<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SCOTTISH 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 ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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, of telephone number, including area code,
Registrant's principal executive offices) of agent for service)
</TABLE>
<TABLE>
<S> <C> <C>
COPIES TO:
ROBERT L. ESTEP, ESQ. HENRY SMITH, ESQ. CRAIG B. BROD, ESQ.
JONES, DAY, REAVIS & POGUE MAPLES AND CALDER CLEARY, GOTTLIEB, STEEN & HAMILTON
2300 TRAMMELL CROW CENTER P.O. BOX 309, UGLAND HOUSE ONE LIBERTY PLAZA
2001 ROSS AVENUE GEORGE TOWN, GRAND CAYMAN NEW YORK, NEW YORK 10006
DALLAS, TEXAS 75201 CAYMAN ISLANDS, BWI (212) 225-2000
(214) 220-3939 (345) 949-8066
</TABLE>
--------------
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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary Shares, $0.01 par value 19,262,500
per share...................... shares $15.00 $288,937,500 $85,237
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 2,512,500 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
--------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 JUNE 19, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
16,750,000 Shares
SCOTTISH LIFE HOLDINGS, LTD.
Ordinary Shares
- --------------------------------------------------------------------------------
All of the 16,750,000 ordinary shares, par value $0.01 per share (the "Ordinary
Shares"), offered hereby (the "Offering") are being sold by Scottish 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 will be 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 10% or more of the Ordinary Shares of
the Company (other than as described herein), require divestiture of Ordinary
Shares to reduce the beneficial ownership of any holder to less than 10% of the
Ordinary Shares of the Company and reduce the voting power of any holder
beneficially owning 10% or more of the Ordinary Shares of the Company to less
than 10% of the total voting power of the Company's shares. See "Description of
Shares."
SEE "RISK FACTORS" ON PAGES 9 TO 17 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
ORDINARY SHARES OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<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 $ . 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 Life Assurance (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
Life Holdings, Ltd., a Cayman Islands company ("Holdings"), together with its
wholly-owned subsidiary, Scottish Life Assurance (Cayman) Ltd., a Cayman
Islands insurance company ("Scottish Life"), through which Holdings expects to
conduct all of its operations. Holdings and Scottish Life were incorporated on
May 12, 1998 and June 3, 1998, respectively, in the Cayman Islands and neither
has an operating history. Scottish Life was licensed in the Cayman Islands on
July , 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 Life 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. 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 significant opportunities to reinsure blocks of
existing fixed 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 believes that, in response to
heightened regulatory and rating agency scrutiny, insurers are increasingly
seeking to reinsure as a means to manage 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.
4
<PAGE>
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 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 business to develop the Company's variable life
insurance 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, , the Company's Senior Vice President and
Chief Insurance Officer, has over years experience as a senior executive
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 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 services the Company is to
provide to Scottish Annuity under such agreement. Also, 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, has assigned Scottish Life
a preliminary claims-paying ability rating of " ". The rating is
contingent on the Company raising gross proceeds of $ million in the
Offering.
5
<PAGE>
APPLY PRUDENT RISK MANAGEMENT POLICY
The principal risk associated with the Company's variable life insurance
policies is mortality risk. The death benefit provided to a policyholder by a
variable life insurance policy issued by the Company will vary based on the
investment return achieved on the underlying separate account by the private
independent money manager managing the account. The difference between the
value of the assets underlying a variable life insurance policy and the
policy's stated death benefit, known as the "net amount at risk," represents a
general liability of the Company. In accordance with GAAP and any additional
Cayman Islands regulatory requirements, once the Company begins to issue
variable life insurance policies, the Company will be required to establish and
record policy reserves designed to meet the Company's estimated future life
insurance death benefit obligations. Mortality risk tends to be more stable
when spread across large numbers of insureds. The Company's variable life
insurance policies are expected to be placed with a relatively small number of
high net worth policyholders and 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 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 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
6
<PAGE>
order to achieve this investment objective, the Company initially expects to
invest approximately 10% to 15% 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, generally referred to as "non-
traditional" or "alternative" strategies, use hedging, trading, arbitrage or
other strategies that seek to 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. Both Cambridge and
Maverick are registered investment advisers under the Investment Advisers Act
of 1940 (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 May 31, 1998, Maverick had aggregate assets under
management of approximately $2.0 billion in funds utilizing a 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 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 Life 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"). 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."
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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 Life 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 Life
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 Life has retained IRM Cayman as its licensed
insurance manager in the Cayman Islands and to provide certain additional
administrative services. Also, Scottish Life 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 Life
will be dependent upon the quality of the services provided by such firms. The
inability of Scottish Life 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 Life
has retained 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. 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
who will not be compensated by the Company for any activities undertaken in
the U.S., (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
and (v) attract clients through referrals from Scottish Annuity.
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Because neither Holdings nor Scottish Life will be licensed or registered to
do business in any jurisdiction in the U.S., no intermediary 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. In
addition, 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. In addition, 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
Life. Further, 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 " "
claims-paying ability rating from or, if the Company is unable to
maintain such rating, to obtain a similar claims-paying ability rating from
another major rating agency. In addition, 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.
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.
The Company's business plan provides that Scottish Life will initially focus
its reinsurance activities on reinsuring blocks of existing fixed annuities
and similar contracts which are not large enough to be attractive to major
international reinsurers and 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 Life's reinsurance business,
particularly to the extent such contracts have been issued by insurers no
longer actively writing new fixed annuity contracts. Also, Scottish Life
expects that a portion of any block of fixed annuities that it reinsures will
be surrendered each year, a risk that Scottish Life will take into account
when negotiating prices for its reinsurance products. No assurance can be
given, however, that Scottish Life 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 Life 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.
EFFECT OF CHANGES IN U.S. TAX LAWS ON VARIABLE LIFE INSURANCE SALES. The
market for variable life insurance products in the United States is based in
large part on the favorable tax treatment these products receive relative to
certain other investment alternatives. Any material change in such tax
treatment, including the imposition of a "flat tax" or a national sales tax in
lieu of the current federal income tax structure in the United States, would
have an adverse effect on the market for variable life insurance products. The
current budget proposal submitted to the United States Congress by the Clinton
Administration includes certain provisions which, if not modified, could limit
the ability of policyholders to change private independent money managers from
time to time without triggering adverse tax consequences. If these proposed
tax changes were enacted into law, they could adversely affect the Company's
variable life insurance business. In addition, the Clinton budget proposal
contains a provision that would prevent all transfers to trusts from
qualifying for the annual present interest exclusion from the gift tax, even
if a beneficiary held a so-called "Crummey power" (or right of withdrawal). If
this proposal were enacted into law, the primary and most tax-efficient method
of funding premium payments by insurance trusts would be eliminated. Because
the Company's variable life insurance is generally 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
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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 Life, 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 Life
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 Life, 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 Life 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 Life 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
Life for any activities undertaken in the U.S. In addition, all insurance and
reinsurance contracts of Scottish Life are expected to be negotiated, executed
and delivered, and all premiums are expected to be received, outside the
United States. Accordingly, the Company does not believe that Scottish Life
will 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 Life will not be raised in
the future.
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 Life to supervision and regulation in the United States.
In addition, because many jurisdictions do not permit insurance companies to
take credit for reinsurance obtained from unlicensed or non-admitted insurers
on their statutory financial statements unless appropriate security measures
are in place, it is anticipated that the Company's reinsurance clients will
typically require it to post a letter of credit or provide other collateral
through a funds withheld or trust arrangement. If the Company is unable to
obtain a letter of credit facility on commercially acceptable terms or is
unable to arrange for such other collateral, the Company's ability to operate
its reinsurance business will be severely limited.
MORTALITY, INVESTMENT AND OTHER RISKS. 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. 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
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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.
CERTAIN ECONOMIC AND MARKET RISKS. 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."
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.
IMPORTANCE OF MANAGEMENT AND KEY EMPLOYEES; CAYMAN ISLANDS WORK PERMITS. 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 , 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 , 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
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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.
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 . 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 Life.
Although the Company believes that Mr. French and 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."
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 addition, even if Mr. French or Ms. Boucher no longer serve as a
director or executive officer, respectively, of Scottish Annuity, they will
continue to provide services to Scottish Annuity pursuant to the Scottish
Annuity Agreement. No assurance can be given that acting in such dual capacity
or providing services pursuant to the Scottish Annuity Agreement 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 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.
INCOME TAX RISKS
Taxation of Holdings and Scottish Life. Holdings and Scottish Life are
Cayman Islands companies and neither are expected to file United States income
tax returns. Holdings and Scottish Life plan to operate in such a manner that
they are not subject to United States tax (other than withholding tax on
certain investment income
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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 Life 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 "Certain Tax Considerations."
The United States currently imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers with respect to risks located in
the United States. In addition, Holdings may be subject to withholding tax on
certain investment income from United States sources. There can be no
assurance that such taxes will not be increased or that other taxes will not
be imposed on Holdings' business.
Controlled Foreign Corporation Rules. United States persons who may,
directly or through certain attribution rules, acquire 10% or more of the
Ordinary Shares of Holdings, should consider the possible application of the
"controlled foreign corporation" ("CFC") rules. Each "United States
shareholder" of a CFC who owns shares in the CFC on the last day of the CFC's
taxable year generally must include in his gross income for United States
federal income tax purposes his pro-rata share of the CFC's "subpart F
income," even if the subpart F income has not been distributed. For these
purposes, any United States person who owns directly or indirectly 10% or more
of the voting stock of a foreign corporation will be considered to be a
"United States shareholder." In general, a foreign insurance company such as
Scottish Life is treated as a CFC only if such "United States shareholders"
collectively own more than 25% of the total combined voting power or total
value of Holdings' stock for an uninterrupted period of 30 days or more during
any year. Holdings believes that, because of the anticipated dispersion of its
share ownership among holders and because of the restrictions in its Articles
of Association on transfer, issuance or repurchase of the voting shares of
Holdings, shareholders who acquire Ordinary Shares in the Offering will not be
subject to treatment as "United States shareholders" of a CFC. In addition,
because under the Articles of Association no single shareholder will be
permitted to exercise 10% or more of the total combined voting power of
Holdings, shareholders of Holdings should not be viewed as "United States
shareholders" of a CFC for purposes of these rules. There can be no assurance,
however, that these rules will not apply to shareholders of Holdings. See
"Certain Tax Considerations."
Related Person Insurance Income Risks. If Scottish Life'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 Life'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 Life'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 Life
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 Life
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 "Certain Tax Considerations."
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
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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 "Certain Tax
Considerations."
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
Life, intends to be predominately engaged in an insurance business and does
not intend to have financial reserves in excess of the reasonable needs of its
insurance business, Holdings does not expect to meet the requirements for a
PFIC. There can be no assurance, however, that the IRS or a court will concur
in this view. See "Certain Tax Considerations."
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 Life 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 Life 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 Life. There can be no assurance
that after such date Holdings or Scottish Life 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 Life. Holdings' principal source of income
will be dividends paid by Scottish Life. 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 Life, 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 Life to pay dividends to Holdings. While Holdings is not itself
subject to any significant legal prohibitions on the payment of dividends,
Scottish Life is subject to Cayman Islands regulatory constraints which affect
its ability to pay dividends to Holdings. Specifically, payment of dividends
by Scottish Life 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 Life, 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."
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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
any class or series of the issued 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 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
16
<PAGE>
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. 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. See "Shares Eligible for Future Sale."
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS. The Company is a Cayman
Islands company and certain of its officers and directors are residents of
various jurisdictions outside the United States. All or a substantial portion
of the assets of such officers and directors and the Company, at any one time,
are or may be located in jurisdictions outside the United States. Although the
Company has irrevocably agreed that it may be served with process in New York,
New York with respect to actions arising out of or in connection with
violations of United States federal securities laws relating to offers and
sales of Ordinary Shares made hereby, it could be difficult for investors to
effect service of process within the United States on directors and officers
of the Company who reside outside the United States or to recover against the
Company or such directors and officers on judgments of United States courts
predicated upon the civil liability provisions of the United States federal
securities laws.
NO PRIOR PUBLIC MARKET FOR ORDINARY SHARES. Prior to the Offering, there has
been no public market for the Ordinary Shares and there can be no assurance
that an active trading market will develop after the Offering or that the
Ordinary Shares offered hereby will trade at or above the initial public
offering price. The initial public offering price may not be indicative of the
market price for the Ordinary Shares after the Offering. Application has been
made to include the Ordinary Shares being offered hereby for quotation in the
Nasdaq National Market.
DILUTION. Purchasers of Ordinary Shares in the Offering will experience
immediate 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.
17
<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 Life 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
Life, 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 Life to pay dividends to Holdings. While Holdings is not
itself subject to any significant legal prohibitions on the payment of
dividends, Scottish Life 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."
18
<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."
19
<PAGE>
DILUTION
Purchasers of the Ordinary Shares offered in the Offering will experience an
immediate 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 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 this per
Ordinary Share dilution:
<TABLE>
<S> <C>
Initial public offering price........................................ $15.00
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.
20
<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 Life. Holdings and Scottish Life
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 Life 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 Life. 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 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.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Holdings is an insurance holding company which conducts its principal
operations through its subsidiary, Scottish Life. As a holding company,
Holdings' assets consist primarily of the capital stock of Scottish Life.
Accordingly, Holdings will rely primarily on cash dividends and other
permissible payments from Scottish Life 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 Life, 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 Life 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 Life'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 proceeds of the Offering will be sufficient to fund
its planned growth and operating activities for the foreseeable future.
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 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
22
<PAGE>
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. Over time, internally generated
funds plus the capital base established by the Offering are expected to be
sufficient to operate its business for the forseeable future. Consequently,
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 Life is
expected to be obligated to pay any taxes in the Cayman Islands on their
income. Holdings and Scottish Life 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 Life, 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 Life. 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 Life expects to pay fees
(including its insurance license fee) of approximately $6,500 per annum.
Because Holdings and Scottish Life 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 Life will be subject to United States
taxes. See "Risk Factors--Income Tax Risk."
The United States imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. The rate of tax applicable to Scottish Life 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 "Certain Tax Considerations."
23
<PAGE>
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.
24
<PAGE>
BUSINESS
Holdings and Scottish Life 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. 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 significant opportunities to reinsure blocks of
existing fixed 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 believes that in
response to heightened regulatory and rating agency scrutiny, insurers are
increasingly seeking to reinsure as a means to manage 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 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 business to
develop the Company's variable life insurance business. Also, the Company
intends to build on the
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relationships with potential clients as well as intermediaries and other
referral sources that members of its management have developed with Scottish
Annuity. In addition, , the Company's Senior Vice
President and Chief Insurance Officer, has over years experience as a
senior executive 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 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, has assigned Scottish Life
a preliminary claims-paying ability rating of " ". The rating is
contingent on the Company raising gross proceeds of $ million in the
Offering.
Apply Prudent Risk Management Policy
The principal risk associated with the Company's variable life insurance
policies is mortality risk. The death benefit provided to a policyholder by a
variable life insurance policy issued by the Company will vary based on the
investment return achieved on the underlying separate account by the private
independent money manager managing the account. The difference between the
value of the assets underlying a variable life insurance policy and the
policy's stated death benefit, known as the "net amount at risk," represents a
general liability of the Company. In accordance with GAAP and any additional
Cayman Islands regulatory requirements, once the Company begins to issue
variable life insurance policies, the Company will be required to establish
and record policy reserves designed to meet the Company's estimated future
life insurance death benefit obligations. Mortality risk tends to be more
stable when spread across large numbers of insureds. The Company's variable
life insurance policies are expected to be placed with a relatively small
number of high net worth policyholders and provide for substantial death
benefits given expected initial premiums of at least $1.0 million per policy.
As a consequence, the Company's associated mortality risk exposure is likely
to be greater in the aggregate, and its
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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.
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 10% to 15% 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,
generally referred to as "non-traditional" or "alternative" strategies, use
hedging, trading, arbitrage or other strategies that seek to reduce volatility
and market correlation.
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 May
31, 1998, Maverick had aggregate assets under management of approximately $2.0
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
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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. 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.
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 industry sources, 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.
Fixed Annuity Reinsurance Market
The Company's reinsurance business will initially focus on reinsuring blocks
of existing fixed annuity and similar contracts which are not large enough to
be attractive to major international reinsurers and which are 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. 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
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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 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.
PRODUCTS OFFERED BY SCOTTISH LIFE
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.
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
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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.
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
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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.
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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 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., relatively small 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 Life has entered into the Scottish Annuity Agreement with Scottish
Annuity pursuant to which Scottish Life 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. Scottish Annuity will conduct all other administrative and accounting
services related to its variable annuity products.
As compensation for the services rendered by Scottish Life during the term
of the Scottish Annuity Agreement, Scottish Annuity will pay to Scottish Life
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. In addition, Scottish Annuity will reimburse
Scottish Life for all out-of-pocket fees, costs and expenses incurred or
advanced by Scottish Life 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 Life any opportunity or inquiry that
it may receive to issue and sell any life insurance products, and (ii)
Scottish Life 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 Life 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 Life 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 Life.
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ADMINISTRATION
Variable Life Insurance
As part of its strategy to enter into the variable life insurance business,
the Company has entered into a Private Label and Administrative Services
Agreement with BT Re (the "BT Re Agreement") 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 for
certain liabilities.
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.
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 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
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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.
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 Life'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 Life may
purchase, among other things, securities issued by the United States
government and its agencies and instrumentalities, securities issued by
foreign governments if rated "A" or better by at least one major rating
agency, certain asset backed securities, preferred stocks, mortgage backed
securities and corporate debt securities (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.
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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.
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 May 31, 1998, Maverick had aggregate
assets under management of approximately $2.0 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 upon execution of the
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. 25% of this annual fee will be billed and paid in
advance at the beginning of each quarter. 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 an investment advisory agreement
with to manage the Company's fixed income investment portfolio. is
one of the largest fixed income money managers
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in the United States. According to information supplied by , as of March
31, 1998, had aggregate assets under management of approximately $
billion of which approximately % consisted of fixed income assets and
approximately % consisted of equity related assets. is entitled to
receive a fee for its services at an annual rate between and of the
value of the assets it manages on behalf of the Company.
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. has
assigned Scottish Life a preliminary rating of " ". The rating
is contingent on the Company raising gross proceeds of $ million in the
Offering. assigns an " " rating to companies that have, in its
opinion, on balance, . The rating represents the rating agency's
opinion of the Scottish Life's ability to meet its obligations to its
policyholders.
Scottish Life 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.
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
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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
Life. Messrs. French and are each seeking work permits.
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 Life 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 $25,000,
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.
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
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underwriting of Cayman Islands insurance risks, may obtain a Class B license.
Scottish Life 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
Life'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 Life 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 Life 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 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.
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Auditors and Annual Compliance. Cayman Islands insurance companies are
required to have their financial statements audited on an annual basis.
Scottish Life 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 Life 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 Life, 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.
Scottish Life 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 Life'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 Life in George Town, Grand Cayman or in
such other offices outside the United States as Scottish Life may establish or
designate. Based on, among other things, the foregoing, Holdings does not
believe that Scottish Life will be subject to the insurance laws of any state
in the United States or any other jurisdiction.
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Many states impose a premium tax (typically 2%-4% of gross premiums) on
insureds obtaining insurance from unlicensed foreign insurers, such as
Scottish Life. The premiums charged by Scottish Life 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 Life 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.
42
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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) and executive officers of Holdings
and Scottish Life.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HOLDINGS AND SCOTTISH LIFE
---- --- ----------------------------------------
<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
Senior Vice President and Chief Insurance Officer
Michael Austin.......... Director
George Ellis............ Director
Howard Shapiro.......... 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 Life 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
Life's Senior Vice President and Chief Financial Officer upon its formation.
Ms. Boucher is also a director of SHL. Ms. Boucher currently serves as Manager
of Finance and Administration of Scottish Annuity. Ms. Boucher, a Canadian
national, has resided in the Cayman Islands since 1992. 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. Prior thereto, Ms. Boucher was an auditor with Price Waterhouse. Ms.
Boucher is a Chartered Accountant and holds a BMath from the University of
Waterloo.
MICHAEL AUSTIN will be elected a director of Holdings and Scottish Life
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.
GEORGE ELLIS will be elected a director of Holdings and Scottish Life prior
to consummation of the Offering. Mr. Ellis has been a private investor since
1996. Prior to 1996, Mr. Ellis served as Executive Vice President and Chief
Financial Officer of Sterling Software, Inc.
HOWARD SHAPIRO will be elected a director of Holdings and Scottish Life
prior to consummation of the Offering. Mr. Shapiro is the managing partner of
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. Mr. Shapiro founded DC
Planning in 1975.
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
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<PAGE>
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 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.
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, plus an amount equal to any income
taxes payable by him by reason of such payments occurring in connection with a
change of control.
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
44
<PAGE>
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.
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.
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, no
stock options have been granted under the Stock Option Plan. The Company
anticipates granting stock options to Mr. French, Ms. Boucher and in
connection with the consummation of the Offering. Such stock options will have
an exercise price equal to the initial public offering price. 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.
The 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
------------------------------------------------------- ------------------------------
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) $ $
300,000(1) 33.3 15.00(2) (3)
Michelle L. Boucher..... 200,000(1) 22.2 15.00(2) (3)
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
number of Ordinary Shares underlying Mr. French's, and Ms.
Boucher's options will increase to 460,000, 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.
45
<PAGE>
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 following 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)..............................
Michelle L. Boucher(2)............................
(2).......................................
Michael Austin....................................
George Ellis......................................
Howard Shapiro....................................
All directors and executive officers as a group
(six persons)....................................
</TABLE>
- --------
(1) The address for each beneficial owner is c/o Scottish Life Holdings, Ltd.,
Ugland House, 113 South Church Street, George Town, Grand Cayman, Cayman
Islands, British West Indies.
(2) Does not include Ordinary Shares issuable upon exercise of options which
are not currently exercisable or the Class A Warrants.
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
and is, indirectly, a shareholder 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."
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<PAGE>
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)
47
<PAGE>
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.
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
48
<PAGE>
Market, the Directors (or their designee) are required to decline to register
a transfer of shares if they have reason to believe that the result of such
transfer would be to increase the number of total Controlled Shares of any
person to 10% or more of a class of the Company's shares. Similarly, the
Company is restricted from issuing or repurchasing Ordinary Shares if such
issuance or repurchase would increase the number of total Controlled Shares of
any person to 10% or more of a class of the Company's shares.
The Directors (or their designee) also may, in their absolute discretion,
decline to register the transfer of any Ordinary Shares, except for transfers
executed on the Nasdaq National Market, if they have reason to believe
(i) that such transfer may expose the Company, any subsidiary or shareholder
thereof or any variable life policy-holder or any person purchasing
reinsurance from the Company or any such subsidiary to adverse tax or
regulatory treatment in any jurisdiction or (ii) that registration of such
transfer under the Securities Act or under any United States state securities
laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected.
The Company's Directors will not decline to register any transfer of
Ordinary Shares executed on the Nasdaq National Market for the reasons
described above. However, if any such transfer results in the transferee (or
any group of which such transferee is a member) beneficially owning, directly
or indirectly, 10% or more of any class of the Company's shares or causes the
Company's Directors (or their designee) to have reason to believe that such
transfer may expose the Company, any subsidiary or shareholder thereof or any
variable life policy-holder or any person purchasing reinsurance from 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 issued
Ordinary 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
49
<PAGE>
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
Upon consummation of the Offering, the Company will grant options to
purchase an aggregate of 930,000 Ordinary Shares pursuant to its Stock Option
Plan. An additional 570,000 Ordinary Shares 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."
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TRANSFER AGENT
The Company's registrar and transfer agent for all Ordinary Shares and
Preferred Shares is .
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 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
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necessity to waive the general rule that a shareholder may not bring such an
action in order that there not be a denial of justice or a violation of the
corporation's memorandum of association.
Indemnification; Exculpation. Cayman Islands law permits a company's
articles of association to provide for the indemnification of officers and
directors, except to the extent that such provision may be held by the Cayman
Islands courts to be contrary to public policy (for instance, for purporting
to provide indemnification against the consequences of committing a crime). In
addition, an officer or director may not be indemnified for his own dishonesty
or wilful neglect or default.
The Articles contain provisions providing for the indemnity by the Company
of an officer, director, employee or agent of the Company for threatened,
pending or contemplated actions, suits or proceedings, whether civil,
criminal, administrative or investigative (including, without limitation, an
action by or in the right of the Company), brought against such indemnified
person by reason of the fact that such person was an officer, director,
employee or agent 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 voting shares of the Company will be limited to a voting power of
less than 10%, which significantly limits the ability of a prospective
acquiror to effect a takeover of the Company. To the extent these provisions
discourage takeover attempts, they could deprive shareholders of opportunities
to realize takeover premiums for their shares or could depress the market
price of the Ordinary Shares.
In addition to those provisions of the Articles discussed above, set forth
below is a description of other relevant provisions of the Articles. The
descriptions are intended as a summary only and are qualified in their
entirety by reference to the Articles, which are filed as a exhibit to the
Registration Statement of which this Prospectus is a part.
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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.
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.
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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CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of Holdings and Scottish Life and the
taxation of Holdings' shareholders is based upon current law. Legislative,
judicial or administrative changes may be forthcoming that could affect this
summary. The statements as to United States federal income tax law set forth
below represent the opinion of Jones, Day, Reavis & Pogue, United States
counsel to the Company, subject to the qualifications and assumptions set
forth in such statements. The statements as to Cayman Islands tax law set
forth below represent the opinion of Maples and Calder, Cayman Islands counsel
to the Company, subject to the qualifications and assumptions set forth in
such statements. The statements as to the Company's beliefs and intentions as
to factual matters represent the views of the Company's management and do not
represent legal opinions of its counsel.
TAXATION OF HOLDINGS AND SCOTTISH LIFE
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 Life 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 Life, 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 Life'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 Life 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 Life 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 Life 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 Life 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
Life is currently 1%.
Other Countries
Scottish Life 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 Life.
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 Life 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
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directly or indirectly through foreign entities on the last day during such
taxable year on which the corporation is a CFC must include in its gross
income for United States federal income tax purposes his or her pro-rata share
of the CFC's "subpart F income," even if the subpart F income is not
distributed. Subpart F income includes, among other things, "insurance
income," which is generally defined as income (including premium and
investment income) attributable to the issuing (or reinsuring) of any
insurance or annuity contract in connection with risks located in, or
liabilities arising out of, activities in or lives or health of residents of a
country other than the country under the laws of which the insurance company
is organized. Accordingly, it is anticipated that substantially all of the
income of Scottish Life 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 Life 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 Life'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 Life's stock. Scottish Life 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 Life 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 Life by
vote or value for the requisite period; accordingly, the RPII rules of the
Code will apply to Scottish Life unless one of several exceptions (discussed
below) applies to Scottish Life.
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 Life, (ii) RPII, determined on a gross basis, is less than 20% of
Scottish Life's gross insurance income for the taxable year, (iii) Scottish
Life 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 Life elects to be treated as a
United States corporation. Scottish Life 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 Life 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 Life. 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 Life) 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
Life'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 Life 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 Life 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 Life
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 Life'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 Life 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 Life's Ordinary Shares and Scottish Life'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 Life'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 Life 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 Life'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 Life 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 Life 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 Life 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
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adjustment based upon subsequent IRS examination. Each United States person
who is considering an investment in Ordinary Shares should consult his tax
advisor as to the effects of these uncertainties.
Information Reporting. Each United States person who is a direct or indirect
shareholder of the Company on the last day of Holdings' taxable year would be
required to attach to the income tax or information return such holder would
normally file for the period which includes that date a Form 5471 if Scottish
Life 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 Life 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 Life'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 Life's Ordinary Shares is owned by direct or indirect insureds and
persons related to such insureds. For any year in which Scottish Life'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 Life'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.
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Section 953(c)(7) of the Code generally provides that Section 1248 will also
apply to any sale or exchange of shares in a foreign corporation that earns
RPII if the foreign corporation would be taxed as an insurance company if it
were a domestic corporation, regardless of whether the selling shareholder is
or was a 10% shareholder or whether RPII constitutes 20% or more of the
corporation's gross insurance income. Existing Treasury regulations do not
address whether Section 1248 of the Code and the requirement to file Form 5471
would apply if the foreign corporation is not a CFC but the foreign
corporation has a subsidiary that is a CFC or that would be taxed as an
insurance company if it were a domestic corporation (although, as discussed
above, shareholders of 10% or more of the shares of Holdings may have an
independent obligation to file Form 5471).
Section 1248 of the Code and the requirement to file Form 5471 should not
apply to dispositions of Ordinary Shares because Holdings does not intend to
directly engage in the insurance business and, under proposed regulations,
these provisions appear to be applicable only in the case of shares of
corporations that are directly engaged in the insurance business. There can be
no assurance, however, that the IRS will interpret the proposed regulations in
this manner or that the proposed regulations will not be amended or
promulgated in final form so as to provide that Section 1248 of the Code and
the requirement to file Form 5471 will apply to dispositions of Ordinary
Shares. In that event, Holdings would notify shareholders that Section 1248 of
the Code and the requirement to file Form 5471 will apply to dispositions of
Ordinary Shares. Thereafter, Holdings would send a notice after the end of
each calendar year to all persons who were shareholders during the year
notifying them that Section 1248 of the Code and the requirement to file Form
5471 apply to dispositions of Ordinary Shares. Holdings would attach to this
notice a copy of Form 5471 completed with all Holdings information and
instructions for completing the shareholder information.
Foreign Tax Credit. Because it is anticipated that United States persons
will own a majority of Holdings' shares, only a portion of the current income
inclusions under the CFC, RPII and passive foreign investment company rules,
if any, and of dividends paid by Holdings (including any gain from the sale of
Ordinary Shares that is treated as a dividend under Section 1248 of the Code)
will be treated as foreign source income for purposes of computing a
shareholder's United States foreign tax credit limitations. Holdings will
consider providing shareholders with information regarding the portion of such
amounts constituting foreign source income to the extent such information is
reasonably available. It is also likely that substantially all of the RPII and
dividends that are foreign source income will constitute either "passive" or
"financial services" income for foreign tax credit limitation purposes. Thus,
it may not be possible for most United States shareholders to utilize excess
foreign tax credits to reduce United States tax on such income.
Passive Foreign Investment Companies. Sections 1291 through 1298 of the Code
contain special rules applicable to foreign corporations that are "passive
foreign investment companies" ("PFICs"). In general, a foreign corporation
will be a PFIC if 75% or more of its income constitutes "passive income" or
50% or more of its assets produce passive income. If Holdings were to be
characterized as a PFIC, its United States shareholders would be subject to a
penalty tax at the time of their sale of, or receipt of an "excess
distribution" with respect to, their Ordinary Shares, unless such shareholders
(i) elected from the outset to be taxed on their pro-rata share of the
Company's earnings whether or not such earnings were distributed or (ii)
elected to mark their Ordinary Shares to market as of the end of each taxable
year and to treat as ordinary income (or loss) the annual appreciation (or
depreciation) in the value of such shares. In general, a shareholder receives
an "excess distribution" if the amount of the distribution is more than 125%
of the average distribution with respect to the stock during the three
preceding taxable years (or shorter period during which the taxpayer held the
stock). In general, the penalty tax is computed by assuming that the excess
distribution or gain (in the case of a sale) with respect to the shares was
taxed in equal annual portions at the highest applicable ordinary income tax
rate throughout the holder's period of ownership, and that interest accrued on
each tax amount for each prior year from the due date of such prior year's
return. The interest charge is equal to the applicable rate imposed on
underpayments of United States federal income tax for such period.
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
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income "derived in the active conduct of an insurance business by a
corporation which is predominately engaged in an insurance business." This
exception is intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. Scottish Life 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
Life 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 Life 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.
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.
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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. 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.
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.
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.
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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.
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
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.
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<PAGE>
GLOSSARY OF SELECTED LIFE INSURANCE AND ANNUITY TERMS
<TABLE>
<C> <S>
A.M. Best rating........................... A.M. Best Company, Inc. financial condition
ratings are its opinion of an insurance
company's financial strength, operating
performance and ability to meet its
obligations to policyholders. A.M. Best's
ratings range from "A++ (superior)" to "F
(in liquidation)."
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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.
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>
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<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; A transaction whereby a reinsurer cedes to
Retrocessionaire.......................... 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.
Standard & Poor's insurance claims-paying
ability ratings...........................Standard & Poor's insurance claims-paying
ability rating is the opinion of Standard &
Poor's of an operating insurance company's
financial capacity to meet the obligations
of its insurance policies in accordance with
their terms. Standard & Poor's ratings range
from "AAA (superior)" to "CCC (extremely
vulnerable)."
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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.
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>
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SCOTTISH 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 Life Holdings, Ltd.
We have audited the accompanying consolidated balance sheet of Scottish 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 Life Holdings, Ltd. at June 9, 1998 in conformity with accounting
principles generally accepted in the United States of America.
June 19, 1998
Ernst & Young
F-2
<PAGE>
SCOTTISH 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 LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET
JUNE 9, 1998
1. ORGANIZATION
Scottish Life Holdings, Ltd. (formerly, Scottish Annuity and 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 Life Assurance (Cayman) Ltd. ("Scottish Life", and
together with Holdings, the "Company"). Scottish Life 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
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 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. 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 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 quarterly in advance. Such
fees are recognized into income ratably.
F-4
<PAGE>
SCOTTISH 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 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
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 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.
ORGANIZATION COSTS
Organization costs consist of legal, accounting and incorporation expenses
incurred in connection with the formation and organization of the Company.
Such costs will be borne by the Parent.
Certain 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 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
Life 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.
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 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 over three years 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.
F-7
<PAGE>
SCOTTISH LIFE HOLDINGS, LTD.
NOTES TO CONSOLIDATED BALANCE SHEET--CONTINUED
JUNE 9, 1998
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 Life 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 Life
must maintain a net capital worth of US$240,000.
Holdings' ability to pay dividends depends on the ability of Scottish Life
to pay dividends to Holdings. While Holdings itself is not subject to any
significant legal prohibitions on the payment of the dividends, Scottish Life
will be subject to Cayman Islands regulatory constraints which affect its
ability to pay dividends to Holdings. Scottish Life is prohibited from
declaring or paying a dividend if such payment would reduce its net capital
worth below US$240,000.
7. SUBSEQUENT EVENT
The Company has entered into a Warrant Purchase Agreement whereby The Roman
Arch Fund L.P. and The Roman Arch Fund II L.P. have agreed to purchase 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 they are 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 represents fair
value.
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.
F-8
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Management's Discussion and Analysis of Financial Condition and Plan of
Operations............................................................... 21
Business.................................................................. 25
Management................................................................ 43
Principal Stockholders.................................................... 46
Certain Relationships and Related Party Transactions...................... 46
Description of Shares..................................................... 47
Shares Eligible for Future Sale........................................... 54
Certain Tax Considerations................................................ 55
Underwriting.............................................................. 62
Legal Matters............................................................. 63
Experts................................................................... 63
Glossary of Selected Life Insurance and Annuity Terms..................... 64
Index to Consolidated Balance Sheet....................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
16,750,000 Shares
SCOTTISH 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.................................. *
Advisory fee.......................................................... *
Printing costs........................................................ *
Accounting fees and expenses.......................................... *
Legal fees and expenses (not including Blue Sky)...................... *
Blue Sky fees and expenses............................................ *
Miscellaneous expenses................................................ *
--------
Total............................................................... $ *
========
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Cayman Islands law permits a company's articles of association to provide
for the indemnification of officers and directors, except to the extent that
such provision may be held by the Cayman Islands courts to be contrary to
public policy (for instance, for purporting to provide indemnification against
the consequences of committing a crime). In addition, an officer or director
may not be indemnified for his own dishonesty, wilful neglect or default.
The Articles contain provisions providing for the indemnification by the
Company of an officer, director, employee or agent of the Company for
threatened, pending or contemplated actions, suits or proceedings, whether
civil, criminal, administrative or investigative (including, without
limitation, an action by or in the right of the Company), brought against such
indemnified person by reason of the fact that such person was an officer,
director, employee or agent 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 18, 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 Sovliana 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
------- -----------------------
<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 Class A Warrant.
4.3* Form of 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 , 1998 between the Company and
Michael C. French.
10.2* Employment Agreement dated June , 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.7** Investment Advisory Agreement dated June 15, 1998 between the Company
and Cambridge Capital Advisors, Inc.
10.8* Agreement dated June , 1998 between the Company and International
Risk Management (Cayman) Ltd.
10.9* Insurance Administration, Services and Referral Agreement dated as of
June , 1998 between the Company and The Scottish Annuity Company
(Cayman) Ltd.
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.
99.1** Consent of Michael Austin.
99.2** Consent of George Ellis.
99.3** Consent of Howard Shapiro.
99.4** Form F-N.
</TABLE>
- --------
* To be filed by amendment
** Filed herewith.
(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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on June 19,
1998.
SCOTTISH 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
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael C. French Chairman of the Board, Chief June 19, 1998
____________________________________ Executive Officer and
Michael C. French Director (Principal
Executive Officer)
/s/ Michelle L. Boucher Senior Vice President and June 19, 1998
____________________________________ Chief Financial Officer
Michelle L. Boucher (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Donald J. Puglisi Authorized Representative in June 19, 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 Class A Warrant.
4.3* Form of 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 15, 1998 between the
Company and Cambridge Capital Advisors, Inc.
10.8* Agreement dated June , 1998 between the Company and International
Risk Management (Cayman) Ltd.
10.9* Insurance Administration, Services and Referral Agreement dated as
of June , 1998 between the Company and The Scottish Annuity
Company (Cayman) Ltd.
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.
99.1** Consent of Michael Austin.
99.2** Consent of George Ellis.
99.3** Consent of Howard Shapiro.
99.4** Form F-N.
</TABLE>
- --------
*To be filed by amendment.
**Filed herewith.
<PAGE>
EXHIBIT 10.3
SCOTTISH LIFE HOLDINGS, LTD.
1998 STOCK OPTION PLAN
----------------------
1. PURPOSE. The purpose of this Plan is to attract and retain the best
available talent and encourage the highest level of performance by executive
officers, key employees, directors, advisors and consultants, and to provide
them with incentives to put forth maximum efforts for the success of Scottish
Life Holdings, Ltd.'s business, in order to serve the best interests of Scottish
Life Holdings, Ltd. and its stockholders. All options granted under the Plan
are intended to be nonstatutory stock options.
2. DEFINITIONS. The following terms, when used in the Plan with initial
capital letters, shall have the following meanings:
(a) "Act" means the Securities Exchange Act of 1934, as in effect from
time to time.
(b) "Board" means the Board of Directors of the Company and, to the
extent of any delegation by the Board to a committee (or subcommittee
thereof) pursuant to Paragraph 8 of this Plan, such committee (or
subcommittee).
(c) "Change in Control" shall have the meaning provided in Paragraph
10 of this Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(e) "Company" means Scottish Life Holdings, Ltd., a Cayman Islands
limited liability company.
(f) "Date of Grant" means the date specified by the Board on which a
grant of Stock Options shall become effective (which date shall not be
earlier than the date on which the Board takes action with respect
thereto).
(g) "Director" means a member of the Board of Directors of the
Company.
(h) "Eligible Non-Employee Director" means any person, not an employee
of the Company or any Subsidiary, who, prior to the consummation of the
Company's Initial Public Offering, is a Director or who has consented to
become a Director.
(i) "Immediate Family" has the meaning ascribed thereto in Rule 16a-
1(e) under the Act (or any successor rule to the same effect) as in effect
from time to time.
<PAGE>
(j) "Initial Public Offering" means the offering to the public by the
Company of Ordinary Shares registered with the Securities and Exchange
Commission of the United States.
(k) "Market Value per Share" means, as of any given day, the closing
price of an Ordinary Share on a national securities exchange on which the
Ordinary Shares are listed or admitted to trading on the day preceding the
day such determination is being made or, if there was no closing price
reported on such day, on the most recently preceding day on which such a
closing price was reported; or if the Ordinary Shares are not listed or
admitted to trading on a national securities exchange on the day as of
which the determination is being made, the amount determined by the Board
to be the fair market value of an Ordinary Share on such day; provided,
--------
however, that Market Value Per Share with respect to the initial grant of
-------
options to officers and Non-Employee Directors prior to consummation of the
Company's Initial Public Offering means the public offering price per share
of the Ordinary Shares in the Initial Public Offering.
(l) "Option Price" means the purchase price per Ordinary Share payable
on exercise of a Stock Option.
(m) "Optionee" means the optionee named in an agreement evidencing an
outstanding Stock Option or a permitted transferee of a Stock Option.
(n) "Ordinary Shares" means the ordinary shares, par value $0.01per
share, of the Company or any security into which such Ordinary Shares may
be changed by reason of any transaction or event of the type described in
Paragraph 6 of this Plan.
(o) "Participant" means a person who is selected by the Board to
receive Stock Options under Paragraph 5 of this Plan and who is at that
time (i) an executive officer or other key employee of the Company or any
Subsidiary, (ii) an advisor or consultant to the Company or any Subsidiary,
or (iii) a member of the Board.
(p) "Plan" means this 1998 Stock Option Plan of the Company, as
amended from time to time.
(q) "Rule 16b-3" means Rule 16b-3 under Section 16 of the Act (or any
successor rule to the same effect) as in effect from time to time.
(r) "Stock Option" means the right to purchase Ordinary Shares upon
exercise of an option granted pursuant to Paragraph 5 of this Plan.
(s) "Subsidiary" means any corporation, partnership, joint venture or
other entity in which the Company owns or controls, directly or indirectly,
not less than 50% of the total combined voting power or equity interests
represented by all classes of stock issued by such corporation,
partnership, joint venture or other entity.
3. SHARES AVAILABLE UNDER PLAN. The Ordinary Shares which may be issued
under the Plan shall not exceed in the aggregate 1,500,000 shares, subject to
adjustment as provided in
-2-
<PAGE>
this Paragraph 3. Such shares may be shares of original issuance or treasury
shares or a combination of the foregoing.
(a) Any Ordinary Shares which are subject to Stock Options that are
terminated unexercised, forfeited or surrendered or that expire for any
reason shall again be available for issuance under the Plan.
(b) The shares available for issuance under the Plan also shall be
subject to adjustment as provided in Paragraph 6 of this Plan.
4. INDIVIDUAL LIMITATION ON STOCK OPTIONS. Notwithstanding anything in
this Plan to the contrary, and subject to adjustment as provided in Paragraph 6
of this Plan, no individual Participant shall be granted Stock Options under
this Plan, during the term of this Plan, for more than 1,000,000 Ordinary
Shares.
5. GRANTS OF STOCK OPTIONS. The Board may from time to time authorize
grants to any Participant of Stock Options upon such terms and conditions as the
Board may determine in accordance with the provisions set forth below.
(a) Each grant shall specify the number of Ordinary Shares to which it
pertains, subject to the limitations set forth in Paragraphs 3 and 4 of
this Plan.
(b) Each grant shall specify the Option Price, which shall not be less
than 100% of the Market Value per Share on the Date of Grant.
(c) Each grant shall specify whether the Option Price shall be payable
(i) in cash or by check acceptable to the Company, (ii) by the transfer to
the Company of Ordinary Shares owned by the Participant for at least six
months having an aggregate Market Value per Share at the date of exercise
equal to the aggregate Option Price, (iii) with the consent of the Board,
by authorizing the Company to withhold a number of Ordinary Shares
otherwise issuable to the Participant having an aggregate Market Value per
Share on the date of exercise equal to the aggregate Option Price or (iv)
by a combination of such methods of payment; provided, however, that the
-------- -------
payment methods described in clauses (ii) and (iii) shall not be available
at any time that the Company is prohibited from purchasing or acquiring
such Ordinary Shares. Any grant may provide for deferred payment of the
Option Price from the proceeds of sale through a bank or broker of some or
all of the shares to which such exercise relates.
(d) Successive grants may be made to the same Participant whether or
not any Stock Options previously granted to such Participant remain
unexercised.
(e) Each grant shall specify the required period or periods (if any)
of continuous service by the Participant with the Company or any Subsidiary
and/or any other conditions to be satisfied before the Stock Options or
installments thereof shall become exercisable, and any grant may provide
for the earlier exercise of the Stock Options in the event of a Change in
Control of the Company or in the event of any other similar transaction or
event. Unless otherwise provided in the option agreement
-3-
<PAGE>
evidencing a grant, a grant shall become exercisable in three equal annual
installments, commencing on the first anniversary of the grant.
(f) Each grant shall specify whether or not a Stock Option is
transferable, and the conditions, if any, of such transferability.
(g) No Stock Option shall be exercisable more than 10 years from the
Date of Grant.
(h) An Optionee may exercise a Stock Option in whole or in part at any
time and from time to time during the period within which the Stock Option
may be exercised. To exercise a Stock Option, an Optionee shall give
written notice to the Company specifying the number of Ordinary Shares to
be purchased and provide payment of the Option Price and any other
documentation that may be required by the Company.
(i) An Optionee shall be treated for all purposes as the owner of
record of the number of Ordinary Shares purchased pursuant to exercise of
the Stock Option (in whole or in part) as of the date the conditions set
forth in Paragraph 5(h) of this Plan are satisfied.
(j) The Board may permit Optionees to elect to defer the issuance of
Ordinary Shares under this Plan pursuant to such rules, procedures or
programs as it may establish for purposes of this Plan. The Board may also
provide that deferred issuances and settlements include the payment or
crediting of dividend equivalents or interest on the deferred amounts.
(k) On receipt of written notice to exercise, the Board may, in its
sole discretion, elect to cash out all or part of the portion of the Stock
Option(s) to be exercised by paying the Optionee an amount, in cash or
Ordinary Shares, equal to the excess of the Market Value per Share over the
Option Price of the Ordinary Shares on the effective date of such cash-out.
(l) Each grant shall be evidenced by a stock option agreement executed
on behalf of the Company by the Chief Executive Officer (or another officer
designated by the Board) and delivered to the Participant and containing
such further terms and provisions, consistent with the Plan, as the Board
may approve.
6. ADJUSTMENTS. The Board may make or provide for such adjustments in
the maximum number of shares specified in Paragraphs 3 or 4 of this Plan, in the
number of Ordinary Shares covered by outstanding Stock Options granted
hereunder, in the Option Price applicable to any such Stock Options, and/or in
the kind of shares covered thereby (including shares of another issuer), as the
Board in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of
Participants that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities or
any other corporate
-4-
<PAGE>
transaction or event having an effect similar to any of the foregoing. Any
fractional shares resulting from the foregoing adjustments shall be eliminated.
7. WITHHOLDING OF TAXES. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any benefit
realized by an Optionee under the Plan, or is requested by an Optionee to
withhold additional amounts with respect to such taxes, and the amounts
available to the Company for such withholding are insufficient, it shall be a
condition to the realization of such benefit that the Optionee make arrangements
satisfactory to the Company for payment of the balance of such taxes required or
requested to be withheld. In addition, if permitted by the Board, an Optionee
may elect to have any withholding obligation of the Company satisfied with
Ordinary Shares that would otherwise be transferred to the Optionee on exercise
of the Stock Option.
8. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by the
Board, which from time to time may delegate all or any part of its authority
under this Plan to a committee (the "Stock Option Committee") of not less than
two Directors appointed by the Board. The members of the Stock Option Committee
shall be "Non-Employee Directors" within the meaning of Rule 16b-3 and "outside
directors" within the meaning of Section 162(m) of the Code. To the extent of
any such delegation, references in this Plan to the Board shall also refer to
the Stock Option Committee. A majority of the members of the Stock Option
Committee shall constitute a quorum, and any action taken by a majority of the
members of the Stock Option Committee who are present at any meeting of the
Stock Option Committee at which a quorum is present, or any actions of the Stock
Option Committee that are unanimously approved by the members of the Stock
Option Committee in writing, shall be the acts of the Stock Option Committee.
The Board shall have the authority to delegate responsibility and authority for
the operation and administration of this Plan, appoint employees and officers of
the Company and Subsidiaries to act on its behalf, and employ persons to assist
in fulfilling its responsibilities under this Plan.
(b) The Board has the full authority and discretion to interpret and
construe any provision of this Plan or of any agreement, notification or
document evidencing the grant of a Stock Option. The interpretation and
construction by the Board of any such provision and any determination by the
Board pursuant to any provision of the Plan or of any such agreement,
notification or document shall be final and conclusive. No member of the Board
shall be liable for any such action or determination made in good faith.
9. AMENDMENTS, ETC. (a) The Board may, without the consent of the
Optionee, amend any agreement evidencing a Stock Option granted under the Plan,
or otherwise take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock Option, to
waive any other condition or restriction applicable to such Stock Option or to
the exercise of such Stock Option and to reduce the exercise price of such Stock
Option and may amend any such agreement in any other respect with the consent of
the Optionee.
(b) The Plan may be amended from time to time by the Board or any duly
authorized committee thereof. In the event any law, or any rule or regulation
issued or promulgated by the Internal Revenue Service, the Securities and
Exchange Commission, the
-5-
<PAGE>
National Association of Securities Dealers, Inc., any stock exchange upon which
the Ordinary Shares are listed for trading, or any other governmental or quasi-
governmental agency having jurisdiction over the Company, the Common Stock or
the Plan, requires the Plan to be amended, or in the event Rule 16b-3 is amended
or supplemented (e.g., by addition of alternative rules) or any of the rules
---
under Section 16 of the Act are amended or supplemented, in either event to
permit the Company to remove or lessen any restrictions on or with respect to
Stock Options, the Board reserves the right to amend the Plan to the extent of
any such requirement, amendment or supplement, and all Stock Options then
outstanding shall be subject to such amendment.
(c) The Plan may be terminated at any time by action of the Board.
The termination of the Plan shall not adversely affect the terms of any
outstanding Stock Option.
(d) The Plan shall not confer upon any Participant any right with
respect to continuance of employment or other service with the Company or any
Subsidiary, nor shall it interfere in any way with any right the Company or any
Subsidiary would otherwise have to terminate a Participant's employment or other
service at any time.
(e) This Plan shall be effective as of June 18, 1998.
(f) No Stock Option shall be granted pursuant to this Plan on or after
the tenth anniversary of the date of effectiveness of this Plan, but awards
granted prior to such tenth anniversary may extend beyond that date.
10. CHANGE IN CONTROL. For purposes of this Plan, a "Change in Control"
shall mean the occurrence of any of the following events shall have occurred:
(a) The Company is merged or consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than a majority of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders of
Ordinary Shares immediately prior to such transaction;
(b) The Company sells or otherwise transfers all or substantially all
of its assets to any other corporation or other legal person, and less than a
majority of the combined voting power of the then-outstanding securities of such
corporation or person immediately after such sale or transfer is held in the
aggregate by the holders of Ordinary Shares immediately prior to such sale or
transfer;
(c) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Act disclosing in response to Form 8-K
or Schedule 14A (or any successor schedule, form or report or item therein) that
a change in control of the Company has or may have occurred or will or may occur
in the future pursuant to any then-existing contract or transaction; or
(d) If during any period of two consecutive years after December 31,
1998, individuals who at the beginning of any such period constitute the
Directors cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by the
-6-
<PAGE>
Company's shareholders, of each Director first elected during such period was
approved by a vote of at least two-thirds of the Directors then still in office
who were Directors at the beginning of any such period.
Notwithstanding the foregoing provisions of Paragraph 10(c) above, a
"Change in Control" shall not be deemed to have occurred for purposes of this
Plan (i) by reason of any action taken by the Company, including changed in
beneficial ownership of equity securities of the Company occurring in connection
with the Company's Initial Public Offering; (ii) solely because (A) the Company,
(B) a Subsidiary, or (C) any Company-sponsored employee stock ownership plan or
other employee benefit plan of the Company either files or becomes obligated to
file a report or proxy statement under or in response to Schedule 13D, Schedule
14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) under the Act, disclosing beneficial ownership by it of shares, or
because the Company reports that a change of control of the Company has or may
have occurred or will or may occur in the future by reason of such beneficial
ownership; or (iii) solely because of a change in control of any Subsidiary
other than Scottish Life Assurance (Cayman) Ltd.
-7-
<PAGE>
EXHIBIT 10.5
PRIVATE LABEL AND ADMINISTRATIVE
SERVICE AGREEMENT
-between-
BT Reinsurance Limited
and
Scottish Life Assurance (Cayman) Ltd.
Dated as of June 11, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I: Private Label Services.......................................... 1
1.1 Responsibilities of BT Re......................................... 1
1.2 Responsibilities of the Insurer................................... 2
ARTICLE II: Administrative Services........................................ 2
2.1 Services of BT Re................................................. 2
2.2 Services of the Insurer........................................... 2
ARTICLE III: Payments by the Insurer....................................... 2
3.1 Service Fee....................................................... 2
ARTICLE IV: Standards of Service........................................... 2
4.1 General Standard.................................................. 2
4.2 Records and Reports............................................... 3
4.3 Delegation of Authority........................................... 3
ARTICLE V: Indemnification................................................. 3
5.1 In General........................................................ 3
5.2 BT Re Special Indemnification..................................... 3
5.3 BT Re Exceptions.................................................. 4
5.4 Insurer Exceptions................................................ 4
ARTICLE VI: Confidentiality................................................ 4
6.1 In General........................................................ 4
ARTICLE VII: Covenants..................................................... 4
7.1 Covenants of the Insurer; Identification of BT Re................. 4
7.2 Covenants of the Insurer; Disclosures............................. 5
ARTICLE VIII: Term and Termination......................................... 5
8.1 Effective Date of the Agreement................................... 5
8.2 Termination of the Agreement...................................... 5
8.3 Effect of Termination............................................. 6
i
<PAGE>
ARTICLE IX: Miscellaneous.................................................. 6
9.1 Services to Other Clients......................................... 6
9.2 Notices........................................................... 7
9.3 Governing Law..................................................... 7
9.4 No Waiver......................................................... 7
9.5 Counterparts...................................................... 8
9.6 Severability...................................................... 8
9.7 Assignment and Third Party Beneficiaries.......................... 8
9.8 Amendments........................................................ 8
9.9 Interpretation of Headings........................................ 8
9.10 Relationship of the Parties....................................... 8
9.11 Examination of Records............................................ 8
9.12 Force Majeure..................................................... 9
9.13 Integration....................................................... 9
TABLE OF SCHEDULES
------------------
2.1 BT Re Administrative Services
2.2 Insurer Administrative Services
3.1 Service Fee
ii
<PAGE>
PRIVATE LABEL AND ADMINISTRATIVE SERVICE AGREEMENT (the "Agreement"), dated
---------
as of June 11, 1998 (the "Effective Date") between BT REINSURANCE LIMITED, a
--------------
corporation incorporated in Jersey, Channel Islands ("BT Re"), and SCOTTISH LIFE
-----
ASSURANCE (CAYMAN) LTD., a Cayman Islands corporation (the "Insurer").
-------
W I T N E S S E T H:
WHEREAS, BT Re has developed certain variable life insurance policies which
the Insurer wishes to market, issue and sell under its own name and reinsure
such risks with reinsurers arranged by BT Re under this Agreement (the "Private
-------
Label Policies");
- --------------
WHEREAS, BT Re and the Insurer wish to cooperate with one another in
marketing, underwriting and administering the Private Label Policies; and
WHEREAS, BT Re will provide certain services to the Insurer in connection
with such marketing, underwriting and administration of the Private Label
Policies as set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the parties hereto agree as follows:
ARTICLE I: PRIVATE LABEL SERVICES
1.1 RESPONSIBILITIES OF BT RE. BT Re will provide the following services to
the Insurer (the "BT Re Private Label Services"):
----------------------------
(a) Make available to the Insurer its form of variable life insurance
policies together with its related private placement memorandum, underwriting
questionnaire, application for insurance, medical information authorization and
qualified investor questionnaire (the "Insurance Forms") to be used and revised
---------------
as appropriate by the Insurer in the sale of variable life insurance to be
issued by the Insurer.
(b) Assist the Insurer in modifying the Insurance Forms to meet the
requirements of the Insurer and the laws of the jurisdiction of incorporation of
the Insurer, provided that any services of legal counsel required to so modify
--------
the Insurance Forms will be arranged for and paid for directly by the Insurer.
<PAGE>
1.2 RESPONSIBILITIES OF THE INSURER. The Insurer will, at its sole expense:
(a) Review and approve the Insurance Forms made available and modified
pursuant to Section 1.1.
(b) Market, issue and sell under its own name the Private Label Policies
either directly or through its employees, agents and consultants.
(c) Print all Insurance Forms.
(d) Promptly submit to BT Re true, correct and complete copies of any side
letters that are entered into by the Insurer relating to Private Label Policies
that affect the BT Re Services to be provided by BT Re under this Agreement.
ARTICLE II: ADMINISTRATIVE SERVICES
2.1 SERVICES OF BT RE. BT Re agrees to provide the Insurer with the services
set forth in Schedule 2.1 with respect to the Private Label Policies (the "BT Re
-----
Administrative Services").
- -----------------------
2.2 SERVICES OF THE INSURER. The Insurer shall provide and be solely
responsible for all other functions with respect to the Private Label Policies
other than the BT Re Administrative Services, including, without limitation, the
services set forth in Schedule 2.2 (the "Insurer Administrative Services").
-------------------------------
ARTICLE III: PAYMENTS BY THE INSURER
3.1 Service Fee. In consideration for providing the BT Re Private Label
Services and the BT Re Administrative Services (collectively, the "BT Re
-----
Services"), the Insurer shall pay BT Re a fee (the "Service Fee") in the amount
- -------- -----------
and in the manner as set forth in Schedule 3.1. The Service Fee with respect to
the BT Re Private Label Services shall be fully earned when received by BT Re.
ARTICLE IV: STANDARDS OF SERVICE
4.1 GENERAL STANDARD. BT Re will provide the BT Re Services under this
Agreement with professional knowledge, skill and judgment as applied to normal
insurance business practices. BT Re will be responsible for all acts and
omissions by it pursuant to this Agreement or otherwise in connection with the
BT Re Services, provided that BT Re shall not be responsible for failure to
--------
perform any BT Re
2
<PAGE>
Administrative Services if such failure is caused in whole or in part from
inaccurate or incomplete Fund accounting by the Insurer or any other
irregularities caused by Fund investment managers (the "Fund Errors").
-----------
4.2 RECORDS AND REPORTS. BT Re will maintain all records with regard to the
BT Re Administrative Services separately from the records of its other
businesses, provided that BT Re may use identical computer and other systems so
--------
long as information with regard to the BT Re Administrative Services is
maintained separately and in an identifiable manner.
4.3 DELEGATION OF AUTHORITY. The Insurer authorizes BT Re to subcontract any
of its services to be performed hereunder to any entity or individual without
the prior consent of the Insurer, provided that (a) the subcontractor is one
--------
that also provides services to BT Re in its capacity as a direct insurer of
variable life insurance policies, and (b) BT Re is responsible for each
subcontractor meeting the standards of service set forth in Section 4.1.
ARTICLE V: INDEMNIFICATION
5.1 IN GENERAL. BT Re and the Insurer agree to hold each other harmless and
to indemnify each other, and each other's directors, officers, employees and
agents (collectively, the "Indemnified Parties" for purposes of this Article V),
-------------------
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the other party) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements occur as a result of or on account of any act or
omission of the indemnifying party in performance of this Agreement; or
resulting from or arising out of the dishonest or fraudulent acts of the
indemnifying party, or its employees acting alone or in concert with themselves
or others.
5.2 BT RE SPECIAL INDEMNIFICATION. The Insurer agrees to hold BT Re harmless
and to indemnify BT Re, and BT Re's directors, officers, employees and agents
(collectively, the "BT Re Indemnified Parties" for purposes of this Article V),
-------------------------
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the other party) or litigation
(including legal and other expenses), to which the BT Re Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements occur as a result of or on account of (a)
practices of the Insurer, its agents or representatives, in the marketing, sale,
issuance, cancellation or administration of any Private Label Policy, including
but
3
<PAGE>
not limited to, liability arising from advertising claims, errors or omissions
relating to policy information disclosure, engaging in unfair methods of
competition or deceptive acts or practices and replacement transactions, (b)
Fund Errors, or (c) the Insurer giving any information or making any
representations on behalf of or concerning BT Re, including but not limited to
identification of BT Re in any written sales materials or other documents.
5.3 BT RE EXCEPTIONS. BT Re shall not be liable under the indemnification
provision set forth in this Article V with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an Indemnified
Party as such may arise from (a) such Indemnified Party's willful misfeasance,
bad faith, or gross negligence in the performance of such Indemnified Party's
functions or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement, or (b) Fund Errors.
5.4 INSURER EXCEPTIONS. The Insurer shall not be liable under the
indemnification provision set forth in the Article V with respect to any losses,
claims, damages, liabilities or litigation to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful misfeasance,
bad faith, or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations and duties under this Agreement.
ARTICLE VI: CONFIDENTIALITY
6.1 IN GENERAL. Except as otherwise provided in this Agreement, all
information communicated to one party by the other party pursuant to or in
connection with the performance of any duties under this Agreement whether
occurring before or after the Effective Date, shall be received in confidence
and shall be used only for the purposes of this Agreement. No such information,
including, without limitation, the terms of this Agreement specific to the
nonrecipient party, shall be disclosed by the recipient party, its agents or
employees without the prior consent of the nonrecipient party except as may be
necessary by reason of legal, accounting or regulatory requirement beyond the
reasonable control of the recipient party.
ARTICLE VII: COVENANTS
7.1 COVENANTS OF THE INSURER; IDENTIFICATION OF BT RE. The Insurer shall not
give any information or make any representations on behalf of or concerning BT
Re, including but not limited to identification of BT Re in any written sales
materials or other documents, except with the permission of BT Re. Subject to
the preceding sentence, the Insurer may orally disclose the identity of BT Re,
provided that the Insurer
- --------
4
<PAGE>
does not represent BT Re as having any privity of contract with any person other
than the Insurer, including but not limited to a prospective purchaser of or a
proposed insured under a Private Label Policy or a policyholder of or an insured
or beneficiary under a Private Label Policy.
7.2 COVENANTS OF THE INSURER; DISCLOSURES. The Insurer shall promptly give
notice to BT Re of the following: (a) any notice or other communication
(written, oral or otherwise) by a governmental authority relating to the
solvency of the Insurer; (b) any notice or other communication (written, oral or
otherwise) by a governmental authority relating to the marketing, issuance and
sale of the Private Label Policies; and (c) any actual or threatened action by a
governmental authority against the Insurer.
ARTICLE VIII: TERM AND TERMINATION
8.1 EFFECTIVE DATE OF THE AGREEMENT. This Agreement shall commence as of the
Effective Date and will continue until terminated pursuant to Section 8.2.
8.2 TERMINATION OF THE AGREEMENT. This Agreement will terminate on the
earlier of the following:
(a) On the next December 31 after the party terminating the Agreement as of
such date provides at least 90 days prior written notice to the other party.
(b) Immediately upon delivery of written notice by either party to the other
party following:
(i) bankruptcy or insolvency of the other party; or
(ii) fraud or embezzlement on the part of an executive officer of the
other party related to the services to be provided hereunder, provided that
--------
such termination shall not release, diminish or affect any liability on the
part of such party with respect thereto.
(c) Upon delivery of prior written notice by the other party to the
other party effective not less than 30 days after delivery of such written
notice for failure of the other party to comply with any agreement, condition or
covenant under this Agreement, provided that such termination shall not be
--------
effective if, during such 30 day or other notice period, such failure has been
cured, or, in the case of any failure to comply other
5
<PAGE>
than nonpayment of the Service Fee, if the cure will require more than 30 days,
if the cure has been commenced and is being pursued in good faith.
8.3 EFFECT OF TERMINATION. (a) If this Agreement is terminated, the Service
Fee with respect to the BT Re Administrative Services will be prorated to the
effective date of termination and will be based on the value of all of the BT Re
Administrative Services through the termination date.
(b) In the event of termination of this Agreement, the Insurer shall have the
right to collect from BT Re any and all claim files, records and other documents
relating to the Private Label Policies subject to this Agreement and BT Re shall
return same to the Insurer within 90 days following receipt of a written request
by the Insurer for same. The Insurer shall bear the cost of delivery of such
claim files, records and other documents.
(c) In the event that BT Re reinsures risks under the Private Label Policies
pursuant to a separate reinsurance agreement, termination of this Agreement
shall not permit the Insurer to recapture any risks under such reinsurance
agreement absent an express provision in such reinsurance agreement.
(d) The provisions of Articles III, V and VI and Section 9.1 shall survive
the term and termination of this Agreement.
ARTICLE IX: MISCELLANEOUS
9.1 SERVICES TO OTHER CLIENTS. (a) BT Re provides services to other clients
and may give advice and take action with respect to any of those clients that
may differ from the advice given, or the time or nature of action taken, with
respect to the Insurer. Nothing in this Agreement shall in any way be deemed to
restrict the right of BT Re, to perform services for any other person or entity
and to collect fees for such services, and the performance of such services for
others shall not be deemed to violate or give rise to any duty or obligation to
the Insurer.
(b) BT Re will not share with or distribute to other insurers, without the
consent of the Insurer, documents created for the Insurer under Section 1.1 and
bearing the Insurer's name, provided that this Section 9.1(b) shall not prohibit
--------
the Insurer from providing services to other clients as set forth in Section
9.1(a).
(c) BT Re acknowledges that it also offers life insurance policies directly
as an insurer that may be the same as or similar to the Private Label Policies.
BT Re
6
<PAGE>
agrees that it will not solicit such life insurance policies from persons by
using customer information obtained from the Insurer under this Agreement.
9.2 NOTICES. Any notice, demand, request or approval shall be in writing and
shall be sufficiently given when personally delivered or if sent by facsimile or
certified mail to the other party and actually received at the address of such
party set forth below or at such other address as such party may from time to
time specify in writing to the other party.
(a) If to BT Re:
BT Reinsurance Limited
40 Esplanade
St. Helier, Jersey
JE2 3QB
Channel Islands
Attention: Michael J. Harman
Tel: 011-44-1534-285-127
Fax: 011-44-1534-285-122
(b) If to the Insurer:
Scottish Life Assurance
(Cayman) Ltd.
P.O. Box 30868 SMB
5th Floor, Ugland House
George Town, Grand Cayman
Cayman Islands, BWI
Attention: Michelle L. Boucher
Tel: 345-949-2800
Fax: 345-949-2519
9.3 GOVERNING LAW. This Agreement shall be administered, construed, and
enforced according to the laws of the Island of Jersey (without regard to any
conflict of laws provisions).
9.4 NO WAIVER. Failure of any party to enforce any provision of this
Agreement shall not constitute a course of conduct or waiver in the future of
the right to enforce the same or any other provision.
7
<PAGE>
9.5 COUNTERPARTS. This Agreement may be signed in multiple counterparts. Each
counterpart shall be considered an original instrument, but all of them in the
aggregate shall constitute one agreement.
9.6 SEVERABILITY. In the event that any word, sentence, paragraph provision
or article of this Agreement is found to be void or voidable, the remainder of
this Agreement shall nevertheless be legal and binding with the same force and
effect as though the void or voidable parts were deleted.
9.7 ASSIGNMENT AND THIRD PARTY BENEFICIARIES. This Agreement is entered into
for the benefit of the parties hereto and their respective successors, legal
representatives and assigns. No other person or entity shall obtain an interest
herein or be deemed to be a beneficiary of the provisions contained herein
except as specifically set forth herein. This Agreement may not be assigned by
any party without the written consent of the other parties.
9.8 AMENDMENTS. This Agreement may be amended at any time by written
agreement among the parties hereto.
9.9 INTERPRETATION OF HEADINGS. The headings, exhibit names and captions, if
any, provided herein are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this document,
and shall not be used in construing this instrument. This Agreement shall be
interpreted and enforced in accordance with the provisions hereof without the
aid of any canon, custom or rule of law requiring or suggesting constitution
against the party causing the drafting of the provision in question. Whenever
the singular number is used in this Agreement and when required by the context,
the same shall include the plural, and the masculine gender shall include the
feminine and neutral genders.
9.10 RELATIONSHIP OF THE PARTIES. The Insurer and BT Re are independent of
one another. Nothing in this Agreement shall be deemed to create: a joint
venture or partnership between the parties; a relationship of employer and
employee; a relationship of principal and agent; or any relationship other than
independent parties contracting with each other solely for the purpose of
carrying out the provisions of this Agreement.
9.11 EXAMINATION OF RECORDS. BT Re or its representatives shall have the
right to examine at any reasonable time any and all of the Insurer's books and
records relating to the Private Label Policies, including but not limited to the
policy account values of the Private Label Policies, provided that such right
--------
shall not be exercised for any reason other than the proper operation of this
Agreement. At BT Re's option, in lieu
8
<PAGE>
of BT Re or its representatives examining such books and records at the
Insurer's place or places of business where such books and records are
maintained by the Insurer, the Insurer agrees to promptly provide copies of such
books and records to BT Re on receipt of a written request from BT Re. The
Insurer shall cooperate fully with any such examination and provide all such
books and records requested by BT Re or its representatives, subject to the
confidentiality provisions set forth in Section 6.1.
9.12 FORCE MAJEURE. Each party shall be excused from the performance for any
period to the extent that that party is prevented from performing services, in
whole or in part, as a result of delays caused by the other party, an act of God
or war, civil disturbance, court order, labor dispute, third party
nonperformance or other cause beyond that party's reasonable control, including
failures or fluctuation in electric power, heat, light, air conditioning or
telecommunications equipment. Such nonperformance shall not be a default of this
Agreement.
9.13 INTEGRATION. This Agreement and the schedules attached hereto shall be
the complete and total understanding of the parties and shall not be amended
except in writing executed by the parties. This Agreement supersedes all prior
or contemporaneous agreements, letters of intent, discussions or understandings
between the parties concerning the Private Label Policies or any other subject
matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BT REINSURANCE LIMITED
By: /s/ Michael J. Harman
---------------------------------
Name: Michael J. Harman
Title: Joint Managing Director
SCOTTISH LIFE ASSURANCE
(CAYMAN) LTD.
By: /s/ Michelle Boucher
---------------------------------
Name: Michelle Boucher
Title: Director
9
<PAGE>
SCHEDULE 2.1 - BT RE ADMINISTRATIVE SERVICES
NAME OF BT RE DESCRIPTION OF BT RE ADMINISTRATIVE SERVICE
ADMINISTRATIVE SERVICE
- --------------------------------------------------------------------------------
Policy Illustration Service Prepare policy illustrations for prospective
purchasers of the Private Label Policies
- --------------------------------------------------------------------------------
Section 7702 Testing Test the Private Label Policies to determine if
Service they qualify as life insurance under Section
7702 of the Internal Revenue Code of 1986, as
amended (the "Code") and determine whether the
----
Private Label Policy is a modified endowment
contract under Code Section 7702A. Monitor
ongoing Section 7702 compliance and promptly
notify Insurer of return of premiums or other
amounts to assure compliance with Section 7702.
- --------------------------------------------------------------------------------
Medical Information Arrange for collection of medical information
Service and medical examinations for prospective
insureds under the Private Label Policies for
purposes of underwriting the risks of
prospective purchasers of the Private Label
Policies
- --------------------------------------------------------------------------------
Reinsurance Service Use its best efforts to either (a) place
reinsurance of the net amount at risk under the
Private Label Policies with third party
reinsures, or (b) seek to engage BT Re to
reinsure the net amount at risk under the
Private Label Policies with BT Re retroceding
the risk to one or more third party reinsurers
acceptable to BT Re. BT Re contemplates
reinsuring the net amount at risk under the
Private Label Policies and retroceding the
entire risk to a retrocessionnaire. BT Re
contemplates that the reinsurance agreement for
such reinsurance will be put in place before any
Private Label Policies are issued by the
Insurer. Such reinsurance will be available on a
facultative basis (i.e. each risk is subject to
individual underwriting by the reinsurer and/or
retrocessionnaire).
- --------------------------------------------------------------------------------
2.1-1
<PAGE>
NAME OF BT RE DESCRIPTION OF BT RE ADMINISTRATIVE SERVICE
ADMINISTRATIVE SERVICE
- --------------------------------------------------------------------------------
Underwriting Service If BT Re reinsures the net amount at risk under
the Private Label Policies, then BT Re will
underwrite the risks proposed to be insured
under the Private Label Policies using
underwriting guidelines approved by BT Re and
provided to the Insurer. If one or more
reinsurers other than BT Re reinsure the net
amount at risk under the Private Label Policies,
then BT Re will prepare the underwriting
submission to such reinsurers and one or more of
such reinsurers will underwrite the risks
proposed to be insured under the Private Label
Policies using underwriting guidelines approved
by such reinsurer(s) and BT Re and provided to
the Insurer
- --------------------------------------------------------------------------------
Death Benefit Service Review death claims under the Private Label
Policies and calculate the death benefit
required under the Private Label Policies
- --------------------------------------------------------------------------------
2.1-2
<PAGE>
SCHEDULE 2.2 - INSURER ADMINISTRATIVE SERVICES
NAME OF INSURER SERVICE DESCRIPTION OF INSURER SERVICE
- --------------------------------------------------------------------------------
Qualified Purchaser Determination that prospective purchaser of
Qualification Service Private Label Policy is a qualified purchaser
- --------------------------------------------------------------------------------
Insurable Interest Service Determination that the prospective policyowner
of a Private Label Policy has an insurable
interest in the proposed insured
- --------------------------------------------------------------------------------
Fund Investment Identification of, investigation of and
Manager Service appointment of investment managers for
investment funds in which the Private Label
Policies are invested (the "Funds"), including
-----
but not limited to contracting with investment
managers and revisions to private placement
memorandum relating to additions and deletions
of Funds
- --------------------------------------------------------------------------------
Asset/Fund Accounting Investment fund accounting for the Private Label
Service Policies
- --------------------------------------------------------------------------------
817 Compliance Service Monitor compliance with the diversification,
investor control and other requirements of Code
Section 817
- --------------------------------------------------------------------------------
Policy Negotiation Negotiate the sale of the Private Label
Service Policies
- --------------------------------------------------------------------------------
Underwriting Arrange for completion by proposed insured under
Questionnaire and Private Label Policy of all forms required for
Medical Authorization policy underwriting, including but not limited
Service to an underwriting questionnaire and a medical
information authorization
- --------------------------------------------------------------------------------
Policy Issuance and Issue and deliver each Private Label Policy
Delivery Service
- --------------------------------------------------------------------------------
Policy Service Provide all policyholder services for Private
Label Policies after policy issuance, including
but not limited to premium billing, preparation
and delivery of monthly policy account
statements, processing of policy loans,
processing of change of policyowner and
beneficiary requests, processing of transfers
among Funds and policy surrenders (total and
partial)
- --------------------------------------------------------------------------------
Payment of Death Benefit Following calculation of the death benefit under
a Private Label Policy by BT Re, payment of
death benefit under a Private Label Policy
- --------------------------------------------------------------------------------
2.2-1
<PAGE>
NAME OF INSURER SERVICE DESCRIPTION OF INSURER SERVICE
- --------------------------------------------------------------------------------
Policy Litigation Engagement of counsel and payment of fees and
disbursements for defense of any litigation
brought under a Private Label Policy, including
but not limited to claims litigation
- --------------------------------------------------------------------------------
2.2-2
<PAGE>
SCHEDULE 3.1 - SERVICE FEE
Service Fee
- --------------------------------------------------------------------------------
BT Re Private Label Services U.S. $75,000, due on the Effective Date
(Section 1.1(a) & (b))
- --------------------------------------------------------------------------------
BT Re Administrative Services For each Private Label Policy that is issued by
(Section 2.1) the Insurer from and after the Effective Date,
an amount, payable in U.S. dollars, equal to the
lesser of (a) the product of 50 basis points per
------
annum and the policy account value under the
Private Label Policy measured at the end of a
policy year of the Private Label Policy, and (b)
the product of 0.50 and the mortality and
expense or other administrative charge payable
to the Insurer under the Private Label Policy,
provided that such amount shall not be less than
--------
U.S.$15,000. Payment shall be made by the
Insurer to BT Re within 10 days of the date the
Insurer deducts each mortality and expense or
other administrative charge under the Private
Label Policy, provided that any amount to be
--------
paid by the Insurer other than from mortality
and expense or other administrative charge
deductions under the Private Label Policy shall
be paid by the Insurer within 10 days of the
date the Insurer deducts the last mortality and
expense or other administrative charge under the
Private Label Policy during the policy year in
which the U.S.$15,000 minimum amount is in
effect.
- --------------------------------------------------------------------------------
BT Re Administrative Services Fee for collection of medical information and
(Section 2.1) medical examinations for prospective insureds
under the Private Label Policies for purposes of
underwriting the risks of prospective purchasers
of the Private Label Policies: U.S.$2,000 each
such prospective insured, payable with
submission of underwriting questionnaire or
application for insurance for each prospective
insured.
- --------------------------------------------------------------------------------
3.1-1
<PAGE>
EXHIBIT 10.6
INVESTMENT MANAGEMENT AGREEMENT
This Agreement, dated as of June 15, 1998 is between Scottish Life
Assurance (Cayman), Ltd., a Cayman Islands insurance company ("Scottish
Life") and Maverick Capital, Ltd., a Texas limited partnership ("Maverick").
In consideration of the mutual promises herein contained, the
parties agree as follows:
1. Scottish Life hereby retains Maverick to act as an investment
manager for Scottish Life, and to invest and reinvest the assets of
Scottish Life from time to time turned over to Maverick by Scottish
Life and designated in writing by Scottish Life to be included under
this agreement.
2. Both parties agree that to discharge its duties hereunder Maverick
may elect to deposit the funds delivered by Scottish Life for
investment management hereunder in Maverick Fund, Ltd., a pooled
investment vehicle managed by Maverick. In such case, Maverick shall
be entitled to receive only the fees it is otherwise entitled to
receive under its investment management agreement with Maverick
Fund, Ltd.
3. In the event Maverick elects to manage the investment assets of
Scottish Life delivered hereunder in a separate account, Maverick
shall be entitled to receive fees based on the same compensation
formula under which it is compensated by Maverick Fund.
4. This agreement may be terminated by either party upon 45 days
written notice, provided that in the event Maverick has elected to
deposit the Scottish Life investment assets in Maverick Fund, Ltd.
those funds will be returned to Scottish Life in accordance with the
withdrawal provisions of Maverick Fund, Ltd.
5. Scottish Life acknowledges that it has reviewed, consents to and
understands the provisions of the investment management documents of
Maverick Fund, Ltd., and further acknowledges that prior to the
delivery by it of any funds for management by Maverick hereunder,
Scottish Life will meet the definition of a "qualified purchaser"
under the terms of the Investment Company Act of 1940, as amended.
In the event Maverick elects to place the investment assets of
Scottish Life in Maverick Fund, Ltd., Scottish Life will execute the
appropriate subscription documents for Maverick Fund, Ltd.
6. This agreement shall not be assigned by either party without the
express written consent of the other.
7. This agreement shall be governed by and construed in accordance with
the laws of the State of Texas.
<PAGE>
In witness whereof the parties have executed the agreement as of the date set
forth above.
Scottish Life Assurance (Cayman) Ltd.
/s/ Michael C. French
----------------------------------
By: Michael C. French
Maverick Capital, Ltd.
/s/ Lee S. Ainslie
----------------------------------
By: Lee S. Ainslie
<PAGE>
EXHIBIT 10.7
INVESTMENT ADVISORY AGREEMENT
The undersigned Scottish Life Assurance (Cayman) Limited (an insurance company
hereafter referred to as "the Client" and Cambridge Capital Advisors, Inc. (a
Massachusetts corporation hereafter referred to as "the Advisor") agree as
follows:
1. INVESTMENT ADVICE TO THE CLIENT
The Client hereby appoints the Advisor to advise and monitor the Client's funds
with respect to investment and reinvestment of assets in the Marketable
Alternative Investment Program ("the Program") as amended from time to time.
The initial size of the Program is anticipated to be $100 million.
2. DUTIES OF ADVISOR
During the period prior to the Initial Public Offering of the Client's
securities, the Advisor shall:
(a) Develop materials describing the proposed Program, its potential risk and
return characteristics and such other material as may be important to
rating agencies in evaluating the securities and insurance rating of the
Client.
(b) Meet with rating agencies as needed to explain the scope, objectives, and
expectations of the Program.
Upon completion of the Initial Public Offering and funds being made available
for investment, the Advisor shall:
(c) Provide comprehensive investment planning and oversight services with
regard to the Marketable Alternative Investment Program, including:
o assistance in developing the financial objectives, investment
guidelines, asset allocation, and selection criteria for the Program.
o reviewing and evaluating objectives, guidelines, and asset allocation on
a periodic basis based on then existing market conditions.
o assistance in developing a manager and investment structure for the
Program and evaluating, qualifying, selecting and recommending
individual managers or investments. This will take into account
correlations with and complementary styles to the Maverick investment
currently intended.
o providing recommendations on proposed investments or investment managers
referred by the Client.
o monitoring the performance of investments and individual investment
managers within the Program and making recommendations for modifying a
relationship with or terminating an existing manager, or liquidating an
investment.
(d) Provide quarterly and annual investment performance measurement and
evaluation of investments and investment managers of the Marketable
Alternative Investment Program.
Upon request, the Advisor will in addition provide separate reports for
separate pools of assets. The provision of such separate reports will be
considered Additional Performance Measurement Services and will be
compensated under the provisions of Paragraph 7.
(e) Provide written reports on various topics related to alternative investment
assets.
(f) Provide access to investment and financial data drawn from the Cambridge
Capital Advisors databases.
(g) Upon request by the Client and at the sole discretion of the Advisor, the
Advisor may provide consulting services with respect to investment of
assets other than the Marketable Alternative Investment Program. Such
services will be considered Additional Consulting Services and will be
compensated under the provisions of Paragraph 7.
<PAGE>
In performing its obligations under this Agreement, the Advisor shall discharge
its duties and exercise its powers hereunder with the care, skill, prudence and
diligence that, under the circumstances then prevailing, a prudent person acting
in a like capacity would use. The Advisor shall only act in an advisory
capacity.
3. RESTRICTIONS ON THE ADVISOR AND EXCLUSIONS FROM SERVICES
The Advisor may not enter into any transaction on behalf of the Client or bind
the Client in any way without the prior written consent of the Client.
The Advisor shall at no time have custody, possession, or control of any of the
assets of the Marketable Alternative Investment Program or any cash, securities,
or other assets of the Client.
The Advisor shall not provide or otherwise be responsible for the provision of
tax advice or legal counsel. The Client shall obtain legal counsel as it deems
necessary.
4. EFFECTIVE PERIOD OF AGREEMENT AND TERMINATION
The initial term of this Agreement shall be from June 15, 1998 through June 14,
1999 and shall renew thereafter on an annual basis unless terminated by either
party. The Agreement may be terminated at any time by either party upon 30 days
written notice. If this Agreement is terminated, fees payable to the Advisor
shall be adjusted on a pro rata basis. Notwithstanding the foregoing, if the
Initial Public Offering of the Client's securities is not successful and no
funds become available for investment, this Agreement will terminate and there
will be no further obligations by either party under this Agreement.
5. CONFIDENTIALITY AND EXCLUSIVE USE
The Advisor shall regard as confidential all information concerning the affairs
of the Client, but shall be permitted to disclose to third parties the fact that
the Advisor is performing advisory activities on the Client's behalf. The
information and recommendations furnished by the Advisor are for the use of the
Client solely in relation to the investment and reinvestment of the assets of
the Alternative Investment Program and may not be used for any other purpose.
The Client, its officers and employees, and other affiliated parties shall
regard as confidential all information and recommendations furnished by the
Advisor to the Client subject to disclosure as may be required by law. No data
or research may be distributed to anyone beyond the Client's staff and directors
or trustees without the prior permission of the Advisor.
6. SERVICES TO OTHER CLIENTS
The Advisor and its affiliates may act and continue to act as investment
advisors for others, and nothing in this Agreement shall in any way be deemed to
restrict the right of the Advisor or its affiliates to perform investment
advisory or other services for any other person or entity, and the performance
of such services for others shall not be deemed to violate or give rise to any
duty or obligation to the Client.
The Advisor shall maintain such policies and practices as may be necessary so as
not to favor or disfavor consistently or consciously any client or class of
clients, and shall to the extent practical allocate investment opportunities
among clients over a period of time on a fair and equitable basis.
7. FEES
The Advisor's compensation shall be determined as follows:
Initial Retainer
----------------
Upon the commencement of this Agreement and as full compensation for
services prior to the Initial Public Offering of the Client's securities,
Client shall pay a one-time non-refundable retainer fee of $50,000.
Annual fee
----------
As full compensation for all services and expenses assumed by the Advisor
hereunder after the initial Public Offering, except for those services that
are explicitly defined as Additional Services, the Client shall pay an
Annual Fee equal to the greater of $150,000 or an amount based on
Marketable Alternative Investment Assets calculated as the sum of:
<PAGE>
45 basis points for the first $100 million in Marketable
Alternative Assets
30 basis points of amounts above $100 million in Marketable
Alternative Assets
The Initial Retainer payment will be credited against the first quarterly
payment of the Annual Fee as noted below. Twenty-five percent (25%) of the
Annual Fee as determined above shall be billed and paid in advance at the
beginning of each quarter of this Agreement. The Annual Fee will be
adjusted each quarter based on the market value of the Marketable
Alternative Assets on the last day of the most recently ended calendar
quarter.
Additional services
-------------------
The Advisor will be compensated for any Additional Performance Measurement
Services provided under Paragraph 2(d) in accordance with its then current
fee schedule for performance measurement services.
The Advisor will be compensated for any Additional Consulting Services
provided under Paragraph 2(g) in accordance with its then current hourly
rates.
8. ASSIGNMENT
Neither the Client nor the Advisor shall assign this agreement or any of its
rights or obligations hereunder without the prior written consent of the other.
Not withstanding this paragraph, notice is hereby provided and the Institution
hereby agrees that certain research, data collection, and other services to be
provided under this contract may be performed by Cambridge Associates (UK)
Limited ("CA-UK"), and/or Cambridge Associates, Inc. ("CA"). Both CA-UK and CA
are registered as investment advisors under the Investment Advisers Act of 1940
as amended and are under common ownership and control with the Advisor.
9. WARRANTY AND REPRESENTATIONS
The Advisor represents and warrants that it is a registered investment advisor
under the Investment Advisers Act of 1940, as amended, and that such
registration is currently effective. The Client acknowledges receipt, at least
48 hours prior to entering into this agreement, of a copy of Part II of the
Advisor's current filing with the Securities and Exchange Commission on Form
ADV. Cambridge Capital Advisors' employees and other associated persons may
purchase securities that are owned by one or more of the Advisor's clients
provided that such activities do not conflict with securities laws, the firm's
insider trading policies, Code of Ethics, or any other company policies with
respect to personal trading.
10. AUTHORIZED SIGNERS
The Client shall provide the Advisor with a list of Authorized Signers and their
specimen signatures from whom the Advisor may accept signed written day to day
instructions, confirmations or authority under this agreement. The Advisor
shall not be liable for acting in good faith upon any instruction, confirmation
or authority purporting to have been signed by an Authorized Signer, which
signature the Advisor reasonably believes to be genuine, notwithstanding the
fact that it shall subsequently be shown that such instruction, confirmation or
authority was not in fact signed by an Authorized Signer.
11. NOTICES
Except as otherwise expressly provided in this Agreement, whenever any notice is
required or permitted to be given under any provision of this Agreement, such
notice shall be in writing, shall be signed by or on behalf of the party giving
the notice and shall be mailed by first class mail or sent by courier or telefax
with confirmation of transmission to the other party at the address set forth
below or to such other address as a party may from time to time specify. Any
such notice shall be deemed duly given when delivered at such address.
12. AMENDMENTS
Any amendments to this Agreement shall be effective only if in writing and
signed by an authorized officer on behalf of the Advisor and by an Authorized
Signer of the Client.
<PAGE>
13. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
Massachusetts law, without regard to its principles of conflicts of law.
14. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties concerning
the subject matter hereof and supersedes all prior agreements and
understandings, oral or written, between them regarding such subject matter.
CAMBRIDGE CAPITAL ADVISORS, INC. SCOTTISH LIFE ASSURANCE (CAYMAN) LIMITED
By: /s/ Francis J. Phillips By: /s/ Michael C. French
-------------------------- ---------------------------
Francis J. Phillips Michael C. French
Controller Chairman
Date: 6/11/98 Date: 6/15/98
-------------------------- ---------------------------
Address: One Winthrop Square Address: P.O. Box 30868 SMB
Boston, MA 02110 5th Floor, Ugland House
George Town, Grand Cayman
Cayman Islands
British West Indies
<PAGE>
EXHIBIT 21.1
SUBISIDIARIES OF THE REGISTRANT
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Scottish Life Assurance (Cayman) Ltd. Cayman Islands, British West Indies
<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, in the Registration Statement
(Form S-1) and the related Prospectus of Scottish Life Holdings, Ltd.
dated June 19, 1998.
/s/ Ernst & Young LLP
George Town, Grand Cayman
June 19, 1998
<PAGE>
EXHIBIT 99.1
CONSENT OF MICHAEL AUSTIN
The undersigned hereby consents to being named in the Registration
Statement on Form S-1 of Scottish Life Holdings, Ltd., a Cayman Islands company
(the "Company"), filed with the Securities and Exchange Commission on June 19,
1998 (the "Registration Statement"), and in any amendments or supplements
thereto (including post-effective amendments), as a person about to become a
director of the Company, as set forth in the Registration Statement under the
caption "Management--Executive Officers and Directors."
/s/ Michael Austin
-------------------------------------
Michael Austin
<PAGE>
EXHIBIT 99.2
CONSENT OF GEORGE ELLIS
The undersigned hereby consents to being named in the Registration
Statement on Form S-1 of Scottish Life Holdings, Ltd., a Cayman Islands company
(the "Company"), filed with the Securities and Exchange Commission on June 19,
1998 (the "Registration Statement"), and in any amendments or supplements
thereto (including post-effective amendments), as a person about to become a
director of the Company, as set forth in the Registration Statement under the
caption "Management--Executive Officers and Directors."
/s/ George Ellis
-------------------------------------
George Ellis
<PAGE>
EXHIBIT 99.3
CONSENT OF HOWARD SHAPIRO
The undersigned hereby consents to being named in the Registration
Statement on Form S-1 of Scottish Life Holdings, Ltd., a Cayman Islands company
(the "Company"), filed with the Securities and Exchange Commission on June 19,
1998 (the "Registration Statement"), and in any amendments or supplements
thereto (including post-effective amendments), as a person about to become a
director of the Company, as set forth in the Registration Statement under the
caption "Management--Executive Officers and Directors."
/s/ Howard Shapiro
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Howard Shapiro
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EXHIBIT 99.4
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM F-N
APPOINTMENT OF AGENT FOR SERVICE OF PROCESS BY FOREIGN BANKS AND
FOREIGN INSURANCE COMPANIES AND CERTAIN OF THEIR HOLDING COMPANIES AND
FINANCE SUBSIDIARIES MAKING PUBLIC OFFERINGS OF SECURITIES IN THE UNITED STATES
GENERAL INSTRUCTIONS
I. Form F-N shall be filed with the Commission in connection with the filing of
a registration statement under the Securities Act of 1933 by:
1. a foreign issuer that is a foreign bank or foreign insurance company
excepted from the definition of an investment company by Rule 3a-6 under the
Investment Company Act of 1940 (the "1940 Act");
2. a foreign issuer that is a finance subsidiary of a foreign bank or
foreign insurance company, as those terms are defined in Rule 3a-6 under the
1940 Act, if such finance subsidiary is excepted from the definition of
investment company by Rule 3a-5 under the 1940 Act; or
3. a foreign issuer that is excepted from the definition of investment
company by Rule 3a-1 under the 1940 Act because some or all of its majority-
owned subsidiaries are foreign banks or foreign insurance companies excepted
from the definition of investment company by Rule 3a-6 under the 1940 Act.
II. Notwithstanding paragraph (I), the following foreign issuers are not
required to file Form F-N:
1. a foreign issuer that has filed Form F-X under the Securities Act of
1933 with the Commission with respect to the securities being offered; and
2. a foreign issuer filing a registration statement to debt securities or
non-voting preferred stock that has on file with the Commission a currently
accurate Form N-6C9 under the 1940 Act.
III. Six copies of the Form F-N, one of which shall be manually signed, shall
be filed with the Commission at its principal office. A form F-N filed in
connection with any other Commission form should not be bound together with or
be included only as an exhibit to, such other form.
A. Name of Issuer or person filing ("Filer"):
SCOTTISH LIFE HOLDINGS, LTD.
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B. This is (select one):
[ X ] an original filing for the Filer [ ] an amended filing for
the Filer
C. Identify the filing in conjunction with which this Form is being filed:
Name of registrant
SCOTTISH LIFE HOLDINGS, LTD.
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Form Type
FORM S-1
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File Number (if known)
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Filed by
SCOTTISH LIFE HOLDINGS, LTD.
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Date Filed (if filed concurrently, so indicate)
FILED CONCURRENTLY HEREWITH
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D. The Filer is incorporated or organized under the Laws of (Name of the
jurisdiction under whose Laws the filer is organized or incorporated)
CAYMAN ISLANDS, BRITISH WEST INDIES
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and has its principal place of business at (Address in full and telephone
number)
UGLAND HOUSE, 113 SOUTH CHURCH STREET, GEORGE TOWN, GRAND CAYMAN, CAYMAN
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ISLANDS
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BRITISH WEST INDIES (345) 949-2800
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E. The Filer designates and appoints (Name of United States person serving
as agent)
CT CORPORATION SYSTEM ("Agent") Located at (Address in full in the
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United States and telephone number)
1633 BROADWAY, NEW YORK, NEW YORK 10019 (212) 664-1666
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as the agent of the Filer upon whom may be served any process, pleadings,
subpoenas, or other papers in:
(a) any investigation or administrative proceeding conducted by the
Commission, and
(b) any civil suit or action brought against the Filer or to which the
Filer has been joined as defendant or respondent, in any appropriate court in
any place subject to the jurisdiction of any state or of the United States or
any of its territories or possessions or of the District of Columbia,
arising out of or based on any offering made or purported to be made in
connection with the securities registered by the Filer on Form S-1 filed
concurrently herewith, 1998 or any purchases or sales of any security in
connection therewith. The Filer stipulates and agrees that any such civil suit
or action or administrative proceeding may be commenced by the service of
process upon, and that service of an administrative subpoena shall be effected
by service upon, such agent for service of process, and that the service as
aforesaid shall be taken and held in all courts and administrative tribunals to
be valid and binding as if personal service thereof had been made.
F. Each person filing this Form stipulates and agrees to appoint a
successor agent for service of process and file an amended Form F-N if the Filer
discharges the Agent or the Agent is unwilling or unable to accept service on
behalf of the Filer at any time until six years have elapsed from the date of
the Filer's last registration statement or report, or amendment to any such
registration statement or report, filed with the Commission under the Securities
act of 1933 or Securities Exchange Act of 1934. Filer further undertakes to
advise the Commission promptly of any change to the Agent's name or address
during the applicable period by amendment of this Form referencing the file
number of the relevant registration form in conjunction with which the amendment
is being filed.
G. Each person filing this form undertakes to make available, in person or
by telephone, representatives to respond to inquiries made by the Commission
staff, and to furnish promptly, when requested to do so by the Commission staff
information relating to the securities registered pursuant to the form
referenced in paragraph E or transactions in said securities.
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The Filer certifies that it has duly caused this power of attorney, consent,
stipulation and agreement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York
Country of United States this 19th day of June, 1998 A.D.
Filer:
SCOTTISH LIFE HOLDINGS, LTD.
By : /s/ Michael C. French
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Name: Michael C. French
Title: Chairman of the Board and
Chief Executive Officer
Agent:
CT CORPORATION SYSTEMS
By : /s/ Patrick Nolan
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Name: Patrick Nolan
Title: Assistant Secretary
Instructions
1. The power of attorney, consent, stipulation and agreement shall be
signed by the Filer and its authorized Agent in the United States.
2. The name of each person who signs Form F-N shall be typed or
printed beneath his signature. Where any name is signed pursuant to a board
resolution, a certified copy of the resolution shall be filed with each copy of
the Form. If any name is signed pursuant to a power of attorney, a manually
signed copy of each power of attorney shall be filed with each copy of the Form.
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SCOTTISH LIFE HOLDINGS, LTD.
OFFICER'S CERTIFICATE
June 19, 1998
The undersigned, Michael C. French, Chairman of the Board and Chief Executive
Officer of Scottish Life Holdings, Ltd. ("the Company"), does hereby certify
that:
1. He is the duly elected, qualified and acting Chairman of the Board and
Chief Executive Officer of the Company and is familiar with the facts herein
certified.
2. Attached hereto as Annex A is a true, correct and complete copy of
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resolutions of the Company pertaining to the appointment of CT Corporation
Systems on the Form F-N as agent to accept service of process on behalf of the
Company, as adopted at a Special Meeting of the Board of Directors on June 18,
1998. Such resolutions have not been rescinded and remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned has executed this certificate effective as
of the date first above written.
/s/ Michael C. French
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Michael C. French
Chairman of the Board and
Chief Executive Officer
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ANNEX A
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Resolved
THAT the form of Form F-N for the appointment of an agent for the service of
process (the Form F-N"), and to be filed with the Securities and Exchange
Commission in connection with the Registration Statement on Form S-1 for the
registration under the Securities Act of 1933, as amended, of the Ordinary
Shares to be offered by the Company be, and it hereby is, approved.
THAT the appointment of CT Corporation Systems as the agent for service of
process of the Company and to be so designated on the Form F-N be, and it hereby
is, approved.
THAT the Chairman of the Board, the President and any Vice President of the
Company (collectively, the "Authorized Officers") be, and each of them hereby
is, authorized to cause to be prepared the Form F-N designating CT Corporation
Systems the agent of the Company for service of process.
THAT the Authorized Officers be, and each of them hereby is, authorized, with
full power and authority to delegate such authority to one or more attorneys-in-
fact or agents acting for such Authorized Officer pursuant to a power of
attorney, to execute and to cause to be filed with the Commission the Form F-N
and any such amendment, supplement, exhibit, application, statement, report,
certification or other document.
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