<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1998
REGISTRATION STATEMENT NO. 333-57227
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
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)
--------------
<TABLE>
<S> <C> <C>
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)
</TABLE>
UGLAND HOUSE, 113 SOUTH CHURCH STREET CT CORPORATION SYSTEM
GEORGE TOWN, GRAND CAYMAN 1633 BROADWAY
CAYMAN ISLANDS, BRITISH WEST INDIES NEW YORK, NEW YORK 10019
(345) 949-2800 (212) 664-1666
(Address, including zip code, and (Name, address, including zip code, and
telephone number, including area code, telephone number, including area code,
of Registrant's principal executive of agent for service)
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED SEPTEMBER 10, 1998
PROSPECTUS
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16,750,000 Shares
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
Ordinary Shares
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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.
Application has been made to include the Ordinary Shares for quotation in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "SCTLF ."
The Ordinary Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which, among other things, generally prevent
transfers to holders beneficially owning issued shares of the Company
representing 10% or more of the total combined voting rights attaching to the
issued 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 issued voting shares of the Company and reduce the
voting power of any holder beneficially owning 10% or more of the issued 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 18 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
ORDINARY SHARES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Ordinary Share....................... $ $ $
- ----------------------------------------------------------------------------------------------
Total(3)................................. $ $ $
</TABLE>
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(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 $2.5 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."
- --------------------------------------------------------------------------------
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
, 1998
<PAGE>
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
<PAGE>
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
<PAGE>
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 fixed annuity 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 to provide customized
variable life insurance products to high net worth individuals and families who
are or may become U.S. taxpayers and to provide reinsurance of 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. The Company's business plan and product focus has been developed to
respond to certain insurance industry trends affecting both policyholders and
issuers of such policies. The Company's objective is to become a leading
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 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's fixed annuity 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
expects to focus its reinsurance activities on blocks of existing fixed annuity
contracts such as structured settlements, single premium deferred annuities,
immediate annuities or similar contracts. The Company will target insurance
companies that have discontinued writing new fixed annuities or similar
contracts or that seek relief from the reserve and capital requirements
associated with such contracts. The Company believes that, in response to
heightened regulatory and rating agency scrutiny, insurers are increasingly
seeking to reinsure as a means to improve earnings or risk-based capital or
other financial ratios. The Company believes that its planned low cost
operating strategy and its investment strategy for capital surplus not
otherwise dedicated from time to time to policy reserves or other corporate
purposes, as well as the absence of a corporate level tax in the Cayman
Islands, will enable it to offer competitive pricing for its reinsurance
products.
BUSINESS STRATEGY
In order to achieve its objective to become a leading 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
components:
4
<PAGE>
LEVERAGE MANAGEMENT EXPERTISE
The Company was organized by the management and shareholders of The Scottish
Annuity Company (Cayman) Ltd. ("Scottish Annuity"), a privately held Cayman
Islands insurance company that commenced operations in 1994. Scottish Annuity
offers outside the United States variable annuity contracts to persons who are
or may become U.S. taxpayers that have the same cash value management features
and target market as the Company's variable life insurance policies. The
Company intends to draw on management'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 intermediaries and
other referral sources that members of its management have developed with
Scottish Annuity. In addition, Henryk Sulikowski, the Company's Senior Vice
President and Chief Insurance Officer, has over 17 years experience in the
insurance and reinsurance industry. The Company intends to draw in particular
on his 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
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 agreements with a number of third party service providers to provide key
services to the Company. In June 1998, the Company entered into an agreement
with BT Reinsurance Limited, a Jersey, Channel Islands company ("BT Re"), to
provide the Company with certain administration, underwriting and other
services for its variable life insurance business. In addition, in June 1998,
the Company also entered into an insurance administration, services and
referral agreement with Scottish Annuity (the "Scottish Annuity Agreement"),
under which Scottish Annuity will refer potential clients to the Company as
part of the consideration for the insurance administration and other services
the Company is to provide to Scottish Annuity under such agreement. The Company
has retained International Risk Management (Cayman) Ltd. ("IRM Cayman") to act
as the Company's licensed insurance manager in the Cayman Islands and to
provide to the Company certain additional administrative services. The Company
will also retain certain investment managers to manage the Company's investment
portfolio consistent with the Company's Investment Guidelines. See "Business--
Investment Portfolio--Investment Guidelines," "--Investment Portfolio--
Investment Managers," "--Marketing" and "--Administration." The Company intends
to administer its fixed annuity reinsurance business primarily with its own
personnel.
BUILD ON SIGNIFICANT CAPITAL BASE
Upon consummation of the Offering, the Company will have an equity
capitalization of approximately $ 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 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." The "A" rating is contingent on the consummation of the Offering
and the investment by the Company of at least $150 million of surplus capital
in fixed income investments that have a minimum weighted average rating of "A."
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
5
<PAGE>
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 per policy. 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 a substantial portion of
the Company's mortality 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
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 establish reserves and risk capital in
accordance with GAAP and any additional Cayman Islands regulatory requirements
in an effort to reflect the level of investment and other risks associated with
the fixed annuities it will reinsure. An additional risk associated with the
Company's fixed annuity 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.
EMPLOY PROFESSIONAL INVESTMENT STRATEGY
The Company will seek to generate attractive levels of investment income
through a professionally managed investment portfolio. Following the Offering,
the Company will have approximately $ of capital available for
policy reserves and other corporate purposes as well as to allocate to cover
possible volatility in mortality experience with respect to its variable life
insurance policies. The Company's investment activities will be governed by the
Company's Investment Guidelines as approved by the Investment Committee of the
Board of Directors. The Company's investment portfolio for policy reserves will
consist of investment grade, fixed income securities invested with the
objective of matching the Company's anticipated asset and liability cash flows.
Capital surplus not otherwise dedicated from time to time to policy reserves
and other corporate purposes will be invested by the Company with the objective
of maximizing investment income while maintaining adequate liquidity in order
to provide for additional policy reserves or other corporate purposes as
needed. In order to achieve this investment objective, the Company initially
expects to invest approximately 30% to 40% of such capital surplus in
investment grade, fixed income securities, and to invest the balance with
independent investment managers who use investment strategies that are intended
to reduce investment volatility and correlation to the traditional equity and
fixed income investment markets. These investment strategies, frequently
referred to as "non-traditional" or "alternative" strategies, involve long and
short positions and arbitrage strategies in equity securities that seek to
hedge overall risk and reduce volatility and market correlation.
The Company has retained Cambridge Capital Advisors, Inc. ("Cambridge") and
Maverick Capital, Ltd. ("Maverick") to advise it in the development and
management of its alternative investment activities. The Company intends to
allocate no more than 50% of its capital surplus dedicated to alternative
investments to Maverick, and the balance to investment managers that the
Investment Committee will select with the advice and assistance of Cambridge.
In performing its advisory services, Cambridge will take into account the
Company's entire alternative investment portfolio, with the objective of
recommending to the Company investment managers that would provide
complementary alternative investment strategies.
6
<PAGE>
The Company believes that using alternative investment strategies for a
substantial portion of its capital surplus will enhance the Company's ability
to preserve its capital and achieve superior investment returns. As the
Company's variable life insurance and fixed annuity reinsurance business
expands, the Company will dedicate an increasing portion of its capital surplus
to policy reserves, resulting in an increase in the proportion of its capital
invested in investment grade, fixed income securities.
The Company's principal executive office is located at Ugland House, 113
South Church Street, George Town, Grand Cayman, Cayman Islands, British West
Indies, and its telephone number is (345) 949-2800.
7
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Ordinary Shares Offered Hereby.................. 16,750,000 Ordinary Shares
Ordinary Shares to be Outstanding after the
Offering(1).................................... 18,250,000 Ordinary Shares
Use of Proceeds................................. Substantially all of the net
proceeds will be contributed
to the net capital of
Scottish Insurance to support
its insurance and reinsurance
activities. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.......... SCTLF
</TABLE>
- --------
(1) Scottish Holdings, Ltd., a Cayman Islands company ("SHL"), owns 1,500,000
Ordinary Shares, which constitute all of the currently outstanding Ordinary
Shares of the Company. Prior to the consummation of the Offering, SHL will
distribute such Ordinary Shares to its stockholders (the "SHL
Distribution"). The SHL Distribution is being made to eliminate the top
tier of a multi-tier holding company structure. Ordinary Shares to be
outstanding after the Offering excludes 1,550,000 Ordinary Shares issuable
upon exercise of Class A Warrants, 200,000 Ordinary Shares issuable upon
exercise of Class B Warrants, 930,000 Ordinary Shares issuable upon
exercise of options to be granted to management and non-employee Directors
of the Company upon consummation of the Offering and 570,000 Ordinary
Shares reserved for future issuance pursuant to the Company's 1998 Stock
Option Plan (the "Stock Option Plan"). If the Underwriters' over-allotment
option is exercised in full, upon consummation of the Offering, 20,762,500
Ordinary Shares will be outstanding, and the number of Ordinary Shares
issuable upon exercise of options to be granted to management and non-
employee Directors of the Company upon consummation of the Offering will
increase to 1,069,500 Ordinary Shares. The number of Ordinary Shares
issuable upon exercise of the Class A Warrants and the Class B 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 "Description of Shares--Warrants" and "--Options" and
"Management--Stock Option Plan."
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
<PAGE>
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. Scottish
Insurance currently has retained BT Re to perform a number of administrative,
underwriting and reinsurance functions relating to its variable life insurance
business. In addition, Scottish Insurance has retained IRM Cayman as its
licensed insurance manager in the Cayman Islands and to provide certain
additional administrative services. Also, Scottish Insurance has retained
Maverick to manage no more than 50% of its surplus capital which is not
otherwise dedicated from time to time to policy reserves or other corporate
purposes and Cambridge to assist in the selection of additional investment
managers with investment strategies consistent with the Company's Investment
Guidelines. 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 "Management--Executive Officers and Directors."
ABILITY TO IMPLEMENT ITS BUSINESS PLAN.
General. The Company's business plan is focused 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 compensated by the Company for any
activities undertaken in the U.S., (ii) in the case of its fixed annuity
reinsurance business, 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.
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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 referrals or
otherwise directs business to the Company may 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. 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 contractual or other
arrangement with any referral source, 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 initially focus its reinsurance activities on
reinsuring blocks of existing fixed annuities such as structured settlements,
deferred annuities and immediate annuities 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.
Underwriting and Investment Policies. Because of the risks associated with
variable life insurance and fixed annuity reinsurance businesses (e.g.,
mortality and investment 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 and investment policies or that ceding
companies will maintain appropriate interest crediting rates with respect to
fixed annuities reinsured by Scottish Insurance.
Maintenance of Claims Paying Rating. 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,
if the Company is unable to maintain such rating, to obtain a similar claims-
paying ability rating from another major rating agency.
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 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
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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.
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. The insurance laws of each
state in the United States 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, settle
claims or conduct other insurance activities, in the United States.
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 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 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 counsel, The
Bernstein Law Firm, that Scottish Insurance will not be subject to the
insurance laws of any state of the United States. 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
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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 per policy. 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 and Ceding Insurer 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 is expected 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. An
additional risk associated with the Company's annuity reinsurance 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. The Company will also be subject to
surrender and lapse risks.
RISKS ASSOCIATED WITH INVESTMENT ACTIVITIES. A significant portion of the
Company's capital surplus not otherwise dedicated from time to time to policy
reserves and other corporate purposes will be invested with investment
managers who are expected to use alternative investment strategies, including
those focused on equity and equity-based securities. Although the Company's
investment managers are expected to use various hedging and other investment
techniques aimed at lowering the volatility of such investments and their
correlation with the traditional equity and fixed income markets, there can be
no assurance that such hedging and other investment techniques will be
successful or that the Company's results of operations will not be adversely
affected by a general economic downturn or a downturn in the equity and fixed
income capital markets. In addition, unexpected volatility or illiquidity in
the markets in which it directly or indirectly holds positions could also
adversely affect the Company. Also, the Cayman Monetary Authority has the
power to prescribe that certain classes of investments made by an insurance
company licensed in the Cayman Islands be approved and any existing
investments realized within a specified period. The Company is not aware of
any circumstances in which the Cayman Monetary Authority has ever exercised
such power, however no assurance can be given that the Cayman Monetary
Authority will not exercise such power with respect to the Company's
investments and if exercised, that the Company's investment portfolio would
not be adversely affected.
In addition, each of the Company's investment managers will have
discretionary authority over the portion of the Company's assets it manages,
subject to the Investment Guidelines adopted by the Company. The performance
of the Company's investment of its assets, therefore, will depend to a great
extent on the ability of the investment managers to select and manage such
investments. There can be no assurance that such investment managers will be
successful in achieving the Company's investment objectives. See "Business--
Investment Portfolio--Investment Guidelines" and "--Investment Managers."
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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 the capital markets or in the performance results of its
investment managers. Furthermore, a downturn in the economy or the capital
markets could adversely affect the market for many life insurance and fixed
annuity products. If the market for life insurance or fixed annuity contracts
were adversely affected, it would likely depress the demand for the Company's
variable life insurance and fixed annuity 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 or 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."
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, Chairman
of the Board and Chief Executive Officer, Michelle L. Boucher, Senior Vice
President and Chief Financial Officer, 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. The Company has applied for a work permit for Mr. French
and Mr. Sulikowski. 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. Although the Company believes
that Mr. French and Mr. Sulikowski will receive work permits and that Ms.
Boucher's work permit will be amended, no assurance can be given that such
work permits will be granted or amended. See "Business--Employees" and
"Management--Executive Officers and Directors." If such work permits are not
granted or amended, 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 establishing residency in some
other location outside the United States, which could increase the Company's
administrative expenses.
DUAL MANAGEMENT DUTIES. Mr. French is currently a director, and Ms. Boucher
is currently an executive officer, of Scottish Annuity. It is contemplated
that Mr. French and Ms. Boucher will continue to serve in such dual capacities
following the Offering. In providing services under the Scottish Annuity
Agreement, Mr. French and Ms. Boucher will be performing their duties for the
Company. No assurance can be given that acting in such dual capacity will not
adversely affect the ability of such persons to perform their 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
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private independent money managers, the Company's variable life insurance
policies compete with mutual funds and other investment and savings vehicles.
The Company competes 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 fixed annuity
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. 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 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
issued voting 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
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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 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
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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 applied
for and expect to receive 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 level of variable
life insurance and reinsurance underwriting 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."
LIMITATIONS ON OWNERSHIP, TRANSFERS AND VOTING RIGHTS. Holdings' Articles of
Association contain certain ownership, transfer and voting restrictions with
respect to the Ordinary Shares. The Company's Board of Directors has the
absolute discretion to decline to register a transfer or series of transfers
of Ordinary Shares (even if execution on the Nasdaq National Market has
occurred) when the transfer or series of transfers results in a person or
group of persons, directly or indirectly, beneficially owning 10% or more of
the issued voting shares of the Company or under certain other specified
circumstances. Should the Company's Board of Directors decide not to register
such a transfer, the transferee of the Ordinary Shares will be permitted to
dispose of the Ordinary Shares. The transferor of the Ordinary Shares will be
deemed to own the Ordinary Shares for dividend, voting and reporting purposes
until a transfer of the Ordinary Shares has been registered on the register of
members of the Company. 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 Holdings' Articles of Association is
untested, as a matter of general principle, restrictions on transfers are
enforceable under Cayman Islands law and are not uncommon. See "Description of
Shares--Ordinary Shares--Restrictions on Transfer."
Holdings' Articles of Association also 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 voting shares of
the Company will be limited to a voting power of less than 10%. See
"Description of Shares--Ordinary Shares--Voting Rights."
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
16
<PAGE>
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, the
Company will have outstanding 18,250,000 Ordinary Shares, Class A Warrants to
purchase an aggregate of 1,550,000 Ordinary Shares, Class B Warrants to
purchase an aggregate of 200,000 Ordinary Shares and options to purchase an
aggregate of 930,000 Ordinary Shares. If the Underwriters' over-allotment
option is exercised in full, 20,762,500 Ordinary Shares will be outstanding
and the number of Ordinary Shares issuable upon exercise of outstanding
options will increase to 1,069,500 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. See "Management--Stock Option Plan" and "Description of Shares--
Warrants" and "--Options." 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 1,500,000 Ordinary Shares issued upon
formation of the Company and the Ordinary Shares underlying the Class A
Warrants, Class B 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 and directors, SHL, the shareholders of SHL to receive Ordinary
Shares of Holdings as a result of the SHL Distribution 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, 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 shares of the Company or any securities
convertible into, or exercisable or exchangeable for, any Ordinary Shares or
other shares of the Company without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters and provided further
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 officers of Prudential Securities Incorporated. 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, Ordinary Shares underlying stock options for a
period of one year from the date of this Prospectus. Prudential Securities
Incorporated may, in its 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 officers of
Prudential Securities Incorporated. 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.
17
<PAGE>
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 $ per share (based upon
the initial public offering price of $15 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 October 31, 1998. In addition, the
Company relies significantly on a number of third party service providers,
such as BT Re, IRM Cayman, Cambridge and Maverick, each of whose respective
systems the Company has confirmed are Year 2000 compliant. The Company also
intends to require that any new investment managers or other third party
service providers are or will be Year 2000 compliant. There can be no
assurance, however, that the Company's operations will not experience
disruptions due to the failure of such third parties, such as 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.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Ordinary Shares to be sold in the
Offering are estimated to be approximately $ million ($ 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 purpose of the Offering is to
enable the Company to implement its business plan to enter into the variable
life insurance and fixed annuity reinsurance businesses. Substantially all of
the net proceeds of the Offering will be contributed to the capital of
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."
19
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
as of June 9, 1998 and as adjusted to give effect to the Offering and the
receipt of the estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE
ACTUAL OFFERING
------ -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Preferred Shares, par value $0.01 per share (50,000,000
shares authorized; no shares outstanding actual and as
adjusted)............................................. -- --
Ordinary Shares, par value $0.01 per share (100,000,000
shares authorized; 1,500,000 shares outstanding
actual; 18,250,000 shares outstanding as adjusted)
(1)................................................... 15 182
Additional paid-in capital............................. 585
---- -------
Total shareholder's equity........................... 600
---- -------
Total capitalization................................. $600 $
==== =======
</TABLE>
- --------
(1) SHL owns 1,500,000 Ordinary Shares, which constitute all of the currently
outstanding Ordinary Shares of the Company. Prior to the consummation of
the Offering, SHL will effect the SHL Distribution. Ordinary Shares
outstanding after the Offering excludes 1,550,000 Ordinary Shares issuable
upon exercise of Class A Warrants, 200,000 Ordinary Shares issuable upon
exercise of Class B Warrants, 930,000 Ordinary Shares issuable upon
exercise of options to be granted to management and non-employee Directors
of the Company upon consummation of the Offering and 570,000 Ordinary
Shares reserved for future issuance pursuant to the Stock Option Plan. If
the Underwriters' over-allotment option is exercised in full, upon
consummation of the Offering, 20,762,500 Ordinary Shares will be
outstanding and the number of Ordinary Shares issuable upon exercise of
options to be granted to management and non-employee Directors of the
Company upon consummation of the Offering will increase to 1,069,500
Ordinary Shares. The number of Ordinary Shares issuable upon exercise of
the Class A Warrants and the Class B 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
"Description of Shares--Warrants" and "--Options" and "Management--Stock
Option Plan."
20
<PAGE>
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, 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
$ million, or approximately $ 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 $ per
Ordinary Share, without taking into account any Ordinary Shares issuable upon
exercise of Class A Warrants, the Class B 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.
The following table illustrates the per Ordinary Share dilution to investors
purchasing Ordinary Shares in the Offering:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $15.00
Net tangible book value per outstanding Ordinary Share before
giving effect to the Offering............................... $ .40
Increase in net tangible book value per outstanding Ordinary
Share attributable to the sale of the Ordinary Shares in the
Offering(1).................................................. $
Pro forma net tangible book value per outstanding Ordinary
Share upon completion of the Offering(1).....................
------
Dilution to new investors in the Offering..................... $
======
</TABLE>
- --------
(1) Ordinary Shares outstanding after the Offering excludes 1,550,000 Ordinary
Shares issuable upon exercise of Class A Warrants, 200,000 Ordinary Shares
issuable upon exercise of the Class B Warrants, 930,000 Ordinary Shares
issuable upon exercise of options to be granted to management and non-
employee Directors of the Company upon consummation of the Offering
(1,069,500 Ordinary Shares if the Underwriters' over-allotment option is
exercised in full) and 570,000 Ordinary Shares reserved for future
issuance pursuant to the Stock Option Plan. The number of Ordinary Shares
issuable upon exercise of the Class A Warrants and the 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. The exercise of Class A Warrants, Class B Warrants and the
options to be granted to management and certain non-employee Directors
upon consummation of the Offering 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 "Description of Shares--Warrants" and "--Options" and
"Management--Stock Option Plan."
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 the Offering, assuming underwriting discounts and commissions:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
------------------ ----------------------- PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Shares issued upon
formation................ 1,500,000 8.2% $ 500,000(1) % $ 0.33(1)
Offering.................. 16,750,000 91.8 $ $15.00
---------- ----- ------------ ----- ------
Total..................... 18,250,000 100.0% $ 100.0% $
========== ===== ============ ===== ======
</TABLE>
- --------
(1) Represents amount paid by SHL for Ordinary Shares of the Company issued
upon its formation. 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 Class A Warrants.
21
<PAGE>
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 to issue customized variable life insurance policies to
high net worth qualified purchasers and to reinsure fixed annuity and similar
contracts issued by other insurance companies. 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
fixed annuities and similar contracts will typically be on a coinsurance
basis, with the Company assuming all of the liability for such contracts and
the ceding company transferring to the Company all of its reserve account 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 will 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 fixed annuity reinsurance business, the primary source of operating
revenues 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 reinsured fixed annuity or similar
contracts.
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, payable quarterly, 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 March 31, 1998, the annual amount of such fee would have been $819,500. See
"Business--Scottish Annuity Agreement."
The Company's main operating costs will consist of professional fees, travel
and promotional expenditures and employee related expenses. Management will
seek to limit personnel expense by retaining third party service providers
such as BT Re, IRM Cayman, Cambridge and Maverick. The Company will not employ
commissioned sales or 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 fixed annuity
reinsurance business, international insurance brokers, insurance consultants,
members of the actuarial profession and senior insurance company executives
with whom the
22
<PAGE>
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.
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, M&E fees
and certain other fees, realized net investment income and other income,
including fees received from Scottish Annuity under the Scottish Annuity
Agreement, as well as liquidations of the Company's investment portfolio.
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 fixed annuity
reinsurance will be primarily based on historical experience and information
provided by ceding companies.
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 $1.0 million per policy. 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 fixed annuities 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
23
<PAGE>
expected to be reinsured. 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,
surrender and lapse 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 fixed annuity 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.
The Company expects that the net proceeds of the Offering will permit it to
begin implementation of its business plan and, together with M&E fees, fees
from Scottish Annuity and realized investment income, will provide sufficient
sources of liquidity and capital to meet the Company's anticipated needs in
the short-term and for the 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 fixed annuity 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.
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 applied for and expect to receive
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 fees of approximately $700 per annum and Scottish
Insurance expects to pay fees (including its 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. See "Risk Factors--
Income Tax Risk."
24
<PAGE>
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."
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
October 31, 1998. In addition, the Company relies significantly on a number of
third party service providers, such as BT Re, IRM Cayman, Cambridge and
Maverick, each of whose respective systems the Company has confirmed are Year
2000 compliant. The Company also intends to require that any new investment
managers or other third party service providers are or will be Year 2000
compliant. There can be no assurance, however, that the Company's operations
will not experience disruptions due to the failure of such third parties, such
as 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.
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BUSINESS
Holdings and Scottish Insurance were recently formed to provide customized
variable life insurance products to high net worth individuals and families
who are or may become U.S. taxpayers and to provide reinsurance of 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. The Company's business plan and product focus has been
developed to respond to certain insurance industry trends affecting both
policyholders and issuers of such policies. The Company's objective is to
become a leading provider of variable life insurance and fixed annuity
reinsurance products in its 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 (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.
Through its fixed annuity reinsurance activities, the Company seeks to focus
on what it 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
expects to focus its reinsurance activities on blocks of existing fixed
annuities such as structured settlements, deferred annuities, immediate
annuities or similar contracts that are not large enough to be attractive to
major international reinsurers. The Company will target insurance companies
that have discontinued writing new fixed annuities or similar contracts or
that seek relief from the reserve and capital requirements associated with
such contracts. The Company will not reinsure any variable annuity contracts
issued by Scottish Annuity, for which the Company provides certain insurance
and other administrative services. The Company believes that in response to
heightened regulatory and rating agency scrutiny, insurers are increasingly
seeking to reinsure as a means to improve earnings or risk-based capital or
other financial ratios. By shifting mortality 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. In
addition, the Company believes that reorganizations of insurers (including
through demutualizations) and consolidation within the insurance industry will
continue, with a concurrent potential increase in demand for reinsurance of
blocks of existing fixed annuity business, particularly in the case of mutual
insurance companies attempting to enhance their balance sheets in preparation
for an initial public offering. The Company believes that its planned low cost
operating strategy and its investment strategy for capital surplus not
otherwise dedicated from time to time to policy reserves or other corporate
purposes, as well as the absence of a corporate level tax in the Cayman
Islands, will enable it to offer competitive pricing for its reinsurance
products.
BUSINESS STRATEGY
In order to achieve its objective to become a leading 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
components:
Leverage Management Expertise
The Company was organized by the management and shareholders of Scottish
Annuity, a privately held Cayman Islands insurance company that commenced
operations in 1994. Scottish Annuity offers outside the United States variable
annuity contracts to persons who are or may become U.S. taxpayers that have
the same
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cash value management features and target market as the Company's variable
life insurance policies. The Company intends to draw on management'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 intermediaries and other referral sources that
members of its management have developed with Scottish Annuity. In addition,
Henryk Sulikowski, the Company's Senior Vice President and Chief Insurance
Officer, has over 17 years experience in the insurance and reinsurance
industry. The Company intends to draw in particular on his 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
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 agreements with a number of third party service providers to provide key
services to the Company. In June 1998, the Company entered into an agreement
with BT Re to provide the Company with certain administration, underwriting
and other services for its variable life insurance business. In addition, in
June 1998, the Company entered into the Scottish Annuity Agreement under which
Scottish Annuity will refer potential clients to the Company as part of the
consideration for the insurance administration and other services the Company
is to provide to Scottish Annuity under such agreement. Also, the Company has
retained IRM Cayman to act as the Company's licensed insurance manager in the
Cayman Islands and to provide to the Company certain additional administrative
services. The Company will also retain certain investment managers to manage
the Company's investment portfolio consistent with the Company's Investment
Guidelines. See "Business--Investment Portfolio--Investment Guidelines," and
"Investment Portfolio--Investment Managers", "--Marketing" and "--
Administration." The Company intends to administer its fixed annuity
reinsurance business primarily with its own personnel.
Build on Significant Capital Base
Upon consummation of the Offering, the Company will have an equity
capitalization of approximately $ 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 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." The "A" rating is
contingent on the consummation of the Offering and the investment by the
Company of at least $150 million of surplus capital in fixed income
investments that have a minimum weighted average rating of "A."
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
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and provide for substantial death benefits given expected initial premiums of
at least $1.0 million per policy. 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 a
substantial portion of the Company's mortality 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 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 establish
reserves and risk capital in accordance with GAAP and any additional Cayman
Islands regulatory requirements in an effort to reflect the level of
investment and other risks associated with the fixed annuities it will
reinsure. An additional risk associated with the Company's fixed annuity
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.
Employ Professional Investment Strategy
The Company will seek to generate attractive levels of investment income
through a professionally managed investment portfolio. Following the Offering,
the Company will have approximately $ of capital available for
policy reserves and other corporate purposes as well as to allocate to cover
possible volatility in mortality experience with respect to its variable life
insurance policies. The Company's investment activities will be governed by
the Company's Investment Guidelines as approved by the Investment Committee of
the Board of Directors. The Company's investment portfolio for insurance
reserves will consist of investment grade, fixed income securities invested
with the objective of matching the Company's anticipated asset and liability
cash flows.
The Company's investment goal for its capital, not otherwise dedicated from
time to time to policy reserves and other corporate purposes, is to achieve a
higher rate of return than could be obtained from limiting its investments
solely to fixed income instruments so as to provide support for potential
future expansion of the Company's insurance activities without the need for
the Company to raise additional equity capital. In order to achieve this
investment objective, the Company initially expects to invest approximately
30% to 40% of its capital, not otherwise dedicated to policy reserves and
other corporate purposes, in investment grade, fixed income securities and to
invest the remainder in equity related investment strategies.
The Company intends to allocate such equity related investments to
investment managers who utilize hedging or arbitrage strategies that seek to
reduce the correlation of their investment returns to the traditional equity
and fixed income markets. The principal strategies to be utilized by such
managers are expected to be hedged equity strategies, which involve the
establishment of both long and short positions in equity securities,
convertible arbitrage, which involves the purchase of convertible bonds and
the short sale of the underlying equity securities, and event driven
arbitrage, which involves purchases in anticipation of a specific event, such
as announced mergers or reorganizations. In order to effect these strategies,
the Company's investment managers may use derivative instruments, although
such use is expected to be incidental to their overall investment
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activities. The Company's investment guidelines do not contemplate the use of
derivative instruments other than in connection with these incidental
activities of the Company's investment managers.
The Company has retained Cambridge and Maverick to advise it in the
development and management of its alternative investment activities. Both
Cambridge and Maverick are registered investment advisers under the Advisers
Act. Cambridge provides, on a non-discretionary basis, investment consulting
services on alternative money management strategies to university endowments,
non-profit institutions, foundations, pension plans, corporations and high net
worth family groups. According to information supplied by Maverick, as of July
1, 1998, Maverick had aggregate assets under management of over $2.5 billion
in funds utilizing hedged equity investment strategies.
The Company intends to allocate no more than 50% of its capital surplus
dedicated to alternative investments to Maverick, and the balance to
investment managers that the Investment Committee will select with the advice
and assistance of Cambridge. In performing its advisory services, Cambridge
will take into account the Company's entire alternative investment portfolio,
with the objective of recommending to the Company investment managers that
would provide complimentary alternative investment strategies.
The Company believes that using alternative investment management strategies
for a substantial portion of its capital surplus will enhance the Company's
ability to preserve its capital and achieve superior investment returns. As
the Company's variable life insurance and fixed annuity reinsurance business
expands, the Company will dedicate an increasing portion of its capital
surplus to policy reserves, resulting in an increase in the proportion of its
capital invested in 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 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.
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Under the Company's operating guidelines, its variable life insurance
policies will be offered only to "qualified purchasers" within the meaning of
the Investment Company Act of 1940 (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 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 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 million and $20
million, and in excess of 12,000 had a net worth of $20 million or more. The
combined net worth of these two groups was estimated at approximately $1.1
trillion.
Fixed Annuity Reinsurance Market
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 expects to focus its reinsurance activities on blocks
of existing annuities, such as structured settlements, 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 higher levels 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 opportunities, but no formal discussions or
negotiations regarding such opportunities have occurred to date. See "Risk
Factors--Ability to Implement its Business Plan."
The Company believes that, in the past, reinsurers have not focused on this
segment of the fixed annuity market. The Company believes, however, that there
are a number of trends affecting the insurance industry 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 reinsurer reinsures all of the risks associated with such non-core
products. The other significant trend affecting the insurance industry is the
demutualization of a significant number of insurance companies and
consolidation of the insurance industry. 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
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announcing a conversion to a stock company structure in order to enhance their
balance sheet in preparation for an initial public offering.
In addition, the Company believes that insurers seeking reinsurance focus
principally on price and, to a lesser extent, on quality of service in
deciding on a reinsurer. The Company believes its planned low cost operating
structure and its investment strategy for capital surplus not otherwise
dedicated from time to time to policy reserves or other corporate purposes, as
well as the absence of a corporate level tax in the Cayman Islands, will
enable the Company to offer competitive pricing for its reinsurance products.
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 involving the
reinsurance of blocks of fixed annuities.
The Company believes that the net proceeds of the Offering 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 professional fees, travel
and promotional expenditures and employee related expenses. 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".
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 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.
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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 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.
Reinsurance of Fixed Annuities and Similar Contracts
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.
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The Company's business plan contemplates that its reinsurance activities
will focus 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. The Company expects to enter into reinsurance agreements with respect
to cedents' obligations on one or more of their individual and group fixed
annuities, including deferred annuities, payout annuities and structured
settlements. The Company expects to write reinsurance both on a direct and
brokered basis.
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 statutory surplus 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 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 intends to write its fixed annuity reinsurance principally as
coinsurance, with the Company assuming all of the liability for such contracts
and the ceding company transferring to the Company all of its reserve account
for such contracts. 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 arrangement, the ceding company transfers the right to ownership
of the assets supporting the reserves to the reinsurer and 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
require that all of the risks associated with the ceding company's contracts,
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 annuity contracts underlying
coinsurance reinsurance 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 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.
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
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United States to generate clients. In order not to be subject to U.S. state
insurance regulation, none of these intermediaries may receive any commissions
or other remuneration from the Company for activities undertaken in the U.S.
In addition, representatives of the Company will periodically attend
conferences of financial advisors, investment managers and private bankers
held outside the United States, 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
United States, but such representatives will not be permitted to engage in any
promotional activities on behalf of the Company.
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 as the Company's variable life insurance
policies and Scottish Annuity targets the same high net worth market. Scottish
Annuity commenced operations in 1994. According to information supplied by
Scottish Annuity, as of March 31, 1998, Scottish Annuity had issued 66
variable annuity contracts which had aggregate separate account assets of
$163.9 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 activities in the U.S. they may not receive any commissions or other
remuneration from the Company. Given the focus of the Company's proposed
reinsurance business (i.e., blocks of existing 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 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 its low cost structure and its investment strategy for capital
surplus not otherwise dedicated from time to time to policy reserves or other
corporate purposes, as well as 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.
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 per policy. 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
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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. Also, pursuant to its Underwriting
Guidelines, the Company will not issue any variable life insurance policy
until the appropriate reinsurance for such policy has been obtained with a
reinsurer with a claims-paying ability rating of "A" or better.
Reinsurance of Fixed Annuities and Similar Contracts
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 is also subject to
mortality risk with respect to the fixed annuities 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 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, Canada, Western Europe,
Australia or Cayman Islands, 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; and
(iii) the ceding company may not exercise recapture rights for a period of ten
years. 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%).
Any deviation from the Company's Underwriting Guidelines with respect to its
variable life insurance policies and fixed annuity 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.
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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 fixed
annuity reinsurance business, policy reserves will be primarily based on
historical experience and information provided by ceding companies.
The development of policy reserves for the Company's variable life insurance
and fixed annuity 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
Scottish Insurance has entered into the Scottish Annuity Agreement with
Scottish Annuity dated as of July 1, 1998 pursuant to which 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 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 quarterly, for each annuity contract issued by Scottish Annuity, an
amount equal to the lesser of (i) 0.50% per annum based on the policy account
cash value under the annuity contract (measured at the end of a contract year)
and (ii) 50% per annum of the M&E fees and other administrative charges earned
by Scottish Annuity on such annuity contract, except that such amount will not
be less than $25,000 per contract. 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 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.
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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.
ADMINISTRATION AND CONSULTING SERVICES
Variable Life Insurance
As part of its strategy to enter into the variable life insurance business,
the Company entered into a Private Label and Administrative Services Agreement
with BT Re (the "BT Re Agreement") dated June 11, 1998, pursuant to which BT
Re will provide the Company with a variety of administrative services. BT Re's
private label services include providing the Company with the appropriate
insurance forms (which, subject to certain modifications, will serve as the
basis for the policies to be issued by the Company) and assisting the Company
in conforming such policies to applicable law. Such services include
(i) preparing policy illustrations for prospective purchasers, (ii) conducting
testing and monitoring to insure that the Company's private label policies
satisfy key Code requirements, (iii) arranging for the collection of medical
information and conducting medical examinations for prospective insureds, (iv)
using its best efforts to arrange for reinsurance of the Company's private
label policies, and (v) reviewing death claims under the Company's private
label policies and calculating the death benefit thereunder.
BT Re received $75,000 upon execution of the BT Re Agreement and will
receive quarterly fees for each private label policy issued by the Company
pursuant to the BT Re Agreement equal to the lesser of (i) 0.50% per year
based on the separate account cash value and (ii) 50% per year of the
mortality and expense fees earned by the Company on its policies, subject to a
minimum of $15,000 per policy. Either the Company or BT Re may terminate the
BT Re Agreement on December 31 of any year provided that at least 90 days'
prior written notice is given. Either the Company or BT Re may also terminate
the agreement upon shorter notice under specified circumstances (e.g.,
bankruptcy or uncured default under the agreement). BT Re and the Company have
agreed to indemnify each other for certain liabilities. If the BT Re Agreement
is terminated, the Company is required to pay BT Re for any administrative
services it performed for the Company through the date of termination. After
termination, BT Re will not be entitled to any other fees or compensation with
respect to the Company's variable life insurance policies or business.
The Company's administration staff will be responsible for 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.
Eventually, the Company intends to utilize its own administrative staff to
perform the services BT Re provides. The Company anticipates that it will have
such capability by the end of 1999, at which time the BT Re Agreement may be
terminated.
Reinsurance of Fixed Annuities and Similar Contracts
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. 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 fixed annuities or similar 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 International Risk
Management Group, Inc. ("IRMG"), an affiliate of Swiss Reinsurance, to act as
the Company's licensed insurance manager in the
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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.
The Company pays IRM Cayman an annual retainer of $25,000, and IRM Cayman
bills for its actual services on an hourly basis. IRM Cayman has provided
similar services to Scottish Annuity since it commenced operations in 1994.
DC Planning
The Company expects to enter into a definitive 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 expected 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,
the Company will have approximately $ of capital available for policy
reserves and other corporate purposes.
Investment Guidelines
The Company's investment activities will be governed by the Investment
Guidelines as approved by the Investment Committee of the Board of Directors.
A significant portion of the Company's investment portfolio will consist of
investment grade, fixed income securities invested in an effort to match the
Company's anticipated asset and liability cash flows. Assets not otherwise
dedicated from time to time to policy reserves and other corporate purposes,
if any, will be invested with the objectives of maximizing investment income
as well as providing adequate diversification of risk and maintenance of
liquidity in order to provide for additional policy reserves as needed. As a
result, the Company intends to invest such capital surplus primarily in
alternative investments not traditionally utilized by insurance companies,
such as equities and equity-based securities. The Company's investment
objective with respect to such capital surplus is to seek superior returns
with relatively low volatility as well as to preserve capital in declining
markets through hedging techniques or other strategies that are intended to
reduce the correlation between the Company's investments and the performance
of traditional equity and fixed income markets. As the Company's insurance and
reinsurance business grows, however, an increasing percentage of the Company's
capital surplus will be allocated to cover policy reserves and, consequently,
invested as part of the Company's fixed income investment portfolio.
The Investment Guidelines require Scottish Insurance's overall fixed income
investment portfolio to maintain a minimum weighted average rating of "A." A
fixed income security rated "A" by Standard & Poor's is somewhat susceptible
to the adverse effects of changes in circumstances and economic conditions;
however, the issuer's 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 also 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
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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 (including convertible debt securities, but may not include
payment-in-kind corporate securities).
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. The Company will seek to manage interest
rate risk by structuring its investments in an effort to match its anticipated
liabilities under its variable life insurance policies and reinsurance
agreements, and through the use of hedging techniques. The reinsurance of
certain fixed annuity contracts may obligate the Company to credit a return
with respect to a reinsured policy which is derived from a market or other
benchmark rate. In order to manage the investment risks associated with these
fixed annuity contracts, the Company may enter into interest rate hedges or
other similar transactions. The Company may also enter into hedges to reduce
potential mismatches between durations of assets and liabilities and offset
the potential cash flow impact caused by interest rate changes. The Investment
Guidelines 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 from the Investment Committee of the Board of
Directors.
In connection with the investment of the Company's capital surplus not
otherwise dedicated from time to time to policy reserves and other corporate
purposes, if any, the Investment Guidelines (i) limit the maximum amount of
such assets which may be managed by any investment manager to no greater than
15%, except Maverick which may manage no more than 50% of such assets; (ii)
require that each investment manager permit monthly liquidity for the assets
managed by such investment manager; and (iii) mandate that each investment
manager possess five years of historical portfolio performance deemed
satisfactory by the Investment Committee and either be registered as an
investment adviser under the Advisers Act or have a valid exemption therefrom.
Furthermore, 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) United States investments consisting of (a) partnership
interests, (b) residual interests in Real Estate Mortgage Investment Conduits,
(c) any "pass through" certificate unless all underlying debt was issued on or
after July 18, 1984, (d) cash settlement options and forwards if no United
States exchange traded future on the same property exists, (e) options and
forwards on indices which are not traded on United States exchanges, (f)
collateralized mortgage obligations, unless issued with an opinion of counsel
stating that such obligations will be considered debt for tax purposes, (g)
real property interests, including equity in and convertible debt obligations
of real property holding corporations the sale of which would be subject to
tax, (h) any tangible property, (i) any debt obligation the interest on which
does not qualify as "portfolio interest" or is otherwise subject to United
States withholding tax and (j) any investment that does not qualify as a stock
or security for purposes of Section 864(b)(2) of the Code.
The Company's investment goal for its capital, not otherwise dedicated from
time to time to policy reserves and other corporate purposes, is to achieve a
higher rate of return than could be obtained from limiting its investments
solely to fixed income instruments so as to provide support for potential
future expansion of the Company's insurance activities without the need for
the Company to raise additional equity capital. In order to achieve this
investment objective, the Company initially expects to invest approximately
30% to 40% of its capital, not otherwise dedicated to policy reserves and
other corporate purposes, in investment grade, fixed income securities and to
invest the remainder in equity related investment strategies.
The Company intends to allocate such equity related investments to
investment managers who utilize hedging or arbitrage strategies that seek to
reduce the correlation of their investment returns to the traditional
equity and fixed income markets. The principal strategies to be utilized by
such managers are expected to be hedged equity strategies, which involve the
establishment of both long and short positions in equity securities,
convertible arbitrage, which involves the purchase of convertible bonds and
the short sale of the underlying equity securities, and event driven
arbitrage, which involves purchases in anticipation of a specific event, such
as announced mergers or reorganizations. In order to effect these strategies,
the Company's investment managers
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may use derivative instruments, although such use is expected to be incidental
to their overall investment activities. The Company's investment guidelines do
not contemplate the use of derivative instruments other than in connection
with these incidental activities of the Company's investment managers. See
"Risk Factors--Risks Associated with Investment Activities" for a description
of the risks associated with the Company's equity related investment strategy.
The Company intends to attempt to minimize such risks through careful
selection of investment managers and active oversight of such investment
managers by the Investment Committee.
Investment Managers
The Company has entered into an investment management agreement dated June
15, 1998 with Maverick (the "Maverick Agreement") to advise the Company in the
management of no more than 50% of its capital surplus not otherwise dedicated
from time to time to policy reserves or other corporate purposes. According to
information supplied by Maverick, as of July 1, 1998, Maverick had aggregate
assets under management of over $2.5 billion in funds utilizing hedged equity
investment strategies. The Maverick Agreement provides that Maverick will be
entitled to receive an annual management fee equal to 1% of the net asset
value of the assets of the Company under management with Maverick and a
separate performance fee equal to 20% of the annual performance of such
assets. If, at the end of any year, the net asset value of the Company's
assets under management with Maverick decreases from the net asset value at
the end of the previous year, no performance fee will be payable with respect
to such assets until such net asset value returns to the previous year's
level. The Maverick Agreement is terminable by either party upon 45 days prior
written notice.
The Company has also retained Cambridge to advise the Company's Investment
Committee in selecting private investment managers with respect to the
Company's remaining capital~ surplus that is not otherwise dedicated from time
to time to policy reserves or other corporate purposes or invested with
Maverick. Cambridge provides, on a non-discretionary basis, investment
consulting services on alternative money management strategies to university
endowments, non-profit institutions, foundations, pension plans, corporations
and high net worth families and groups. Cambridge will take into account the
Company's entire alternative investment portfolio with the objective of
recommending to the Company investment managers that would provide
complimentary alternative investment strategies. Cambridge has received a
retainer fee of $50,000 from the Company, which was paid on June 15, 1998, the
date the Company executed an investment advisory agreement with Cambridge (the
"Cambridge Agreement"). In addition, the Company will pay Cambridge an annual
fee equal to the greater of $150,000 or an amount equal to the sum of (i)
0.45% of the first $100.0 million aggregate assets managed by investment
managers engaged by the Company based on the advice of Cambridge and (ii)
0.30% of any such aggregate assets in excess of $100.0 million. The annual fee
is payable in quarterly installments in advance, subject to adjustments for
fees calculated on the basis of aggregate assets managed. The $50,000 retainer
fee will be credited against the first quarterly payment. The Cambridge
Agreement has a one year term renewable automatically thereafter on an annual
basis unless terminated by either party. The Cambridge Agreement may be
terminated at any time by either party upon 30 days written notice.
In addition, the Company has entered into investment advisory agreements
with each of Pacific Investment Management Company ("PIMCO") and General Re-
New England Asset Management, Inc. ("General Re") to manage the Company's
fixed income investment portfolio. PIMCO is one of the largest fixed income
money managers in the United States. According to information supplied by
PIMCO, as of July 1, 1998, PIMCO had aggregate assets under management of
approximately $ billion of which approximately % consisted of fixed income
assets and approximately % consisted of equity related assets. Under the
agreement with PIMCO (the "PIMCO Agreement"), the Company will pay PIMCO an
annual fee equal to .50% of the market value of the first $25 million of the
Company's assets managed by PIMCO, .375% on the next $25 million of the
Company's assets under management and .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.
General Re is also one of the largest fixed income money managers in the
United States. According to information supplied by General Re, as of July 1,
1998, General Re had aggregate assets under management
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of approximately $ billion of which approximately % consisted of fixed
income assets and approximately % consisted of equity related assets. Under
the agreement with General Re (the "General Re Agreement"), the Company will
pay General Re an annual fee equal to .20% of the market value of the first
$50 million of the Company's assets under management and .15% of the next $50
million of assets under management of General Re. The fee payable with respect
to the Company's assets under Management in excess of $100 million is
negotiable. 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.
Investment Committee Oversight
The Investment Committee of the Company's Board of Directors will
continuously review the Company's investment portfolio and the performance of
its investment managers. The Investment Committee 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.
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 on service
and other factors, including the general reputation and perceived financial
strength of the reinsurers, other terms and conditions of products offered,
ratings assigned by independent rating agencies and reputation and experience
in the particular line of reinsurance to be written. Because the Company
expects to rely at least initially on a small number of clients in both its
variable life insurance and fixed annuity 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." The "A" rating is
contingent on the consummation of the Offering and the investment by the
Company of at least $150 million of surplus capital in fixed income
investments that have a minimum weighted average rating of "A". Duff & Phelps
assigns an "A" rating to companies that it characterizes as having claims
paying ability, average protection factors and an expectation of variability
in risk over time due to economic or underwriting conditions. The rating
represents the 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 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.
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<PAGE>
EMPLOYEES
Cayman Islands immigration law mandates that the Company employ only
Caymanians unless it can be determined that no Caymanian 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 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. Messrs. French and Sulikowski are each seeking work permits. 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 which 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. 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.
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<PAGE>
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 fixed annuity
reinsurance.
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 Life has engaged IRM Cayman as its licensed
insurance manager in the Cayman Islands. See "Business--Administration."
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
43
<PAGE>
respect of respective premiums paid to it to provide (1) annuities on human
life and (2) 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.
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 introduce 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.
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. The sale of insurance within a jurisdiction where the insurer
is not admitted to do business is generally prohibited.
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<PAGE>
Scottish Insuance 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, settle
claims or conduct other insurance or reinsurance activities in the United
States. 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. Based on, among other things, the
foregoing, Holdings does not believe that Scottish Insurance will be subject
to the insurance laws of any state in the United States or any other
jurisdiction.
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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael C. French....... 55 Chairman of the Board, Chief Executive Officer and Director
Michelle L. Boucher..... 31 Senior Vice President and Chief Financial Officer
Henryk Sulikowski....... 39 Senior Vice President and Chief Insurance Officer
Michael Austin.......... 62 Director
George Ellis............ 49 Director
Howard Shapiro.......... 52 Director
</TABLE>
MICHAEL C. FRENCH was elected a director and Holdings' Chairman of the Board
and Chief Executive Officer upon its formation. 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 Capital 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 and Chief Financial Officer upon its
formation. Ms. Boucher is a director of Scottish Insurance. Ms. Boucher has
served as Manager of Finance and Administration 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.
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
Corporation ("Swiss Re") as well as Senior Vice President of Atlantic
International Reinsurance Company (Barbados) and a Vice President of Swiss Re
Atrium Corporation, companies which are both affiliated with Swiss Re. During
1995 and 1996, Mr. Sulikowski was Vice President of Cologne Life Reinsurance
Company ("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.
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<PAGE>
MICHAEL AUSTIN will be elected a director of Holdings prior to 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.
GEORGE ELLIS will be elected a director of Holdings prior to consummation of
the Offering. Mr. Ellis has been a private investor since 1996. From 1986 to
1996, Mr. Ellis served as Chief Financial Officer, from 1993 to 1996, as
Executive Vice President, and from 1994 to 1996, as Treasurer of Sterling
Software, Inc.
HOWARD SHAPIRO will be elected a director of Holdings prior to consummation
of the Offering. Mr. 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.
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 shareholder will elect three additional
directors, currently contemplated to be Messrs. Austin, Ellis and Shapiro. 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.
Following their initial terms, all classes of directors shall be elected to
three-year terms.
Committees of the Board
At the time additional directors are elected, the Board will establish
Investment and Audit Committees. Each committee will report to the Board.
Investment Committee. The Investment Committee will establish and monitor
the Company's investment policies and the performance of its investment
managers. See "Business--Investment Portfolio--Investment Guidelines."
Audit Committee. 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.
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 on 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 Chairman of the Board and Chief Executive
Officer of the Company for an initial term ending on the third anniversary of
the consummation of the Offering, which term will be automatically increased
annually for
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<PAGE>
an additional year, subject to 90 days advance notice 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 Board of Directors. 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. In addition, pursuant to Mr. French's Employment
Agreement, if his employment with the Company is terminated without serious
cause or if he terminates his employment with the Company for good reason or
within one year following a change in control, Mr. French will be entitled to
receive 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.
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 the third anniversary of
the consummation of the Offering, which term will be automatically increased
annually for an additional year, subject to 90 days advance notice 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. 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. In addition, pursuant to Ms. Boucher's Employment
Agreement, if her employment with the Company is terminated without serious
cause or if she terminates her employment with the Company for good reason or
within one year following a change in control, Ms. Boucher will be entitled to
receive 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.
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 annually for an additional year, subject to 90
days advance notice 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. 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. In addition, pursuant to Mr. Sulikowski's Employment
Agreement, if his employment with the Company is terminated without serious
cause or if he terminates his employment with the Company for good reason or
within one year following a change in control, Mr. Sulikowski will be entitled
to receive 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.
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<PAGE>
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 1,500,000 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 and upon
such terms and conditions as the Board of Directors or a committee thereof may
determine at the time of the grant. 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 into 400,000 Ordinary Shares, 200,000
Ordinary Shares, and 300,000 Ordinary Shares, respectively, which, if the
Underwriters' over-allotment option is exercised in full, shall 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 closing 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.
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 on the date the Offering
is consummated 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 at or prior to the
consummation of the Offering 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.
The following table sets forth information concerning the stock options to
be granted upon consummation of the Offering by the Company to its executive
officers under the Stock Option Plan.
INITIAL OPTION GRANTS
<TABLE>
<CAPTION>
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%
- ---- --------------- ------------------ --------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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.
(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.
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PRINCIPAL STOCKHOLDERS
All of the issued and outstanding Ordinary Shares of Holdings are currently
owned by SHL, which also owns all of the outstanding capital stock of Scottish
Annuity. Prior to the Offering, SHL intends to distribute the Ordinary Shares
of Holdings to its stockholders, none of whom will own 5% or more of the
Ordinary Shares of Holdings upon consummation of the Offering.
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.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) NUMBER OF SHARES PERCENT OF CLASS
---------------------------------------- ---------------- ----------------
<S> <C> <C>
Michael C. French(2)(3)...................... -- --
Michelle L. Boucher(3)....................... 45,000 *
Henryk Sulikowski(4)......................... -- --
Michael Austin(4)............................ -- --
George Ellis(4).............................. -- --
Howard Shapiro(4)............................ -- --
All directors and executive officers as a
group (six persons)......................... 45,000 *
</TABLE>
- --------
*Less than 1%.
(1) The address for each beneficial owner is c/o Scottish Annuity & Life
Holdings, Ltd., Ugland House, 113 South Church Street, George Town, Grand
Cayman, Cayman Islands, British West Indies.
(2) Does not include 570,000 Ordinary Shares beneficially owned by an
irrevocable trust of which Mr. French and certain family members are
beneficiaries; Mr. French disclaims beneficial ownership of such Ordinary
Shares.
(3) Does not include Ordinary Shares issuable upon exercise of stock options
or the Class A Warrants not exercisable within 60 days.
(4) Does not include Ordinary Shares issuable upon exercise of stock options
not exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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, Chairman, Chief
Executive Officer 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."
The Company expects to enter into a definitive 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 expected 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.
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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 1,500,000 Ordinary Shares were outstanding at June 9, 1998,
and 50,000,000 Preferred Shares, par value $0.01 per share, none of which were
outstanding at June 9, 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, 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, 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 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 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 addition to
any regulatory or court approvals) the approval 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)
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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 rights of the holders of any Preferred Shares, 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 Ordinary Shares generally
entitled to vote.
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 Ordinary Shares
or voting Preferred Shares owned by such person, whether (i) directly,
(ii) with respect to persons who are United States persons, by
application of the attribution and constructive ownership rules of
Sections 958(a) and 958(b) of the Code or (iii) beneficially, directly or
indirectly, within the meaning of Section 13(d)(3) of the Exchange Act,
and the rules and regulations thereunder.
The Formula will be applied successively as many times as may be necessary
to ensure that no person 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, (ii) with respect to persons who are United States
persons, by application of the attribution and constructive ownership rules of
Sections 958(a) and 958(b) of the Code or (iii) beneficially, directly or
indirectly, within the meaning of Section 13(d)(3) of the Exchange Act, issued
Ordinary Shares of the Company carrying 10% or more of the total combined
voting rights attaching to all issued shares.
The Directors are empowered to require any shareholder to provide
information as to that shareholder's beneficial share ownership, the names of
persons having beneficial ownership of the shareholder's shares, relationships
with other shareholders or any other facts the directors may deem relevant to
a determination of the number of Controlled Shares attributable to any person.
The Directors may disregard the votes attached to shares of any holder failing
to respond to such a request or submitting incomplete or untrue information.
The directors retain certain discretion to make such final adjustments to
the aggregate number of votes attaching to the voting shares of any
shareholder that they consider fair and reasonable in all the circumstances to
ensure that no person will be a 10% Shareholder at any time.
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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 the Company's issued voting 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 the Company's issued voting 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 the Company's issued voting 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 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 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.
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 and ownership of 10% or more of the Company's
issued voting 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.
PREFERRED SHARES
The Articles authorize the Directors to create and issue one or more series
of Preferred Shares and determine the rights and preferences of each such
series, to the extent permitted by the Articles and applicable law. Among
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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; (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 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 series, which the holders of the shares of that
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
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 series; (vii) the terms, if
any, upon which the shares of that series shall be convertible into or
exchangeable for shares of any other series, or other securities, whether or
not issued by the Company; (viii) the restrictions, limitations and
conditions, if any, upon issuance of indebtedness of the Company so long as
any shares of that 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. Class A Warrants to purchase an aggregate of 1,550,000
Ordinary Shares have been purchased by Michael C. French, Michelle L. Boucher
and certain companies wholly owned by certain shareholders of SHL , subject to
adjustment as provided in the Class A Warrants. 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 for a
one-year period from the date of this Prospectus. See "Shares Eligible for
Future Sale" and "Underwriting."
Class B Warrants. Upon completion of the Offering, 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 tenth
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."
OPTIONS
The Company has issued options to purchase an aggregate of 900,000 Ordinary
Shares pursuant to the Stock Option Plan. Additionally, upon consummation of
the Offering, the Company will grant options to purchase an aggregate of
30,000 Ordinary Shares pursuant to its Stock Option Plan. An additional
570,000 Ordinary Shares
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are reserved for future issuance under the Stock Option Plan. If the
Underwriters' over-allotment option is exercised in full, the number of Common
Shares issuable upon exercise of the future options to be issued upon
consummation of the Offering will increase to 1,069,500 Ordinary Shares. 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 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
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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 or employee of the 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 or employee of
the Company. 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.
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.
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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 a 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 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
18,250,000 Ordinary Shares, Class A Warrants to purchase an aggregate of
1,550,000 Ordinary Shares, Class B Warrants to purchase an aggregate of
200,000 Ordinary Shares and options to purchase an aggregate of 930,000
Ordinary Shares. If the Underwriters' over-allotment option is exercised in
full, 20,762,500 Ordinary Shares will be outstanding and the number of
Ordinary Shares issuable upon exercise of outstanding options will increase to
1,069,500 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. See "Management --
Stock Option Plan," and "Description of Shares -- Warrants" and "--Options."
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
1,500,000 Ordinary Shares issued upon formation of the Company and the
Ordinary Shares underlying the Class A Warrants, Class B 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 and directors, SHL, the shareholders of SHL to
receive Ordinary Shares of Holdings as a result of the SHL Distribution, and
holders of the Class A 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 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 shares of the Company or
any securities convertible into, or exercisable or exchangeable for, any
Ordinary Shares or other shares of the Company without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters
and provided further 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 officers of Prudential Securities
Incorporated. 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 may, in its 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 officers of Prudential Securities Incorporated.
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. See "Description of Shares--Warrants."
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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. Application has
been made by Holdings and Scottish Insurance to the Governor pursuant to the
Tax Concessions Law (1995 Revision) of the Cayman Islands for an undertaking
that in the event of any change to the foregoing Holdings and Scottish
Insurance, for a period of twenty years from the date of the grant of the
undertaking, will not be chargeable to tax in the Cayman Islands on its income
or its capital gains arising in the Cayman Islands or elsewhere and that
dividends of Holdings will be payable without deduction of Cayman Islands tax.
It is expected that such undertaking will be forthcoming. 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 of $6,500 payable in respect
of Scottish Insurance's unrestricted Insurance B License.
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 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
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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
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
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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 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.
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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 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.
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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 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
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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.
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
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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.
65
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated is acting as representative (the "Representative"),
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:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER ORDINARY SHARES
----------- ---------------
<S> <C>
Prudential Securities Incorporated.........................
----------
Total...................................................... 16,750,000
==========
</TABLE>
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 Underwriters, through the Representative, 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
Representative.
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 and officers, SHL, the shareholders of SHL to
receive Ordinary Shares as a result of the SHL Distribution, and the holders
of Class A 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 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 shares of the Company or any other securities convertible into, or
exercisable or exchangeable for, any Ordinary Shares or other shares of the
Company, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters and provided further 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 officers of Prudential Securities Incorporated. 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 may, in its 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 officers of
Prudential Securities Incorporated.
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 Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
66
<PAGE>
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 Representative 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
thereby, the Company will pay Prudential Securities Incorporated an advisory
fee equal to $1.0 million (plus reimbursement of related out-of-pocket
expenses) for investment banking and financial advisory services in connection
with the Offering. 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 Representative, 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 Representative
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.
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,
Chairman of the Board, Chief Executive Officer and Director of the Company,
serves as a consultant to Jones, Day, Reavis & Pogue. Certain matters as to
state insurance 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.
67
<PAGE>
GLOSSARY OF SELECTED LIFE INSURANCE AND ANNUITY TERMS
<TABLE>
<S> <C>
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.
Annuitant......................The person on whose life or life 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.
Capital surplus................Capital of the Company from time to time not
otherwise dedicated to policy reserves or
other corporate purposes.
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.
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.
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
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 a variability to 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. Indemnity reinsurance does
not legally discharge the primary insurer
from its liability with respect to its
obligations to the insured.
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.
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.
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
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.
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.)
Retention.........................The amount or portion of insurance 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;
Retrocessionaire.................A transaction whereby a reinsurer 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.
Reinsurance companies cede risks to
retrocessionaires for reasons similar to
those that cause primary insurers to
purchase reinsurance: to reduce net
liability on individual risks, to protect
against multiple losses, to stabilize
financial ratios and to obtain additional
underwriting capacity.
Separate account..................A segregated account established by an
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.
</TABLE>
70
<PAGE>
<TABLE>
<S> <C>
Underwriting..............The insurer's or reinsurer's process.of
reviewing contracts submitted for insurance
or reinsurance coverage, deciding whether to
accept all or part of the coverage requested
and determining the applicable premiums.
Underwriting capacity.....The maximum amount that an insurance or
reinsurance company can underwrite.
Reinsurance serves to increase an insurer's
underwriting capacity by reducing its
exposure from particular risks.
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.
Variable annuity..........An annuity which includes a provision 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.
</TABLE>
71
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
INDEX TO CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheet as of June 9, 1998............................... F-3
Notes to Consolidated Balance Sheet......................................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholder 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
June 19, 1998
except for Note 7, as to which the date is
July 1, 1998
and except for note 8, as to which the date is
September 9, 1998
F-2
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEET
(STATED IN UNITED STATES DOLLARS)
JUNE 9, 1998
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents....................................... $600,000
--------
Total assets.................................................... $600,000
========
SHAREHOLDER'S EQUITY:
Share capital, par value $.01 per share:
Issued and fully paid: 1,500,000 Ordinary Shares.............. $ 15,000
Additional paid in capital.................................... 585,000
--------
Total shareholder's equity...................................... $600,000
========
</TABLE>
See accompanying notes.
F-3
<PAGE>
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 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"). Scottish Insurance has applied for 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").
During the period from its inception to the date of the balance sheet, 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 will be accounted for under the Financial Accounting Standards
Board's 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 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 will be recognized generally
as revenue when due from policyholders on a pro rata basis. Benefits and
expenses are matched with such 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.
F-4
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
DEFERRED POLICY ACQUISITION COSTS
For variable life insurance and reinsurance of investment type fixed 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, 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. 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.
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 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.
F-5
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
INVESTMENTS
The Company categorizes all investments as trading 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 and unrealized gains and loses will be recorded in the statement of
operations and included in investment income.
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.
OFFERING COSTS
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.
EARNINGS PER ORDINARY SHARE
The Company will calculate earnings per Ordinary Share based upon the
guidance provided in Financial Accounting Standards Board Statement No. 128
"Earnings per Share". This statement requires the presentation of two amounts
of earnings per share when the company has a complex capital structure. These
amounts are 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.
F-6
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
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 ("FASB") 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.
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. The consideration paid for the Class A Warrants was
determined to be fair value in the best judgment of the Company in light of
such uncertainty. The Class B Warrants, discussed in Note 8 below, were issued
on
F-7
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
June 19, 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. 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.
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. 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 applied for and expect to receive an exemption
from the Governor-in-Council of the Cayman Islands 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.
F-8
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
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 pursuant to which 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
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 quarterly, for each annuity contract issued by Scottish Annuity, an
amount equal to the lesser of (i) 0.50% per annum based on the policy account
cash value under the annuity contract (measured at the end of a contract year)
and (ii) 50% per annum of the mortality and expense fees and other
administrative charges earned by Scottish Annuity on such annuity contract,
except that such amount will not be less than $25,000 per contract. 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.
BT RE AGREEMENT
As part of its strategy to enter into the variable life insurance business,
Scottish Insurance has entered into a Private Label and Administrative
Services Agreement (the "BT Re Agreement") with BT Reinsurance Limited,
F-9
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
a Jersey, Channel Islands company ("BT Re") dated June 11, 1998 pursuant to
which BT Re will provide the Company with a variety of administrative
services. BT Re's private label services include providing the Company with
the appropriate insurance forms (which, subject to certain modifications, will
serve as the basis for the policies to be issued by the Company) and assisting
the Company in conforming such policies to applicable law. Such services
include (i) preparing policy illustrations for prospective purchasers, (ii)
conducting testing and monitoring to insure that the Company's private label
policies satisfy key Code requirements, (iii) arranging for the collection of
medical information and conducting medical examinations for prospective
insureds, (iv) using its best efforts to arrange for reinsurance of the
Company's private label policies, and (v) reviewing death claims under the
Company's private label policies and calculating the death benefit thereunder.
BT Re received $75,000 upon execution of the BT Re Agreement and will
receive quarterly fees for each private label policy issued by the Company
equal to the lesser of (i) 0.50% per year based on the separate account cash
value and (ii) 50% per year of the mortality and expense fees earned by the
Company on its policies, subject to a minimum of $15,000 per policy. Either
the Company or BT Re may terminate the BT Re Agreement on December 31 of any
year provided that at least 90 days' prior written notice is given. Either the
Company or BT Re may also terminate the agreement upon shorter notice under
specified circumstances (e.g., bankruptcy or uncured default under the
agreement). BT Re and the Company have agreed to indemnify each other and
their respective employees for certain liabilities.
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 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. The Company
pays IRM Cayman an annual retainer of $25,000, and IRM Cayman bills for its
actual services on an hourly basis.
MAVERICK AGREEMENT
Scottish Insurance has entered into an Investment Management Agreement (the
"Maverick Agreement") dated June 15, 1998 pursuant to which Maverick Capital,
Ltd., a Texas limited partnership ("Maverick"), will advise the Company in the
management of no more than 50% of its capital not otherwise dedicated from
time to time to policy reserves or other corporate purposes. According to
information supplied by Maverick, as of July 1, 1998, Maverick had aggregate
assets under management of over $2.5 billion in funds utilizing hedged equity
investment strategies. The Maverick Agreement provides that Maverick will be
entitled to receive an annual management fee equal to 1% of the net asset
value of the assets of the Company under management with Maverick and a
separate performance fee equal to 20% of the annual performance of such
assets. If, at the end of any year, the net asset value of the Company's
assets under management with Maverick decreases from the net asset value at
the end of the previous year, no performance fee will be payable with respect
to such assets until such net asset value returns to the previous year's
level. The Maverick Agreement is terminable by either party upon 45 days prior
written notice.
F-10
<PAGE>
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
CAMBRIDGE AGREEMENT
Scottish Insurance has entered into an Investment Advisory Agreement (the
"Cambridge Agreement") with Cambridge Capital Advisors, Inc., a Massachusetts
corporation ("Cambridge") dated June 11, 1998. The Company has retained
Cambridge to advise the Investment Committee of the Company's Board of
Directors in selecting private investment managers with respect to the
Company's remaining capital surplus that is not otherwise dedicated from time
to time to policy reserves or other corporate purposes or invested with
Maverick. Cambridge has received a retainer fee of $50,000 from the Company,
which was paid upon execution of the investment advisory agreement with
Cambridge. In addition, the Company will pay Cambridge an annual fee equal to
the greater of $150,000 or an amount equal to the sum of (i) 0.45% of the
first $100.0 million aggregate assets managed by investment managers engaged
by the Company based on the advice of Cambridge and (ii) 0.30% of any such
aggregate assets in excess of $100.0 million. The annual fee is payable in
quarterly installments in advance, subject to adjustments for fees calculated
on the basis of aggregate assets. The $50,000 retainer fee will be credited
against the first quarterly payment. The Cambridge Agreement has a one year
term renewable automatically thereafter on an annual basis unless terminated
by either party. The Cambridge Agreement may be terminated at any time by
either party upon 30 days written notice.
8. SUBSEQUENT EVENTS
The Company entered into a Warrant Purchase Agreement 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 ten years after the consummation of the Offering. Management is of
the view that the agreed sale price of the Class B Warrants represented fair
value at the time of purchase.
The Roman Arch Fund L.P. and The Roman Arch Fund II L.P. are each limited
partnerships and affiliates of Prudential Securities Incorporated, one of the
underwriters of the Offering, and make investments for the benefit of limited
partners who are employees of Prudential Securities Incorporated. The Company
has agreed to pay a fee of $1.0 million (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 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-11
<PAGE>
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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
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Management's Discussion and Analysis of Financial Condition and Plan of
Operations............................................................... 22
Business.................................................................. 26
Management................................................................ 46
Principal Stockholders.................................................... 50
Certain Relationships and Related Party Transactions...................... 50
Description of Shares..................................................... 51
Shares Eligible for Future Sale........................................... 58
Material Tax Consequences................................................. 59
Underwriting.............................................................. 66
Legal Matters............................................................. 67
Experts................................................................... 67
Glossary of Selected Life Insurance and Annuity Terms..................... 68
Index to Consolidated Balance Sheet....................................... F-1
</TABLE>
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16,750,000 Shares
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
Ordinary Shares
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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.
<TABLE>
<S> <C>
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........................................................ 1,000,000
Printing costs...................................................... 250,000
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
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Total............................................................. $2,500,000
==========
</TABLE>
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 or employee of the 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 or
employee of the Company. 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
<PAGE>
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 Assets 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.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by
an issuer not involving a public offering. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. Except as otherwise indicated, the following Exhibits are filed
herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<C> <S>
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.
5.1+ Opinion of Maples and Calder as to the validity of the securities
being offered.
8.1+ Opinion of Maples and Calder (contained in Exhibit 5.1).
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** 1998 Stock Option Plan dated June 18, 1998.
10.4+ Form of Stock Option Agreement in connection with 1998 Stock Option
Plan.
10.5** Private Label and Administrative Services Agreement dated June 11,
1998 between the Company and BT Reinsurance Limited.
10.6** Investment Management Agreement dated June 15, 1998 between the
Company and Maverick Capital, Ltd.
10.7** Investment Advisory Agreement dated June 11, 1998 between the Company
and Cambridge Capital Advisors, Inc.
10.8** Agreement dated June 30, 1998 between the Company and International
Risk Management (Cayman) Ltd.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.9** Insurance Administration, Services and Referral Agreement dated as of
July 1, 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.
10.11+ Amended and Restated 1998 Stock Option Plan.
10.12* Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.13+ Investment Management Agreement dated , 1998 between the Company
and Pacific Investment Management Company.
10.14+ Investment Management Agreement dated , 1998 between the Company
and General Re--New England Asset Management, Inc.
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.
99.2** Consent of George Ellis.
99.3** Consent of Howard Shapiro.
99.4** Form F-N.
</TABLE>
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* 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.
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to Registration Statement No. 333-57227 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Dallas,
Texas, on September 9, 1998.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
/s/ Michael C. French
By: ___________________________________
Michael C. French
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement No. 333-57227 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael C. French Chairman of the Board, Chief September 9, 1998
____________________________________ Executive Officer and
Michael C. French Director (Principal
Executive Officer)
/s/ Michelle L. Boucher Senior Vice President and September 9, 1998
____________________________________ Chief Financial Officer
Michelle L. Boucher (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Donald J. Puglisi Authorized Representative in September 9, 1998
____________________________________ the United States
Donald J. Puglisi
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
SEQUENTIAL
NUMBER
PAGE NO. DESCRIPTION OF DOCUMENT
---------- -----------------------
<C> <S>
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.
5.1+ Opinion of Maples and Calder as to the validity of the securities
being offered.
8.1+ Opinion of Maples and Calder (contained in Exhibit 5.1).
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** 1998 Stock Option Plan dated June 18, 1998.
10.4+ Form of Stock Option Agreement in connection with 1998 Stock Option
Plan.
10.5** Private Label and Administrative Services Agreement dated June 11,
1998 between the Company and BT Reinsurance Limited.
10.6** Investment Management Agreement dated June 15, 1998 between the
Company and Maverick Capital, Ltd.
10.7** Investment Advisory Agreement dated June 11, 1998 between the
Company and Cambridge Capital Advisors, Inc.
10.8** Agreement dated June 30, 1998 between the Company and International
Risk Management (Cayman) Ltd.
10.9** Insurance Administration, Services and Referral Agreement dated as
of July 1, 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.
10.11+ Amended and Restated 1998 Stock Option Plan.
10.12* Form of Indemnification Agreement between the Company and each of
its directors and officers.
10.13+ Investment Management Agreement dated , 1998 between the Company
and Pacific Investment Management Company.
10.14+ Investment Management Agreement dated , 1998 between the Company
and General Re--New England Asset Management, Inc.
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.
99.2** Consent of George Ellis.
99.3** Consent of Howard Shapiro.
99.4** Form F-N.
</TABLE>
- --------
*Filed herewith.
**Previously filed.
+To be filed by amendment.
<PAGE>
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
-------------------------
This INDEMNIFICATION AGREEMENT, dated as of _____________, 1998 (this
"Agreement"), is made and entered into by and between Scottish Annuity & Life
Holdings, Ltd., a Cayman Islands corporation (the "Company"), and
_________________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors
and officers the most capable persons available;
WHEREAS, Indemnitee is a director, officer, employee and/or agent of the
Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors, officers,
employees and/or agents of companies in today's environment;
WHEREAS, the Company's Articles of Association (the Articles) provide that
the Company will indemnify its directors, officers, employees and/or agents to
the fullest extent permitted by law and will advance expenses in connection
therewith, and Indemnitee's willingness to serve as a director, officer,
employee and/or agent of the Company is based in part on Indemnitee's reliance
on such provisions; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner, and Indemnitee's reliance on the aforesaid
provisions of the Articles, and in part to provide Indemnitee with specific
contractual assurance that the protection promised by such provisions will be
available to Indemnitee regardless of, among other things, any amendment to or
revocation of such provisions or any change in the composition of the Company's
Board of Directors or any acquisition or business combination transaction
relating to the Company, the Company wishes to provide in this Agreement for the
indemnification of and the advancement of expenses to Indemnitee as set forth in
this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto hereby agree as follows:
1. Certain Definitions.
-------------------
1.1. Claim. The term "Claim" shall mean any threatened, pending or
-----
completed action, suit or proceeding, or any inquiry or investigation that
Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether civil, criminal, administrative,
investigative (including, without limitation, an action by or in the right of
the Company) or other.
1.2. Indemnifiable Event. The term "Indemnifiable Event" shall mean
-------------------
any actual or asserted event or occurrence related to the fact that Indemnitee
is or was a director, officer, employee, agent, or fiduciary of the Company, or
is or was serving at the request of the Company as a director, officer,
employee, trustee, agent, or fiduciary of another corporation, partnership,
<PAGE>
joint venture, employee benefit plan, trust, or other entity, or anything done
or not done by Indemnitee in any such capacity.
2. Basic Indemnification Arrangement. (a) The Company shall indemnify,
---------------------------------
in accordance with and to the full extent now or hereinafter permitted by law,
Indemnitee who was or is a party or is threatened to be made a party to any
Claim by reason of (or arising in whole or in part out of) an Indemnifiable
Event, against any liability or expense actually and reasonably incurred,
including, without limitation, attorney's fees and other fees and expenses,
judgments, fines and amounts paid in settlement (including all interest,
assessments and other charges paid or payable in connection with or in respect
of any such attorneys' fees and other fees and expenses, judgments, fines or
amounts paid in settlement) by Indemnitee in connection with such Claim or any
appeal therefrom, if Indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the Company,
and, with respect to any criminal action, proceeding or investigation, had no
reasonable cause to believe his or her conduct was unlawful.
(b) In the event Indemnitee was, is or becomes a party to or other
participant in, or is threatened to be made a party to or other participant in,
a Claim by or in the right of the Company to procure a judgment in its favor by
reason of (or arising in whole or in part out of) an Indemnifiable Event, the
Company will indemnify Indemnitee to the fullest extent permitted by law against
costs, charges and expenses, including, without limitation, attorneys' fees and
other fees and expenses, actually and reasonably incurred by Indemnitee in
connection with such Claim or any appeal therefrom, if Indemnitee acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Company, except that no indemnification shall be made
in respect of any such Claim as to which Indemnitee shall have been adjudged to
be liable to the Company unless and only to the extent that the Grand Court of
the Cayman Islands or the court in which such action, suit or proceeding was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which the Grand
Court of the Cayman Islands or such other court shall deem proper.
(c) To the extent that the Indemnitee has been successful on the
merits or otherwise, including, without limitation, the dismissal of an action
without prejudice, in defense of any Claim referred to in Sections 2(a) or 2(b)
hereof, Indemnitee shall be indemnified against costs, charges and expenses
(including attorneys' fees and other fees and expenses) actually and reasonably
incurred by him in connection therewith.
(d) Directors of the Company shall have no personal liability to the
Company or its Members for monetary damages for breach of fiduciary or other
duties as a director, except (i) for any breach of a director's duty of loyalty
to the Company or its stockholders, (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.
2
<PAGE>
(e) Subject to Section 3(a), any indemnification under Sections 2(a)
or 2(b), unless ordered by a court, shall be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
Indemnitee is proper in the circumstances because Indemnitee has satisfied the
applicable standard set forth in Section 2(a) or 2(b), as the case may be.
Subject to Section 4(a), such determination shall be made (i) by the Board of
Directors of the Company (the "Board"), by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
(ii) if such a quorum of disinterested directors is not available or if such
disinterested directors so direct, by independent legal counsel (designated in
the manner provided below in this subsection (d)) in a written opinion or (iii)
by the stockholders of the Company (the "Stockholders") by a majority vote of
Stockholders present at a meeting at which a quorum is present. Independent
legal counsel shall be designated by vote of a majority of the disinterested
directors; provided, however, that if the Board is unable or fails to so
-------- -------
designate, such designation shall be made by the Indemnitee subject to the
approval of the Company which approval shall not be unreasonably withheld.
Independent legal counsel shall not be any person or firm who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or the Indemnitee in an
action to determine the Indemnitee's rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of such independent legal counsel
and to indemnify fully such counsel against costs, charges and expenses,
including, without limitation, attorneys' fees and other fees and expenses,
actually and reasonably incurred by such counsel in connection with this
Agreement or the opinion of such counsel pursuant hereto.
(f) All expenses, including, without limitation, attorneys' fees and
other fees and expenses, incurred by Indemnitee in his capacity as a director,
officer, employee and/or agent of the Company in connection with a Claim shall
be paid by the Company in advance of the final disposition of such Claim in
accordance with and to the full extent now or hereafter permitted by law, and in
the procedural manner prescribed by Section 3(b) hereof.
3. Certain Procedures Relating to Indemnification and Advancement of
-----------------------------------------------------------------
Expenses. (a) Except as otherwise permitted or required by the Cayman Islands
- --------
Companies Law (the "CICL"), for purposes of pursuing any rights to
indemnification under Sections 2(a), 2(b) or 4(a) hereof, as the case may be,
Indemnitee may, but shall not be required to, (i) submit to the entity making
the determination whether the Indemnitee is entitled to indemnification (the
"Determining Entity") a written statement of request for indemnification stating
that he or she is entitled to indemnification hereunder and the basis for
asserting such a claim for indemnification; and (ii) present to the Company
reasonable evidence of all expenses for which payment is requested. Submission
of such a written statement to the Determining Entity shall create a presumption
that the Indemnitee is entitled to indemnification under Sections 2(a), 2(b) or
4(a) hereof, as the case may be, and the Determining Entity shall be deemed to
have determined that Indemnitee is entitled to such indemnification unless
within 30 calendar days after receipt of such written statement the Determining
Entity shall determine (i) in the case of a determination made by the Board, by
a vote of a majority of the directors who are not parties to such suit, action
or proceeding at a meeting at which a quorum is present, (ii) in the case of a
determination made by independent legal counsel, in its judgment, or (iii) in
the case of a determination made by the Stockholders, by a vote of a majority of
the Stockholders present at a meeting of Stockholders entitled to vote thereon
at a meeting at which a quorum is present, in each case based upon clear and
convincing evidence
3
<PAGE>
(sufficient to rebut the foregoing presumption) that Indemnitee is not entitled
to indemnification and Indemnitee shall have received notice within such 30
calendar day period in writing of such determination that Indemnitee is not so
entitled to indemnification. The notice to the Indemnitee specified in the
preceding sentence shall disclose with particularity the evidence in support of
the Determining Entity's determination. The provisions of this Section 3(a) are
intended to be procedural only and shall not affect the right of Indemnitee to
indemnification under this Agreement and any determination by the Determining
Entity that the Indemnitee is not entitled to indemnification and any failure to
make the payments requested in the written statement for indemnification shall
be subject to judicial review as provided in Section 7 hereof.
(b) For purposes of determining whether to authorize advancement of
expenses pursuant to Section 2(e) hereof, Indemnitee shall submit to the Board a
sworn statement of request for advancement of expenses substantially in the form
of Exhibit 1 attached hereto and made a part hereof (the "Undertaking"),
averring that (i) he or she has reasonably incurred or will reasonably incur
actual expenses in connection with a Claim and (ii) he or she undertakes to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Company under this Agreement or otherwise.
For purposes of requesting advancement of expenses pursuant to Section 4(b)
hereof, Indemnitee shall submit an Undertaking or such other form of request as
he or she determines to be appropriate (an "Expense Request"). Upon receipt of
an Undertaking or Expense Request, as the case may be, the Board shall within 10
calendar days authorize immediate payment of the expenses stated in the
Undertaking or Expense Request, as the case may be, whereupon such payments
shall immediately be made by the Company. No security shall be required in
connection with any Undertaking or Expense Request and any Undertaking or
Expense Request shall be accepted without reference to the Indemnitee's ability
to make repayment.
4. Indemnification for Additional Expenses. (a) Without limiting any
---------------------------------------
right which Indemnitee may have pursuant to Section 2 hereof, the Articles, the
CICL, any policy of insurance or otherwise, but subject to the limitations on
the maximum permissible indemnity which may exist under applicable law at the
time of any request for indemnity hereunder determined as contemplated by this
Section 4(a), the Company shall indemnify Indemnitee against any amount which he
or she is or becomes legally obligated to pay relating to or arising out of any
Claim because of any act, failure to act or neglect or breach of duty, including
any actual or alleged error, misstatement or misleading statement, by reason of
an Indemnifiable Event. The payments which the Company is obligated to make
pursuant to this Section 4(a) shall include, without limitation, damages,
judgments, settlements and charges, costs, expenses, expenses of investigation
and expenses of defense of legal actions, suits, proceedings or claims,
including attorneys' fees, and appeals therefrom, and expenses of appeal,
attachment or similar bonds, including attorneys' fees; provided, however, that
-------- -------
the Company shall not be obligated under this Section 4(a) to make any payment
in connection with any claim against Indemnitee:
(i) to the extent of any fine or similar governmental imposition
which the Company is prohibited by applicable law from paying which results
in a final, nonappealable order; or
4
<PAGE>
(ii) to the extent based upon or attributable to Indemnitee gaining
in fact a personal profit to which he or she was not legally entitled,
including, without limitation, profits made from the purchase and sale by
Indemnitee of equity securities of the Company which are recoverable by the
Company pursuant to Section 16(b) of the Securities Exchange Act of 1934,
and profits arising from transactions in publicly traded securities of the
Company which were effected by Indemnitee in violation of Section 10(b) of
the Securities Exchange Act of 1934, including Rule 10b-5 promulgated
thereunder.
The procedures set forth in Section 3(a) shall be available to the Indemnitee
for purposes of indemnification under this Section 4(a).
(b) Expenses, including, without limitation, attorneys' fees and other
fees and expenses, incurred by Indemnitee in defending any actual or threatened
civil or criminal action, suit, proceeding or claim shall be paid by the Company
in advance of the final disposition thereof as authorized in accordance with
Section 3(b) hereof.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines and amounts paid in settlement of a Claim but not,
however, for all of the total amount thereof, the Company will nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Moreover, notwithstanding any other provision of this Agreement, to the extent
that Indemnitee has been successful on the merits or otherwise in defense of any
or all Claims relating in whole or in part to an Indemnifiable Event or in
defense of any issue or matter therein, including, without limitation, dismissal
without prejudice, Indemnitee will be indemnified against all costs, charges and
expenses, including, without limitation, attorneys' fees and other fees and
expenses, incurred in connection therewith.
6. No Presumption. For purposes of this Agreement, the termination of
--------------
any Claim by judgment, order, settlement (whether with or without court
approval), or conviction, or upon a plea of nolo contendere or its equivalent,
will not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.
7. Enforcement. (a) If a claim for indemnification made to the Company
-----------
is not paid in full by the Company within 30 calendar days after a written claim
has been received by the Company, the Indemnitee may at any time thereafter
bring suit against the Company to recover the unpaid amount of the claim.
(b) In any action brought under Section 7(a) hereof, it shall be a defense
to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the Undertaking, if any is
required, has been tendered to the Company) that the Indemnitee has not met the
standards of conduct which make it permissible under this Agreement and/or the
CICL for the Company to indemnify the Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the Company. Neither the failure of
the Company, including the Board, independent legal counsel or the Stockholders,
to have made a determination prior to
5
<PAGE>
commencement of such action that indemnification of the Indemnitee is proper in
the circumstances because he has met the applicable standard of conduct set
forth in the this Agreement and/or the CICL, nor an actual determination by the
Company, including the Board, independent legal counsel or the Stockholders,
that the Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the Indemnitee has not met
the applicable standard of conduct.
(c) It is intent of the Company that the Indemnitee not be required to
incur the expenses associated with the enforcement of his rights under this
Agreement by litigation or other legal action because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Indemnitee hereunder. Accordingly, if it should appear to the Indemnitee
that the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes any action
to declare this Agreement void or unenforceable, or institutes any action, suit
or proceeding designed (or having the effect of being designed) to deny, or to
recover from, the Indemnitee the benefits intended to be provided to the
Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from
time to time to retain counsel of his choice, at the expense of the Company as
hereinafter provided, to represent the Indemnitee in connection with the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Regardless of the outcome
thereof, the Company shall pay and be solely responsible for any and all costs,
charges and expenses, including, without limitation, attorneys' and other fees
and expenses, reasonably incurred by the Indemnitee (i) as a result of the
Company's failure to perform this Agreement or any provision thereof or (ii) as
a result of the Company or any person contesting the validity or enforceability
of this Agreement or any provision thereof as aforesaid.
8. Non-Exclusivity and Severability. (a) The rights of Indemnitee
--------------------------------
hereunder will be in addition to any other rights Indemnitee may have under the
Articles or the CICL or otherwise; provided, however, that to the extent that
-------- -------
Indemnitee otherwise would have any greater right to indemnification under any
provision of the Articles or the CICL as in effect on the date hereof,
Indemnitee will be deemed to have such greater right hereunder; and, provided
--------
further, that to the extent that any change is made to the CICL (whether by
- -------
legislative action or judicial decision) or the Articles which permits any
greater right to indemnification than that provided under this Agreement as of
the date hereof, Indemnitee will be deemed to have such greater right hereunder.
The Company will not adopt any amendment to the Articles the effect of which
would be to deny, diminish or encumber Indemnitee's right to indemnification
under the Articles, the CICL, or otherwise as applied to any act or failure to
act occurring in whole or in part prior to the date upon which the amendment was
approved by the Company's Board of Directors and/or its Stockholders, as the
case may be.
(b) If any provision of this Agreement or the application of any provision
hereof to any person or circumstance is held invalid, unenforceable or otherwise
illegal, the remainder of this Agreement and the application of such provision
to any other person or circumstance will not be affected, and the provision so
held to be invalid, unenforceable or otherwise illegal will be reformed to the
extent (and only to the extent) necessary to make it enforceable, valid or
legal.
6
<PAGE>
9. Liability Insurance. The Board of Directors may authorize the Company
-------------------
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
company, partnership, joint venture, trust or other enterprise, or in a
fiduciary or other capacity with respect to any employee benefit plan maintained
by the Company, against any liability asserted against him and incurred by him
in any such official 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 contained in Articles (S)119.
10. Allowance for Compliance with Commission Requirements. Indemnitee
------------------------------------------------------
acknowledges that the Securities and Exchange Commission (the "Commission") has
expressed the opinion that indemnification of directors and officers from
liabilities under the Securities Act of 1933 ("Act") is against public policy as
expressed in the Act and is, therefore, unenforceable. Indemnitee hereby
acknowledges and agrees that it will not be a breach of this Agreement for the
Company to undertake with the Commission in connection with the registration for
sale of any shares or other securities of the Company from time to time that, in
the event a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director or officer of
the Company in the successful defense of any action, suit or proceeding) is
asserted in connection with such shares or other 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 competent jurisdiction
the question of whether or not such indemnification by the Company is against
public policy as expressed in the Act and the Company will be governed by the
final adjudication of such issue. Indemnitee further agrees that such
submission to a court of competent jurisdiction shall not be a breach of this
Agreement.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company will be subrogated to the extent of such payment to all of the related
rights of recovery of Indemnitee against other persons or entities. Indemnitee
will execute all papers reasonably required and will do everything that may be
reasonably necessary to secure such rights and enable the Company effectively to
bring suit to enforce such rights, including all of Indemnitee's reasonable
costs and expenses, including attorneys' fees and disbursements, to be
reimbursed by, or at the option of Indemnitee advanced by, the Company.
12. No Duplication of Payments. The Company will not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, the Articles or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. Successors and Binding Agreement. (a) The Company will use reasonable
--------------------------------
efforts to require any successor (whether direct or indirect, by purchase,
merger, consolidation, reorganization or otherwise) to all or substantially all
of the business or assets of the Company, by agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the Company would be
required to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Company and any successor to the
Company, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the business or
7
<PAGE>
assets of the Company whether by purchase, merger, consolidation, reorganization
or otherwise (and such successor will thereafter be deemed the "Company" for
purposes of this Agreement), but this Agreement will not otherwise be
assignable, transferable or delegatable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
Indemnitee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
may, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Sections 12(a) and 12(b). Without limiting the generality or effect of the
foregoing, Indemnitee's right to receive payments hereunder will not be
assignable, transferable or delegatable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Indemnitee's will
or by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 12(c), the Company will have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
14. Notices. (a) For all purposes of this Agreement, all communications,
-------
including, without limitation, notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and may be given
by the Company to any Stockholder either personally or by sending it by post,
cable, telex or telecopy to him or to his address as shown in the register of
Stockholders, such notice, if mailed, to be forwarded airmail if the address be
outside the Cayman Islands.
(b) Where a notice or other communication is sent by post, service of the
notice shall be deemed to be effected by properly addressing to the Company, to
the attention of the President of the Company, at its principle executive office
and to Indemnitee at Indemnitee's principal residence as shown in the Company's
most current records, pre-paying and posting a letter containing the notice, and
to have been effected at the expiration of sixty hours after the letter
containing the same is posted as aforesaid.
(c) Where a notice or other communication is sent by cable, telex, or
telecopy, service of the notice shall be deemed to be effected by properly
addressing, and sending such notice through a transmitting organization (with
receipt thereof orally confirmed) and to have been effected on the day the same
is sent as aforesaid.
15. Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the Cayman Islands.
16. Miscellaneous. No provision of this Agreement may be waived, modified
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Indemnitee and the Company. No waiver by either party hereto
at any time of any breach by the other party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or
8
<PAGE>
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same agreement.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By:
------------------------------------------------
Name:
Title:
INDEMNITEE:
------------------------------------------------
Name:
Title:
9
<PAGE>
Exhibit 1
---------
UNDERTAKING
-----------
CAYMAN ISLANDS
I, __________________________________, being first duly sworn do
depose and say as follows:
1. This Undertaking is submitted pursuant to the Indemnification
Agreement, dated as of ________________________________, 199__, between Scottish
Annuity & Life Holdings, Ltd. (the "Company"), a Cayman Islands corporation and
the undersigned.
2. I am requesting advancement of certain costs, charges and expenses
which I have incurred or will incur in defending an actual or pending civil or
criminal action, suit, proceeding or claim.
3. I hereby undertake to repay this advancement of expenses if it
shall ultimately be determined that I am not entitled to be indemnified by the
Company under the aforesaid Indemnification Agreement or otherwise.
4. The costs, charges and expenses for which advancement is requested
are, in general, all expenses related to
---------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------------------------------
Subscribed and sworn to before me, a Notary Public in and for the
Cayman, this _________ day of _______________________, 19__.
[Seal] --------------------------------
My commission expires the _____________ day of ______________, 19__.
10
<PAGE>
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 June 19, 1998, and July 1, 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
September 9, 1998
