information about itself in this Agreement, or (ii) if any of the Company's representations or warranties in Section 18 hereof are no longer true or completely accurate. This Agreement may be amended at any time but only by the mutual agreement of the parties, in writing. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. This Agreement constitutes the entire agreement between the parties and supersedes in their entirety all prior agreements between the parties relating to the subject matter hereof. This Agreement shall be executed in two counterparts, each of which shall be considered to be an original. PAGE 6 EXECUTED on the date first above written. PACIFIC INVESTMENT MANAGEMENT COMPANY By: PIMCO Management Inc., a general partner By: /s/ James F. Muzzy -------------------------------------- Name: James F. Muzzy Title: Managing Director SCOTTISH ANNUITY AND LIFE HOLDINGS, LTD. By: /s/ Michael C. French -------------------------------------- Name: Michael C. French Title: President and CEO PAGE 7 APPENDIX A ---------- Futures and Options - ------------------- The Manager's investment authority shall include the authority to purchase, sell, cover open positions, and generally to deal in financial futures contracts and options thereon, in accordance with the Investment Guidelines and Restrictions. The Company will: (i) open and maintain brokerage accounts for financial futures and options (such accounts hereinafter referred to as "brokerage accounts") on behalf of and in the name of the Account and (ii) execute for and on behalf of the Account, standard customer agreements with a broker or brokers. The Manager may, using such of the securities and other property in the Account as the Manager deems necessary or desirable, direct the custodian to deposit on behalf of the Account, original and maintenance brokerage deposits and otherwise direct payments of cash, cash equivalents and securities and other property into such brokerage accounts and to such brokers as the Manager deems desirable or appropriate. The Manager has delivered to the Company a copy of its Disclosure Document, as amended, dated March 31, 1998, on file with the Commodity Futures Trading Commission. The Company hereby acknowledges receipt of such copy. APPENDIX B ---------- In-Kind Securities - ------------------ The Company desires to include within the Account certain "in-kind" securities (the "In-Kind Securities"). A list of the In-Kind Securities to be transferred to the Account is set forth below. The Company acknowledges and agrees that some or all of the In-Kind Securities may have value for the Account and it may be in the Company's best interest to retain them, but in order to comply with the investment objectives or strategies of the Account, some or all of such assets may be liquidated at such times and in such manner as is deemed appropriate by Manager. List of Securities to be Transferred to Account - ----------------------------------------------- APPENDIX C ---------- Investment in PIMCO Funds - ------------------------- Provided that the following conditions have been met, the Manager may purchase and sell shares (the "Shares") of PIMCO Funds for the Account. a) The Account will pay no sales commission with respect to either the purchase or the sale of such Shares. b) The Account will not pay a redemption fee in connection with the sale of the Shares. c) The Account will not pay an investment management fee ("Investment Management Fee") under this Investment Management Agreement with respect to those assets of the Company invested in the Shares, for the entire period of the investment. This condition does not preclude (1) the payment of investment advisory fees ("Investment Advisory Fees") by the investment company under the terms of its investment advisory agreement of PIMCO Funds adopted in accordance with Section 15 of the Investment Company Act of 1940, or (2) the payment of an Investment Management Fee by the Account based on total assets from which a credit has been subtracted representing the Account's pro rata share of the Investment Advisory Fee paid by PIMCO Funds. If, during any fee period for which the Account has prepaid its Investment Management Fee, the Account purchases Shares, the requirement for the above paragraph shall be deemed met with respect to such prepaid fee if the amount of the prepaid fee that constitutes the portion of the Investment Advisory Fee related to the Shares is (1) subtracted from the prepaid fee at the time of the payment of such fee or (2) is returned to the Account no later than during the immediately following fee period or (3) is offset against the prepaid fee for the immediately following fee period or for the fee period immediately following thereafter. A fee shall be deemed to be prepaid for any fee period if the amount of such fee is calculated as of a date not later than the first day of such period. d) The Company is independent and unrelated to the Manager or any affiliate thereof, has received a current prospectus of the Fund and full and detailed written discosure of the Investment Advisory Fee and other fees paid by the Company and PIMCO Funds, including the nature and extent of any differential between the rates of such fees, the reasons why the Manager considers purchases of Shares to be appropriate for the Account, and any limitations on the Manager with respect to which assets may be invested in Shares and, if so, the nature of such limitation. The Company hereby acknowledges receipt of the foregoing documents and hereby approves the purchase and sale of the Shares. EXHIBIT A SCHEDULE OF ASSETS ------------------ Approximately $____ million in cash [and in-kind securities]. EXHIBIT B FULL DISCRETION GUIDELINES MODERATE DURATION October 22, 1998 1. Type of Portfolio Management Active Bond Management ---------------------------- 2. Objective High Total Return --------- 3. Performance Benchmarks ---------------------- a. Passive Indices Lehman Intermediate Government/Corporate/Yankee Index b. Manager Universe Second quartile minimum c. Measurement Period 3-5 years minimum 4. Portfolio Duration Range 2-5 years ------------------------ 5. Permitted Asset-Types . Money Market Instruments and Funds --------------------- . U.S. Treasury and Agency Notes and Bonds . Corporate Fixed Income Securities . Mortgage-backed Securities . Asset-Backed Fixed Income Securities . Non-Convertible Preferred Stock . Convertible/Exchangeable Securities . Non-U.S. Fixed Income Securities 6. Permitted Instruments . Cash and forward settlement --------------------- . Futures and Options . Interest Rate Swaps and Caps . PIMCO Pooled Funds 7. Credit Quality Minimums ----------------------- Average Portfolio Quality A Rating Individual Security Quality B Rating 8. Concentration Limits Maximum (except U.S. Treasury/Agency) -------------------- ------- Issue 10% of portfolio Issuer 10% of portfolio Sector: Below BBB 15% of portfolio Non-U.S. 30% of portfolio PACIFIC INVESTMENT MANAGEMENT COMPANY POLICIES & PROCEDURES FOR INVESTMENT GUIDELINES A. GENERAL 1. The following are the policies and procedures Manager will follow for all portfolios under management unless the client's specific written investment guidelines state otherwise, in which case the client's specific written guidelines will apply. 2. Manager shall have full discretion within the guidelines set forth to invest in fixed income and related securities. Manager shall use this discretion consistent with the standard of care commonly known as the "prudent expert rule." Namely, in adhering to this rule we will perform our duties in the sole interest of the plan's participants and beneficiaries and "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and like aims." 3. Guidelines apply at the time of purchase. Subsequent changes due to market ---------------- appreciation/depreciation or upgrades/downgrades which result in a security or group of securities not complying to guideline specifications will not constitute a guideline violation and will not dictate a transaction unless specifically stated in the guidelines. B. QUALITY 1. The applicable rating for guideline purposes is the higher of Moody's, S&P, Duff & Phelps, Fitch, or, if no such rating is available, Manager's own internal rating. 2. The minimum and average quality will include all variations within the minimum or average quality rating category. For example, a minimum quality restriction of BBB, would permit investments rated BBB+, BBB and BBB-. 3. Commercial Paper: The long-term debt rating of the commercial paper issuer ---------------- must comply with the client's minimum quality restriction. If there is no long-term debt rating, the commercial paper must be rated at least A2/P2. 4. Downgrades: If an issue is downgraded such that all ratings (Moody's, S&P, ---------- Duff & Phelps, Fitch or PIMCO) are below the allowable minimum security quality, Manager will determine the appropriate action (sell or hold) based on the perceived risk, expected return and client guidelines for asset quality. C. ASSET TYPES AND INVESTMENT VEHICLES 1. Manager will have the discretion to invest in the asset types listed below. The securities may be issued publicly or privately. If the client is a "Qualified Institutional Buyer," 144a private placements may also be used. 2. U.S. Treasury and Agency Notes and Bonds. 3. Money Market Instruments are defined as fixed income assets maturing in ------------------------ one year or less at the time of issuance. These assets include, but are not limited to, the following: Treasury bills, federal agency discount paper, commercial paper, Eurodollar commercial paper, Eurodollar time deposits, bankers acceptances (U.S. and Euro), certificates of deposits (U.S. and Euro), repurchase agreements, reverse repurchase agreements, bank STIF accounts and U.S. Money Market Mutual Funds. 4. Corporate Securities: All fixed income securities issued by U.S. -------------------- corporations and U.S. dollar fixed income securities of foreign issuers. Corporate securities include U.S. corporate notes and bonds, Yankee bonds and Eurodollar bonds. 5. Mortgage-backed Securities: All securities whose source of repayment is -------------------------- a mortgage or pool of mortgages, or whose repayments are collateralized by a mortgage or pool of mortgages. Mortgage-backed securities include, but are not limited to, the following: agency pass-throughs, non-agency pass-throughs, collateralized mortgage obligations (CMOs), and stripped mortgage pass-through securities (interest-only and principal-only securities). 6. Asset-backed Securities: All fixed income securities whose source of ----------------------- repayment is an asset, such as an installment contract or a revolving loan, and have some form of credit enhancement, such as overcollateralization, letter of credit, third party guaranty, or senior/subordinated structure. 7. Non-Convertible Preferred Stock: All fixed-rate and variable-rate stock ------------------------------- that has preference over common stock concerning dividends and liquidation of the issuer, and is not convertible into common stock. --- 8. Convertible/Exchangeable Securities: All securities that are convertible ----------------------------------- or exchangeable into equity or fixed income securities, or any combination thereof of the issuer, including warrants. 9. Non-U.S. Fixed Income Securities: This refers to all fixed income -------------------------------- securities which are (1) issued in a currency other than U.S. dollars, and (2) issued in a country outside the U.S. These securities must conform to the quality, concentration and other characteristics set forth by the guidelines. Manager generally will hedge at least 75% of its currency exposure. 10. Futures & Options: Manager may use futures and options whose underlying ----------------- instrument is a security or index of an asset type described in C. 2-9 above. Manager may also use currency forwards and options to hedge non- U.S. currency exposure. 11. Interest Rate Swaps and Caps: Manager may use interest rate swaps and ---------------------------- caps whose underlying instrument is a security or index of an asset type described in C. 2-9 above. 12. PIMCO Funds: As a means of obtaining sector exposure in a diversified, ----------- cost effective manner, Manager may use its PIMCO Funds series of mutual funds, such as the PIMCO International Fund and the PIMCO High Yield Fund. Appropriate documentation must be completed by the client before these funds will be used. D. ISSUE/ISSUER CONCENTRATION With the exception of issues from the U.S. Treasury, direct agencies of the U.S. government, and the governments of Canada, Japan, France, Germany and the United Kingdom, Manager will limit exposure to any issue or issuer to 10% of the market value of the portfolio at the time of purchase. Subsidiary and parent companies will be considered separate issuers, however Manager will closely monitor the combined exposure in the circumstances where we hold issues from both the parent and subsidiary. With regard to CMO issues, we will regard the specific mortgage pool as the issuer, and each tranche within the CMO as a specific issue. E. PORTFOLIO DURATION Manager will maintain the overall duration of the portfolio within two (2) years (plus or minus) of the duration of the benchmark index. EXHIBIT C TOTAL RETURN FEE SCHEDULE ------------ Following is the schedule of annual fees for advice and counseling services performed by Manager with respect to the domestic Total Return investment portfolio of the client. 0.50% ON FIRST $25 MILLION 0.375% ON NEXT $25 MILLION 0.25% THEREAFTER Fees are payable quarterly in advance and are computed based on the market value of the client's investment portfolio as reported on the Manager's statement at the beginning of the billing period. Market value for the portfolio will be determined by aggregating the market value for each asset in the portfolio using the last sale price on the principal exchange on which the security is listed as reported in the financial press. If such sale price is not readily available, the market price shall be determined in good faith by or at the direction of Manager. Fees shall be prorated on a daily basis when the investment portfolio is under the supervision of Manager for a portion of any quarter except that in the event services are terminated in the first three months, no proration shall be made for the first three months' fees. The investment portfolio is comprised of all funds and assets, including cash, cash accruals, additions, substitutions and alterations which are subject to advice by the Manager. EXHIBIT D DESIGNATED REPRESENTATIVES OF THE COMPANY -------------- NAME/TITLE SIGNATURE ---------- --------- - -------------------------------- ------------------------------ - -------------------------------- ------------------------------ - -------------------------------- ------------------------------ EX-10.14 10 INVESTMENT MANAGEMENT AGREEMENT DATED 10/22/98 EXHIBIT 10.14 GENERAL RE - NEW ENGLAND ASSET MANAGEMENT, INC. INVESTMENT MANAGEMENT AGREEMENT ------------------------------- This Agreement is made as of the 22nd day of October, 1998, between 1. GENERAL RE - NEW ENGLAND ASSET MANAGEMENT, INC., a corporation organized under the laws of the State of Delaware ("Manager"); and 2. SCOTTISH ANNUITY & LIFE HOLDINGS, LIMITED, a corporation organized under the laws of the Cayman Islands ("Client"). WHEREAS, Client desires to appoint Manager as the investment manager of that portion of Client's assets constituting the Account (as defined below); NOW THEREFORE, in consideration of the mutual agreements herein contained, it is agreed as follows: SECTION 1. THE ACCOUNT ----------- The cash, securities and other assets placed by Client in the account to be managed under this Agreement (the "Account") are listed on Schedule A. Assets may be added to the Account at any time with the consent of the Manager. The Account will include these assets and any changes in them resulting from transactions directed by Manager, withdrawals made by Client, or dividends, interest, stock splits and other earnings, gains or losses on the assets. Assets placed in the Account by Client that are not to be managed by Manager are separately identified on Schedule A ("Unmanaged Assets"). Manager will include these assets in its periodic reports to Client, but will exclude their value from the Account in calculating Manager's fees. 1 SECTION 2. MANAGEMENT OF THE ACCOUNT ------------------------- Manager will make all investment decisions for the Account, in Manager's sole discretion and without first consulting or notifying Client, in accordance with the investment restrictions and guidelines which are attached as Schedule B (the "Investment Guidelines"). Client may change these Investment Guidelines at any time, but Manager will be bound by the changes only after it has received and agreed to them in writing. Other than by the Investment Guidelines and the terms of this Agreement, the investments made by Manager on behalf of the Client will not be restricted in any manner, except by operation of law. Manager will have full power and authority, on behalf of Client, to instruct any brokers, dealers or banks to buy, sell, exchange, convert or otherwise trade in all securities, futures or other investments for the Account. Manager will not be responsible for giving Client investment advice or taking any other action with respect to Unmanaged Assets. Client appoints Manager as the true and lawful attorney of the Client for and in the name, place and stead of Client, in Manager's unrestricted discretion, to operate and conduct the brokerage accounts of the Client and to do and perform all and every act and thing whatsoever requisite in furtherance of this Agreement, including the execution of all writings related to the purchase or sale, assignments, transfers and ownership of any stocks, bonds, commodities, or other derivatives or securities. Manager is hereby fully authorized to act and rely on the authority vested pursuant to said power of attorney. SECTION 3. TRANSACTIONS FOR THE ACCOUNT ---------------------------- Manager will arrange for securities transactions for the Account to be executed through those brokers, dealers or banks that Manager believes will provide best execution. In choosing a broker, dealer or bank, Manager will consider the broker, dealer or bank's execution capability, reputation and access to the markets for the securities being traded for the Account. Manager will seek competitive commission rates, but not necessarily the lowest rates available. Manager may also send transactions for the Account to brokers who charge higher commissions than other brokers, provided that Manager determines in good faith that the amount of commissions Manager pays is reasonable in relation to the value of the brokerage and research services provided, viewed in terms either of that particular transaction or 2 Manager's overall responsibilities with respect to all clients whose accounts Manager manages on a discretionary basis. If Manager decides to purchase or sell the same securities for Client and other clients at about the same time, Manager may combine Client's order with those of other clients if Manager reasonably believes that it will be able to negotiate better prices or lower commission rates or transaction costs for the combined order than for Client's order alone. Client will pay the average price and transaction costs obtained for such combined orders. If Manager cannot obtain execution of the combined orders at prices or for transaction costs that Manager believes to be desirable, Manager will allocate the securities purchased or sold as part of the combined order by following its order allocation procedures. Manager generally will allocate securities purchased or sold as part of a combined order to Client's Account and to accounts of other clients pro rata --- ---- in proportion to the size of the order placed for each client. However, Manager may increase or decrease the amounts of securities allocated to each client if necessary to avoid having odd or small numbers of shares held for the account of any client. Each client that participates in a combined order will receive or pay the average share price for all transactions executed as part of the combined order and will pay its pro rata share of the transaction costs. --- ---- If Client directs Manager to use particular brokers, dealers or banks to execute transactions for the Account, Manager will do so, but Manager will not seek better execution services or prices for Client from other brokers, dealers or banks, and Client may pay higher prices or transaction costs as a result. Manager also may not be able to seek better execution services for Client by combining Client's orders with those of other clients. Client may direct all transactions for the Account to a particular broker, dealer or bank, by writing the name and address of that broker, dealer or bank in the space provided on Schedule A. SECTION 4. TRANSACTION CONFIRMATIONS ------------------------- Manager will instruct the brokers, dealers or banks who execute transactions for the Account to send Client all transaction confirmations, unless Client chooses not to receive confirmations. If Client does not wish to receive --- individual confirmations, this box should be checked. [ ] Client may elect to receive individual confirmations at any time by giving Manager written notice. 3 SECTION 5. CUSTODY OF ACCOUNT ASSETS ------------------------- The assets in the Account will be held for Client by the custodian named on Schedule A (the "Custodian"). Manager will not have custody of any Account assets. Client will pay all fees of the Custodian. Client will authorize the Custodian to follow Manager's instructions to make and accept payments for, and to deliver or to receive, securities, cash or other investments purchased, sold, redeemed, exchanged, pledged or loaned for the Account. Client also will instruct the Custodian to send Client and Manager monthly statements showing the assets in and all transactions for the Account during the month, including any payments of Manager's fees. Client will provide Manager with a copy of its agreement with the Custodian, and will give Manager reasonable advance notice of any change of Custodian. SECTION 6. REPORTS TO CLIENT ----------------- Manager will send Client monthly written reports showing the identity, cost, and current market value of the assets in the Account and each transaction made for the Account during the period covered by the report. The Account's performance will be sent quarterly. SECTION 7. ACCOUNT VALUATION ----------------- Manager will value the securities in the Account that are listed and traded on a national securities exchange or on NASDAQ on the valuation date at the closing price on the principal market where the securities are traded. Where the market value of any security is not readily available, Client and the Manager will each choose one broker-dealer and the market value will be deemed to be the average of the values determined by the two broker-dealers. SECTION 8. MANAGER'S FEES -------------- For Manager's services, Client will pay a percentage of the value, as determined under Section 7 of this Agreement, of all assets in the Account (excluding Unmanaged Assets) as of the last trading day of each calendar month. The fees are payable at the end of each calendar quarter for services provided by Manager during the prior three months. The percentage amount of the fees is shown on Schedule A. In any partial quarter, the fees will be reduced pro rata based on the number of days the Account was managed. --- ---- 4 Client agrees to pay Manager's fees as follows: [_] The Custodian will deduct the fees from Client's Account and pay them to Manager each quarter. Manager will send Client and the Custodian at the same time a bill showing the amount of Manager's fees, the Account value on which they were based and how they were calculated. The Custodian will send Client a monthly statement showing all amounts paid from the Account, including Manager's fees. [_] Client will be billed directly by Manager and will pay Manager's fees within 30 days of receiving the bill. If Manager invests in securities issued by money market funds or other investment companies for the Account, these securities will be included in the value of the Account when Manager's fees are calculated. These same assets will be subject to additional investment management and other fees that are paid by the investment company but ultimately borne by its shareholders. These additional fees are described in each investment company's prospectus. SECTION 9. PROXY VOTING ------------ Proxies for securities in the Account should be voted as follows: [_] Client directs Manager not to vote proxies for securities held for the --- Account. [_] Client directs Manager to vote all proxies for securities held for Client's Account in accordance with-- [_] Manager's own discretion or [_] Client's proxy voting guidelines attached as Schedule C. Client will direct Custodian to send promptly all proxies and related shareholder communications to Manager and to identify them as relating to Client's Account. Client understands that Manager will not be able to vote proxies if they are not received on a timely basis from the Custodian as properly identified as relating to Client's Account. These proxy voting instructions may be changed at any time by notifying Manager in writing. 5 SECTION 10. LEGAL PROCEEDINGS ----------------- Manager will not advise or act for Client in any legal proceedings, including bankruptcies or class actions, involving securities held in the Account or issuers of those securities. SECTION 11. RISK ---- Manager cannot guarantee the future performance of the Account, promise any specific level of performance or promise that its investment decisions, strategies or overall management of the Account will be successful. The investment decisions Manager will make for Client are subject to various market, currency, economic, political and business risks, and will not necessarily be profitable. SECTION 12. STANDARD OF CARE; LIMITATION OF LIABILITY ----------------------------------------- Except as may otherwise be provided by law, Manager will not be liable to Client for any loss (i) that Client may suffer as a result of Manager's good faith decisions or actions where Manager exercises the degree of care, skill, prudence and diligence that a prudent person acting in a like fiduciary capacity would use; (ii) caused by following Client's instructions; or (iii) caused by the Custodian, any broker, dealer or bank to which Manager directs transactions for the Account or any other person. Federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith, and this Agreement does not waive or limit Client's rights under those laws. Manager will not be responsible for Client's own compliance with the insurance investment laws of Client's state of domicile or for Client's compliance with applicable tax laws. In managing the Account, Manager will not consider any other securities, cash, or other investments or assets Client owns for diversification or other purposes. Manager shall have no responsibility whatsoever for the management of the Unmanaged Assets or any assets of Client other than the Account and shall incur no liability for any loss or damage which may result from the management of such other assets. 6 SECTION 13. CLIENT DIRECTIONS ----------------- The names and specimen signatures of each individual who is authorized to give directions to Manager on Client's behalf under this Agreement are set forth on Schedule D. Directions received by Manager from Client must be signed by at least one such person. If Manager receives directions from Client which are not signed by a person that Manager reasonably believes is authorized to do so, Manager shall not be required to comply with such directions until it verifies that the directions are properly authorized by Client. Manager shall be fully protected in relying upon any direction signed or given by a person that Manager reasonably believes is authorized to give such directions on Client's behalf. Manager also shall be fully protected when acting upon an instrument, certificate, or paper that Manager reasonably believes to be genuine and to be signed or presented by any such person or persons. Manager shall be under no duty to make any investigation or inquiry as to any statement contained in any writing and may accept the same as conclusive evidence of truth and accuracy of statements contained therein. SECTION 14. CONFIDENTIALITY --------------- Except as Client and Manager otherwise agree or as may be required by law, all information concerning the Account and services provided under this Agreement shall be kept confidential. SECTION 15. NON-EXCLUSIVE AGREEMENT ----------------------- Manager provides investment advice to other clients and may give them advice or take actions for them, for Manager's own accounts or for accounts of persons related to or employed by Manager, that is different from advice provided to or actions taken for Client. Manager is not obligated to buy, sell or recommend for Client's Account any security or other investment that Manager may buy, sell or recommend for other clients or for the account of Manager or its related persons or employees. If Manager obtains material, non-public information about a security or its issuer that manager may not lawfully use or disclose, Manager will have no obligation to disclose the information to Client or to use it for Client's benefit. 7 SECTION 16. TERM OF AGREEMENT ----------------- Either Client or Manager may cancel this Agreement at any time upon 30 days written notice. This Agreement will remain in effect until terminated. Termination of this Agreement will not affect (i) the validity of any action that Manager or client has previously taken; (ii) the liabilities or obligations of Manager or Client for transactions started before termination; or (iii) Client's obligation to pay Manager's fees through the date of termination. Upon termination, Manager will have no obligation to recommend or take any action with regard to the securities, cash or other assets in the Account. SECTION 17. AGREEMENT NOT ASSIGNABLE ------------------------ This Agreement may not be assigned within the meaning of the Investment Advisers Act of 1940 (the "Advisers Act") by Manager without Client's consent. SECTION 18. GOVERNING LAW ------------- The internal law of Connecticut will govern this Agreement. However, nothing in this Agreement will be construed contrary to any provision of the Advisers Act or the rules thereunder. SECTION 19. MISCELLANEOUS ------------- If any provision of this Agreement is or becomes inconsistent with any applicable law or rule, the provision will be deemed rescinded or modified to the extent necessary to comply with such law or rule. In all other respects, this Agreement will continue in full force and effect. This Agreement contains the entire understanding between Manager and Client and may not be changed except in writing signed by both parties. Failure to insist on strict compliance with this Agreement or with any of its terms or any continued conduct will not be considered a waiver by either party under this Agreement. SECTION 20. NOTICES ------- All notices and instructions with respect to the Account or other matters covered by this Agreement may be sent by U.S. mail, overnight courier, or facsimile transmission (with a hard copy sent by U.S. mail) to Client and to Manager at the addresses at the end of this agreement or to another address provided in writing. 8 SECTION 21. REPRESENTATIONS OF CLIENT ------------------------- Client represents and warrants to Manager that (a) Client is the beneficial owner of all assets in the Account and that there are no restrictions on transfer or sale of any of those assets; (b) this Agreement has been duly authorized, executed, and delivered by Client and is Client's valid and binding obligation; (c) the names of the individuals who are authorized to act under this Agreement on behalf of Client have been given to Manager in writing; (d) no government authorizations, approvals, consents, or filings not already obtained are required in connection with the execution, delivery, or performance of this Agreement by Client; and (e) Client certifies that it is not an employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or a plan subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), nor a Person acting on behalf of any such plan. Client agrees to notify Manager in writing within five (5) days after the occurrence of an event making the above statement no longer accurate. Client agrees to indemnify, defend and hold harmless Manager and its officers, directors, agents, employees, shareholders, legal representatives, successors and assigns, from and against any and all claims, actions, suits, damages, costs, liabilities, judgments, losses, charges, costs and expenses, including attorneys' fees, of Manager arising from any failure by Client to accurately disclose its status under this Section or by reason of any defect in Client's authority to appoint Manager under this Agreement. SECTION 22. REPRESENTATIONS OF MANAGER -------------------------- Manager represents and warrants that this Agreement has been duly authorized, executed and delivered by Manager and is its valid and binding obligation. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 SECTION 23. FORM ADV -------- Client has received and reviewed a copy of Part II of Managers Form ADV and a copy of this Agreement. AGREED TO AND ACCEPTED BY: GENERAL RE - NEW ENGLAND SCOTTISH ANNUITY & LIFE ASSET MANAGEMENT, INC. HOLDINGS, LIMITED /s/ Dennis R. Richey /s/ Michael C. French - ----------------------- ---------------------------- By: Dennis R. Richey Signature Its Vice President Michael C. French ---------------------------- (Name) President & CEO ---------------------------- (Title) Pond View Corporate Center Ugland House, PO Box 10657 APO 76 Batterson Park Road 113 S. Church St. Farmington, Connecticut 06032 George Town, Grand Cayman Island Cayman Islands, BWI (Principal Address) NA ---------------------------- (Taxpayer Identification Number) 10 SCHEDULE A I. ACCOUNT ASSETS. -------------- A. MANAGED ASSETS - Client has deposited the following securities, cash -------------- and other assets with the Custodian identified below to be managed under this Agreement. B. UNMANAGED ASSETS - Client also deposited with the Custodian the ---------------- following assets which are not to be managed under this Agreement: ________________________________________________________________________________ II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement and ------------------------- any Unmanaged Assets will be held by: _____________________________ Custodial Account Number:______________ (Name) _____________________________ (Address) _____________________________ ________________________________________________________________________________ III. FEES. Manager's fees for services provided under this Agreement shall be as ---- follows: If assets under management are less than $150,000,000, then following fee schedule applies: Annual fee of .20% (20 hundredths of one percent) on the first $50 million; .15% (15 hundredths of one percent) on next $50 million and .12% (12 hundredths of one percent) on market value of remaining assets under management. If assets under management are in excess of $150,000,000, the annual fee will be .12% (12 hundredths of one percent) on the market value of assets under management. ________________________________________________________________________________ IV. BROKERAGE DIRECTION. Client directs Manager to cause all transactions for ------------------- the Account to be executed through the following broker, dealer or bank: ________________________________________________________________________________ Client has read, understands and accepts the limitations that this direction will place on Manager's ability to seek best execution for the Account. This direction may be changed by Client at any time by notifying Manager in writing. ________________________________________________________________________________ V. NAME OF CLIENT: VI. DATE: SCOTTISH ANNUITY & LIFE HOLDINGS, LIMITED ________________________________ By:______________________________________ 11 October 26, 1998 SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. Investment Policy and Guidelines MAP GENERAL RE LOGO NEW ENGLAND ASSET MANAGEMENT, INC./TM/ SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. INVESTMENT POLICY INVESTMENT PHILOSOPHY Insurance and investment risk are inextricably linked. Consequently, the assumption of risk in either area has significant impact on the company's ability to assume risk in the other. It is imperative, therefore, that the investment policy provide a framework to manage and adjust investment portfolio risk profiles to accommodate present and future corporate insurance risk preferences. INVESTMENT POLICY The company will manage its total investments so that at all times there are fixed income securities which are adequate in amount and duration to meet the cash requirements of current operations as well as longer term liabilities. To the extent that there are funds available for investment beyond these requirements, the investment objective for such funds will be to maximize total return within a prudent level of risk, taking into account the potential impact on the volatility of reported earnings and reserves, as well as the importance of maintaining the company's A.M. Best rating. INVESTMENT OBJECTIVE Scottish Annuity & Life Holding's assets shall be invested to achieve the following objectives: . Meet insurance regulatory requirements with respect to investments under pertinent insurance laws and regulation. . Maintain an appropriate level of liquidity to satisfy the cash requirements of current operations and longer term obligations. . Adjust investment risk to offset or complement insurance risks based on total corporate risk tolerance. . Subject to the foregoing objectives and specific guidelines set forth below, maximize total return on an after-tax basis, taking into account the net operating losses carried forward for Federal income tax purposes. - -------------------------General Re [LOGO] New England Asset Management, Inc.(TM) SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. INVESTMENT POLICY PORTFOLIO CHARACTERISTICS . Target duration will be related to the duration of the company's liabilities. Currently neutral duration is 5.0 years. Active management will permit a maximum duration for the portfolio of 6.0 years and a minimum of 3.0 years. . Average quality will be "A" or better. . Securities lending is allowed with appropriate collateralization. PERMITTED INVESTMENTS % OF INVESTED ASSETS (1) (6) MIN MAX NOTES --- --- ----- Governments 0 100 Agencies 0 100 Corporates 0 60 MBS 0 35 (2) CMO's 0 15 ABS 0 20 Foreign 0 15 (4) (5) Equities 0 0 Notes - ----- (1) Aggregate limit of 20% on Private Placements (144A-20%; privates - 10%) (2) Per Issue limit - agency MBS 5.0% (3) U.S. and Canadian denominated (4) Non-dollar denominated - prior approval with exception of assets supporting non-dollar liabilities (5) Other securities including Schedule BA items, Real Estate and Mortgage Loans need prior approval of Investment Committee (6) No equity and emerging markets debt allowed - -------------------------General Re [LOGO] New England Asset Management, Inc.(TM) SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. INVESTMENT POLICY Diversification Limitation on the amount of securities owned of any - --------------- one issuer (except governments and agencies) is as follows: Rating Agency/ NAIC Limit Per Issuer Limit By Rating -------------- ---------------- --------------- AAA/1 3% of Assets None AA/1 2% of Assets None A/1 1.5% of Assets None BBB/2 1.5% of Assets 20% of Assets BB .5% of Assets 5.0% of Assets B .3% of Assets 5.0% of Assets Performance Benchmark Lehman Aggregate Bond Index (1) Investments carried at market value. (2) Investments carried at amortized cost. - ------------------------ GENERAL RE [LOGO] NEW ENGLAND ASSET MANAGEMENT, INC.(TM) SCHEDULE B - -------------------------------------------------------------------------------- INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager in - --------------------- managing Client's Account are set forth below: - -------------------------------------------------------------------------------- NAME OF CLIENT: DATE: SCOTTISH ANNUITY & LIFE HOLDINGS, LIMITED By:_________________________ By: _________________________ - -------------------------------------------------------------------------------- 12 SCHEDULE C PROXY VOTING GUIDELINES: The proxy voting guidelines to be followed by Manager - ----------------------- in voting securites held in the Account are set forth below: (If none, check here [ ].) NAME OF CLIENT: DATE: SCOTTISH ANNUITY & LIFE HOLDINGS, LIMITED By: ------------------------- ------------------ 13 SCHEDULE D SECRETARY'S CERTIFICATE ----------------------- I, _________________________________, the Secretary of SCOTTISH ANNUITY & LIFE HOLDINGS, LIMITED (the "Corporation"), a Corporation organized and existing under the laws of the Cayman Islands, hereby certify that each of the following officers of the Corporation, acting singly, is authorized in the name and on behalf of the Corporation, to give instructions to General Re-New England Asset Management, Inc. ("Manager") with respect to any and all matters, including investment and reinvestment of securities, pertaining to the Investment Management Agreement between the Corporation and Manager, and to execute and deliver any and all documents and to take any and all other action to carry out the purposes of said Investment Management Agreement. I further certify that the specimen signature set forth next to the names of such officers, is the true and genuine signature of such persons. Name of Officer Title Signature ______________________ _____________________ ___________________ ______________________ _____________________ ___________________ ______________________ _____________________ ___________________ This Certificate shall be in effect from the date hereof until written notice is given on behalf of the Corporation to terminate or revise it. IN WITNESS WHEREOF, I set my hand and seal of the Corporation. _____________________ ___________________ (Corporate Seal) Secretary Date 14 EX-10.16 11 INVESTMENT MANAGEMENT AGREEMENT DATED 10/22/98 EXHIBIT 10.16 ------------- Investment Management Agreement This Investment Management Agreement (the "Agreement") between Scottish --------- Annuity and Life Holdings, Ltd. (the "Client") and The Prudential Investment Corporation, a New Jersey corporation (the "Investment Manager") is dated as of October 22, 1998. WHEREAS, the Client desires to appoint the Investment Manager to manage certain of its assets in account(s) established by the Client ("Investment ---------- Manager Accounts"); and - ---------------- WHEREAS, the Investment Manager is willing to accept the duties and responsibilities of an investment manager with respect to the Investment Manager Accounts; NOW, THEREFORE, in consideration of the promises and mutual considerations provided herein, and intending to be legally bound hereby, the Client and the Investment Manager agree as follows: 1. Appointment. The Investment Manager will act as an investment manager ----------- with respect to the Investment Manager Accounts. 2. Fees. The Client will pay the Investment Manager, as compensation for ---- its services under this Agreement, a fee determined in accordance with Schedule A to this Agreement. Such fee may be changed by the Investment Manager upon 45 days' written notice to the client. 3. Authority of Investment Manager. Subject to Section 4 of this ------------------------------- Agreement the Investment Manager shall have the discretionary authority to manage and control assets of the Client that are segregated in an Investment Manager Account, including the power to acquire and dispose of assets in each Investment Manager Account. In exercise of that power, the Investment Manager may invest and reinvest the assets, without distinction between principal and income, in investments described by the Client's investment management guidelines, consisting of Schedule B to this Agreement. When exercising its authority under this Section 3, the Investment Manager shall be under no obligation to consult with or obtain the consent of the Client. The assets initially segregated into each Investment Manager Account shall be cash. Assets other than cash may be segregated into an Investment Manager Account with the consent of the Investment Manager. The Client may remove assets from any Investment Manager Account at any time without the consent of the Investment Manger. Upon segregating assets of the Client into an Investment Manager Account, the Client shall promptly inform the Investment Manager of all assets segregated into the Investment Manager Account. The Client shall also establish reporting and accounting arrangements so that the Investment Manager will be fully informed at all times as to the assets segregated into any Investment Manager Account. 4. Investment Limitations and Guidelines. The client may, from time to -------------------------------------- time, communicated in writing general investment guidelines to the Investment Manager. Such communication shall be effective no more than five days subsequent to its receipt by Investment Manager. Until contrary guidelines are communicated from the Client to the Investment Manager, each Investment Management Account shall be managed in accordance with the guidelines contained in Schedule B. 5. Brokerage. Subject to any guidelines annexed hereto, the Investment ----------- Manager shall use its best efforts to obtain best execution of orders at the most favorable prices reasonably obtainable. When determining the most favorable prices reasonably obtainable, the Investment Manager may consider, in accordance with section 28(e) of the Securities Exchange Act of 1934, the value of the receipt by the Investment Manager of services that affect securities transactions and incidental functions, such as clearance and settlement services, and advice as to the value of securities, the advisability of investing in securities, the availability of securities or purchasers or buyers of securities and analyses and reports concerning issues; industries, securities, economic factors, trends, portfolio strategy and the performance of accounts. Commissions charged by brokers who provide these services may be somewhat higher than the commissions charged by brokers who do not provide these services. With respect to the Investment Manager Accounts, the Investment Manager may cause securities transactions to be executed concurrently with authorizations to purchase or sell the same securities for other accounts managed by the Investment Manager, including proprietary accounts or accounts of affiliates. In these instances, the executions of purchases or sales, where possible, shall be allocated equitably among the various accounts (including the Investment Manager Accounts). 6. Other Activities of the Investment Manager. In addition to the ------------------------------------------ investment management services performed under this Agreement, the Investment Manager or any of its affiliates may engage in any other business and may render investment advisory services to any other person. The Investment Manager or any of its affiliates may render investment advisory services to any other person, even if the Investment Manager, its affiliates, or other person has investment policies similar to those followed by the Investment Manager for the Investment Manager Accounts. The Investment Manager may, at any time, buy or sell, or may direct or recommend that another person buy or sell, securities of the same kind or class that are purchased or sold for any Investment Manager Account, at a price which may or may not differ from the price of the securities purchased or sold for the Investment Manager Account. 7. Reports. The Investment Manager shall provide to the Client such ------- reports and information that the client may reasonably request. 8. Investment Manager Covenant. The Investment Manager convenants that it --------------------------- is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Adviser Act"). The Investment Manager shall immediately notify the Client of any change in its status as such. 9. Proxies. The Investment Manager will not be required to take any action ------- or render any advice with respect to the voting of proxies for securities held in any Investment Manager Account, nor will it be obligated to render advice or take any action on behalf of the Client with respect to securities presently or formerly held in any Investment Manager Account which became the subject of any legal proceedings, including bankruptcies.] 10. Termination. The Investment Manager may terminate this Agreement on 45 ----------- days' written notice to the Client. The Client may terminate the Investment Manager's appointment as an investment manager without advance notice. Upon termination of this agreement, The Investment Manager shall be under no obligation to recommend any action with regard to, or liquidate the securities or other investments in, the Investment Manager Accounts; provided, however, that upon such termination, the Client may direct the Investment Manager to remove assets from the Investment Manager Accounts in accordance with Section 3. 11. No Assignment. Neither party may assign this Agreement without the ------------- prior written consent of the other. 12. Change in Control of Investment Manager. The Investment Manager shall --------------------------------------- immediately notify the Client of any material change in the control or ownership of the Investment Manager. 13. Communication. To the extent reasonable and practical, communications ------------- from the Client to the Investment Manager, or vice versa, shall be made in writing or in another reasonable manner and be promptly confirmed in writing. Notice shall be deemed effective if made to the parties as follows: If to the Client: If to the Investment Manager: Michael C. French Martin Lawlor President and CEO Vice President Scottish Annuity and Life Prudential Investment Corporation Holdings, Ltd. Two Gateway Center, 6/th/ Floor Ugland House, P.O. Box 10657 APO Newark, NJ, USA 07102 113 South Church St Georgetown, Grand Cayman Cayman Islands, BWI 14. Disclosure Statement. The Client hereby acknowledges that not less -------------------- than 48 hours before the date it has executed this Agreement it received from the Investment Manager a copy of the disclosure statement required by Rule 204 - (3) of the Advisers Act. 15. Liability. The Investment Manager undertakes to manage the Investment --------- Manager Accounts in accordance with the guidelines set forth herein and in a professional and responsible manner. The Investment Manager will not be liable for any loss or liability incurred by reason of any investment decision made or other action taken or omitted in what the Investment Manager believes in good faith to be the proper performance of its duties hereunder, and the Investment Manager shall not, in any event, be liable for any loss or liability incurred by any reason as a result of any willful or negligent failure to act on the part of any broker or custodian, with respect to the Investment Manager Accounts; provided, however, that this provision shall not constitute a waiver of any right the Client may have under federal securities law. 16. Confidential Relationship. Each party shall use its best efforts to ------------------------- treat all information and advice furnished by the other party to it as confidential and to avoid disclosing same to third parties (other than associates of the Investment Manager) except as otherwise agreed to in writing by both parties as required by law. 17. Entire Agreement; Amendments; Severability. This Agreement constitutes ------------------------------------------ the entire agreement between the parties with respect to the Investment Manager Accounts, and supersedes any prior oral or written agreements with respect to the Investment Manager Accounts. This Agreement may not be amended except in writing signed by both parties. If any provision of this agreement shall be held or made invalid by a statute, rule, regulation, decision of a tribunal or otherwise, the remainder of this Agreement shall not be affected thereby. 18. GOVERNING LAWS. This Agreement shall be construed in accordance with -------------- the laws of the State of New Jersey (without regard to the legislative or judicial conflict of laws or rules of any state), except to the extent superseded by federal law. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date set forth above. Scottish Annuity and Life Holdings, Ltd. By /s/ Michael C. French --------------------------------- Title CEO --------------------------------- The Prudential Investment Corporation By /s/ Martin Lawlor --------------------------------- Title V.P. -------------------------------- APPENDIX A - FEES The fees of the Investment Manager shall be as follows: .20 of 1% of the first $US 50,000,000, plus .15 of 1% of any amount in excess of $US 50,000,000 The fee is billed quarterly, in arrears, and is based upon the average market value of funds managed during the calendar quarter. APPENDIX B - PORTFOLIO GUIDELINES I. The benchmark for the account will be the Lehman Brothers Aggregate Bond Index. The duration of the portfolio will be maintained within +/- 50% of that of the index. II. Approved Investments Types and Limitations: 1) Dollar-denominated investment-grade debt - No Limitation 2) Dollar-denominated non-investment-grade debt - 10% of Assets III. Sector Diversification: 1) U.S. Treasury and Agency debt - No Limitation (including pass-through and CMO issues) 2) Industrials - 50% 3) Utilities - 50% 4) Finance - 50% 5) Other - 25% IV. Issuer Limits: 1) U.S Government and Agencies - No Limitation 2) A or better - 10% 3) BBB+ to BBB- - 5% 4) Below BBB- - 2% V. Other: 1) 144a securities are permitted, subject to sector diversification limits. 2) Futures and options are permitted, for hedging only; initial margin for futures, and premiums paid for options, combined, will be limited to 5% of the value of the portfolio. EX-23.3 12 CONSENT OF ERNST & YOUNG EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 7, 1998 and October 26, 1998, in the Registration Statement (Form S-1), dated June 19, 1998, and any amendments or supplements thereto, and the related Prospectus of Scottish Annuity & Life Holdings, Ltd. /s/ Ernst & Young George Town, Grand Cayman British West Indies October 26, 1998 EX-99.5 13 CONSENT OF SAM WYLY EXHIBIT 99.5 CONSENT OF SAM WYLY The undersigned hereby consents to being named in the Registration Statement on Form S-1 (the "Registration Statement") of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), filed with the Securities and Exchange Commission, and in any other amendments or supplements to the Registration Statement (including post-effective amendments), as a person about to become a director of the Company, as set forth under the caption "Management--Executive Officers and Directors." /s/ Sam Wyly -------------------------------- Sam Wyly EX-99.6 14 CONSENT OF CHARLES J. WYLY, JR. EXHIBIT 99.6 CONSENT OF CHARLES J. WYLY, JR. The undersigned hereby consents to being named in the Registration Statement on Form S-1 (the "Registration Statement") of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), filed with the Securities and Exchange Commission, and in any other amendments or supplements to the Registration Statement (including post-effective amendments), as a person about to become a director of the Company, as set forth under the caption "Management--Executive Officers and Directors." /s/ Charles J. Wyly, Jr. ------------------------------ Charles J. Wyly, Jr. EX-99.7 15 CONSENT OF DAVID MATTHEWS EXHIBIT 99.7 CONSENT OF DAVID MATTHEWS The undersigned hereby consents to being named in the Registration Statement on Form S-1 (the "Registration Statement") of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), filed with the Securities and Exchange Commission, and in any other amendments or supplements to the Registration Statement (including post-effective amendments), as a person about to become a director of the Company, as set forth under the caption "Management--Executive Officers and Directors." /s/ David Matthews --------------------------- David Matthews EX-99.8 16 CONSENT OF R. DUKE BUCHAN III EXHIBIT 99.8 CONSENT OF R. DUKE BUCHAN III The undersigned hereby consents to being named in the Registration Statement on Form S-1 of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), filed with the Securities and Exchange Commission on June 19, 1998 (the "Registration Statement"), and in any amendments or supplements thereto (including post-effective amendments), as a person about to become a director of the Company, as set forth in the Registration Statement under the caption "Management--Executive Officers and Directors." /s/ R. Duke Buchan III --------------------------------- R. Duke Buchan III EX-99.9 17 CONSENT OF ROBERT M. CHMELY EXHIBIT 99.9 CONSENT OF ROBERT M. CHMELY The undersigned hereby consents to being named in the Registration Statement on Form S-1 (the "Registration Statement") of Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the "Company"), filed with the Securities and Exchange Commission, and in any other amendments or supplements to the Registration Statement (including post-effective amendments), as a person about to become a director of the Company, as set forth under the caption "Management--Executive Officers and Directors." /s/ Robert M. Chmely --------------------------------- Robert M. Chmely EX-99.10 18 OPINION OF THE BERNSTEIN LAW FIRM EXHIBIT 99.10 [LETTERHEAD OF THE BERNSTEIN LAW FIRM, PLLC] October 26, 1998 Scottish Annuity & Life Holdings, Ltd. Ugland House P.O. Box 10657 APO George Town, Grand Cayman Cayman Islands, British West Indies Ladies and Gentlemen: Re: SCOTTISH ANNUITY & LIFE HOLDINGS, LTD. AND SCOTTISH ANNUITY & LIFE INSURANCE COMPANY, LTD. We have acted as special United States insurance regulatory counsel for Scottish Annuity & Life Holdings, Ltd. (the "Company") and its wholly-owned subsidiary Scottish Annuity & Life Insurance Company, Ltd. ("Scottish Annuity"). We are rendering this opinion at the request of the Company. Based on the information contained in the Prospectus draft included in Amendment No. 4 to the S-1 Registration Statement dated October 26, 1998, and the representations set forth in the attached GUIDELINES AND PRINCIPLES RELATING ---------------------------------- TO THE ORGANIZATION, GOVERNANCE AND OPERATIONS OF SCOTTISH ANNUITY & LIFE - ------------------------------------------------------------------------- HOLDINGS, LTD. AND SCOTTISH ANNUITY & LIFE INSURANCE COMPANY (CAYMAN), LTD., - --------------------------------------------------------------------------- adopted by the Boards of Directors of the Company and Scottish Annuity on October 22, 1998 (the "Guidelines"), attached hereto as Appendix A, we are of the opinion that neither the Company nor Scottish Annuity is required to be licensed or admitted as an insurer or registered as an insurance holding company in or to otherwise comply with the insurance laws and regulations of any jurisdiction within the United States in order to conduct their respective businesses as described in the Prospectus and the Guidelines, although there can be no assurance that no state regulators will question the method of the purchase of insurance by residents of that state or the purchase of reinsurance by insurers domiciled in that state. Organization and Operation of the Company and Scottish Annuity -------------------------------------------------------------- This opinion is predicated on the following information contained in the Prospectus and the Guidelines: -2- . The Company has been formed under the law of the Cayman Islands and its only business purpose is to hold all the shares of Scottish Annuity, which will operate as an insurance company; . Scottish Annuity has been organized under the law of the Cayman Islands as an insurance company to provide customized variable annuities to high net worth individuals and families and to provide reinsurance for in-force blocks of fixed annuities issued by other insurers and will conduct its insurance and reinsurance operations through its executive offices located in the Cayman Islands; . The Company will conduct no insurance related activities other than through its ownership of Scottish Annuity; . Scottish Annuity will only deal with agents, brokers, intermediaries or other representatives of prospective insureds outside the United States, all application forms and policies will only be issued and delivered outside the United States, and all premiums will be received outside the United States; and . Scottish Annuity will not maintain an office in the United States and its personnel, including directors, employees or agents, will not solicit, advertise, underwrite, settle claims or conduct any insurance activities in the United States. We understand that the Prospectus will be distributed to potential investors in accordance with United States and individual state securities laws and is not for the purpose of soliciting insurance business./1/ Discussion of Applicable Law ---------------------------- Each state prohibits the transaction of an insurance business without a license, subject to certain exceptions. In researching the law for this opinion, and confirming our understanding of relevant law, we have, in addition to reviewing NAIC model statutes dealing with unauthorized insurers and the transaction of an insurance business, reviewed statutory provisions of 20 states./2/ - --------------- /1/ Our opinion does not address the legality of the sale of the Shares under state insurance or securities laws. /2/ California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Illinois, Kansas, Maryland, Massachusetts, -3- The general prohibitions, as well as the exceptions, tend to vary from state to state and even in states that are considered by the NAIC to have enacted the NAIC Nonadmitted Insurance Model Act ("Model Act"), neither the prohibitions nor the exceptions are uniform. Moreover, there is no cohesive pattern of enforcement of such laws by the various state insurance departments either in the 26 states that reportedly have adopted the provisions of the Model Act or substantially similar provisions, or in those other states that have enacted either essential provisions of the Model Act or other provisions directed at prohibiting unauthorized insurers from transacting business in their states./3/ Under Section 3.P. of the Model Act, which includes the so-called "mail order" language, but which also covers acts effected other than by mail, the "transaction of insurance" means: "(1) For purposes of this Act, any of the following acts in this state effected by mail or otherwise by a nonadmitted insurer or by any person acting with the actual or apparent authority of the insurer, on behalf of the insurer, is deemed to constitute the transaction of an insurance business in or from this state. (a) The making of or proposing to make, as an insurer, an insurance contract; (b) The making of or proposing to make, as guarantor or surety, any contract of guaranty or suretyship as a vocation and not merely incidental to any other legitimate business or activity of the guarantor or surety; (c) The taking or receiving of any application for insurance; (d) The receiving or collection of any premium, commission, membership fees, assessments, dues or other consideration for insurance or any part thereof; (e) The issuance or delivery of contracts of insurance to residents of this state or to persons authorized to do business in this state; - --------------- Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Texas, Vermont, Virginia and Wisconsin. /3/ See, e.g., New Jersey Insurance Laws, (S)(S) 17:32-19, 17:22-6.37; California Insurance Code, (S)(S) 35, 700, 703 and 1620. -4- (f) The solicitation, negotiation, procurement or effectuation of insurance or renewals thereof; (g) The dissemination of information as to coverage or rates, or forwarding of applications, or delivery of policies or contracts, or inspection of risks, the fixing of rates or investigation or adjustment of claims or losses or the transaction of matters subsequent to effectuation of the contract and arising out of it, or any other manner of representing or assisting a person or insurer in the transaction of risks with respect to properties, risks or exposures located or to be performed in this state; (h) The transaction of any kind of insurance business specifically recognized as transacting an insurance business within the meaning of the statutes relating to insurance; (i) The offering of insurance or the transacting of insurance business; or (j) Offering an agreement or contract which purports to alter, amend or void coverage of an insurance contract." "(3) The venue of an act committed by mail is at the point where the matter transmitted by mail is delivered or issued for delivery or takes effect." The language of the Model Act including acts "effected by mail," was adopted in an attempt to explicitly apply the police power of the state to "mail order" situations, which, arguably, had previously not been covered by prohibitions against the unauthorized transaction of an insurance business. More than a dozen states have no statutory language explicitly including acts by mail as acts that would constitute the transaction of an insurance business. Accordingly, it might be argued that in these states the activities included in Section 3.P. of the Model Act would not require licensure if effected by mail in the state. Nevertheless, it can be expected that some or all of these states will attempt to apply other "transacting business" provisions of their insurance statutes to activities, including use of the mails, that encompass the acts listed in the Model Act./4/ - --------------- /4/ See, e.g., Wisconsin Statutes Annotated, (S)(S) 618.02 and 618.42. -5- All of the forgoing NAIC Model Act type prohibitions on doing an insurance business require that the business be done "in this state." On the basis of the type of operations of Scottish Annuity as described in the Prospectus and the Guidelines, there are no activities constituting the doing of an insurance business that occur in any state of the United States and there are no valid grounds under existing state insurance regulatory laws on which the activities of Scottish Annuity properly can be deemed to constitute the doing of an insurance business in any of the United States. Nor is there any other valid basis for a state to claim that Scottish Annuity is doing business in its jurisdiction. Due process precludes insurance laws from prohibiting an individual or corporation from approaching an unauthorized insurer and placing insurance with it outside the state if no transaction occurs within the state. Nor can a state impose a tax on such transactions./5/ State Board of Insurance v. Todd Shipyards Corp., 370 US 451 ------------------------ -------------------- (1962); St. Louis Cotton Compress Co. v. Arkansas, 260 US 346 (1922); Allgeyer ----------------------------- -------- -------- v. Louisiana, 165 US 578 (1897). Under Todd, if Scottish Annuity restricts its --------- ---- operations as described in the Prospectus and the Guidelines, a state should not be able to successfully claim that Scottish Annuity is doing an insurance business within its jurisdiction. In addition, certain acts that would otherwise constitute the transaction of insurance are exempted by Section 4.F. of the Model Act and by independent provisions in some other state laws. These exemptions include the lawful transaction of reinsurance by insurers./6/ Since the Prospectus and the Guidelines represent that Scottish Annuity will not be engaged in any activities in any state that would constitute the transaction of insurance or reinsurance, the "transaction of insurance" laws should not apply. The exemption for reinsurance is cited to show that in certain states, Scottish Annuity could engage in reinsurance activities in the state without being licensed. Absent evidence that Scottish Annuity's parent, the Company, is itself conducting an insurance business, we would not expect Scottish Annuity's operations to be imputed to the Company. Moreover, since Scottish Annuity is not doing an insurance business - --------------- /5/ Nevertheless, most states' laws provide for a "direct placement" tax to be paid by the insured in such situations, and despite the Todd decision such ---- laws have been enforced. /6/ Of the 20 state statutes that we examined, 16 provide an explicit exemption for the transaction of reinsurance from the prohibition against transacting insurance in the state without licensure or other authorization. -6- in the United States, even if a state imputed Scottish Annuity's activities to the Company, the Company would not be doing an insurance business in the United States because Scottish Annuity would not be doing such a business. State insurance holding company laws only require registration of controlled insurers who are authorized to transact insurance in the state. Therefore, even if a state found that Scottish Annuity was transacting business in the state, it would be on an unauthorized basis and neither Scottish Annuity nor the Company would be subject to the state's insurance holding company laws. CONCLUSION ---------- If Scottish Annuity operates in the manner described under Organization and Operation of the Company and Scottish Annuity above, we believe - -------------------------------------------------------------- that Scottish Annuity will not be transacting an insurance business in the United States or any state thereof, and neither the Company nor Scottish Annuity will be required to be licensed or admitted as an insurer or registered as an insurance holding company or to otherwise comply with the insurance laws, or regulations of the United States or any state thereof. Nevertheless, there are wide variations in "transacting business" laws in the various states, and there is an absence of any consistent pattern of interpretation or enforcement of these laws by the respective insurance departments. Accordingly, there can be no assurance that questions will not be raised by some insurance departments about Scottish Annuity's operations. We are not members of the bar of any state except New York and the District of Columbia, and, accordingly, do not express any definitive opinion as to any laws other than the laws of New York and the District of Columbia and the federal laws of the United States. We are familiar with the laws of other states and their implementation, and our opinion is based on review of many of those laws and that familiarity. Sincerely, /s/ Robert B. Shapiro Robert B. Shapiro Attachment -----END PRIVACY-ENHANCED MESSAGE-----