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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
For Annual and Transition Reports Pursuant
to Sections 13 or 15(d) of the Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ____ to ______
Commission File Number 0-29788
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
(Exact Name of Registrant as Specified in Its Charter)
Cayman Islands Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
P.O. Box 10657 APO
Grand Pavilion Commercial Centre
802 West Bay Road
George Town, Grand Cayman
Cayman Islands, British West Indies Not Applicable
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (345) 949-2800
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None
Securities Registered Pursuant to Section 12(g) of the Act:
Ordinary Shares, par value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 2000 was $122,356,393.00
As of March 24, 2000, Registrant had 16,046,740 Ordinary Shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for its 2000 Annual Meeting of Shareholders, which is expected to be
filed with the Securities and Exchange Commission (the "Commission") within 120
days of the close of the registrant's fiscal year ended December 31, 1999.
_____________________
_____________________
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
PART I........................................................................................... 1
Item 1: BUSINESS.............................................................................. 1
Item 2: PROPERTY.............................................................................. 5
Item 3: LEGAL PROCEEDINGS..................................................................... 5
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS................................. 5
PART II.......................................................................................... 6
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................. 6
Item 6: SELECTED FINANCIAL DATA............................................................... 6
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 6
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 14
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 14
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 14
PART III......................................................................................... 15
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 15
Item 11: EXECUTIVE COMPENSATION................................................................ 15
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 15
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 15
PART IV.......................................................................................... 16
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................... 16
Consolidated Financial Statements..................................................... 17
Report Of Management.................................................................. 18
Report of Independent Auditors........................................................ 19
Consolidated Balance Sheets........................................................... 20
Consolidated Statements of Income..................................................... 21
Consolidated Statements of Comprehensive Loss......................................... 22
Consolidated Statements of Shareholders' Equity....................................... 23
Consolidated Statements of Cash Flows................................................. 24
Notes to Consolidated Financial Statements............................................ 25
Exhibit Index.................................................................................... 40
</TABLE>
<PAGE>
PART I
Item 1: BUSINESS
General
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Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings", "we", "us", "our",
or "the Company") completed its initial public offering ("IPO") on November 30,
1998. Scottish Holdings, and its wholly owned subsidiary, Scottish Annuity &
Life Insurance Company (Cayman) Ltd. ("Scottish Insurance") were formed in 1998
as offshore companies principally to provide reinsurance of life and annuity
products and to issue customized variable life insurance products to high net
worth individuals and families. The Scottish Annuity Company (Cayman) Ltd.
("Scottish Annuity") , a Cayman Islands insurance company providing customized
variable annuity products to high net worth individuals and families, was
acquired by Scottish Holdings during 1999. Harbourton Reassurance, Inc.
("Harbourton"), a Delaware insurance company which is licensed in 15 states and
admitted as a reinsurer in an additional 8 states, was also acquired during 1999
to provide us with a U.S. based platform to provide reinsurance products. We are
in the process of changing Harbourton's name to Scottish Re (U.S.), Inc.
In our reinsurance activities we seek to reinsure lines of business that are
subject to significant reserve or capital requirements under regulatory and
rating agency guidelines. We believe that, in response to heightened regulatory
and rating agency scrutiny, insurers are increasingly seeking reinsurance as a
means to improve earnings, risk-based capital or other financial ratios. We
focus our reinsurance activities principally on accepting risk from U.S.
insurers, although we also expect to target opportunities in the United Kingdom,
Western Europe, Canada and Australia. In fiscal year 1999, our revenues from
reinsurance activities were derived from the U.S.
We provide both onshore and offshore solutions to primary insurers seeking non-
traditional and traditional life reinsurance of annuity and life insurance
business. Non-traditional reinsurance involves the transfer of investment risks
associated with blocks of new and existing annuity type contracts, such as
deferred annuities, payout annuities, funding agreements and similar contracts.
Our traditional life reinsurance will focus on assuming risks associated with
primary life insurance policies, both in force and new business. We expect to
reinsure the following risks: (i) mortality and ancillary morbidity, (ii)
investment, (iii) persistency, and (iv) expense. We will write reinsurance
predominantly on a direct basis with primary life insurance companies, covering
individual term life insurance policies, whole life insurance policies,
universal life insurance policies, and joint and survivor insurance policies. We
will limit our net liability on any one ordinary life risk up to $1.0 million.
Through our variable products business, we are responding to what we believe are
increasing demands of high net worth individuals and families for customized
products for use as part of sophisticated estate planning strategies. For us,
high net worth generally means individuals and families with a liquid net worth
in excess of $10 million.
We offer both variable universal life insurance policies and variable annuities.
Variable life insurance offers a death benefit and a cash value component which
is placed in a separate account and invested on behalf of the policyholder by a
money manager. As a Cayman Islands insurance company, we have the flexibility
to offer policies that permit the use of private independent money managers to
manage the separate accounts and who utilize investment strategies not typically
available in variable products issued to the general public. We will also seek
to leverage our expertise with respect to variable life insurance products by
offering structured life insurance products, such as corporate-owned life
insurance, which target the deferred compensation market.
Products Offered
Reinsurance
Reinsurance is an arrangement under which an insurance company, called the
reinsurer, agrees to indemnify another insurance company, called the ceding
company or cedent, for all or a portion of the insurance risks underwritten by
the ceding company. It is standard industry practice for primary insurers to
reinsure portions of their insurance risks with other insurance companies. This
practice permits primary insurers to write insurance policies in amounts larger
than they would be willing or able to retain. Reinsurers may also purchase
reinsurance, or "retrocession" coverage, to limit their own risk exposure. We
expect to assume risks from both primary insurers as well as reinsurers.
We are focusing our reinsurance activities principally on the reinsurance of
life insurance and annuity type products. For these products, we write
reinsurance generally as coinsurance or modified coinsurance, whereby we assume
all or a proportionate share of the liability for the reinsured business. Under
coinsurance, ownership of the assets supporting the reserves is transferred to
the reinsurer, whereas in modified coinsurance arrangements, the ceding company
retains ownership of the assets supporting the reserves. Under a coinsurance or
modified coinsurance arrangement, the reinsurer will generally share
proportionately in all material risks inherent in the underlying policies.
When we reinsure life insurance products, the reinsurance may also be structured
on a yearly renewable term basis. Under the yearly renewable term structure,
premium rates are generally adjusted annually based on the age and underwriting
classification of each insured and the age of the policies and the reinsurer
assumes only the mortality risk associated with the underlying policies.
The reinsurer, under such treaties, agrees to indemnify the primary insurer for
all or a portion of the risks associated with the underlying insurance policy in
exchange for a reinsurance premium payable to the reinsurer. We may also enter
into retrocessional reinsurance arrangements with other reinsurers, which
operate in a manner similar to the underlying reinsurance treaty described
above. Under retrocessional reinsurance arrangements, the reinsurer transfers a
portion of the risk associated with the underlying insurance policy to the
retrocessionaires. Each retrocessionaire in our current ordinary life pool
reinsures a percentage of each risk that is retroceded to the pool. Each of the
domestic participants in the pool is rated "A" or better by A.M. Best Company,
Inc. ("A.M. Best").
Our reinsurance agreements will be written on an automatic treaty basis. The
reinsurance may be solicited directly by us or through reinsurance
intermediaries. An automatic treaty provides for a ceding company to cede
contractually agreed-upon risks on specific blocks of business to a reinsurer.
In addition, the reinsurance may be written on either:
1) a proportional basis under which a specified percentage of each risk
in the reinsured class of risk is assumed by the reinsurer from the
ceding company with the reinsurer receiving its proportion of the
underlying premiums in proportion to such assumed risk;
2) or an excess of loss basis under which the reinsurer indemnifies the
ceding company up to a contractually-specified amount for a portion of
claims exceeding a specified retention amount in consideration of non-
proportional premiums being paid.
1
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Variable Life Insurance and Annuities
Variable life insurance and annuity products are "separate account" products
under which the net premiums paid, after deducting expenses, including the costs
of insurance, are placed in a separate account for the policyholder's benefit.
Under Cayman Islands Law, assets held in a separate account are not subject to
claims of the insurance company's general creditors. The cash values of this
separate account are invested for the policyholder by a private independent
money manager. Variable life insurance offers flexible premiums and a minimum
death benefit in addition to providing a return linked to an underlying
portfolio held in a separate account. Variable annuities provide tax-deferred
growth of the contractholder's investment until earnings are withdrawn or
periodic annuity payments begin.
We do not provide any investment management or advisory services to any variable
life policyholder. Our revenues earned from these policies consist of amounts
assessed during the period against policyholders' separate account balances for
mortality and expense fees and policy administration and surrender charges. Our
variable life insurance and annuity contracts have no guaranteed rate of return
on the cash values. The cash value varies based on the investment results on the
policy's assets managed by the policy's private independent money manager.
Marketing
Under our marketing plan with respect to variable life insurance and annuity
policies, we rely primarily on referrals by financial advisors, investment
managers, private bankers, attorneys and other intermediaries in the U.S. to
generate clients. None of these intermediaries represent us as agents or in any
other capacity, nor do they receive any commissions or other remuneration from
us for activities undertaken in the U.S.
Our marketing plan with respect to our reinsurance business seeks to capitalize
on the relationships developed by our executive officers and marketing staff
with members of the actuarial profession and senior insurance company
executives, at both primary insurers and other reinsurers. We target potential
ceding insurers that we believe would benefit from our reinsurance products
based on our analysis of publicly available information and other industry data.
In addition, reinsurance transactions are often placed by reinsurance
intermediaries, brokers and consultants. A significant component of our
marketing program involves working with such third party marketers in an effort
to maintain a high degree of visibility in the reinsurance marketplace.
Underwriting
Reinsurance
The principal risk associated with our fixed annuity reinsurance activities is
investment risk. Specifically, we are subject to the following:
. asset value risk, which is the risk that invested assets supporting the
reinsured business will decrease in value;
. credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and
interest;
. reinvestment risk, which is the risk that interest rates will decline and
funds reinvested will earn less than is necessary to match anticipated
liabilities; and
. disintermediation risk, which is the risk that we may have to sell assets
at a loss to provide for policyholder withdrawals or to satisfy liabilities
not otherwise properly matched.
We may also be subject to mortality risk with respect to the fixed annuities we
reinsure, although our exposure to such risk is expected to be generally
immaterial as compared to the investment risk associated with these products.
We may assume all of the liabilities under the fixed annuity contracts we
reinsure, although, in certain circumstances, we may require the ceding company
to retain a portion of such liabilities, typically not to exceed 10%.
We also reinsure various forms of life insurance products, including universal,
variable, term and whole life insurance. The primary risk under life insurance
policies is mortality risk. Our Underwriting Guidelines with respect to
reinsurance limit such risk to $1,000,000 per insured and we intend to reinsure,
or retrocede, any liability for amounts in excess of $1,000,000 per insured in
order to comply with such guidelines. Universal life insurance and similar
interest-rate sensitive policies provide life insurance with adjustable rates of
return based on applicable interest rates in effect from time to time. As a
consequence, the risks reinsured by us may also include investment risks similar
to those for fixed annuities. As with annuities, all life insurance policies
are subject to surrender risk.
2
<PAGE>
Variable Life Insurance
The principal risk associated with our variable life insurance policies is
mortality risk. The death benefit provided by our variable life insurance
policies varies based on the investment return of the underlying separate
account of policy assets invested by the policy's private independent money
manager. The difference between the value of the assets in the underlying
separate account and the policy's stated death benefit, known as the "net amount
at risk", represents a general liability. Fees are charged, based on the "net
amount at risk", and increase with the age of the insured. In accordance with
generally accepted accounting principles ("GAAP") no reserves are required other
than the deposit liability as the Company fees are based on its expected
mortality for the period charged. Mortality risk tends to be more stable when
spread across large numbers of insureds. We expect that our variable life
insurance policies, which provide substantial death benefits given expected
initial premiums of at least $1.0 million for single premium policies and
$500,000 for multiple premium policies, will be held by a relatively small
number of high net worth policyholders. Consequently, our associated mortality
risk exposure will be greater in the aggregate, and our probability of loss less
predictable, than an insurer with a broader risk pool. Therefore, pursuant to
our Underwriting Guidelines, we reinsure all of the mortality risk associated
with our variable life insurance business. Our Underwriting Guidelines provide
that any reinsurer to whom we cede business must have a financial strength
rating of at least "A-" or higher from A.M. Best or an equivalent rating by
another major rating agency.
Investment Portfolio
General
We seek to generate attractive levels of investment income through a
professionally managed investment portfolio. If we are unable to effectively
manage our investment portfolio and the risks associated with such investments,
our ability to support our variable life insurance and reinsurance businesses,
and our results of operations and financial condition, will be adversely
affected.
Investment Guidelines
Our investment activities are governed by the Investment Guidelines as approved
by the Board of Directors. Our investment portfolio, excluding assets
transferred and invested as part of any reinsurance transaction, principally
consists of fixed income securities with a weighted average investment rating of
"A". Although a fixed income security rated "A" by Standard & Poor's is somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions, however, the issuer's capacity to meet its financial commitment on
the security is still strong. We do not invest in any fixed income securities
in emerging markets or which are not rated by a major rating agency. The
Investment Guidelines provide that we may purchase, among other things,
securities issued by the United States government and its agencies and
instrumentalities, securities issued by foreign governments if rated "A" or
better by at least one major rating agency, certain asset backed securities,
preferred stocks, mortgage backed securities and corporate debt securities
(which may include convertible debt securities, but may not include payment-in-
kind corporate securities), including fixed income securities that are rated
below investment grade. The Investment Guidelines also provide that the fixed
income investment portfolio may not be leveraged and that purchases of
securities on margin and short sales may not be made without approval of the
Board of Directors.
We are exposed to two primary sources of investment risk on fixed income
investments: credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments of principal and
interest, and interest rate risk, relating to the market price and/or cash flow
variability associated with changes in market interest rates. We seek to manage
credit risk through industry and issuer diversification and asset allocation and
interest rate risk through interest rate swaps and other hedging techniques.
Our investments in fixed income securities that are rated below investment
grade, are subject to greater risks than our investments in investment grade
securities. The risk of loss of principal or interest through default is greater
with lower-rated securities because they are usually unsecured and are often
subordinated to an issuer's other obligations. Additionally, issuers of these
securities frequently have higher debt levels which makes them more susceptible
to adverse economic developments, individual corporate developments and rising
interest rates could impair their ability to meet their financial commitments.
Consequently, the market price of these securities may be quite volatile, and
the risk of loss is greater. As a result, the Investment Guidelines provide that
no more than 15% of our investment portfolio may be invested in fixed income
securities that are rated below investment grade.
We will manage the investment risks on the assets received from reinsurance
transactions by matching anticipated payout patterns of the reinsurance
liabilities. We invest such assets principally in fixed income and, to a
lesser extent, equity securities. We may invest in foreign denominated
securities to manage currency risk if the reinsurance transaction has a foreign
currency component. We may also enter into interest rate swap and other hedging
transactions in an effort to manage interest rate risks associated with such
transactions. Although the total investment in derivatives may be substantial,
any use of derivatives is expected to be incidental to our efforts to manage
interest rate risk rather than a speculative investment. Any investment in
equity securities (expected to be typically not more than 10% of the assets
transferred to us in a reinsurance transaction) will be made in an effort to
enhance our overall return on such assets.
3
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Investment Managers
Our portfolio is managed by General Re-New England Asset Management, Inc. ("Gen
Re") and Prudential Investment Corporation. Gen Re manages approximately 89% of
our investment portfolio and Prudential Investment Corporation manages the
balance.
We expect that one or both of the Investment Managers will manage the investment
of any assets transferred to us in any reinsurance transaction.
Investment Oversight
Our Board of Directors, from time to time, reviews our investment portfolio and
the performance of our investment managers. The Board of Directors can approve
exceptions to our Investment Guidelines and periodically reviews our Investment
Guidelines in light of prevailing market conditions. The investment managers and
our Investment Guidelines may be changed from time to time as a result of such
reviews.
Competition and Ratings
The insurance and reinsurance industries are highly competitive. Most of the
companies in such industries are significantly larger, and have operating
histories and access to significantly greater financial and other resources than
we do.
Our variable products primarily compete with those issued by U.S. insurance
companies. To the extent that our variable products provide for management of
the underlying separate accounts by private independent money managers, our
variable products compete with mutual funds and other investment or savings
vehicles. We believe that the most important competitive factor affecting the
marketability of our variable products is the degree to which these products
meet customer expectations, in terms of low expenses, returns (after fees and
expenses) and customer service.
Competition in the reinsurance business is based on price, ratings, perceived
financial strength and service. Because we currently rely on a small number of
clients in both our variable products and reinsurance businesses and expect to
continue to do so for the near future, such businesses are more susceptible to
the adverse effects of competition.
Insurance ratings are used by prospective purchasers of insurance policies as
well as insurers and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers and reinsurers. In
addition, a ceding company's own rating may be adversely affected by an
unfavorable rating or the lack of a rating of its reinsurer. Duff & Phelps has
assigned a rating of "A" and A.M. Best has assigned a Best Rating of "A-"
(Excellent). These ratings have been assigned to Scottish Insurance and
Harbourton. Duff & Phelps assigns an "A" rating to companies that it
characterizes as having, in its opinion, high claims paying ability, average
protection factors and an expectation of variability in risk over time due to
economic or underwriting conditions. A.M. Best assigns an "A- " (Excellent)
rating to companies that have, in its opinion, on balance, excellent financial
strength, operating performance and market profile, as well as strong abilities
to meet their ongoing obligations to policyholders. These ratings represent each
rating agency's opinion of Scottish Insurance's and Harbourton's ability to meet
its obligations to its policyholders. Scottish Annuity is unrated.
Employees
We currently employ forty-five full time employees.
Regulation
Cayman Islands
Scottish Holdings is a holding company owning all of the outstanding Ordinary
Shares of Scottish Insurance, Scottish Annuity, and Harbourton (through a
Delaware holding company). Scottish Insurance and Scottish Annuity are subject
to regulation as licensed insurance companies under Cayman Islands law.
Scottish Insurance holds an unrestricted Class B insurance license under Cayman
Islands Insurance Law and may therefore carry on an insurance business from the
Cayman Islands, but may not engage in any Cayman Islands domestic insurance
business.
Scottish Annuity holds an unrestricted Class B license under Cayman Islands
Insurance Law and may therefore carry on an insurance business from the Cayman
Islands, but may not engage in any Cayman Islands domestic insurance business.
4
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Unless specifically exempted, a Cayman Islands insurance company must engage a
licensed insurance manager operating in the Cayman Islands to provide insurance
expertise and oversight. Scottish Insurance has been exempt from this
requirement and Scottish Annuity has engaged International Risk Management
(Cayman) Ltd. as its licensed insurance manager in the Cayman Islands. It is
anticipated that Scottish Annuity will also be exempted from this requirement
during 2000.
In addition, under the Insurance Law, Cayman Islands insurance companies
carrying on long term business (which includes the writing of life insurance
policies) must hold all receipts in respect of its long-term business and
earnings thereon in a separate long-term business fund. Payments from such long-
term business fund may not be made directly or indirectly for any purpose other
than those of the insurer's long-term business. Every Cayman Islands insurance
company carrying on long-term business may establish any number of separate
accounts in respect of premiums paid to it to provide (i) annuities on human
life and (ii) contracts of insurance on human life, and such respective premiums
shall be kept segregated one from the other and independent of all other funds
of the Cayman Islands insurer, and, notwithstanding the provisions of any other
written law to the contrary, are not chargeable with any liability arising from
any other business of the insurer. The scope and the validity of the Cayman
Islands law regarding separate accounts has not been tested in the courts of the
Cayman Islands.
United States and Other Jurisdictions
Scottish Holdings, Scottish Insurance, and Scottish Annuity are not licensed to
do business in any jurisdiction other than the Cayman Islands. The insurance
laws of each state of the United States and of many foreign countries regulate
the sale of insurance and reinsurance within their jurisdictions by alien
insurers, such as Scottish Insurance and Scottish Annuity, that are not admitted
to do business within such jurisdictions. With some exceptions, the sale of
insurance within a jurisdiction where the insurer is not admitted to do business
is prohibited.
Scottish Insurance and Scottish Annuity conduct their insurance and reinsurance
business through their executive offices in the Cayman Islands, and their
personnel will not solicit, advertise, underwrite, settle claims or conduct
other insurance or reinsurance activities in the United States or in any other
jurisdiction where such activities are prohibited. All of Scottish Insurance's
and Scottish Annuity's insurance, reinsurance, and annuity contracts are
negotiated, executed, and issued, and all premiums will be received, at their
offices in George Town, Grand Cayman or in such other offices outside the United
States as Scottish Insurance or Scottish Annuity may establish or designate.
Harbourton is a Delaware domestic life insurer. In total, Harbourton is
licensed in 15 states and is also an authorized reinsurer in 8 additional
states. As such, Harbourton is subject to individual state regulation and the
requirements set forth by the National Association of Insurance Commissioners.
Harbourton's principal office, which had been located in Aurora, Colorado prior
to the acquisition by Scottish Holdings, has been relocated to Charlotte, North
Carolina.
Item 2: PROPERTY
We currently lease approximately 7,500 square feet of office space in George
Town, Grand Cayman where our executive and principal offices are located. The
base term of the lease is seven years. We also lease approximately 8,000 square
feet of office space in Charlotte, North Carolina where Harbourton's principal
offices are located. We also currently lease approximately 400 feet of office
space in Denver, Colorado where Harbourton currently has temporary offices.
Theses offices will be closed prior to July 2000. We believe that these
properties are adequate to meet our needs for the foreseeable future.
Item 3: LEGAL PROCEEDINGS
The Company is not currently involved in any litigation or arbitration.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Scottish Holdings did not submit any matter to a vote of securities holders
during the fourth quarter of the year covered by this Form 10-K.
5
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PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
A. Market for the Ordinary Shares
The Ordinary Shares, par value $0.01 per share, of Scottish Holdings are quoted
on the Nasdaq Stock Market National Market under the symbol "SCOT". The
Ordinary Shares commenced trading on November 24, 1998. The high and low bid
prices for the Ordinary Shares are shown below:
<TABLE>
<CAPTION>
High Low
--------------------------
<S> <C> <C>
November 24 - December 31, 1998 14.500 11.375
January 1 - March 31, 1999 14.063 8.750
April 1 - June 30, 1999 10.875 9.250
July 1 - September 30, 1999 12.375 9.625
October 1 - December 31, 1999 10.125 7.813
January 1 - March 24, 2000 9.000 7.688
</TABLE>
As of March 24, 2000, Scottish Holdings had approximately twenty-six record
holders of its Ordinary Shares. Approximately 14,180,250 Ordinary Shares are
held in street name. Scottish Holdings did not pay any dividends in 1998. Cash
dividends of $0.05 were paid each quarter by Scottish Holdings in 1999.
Item 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
(Stated in United States Dollars)
December 31, 1999 December 31, 1998
-------------------------------------------------
<S> <C> <C>
Statement of Income Data:
Total revenues $ 22,465,011 $ 1,338,151
Total expenses including tax benefit $ 13,590,292 $ 901,830
Net income $ 8,874,719 $ 436,321
Per Share Data:
Basic and diluted earnings per share $ 0.50 $ 0.12
Book value per share $ 13.63 $ 13.57
Market value per share $ 8.188 $ 13.750
Cash dividends per share $ 0.20 $ --
Actual number of ordinary shares outstanding 16,046,740 18,568,440
Balance Sheet Data:
Total investments $546,806,744 $178,520,719
Total assets $856,634,487 $254,346,239
Total liabilities $637,973,406 $ 2,286,060
Total shareholders' equity $218,661,081 $252,060,179
</TABLE>
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
Scottish Holdings is an insurance holding company, and our principal assets
include the ownership of Scottish Insurance, Harbourton and Scottish Annuity.
Scottish Holdings was formed on May 12, 1998, and Scottish Insurance was formed
on June 3, 1998, under the laws of the Cayman Islands. We commenced our
insurance operations on November 30, 1998, immediately following our IPO.
Harbourton was acquired effective as of September 30, 1999 and Scottish Annuity
was acquired on December 31, 1999.
6
<PAGE>
Results of operations
The following table summarizes our net income:
<TABLE>
<CAPTION>
Period from
Year ended May 12, 1998* to
December 31, 1999 December 31, 1998
Revenues
<S> <C> <C>
Net premium & reinsurance fees $ 21,311 $ -
Interest income, net 24,068,240 1,142,501
Variable life fees 21,438 -
Insurance administration fees 992,528 209,886
Realized losses on securities, net (2,638,506) (14,236)
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Total revenues 22,465,011 1,338,151
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Benefits and expenses
Interest credited and other policy benefits 7,200,135 -
Acquisition expenses and other insurance expenses 2,225,613 -
Operating Expenses 4,205,930 901,830
--------------------------------------------------------
Total benefits and expenses 13,631,678 901,030
--------------------------------------------------------
--------------------------------------------------------
Net income before benefit for
federal income taxes 8,833,333 436,321
--------------------------------------------------------
Benefit for federal income taxes
Current -- --
Deferred (41,386) --
--------------------------------------------------------
(41,386) --
--------------------------------------------------------
Net income $ 8,874,719 $ 436,321
========================================================
Basic and diluted net income per oridnary share $0.50 $0.12
========================================================
</TABLE>
*Date of incorporation
Overview
Our net income of $8,874,719 or $0.50 per share was driven by revenues
from our investment portfolio and insurance administration fees. Our investment
income in 1999 included $14,344,530 earned on our surplus and $9,723,710 earned
in relation to our reinsurance activities. Comparisons to the prior period are
not meaningful because of our limited period of operations after our November
1998 IPO.
Investments
Our investment portfolio is managed by two professional investment managers,
Prudential Investment Corporation and Gen Re. Our investment guidelines are
designed to diversify the portfolio to maximize investment income while
minimizing risk. At December 31, 1999, the portfolio had an average quality
rating of AA, an average duration of 2.98 years and an average book yield of
6.79%. At December 31, 1998, the portfolio had an average quality rating of AA+,
an average duration of 3.67 years and an average book yield of 5.50%. Our fixed
maturity portfolio increased from $178,520,719 to $546,806,744 principally as a
result of the reinsurance transactions and acquisition of Harbourton. The
duration of our portfolio was reduced from 3.67 years to 2.98 years as
investments of short duration were acquired to match the duration of liabilities
acquired through our reinsurance operations. The realized loss of $2,638,506
recorded for the year was due to portfolio restructuring. As at December 31,
1999 we had unrealized depreciation of $15.7 million, a result of the effect
of the current interest rate environment on our fixed income portfolio.
Insurance operations
Our business consists of two lines of business, variable life insurance and
annuities, and life and annuity reinsurance. Prior to the acquisition of
Scottish Annuity, we provided a variety of insurance administration, accounting
and other services to Scottish Annuity.
During 1999, we wrote our first variable life insurance contracts and entered
into several reinsurance treaties. The first treaty was a coinsurance
transaction involving group long term disability claims for which we have
established a reserve for policyholder benefits of approximately $104 million.
This transaction involves a closed block of existing claims that were in effect
as of June 1, 1999. The block consists of approximately 1,500 claimants who are
receiving disability income payments. No additional claimants may be added.
Further, our liability is limited to income benefit payments only and does not
include any health, medical or other types of payments.
Under our second reinsurance agreement, we contracted to reinsure up to $400
million of group funding agreement business. This transaction was structured so
that reserves would be transferred in four separate $100 million tranches.
Additionally, closing each tranch is subject to final approval by both parties.
We closed on the two first tranches in July and August. Subsequently, in mutual
agreement with the ceding company, we elected to delay taking down the third and
fourth tranches. This decision does not reflect the quality of the reinsured
business, but rather came as a result of adverse conditions in the overall
market that were outside our control and that of the ceding company. As of
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December 31, 1999, we have not taken down the third and fourth tranches. As of
year end, the business reinsured has perfomed as we had expected and, if market
conditions permit, we will consider taking down the final two tranches.
On October 15, 1999 we closed our acquisition of Harbourton. Harbourton provides
us with a United States platform to write reinsurance business. Harbourton is
licensed in 15 states and the District of Columbia and is an authorized
reinsurer in an additional 8 states. Harbourton has approximately $83 million of
annuity reinsurance in force as of year end 1999. Subsequent to year end, we
have hired 26 reinsurance professionals to expand the reinsurance operations of
Harbourton. While we expect to write short duration annuity reinsurance business
in Harbourton, the principal focus of new business in Harbourton will be
traditional life reinsurance. In addition, we are in the process of changing the
name of Harbourton to "Scottish Re (U.S.), Inc.". We expect to have all required
regulatory approvals for the name change by the end of the second quarter of
2000.
In the fourth quarter we executed a letter of intent with Lincoln National Life
Insurance Company, under which, beginning in February 2000, Scottish Insurance
will reinsure a 50% share of the new fixed annuity business written by Lincoln
and sold through financial institutions. The business, which is managed by First
Penn-Pacific Life Insurance Company, is expected to generate $150 million of
reinsurance reserves during 2000. The treaty has subsequently been executed,
reinsuring business sold on or after February 15, 2000. However no assurance can
be given that these expectations can be achieved.
Effective December 31, 1999 we acquired ownership of Scottish Annuity, which has
approximately $250 million of variable annuity business. We had previously
provided insurance administration and accounting services to Scottish Annuity
under an administration agreement.
Outlook
Our business consists of two lines of business, variable life insurance and
annuity products, and annuity and life reinsuance. Both lines of business are
designed to capitalize on our offshore location, which allows us to offer unique
product features and competive pricing. During the past year, we entered into
several reinsurance agreements and we are pricing and underwriting several more.
In addition, the variable products business is beginning to grow more rapidly as
we develop relationships with independent insurance brokers.
Capital Resources and Liquidity
At December 31, 1999, total capitalization was $218,661,081. In the third
quarter we completed a stock repurchase program. At its conclusion, we had
repurchased 2,529,700 shares for $24,999,234.
On October 15, 1999 we completed our acquisition of Harbourton for $25,183,372.
On December 31, 1999 we acquired Scottish Annuity for $11,601,464. We currently
have no material commitments for capital expenditures and do not anticipate
incurring material indebtedness other than letters of credit, which may be
required in the ordinary course of our planned reinsurance business.
During the year, we paid quarterly dividends of $928,822 or $0.05 per share, to
the shareholders of record as at June 7, 1999 and September 6, 1999. We also
paid $802,337 or $0.05 per share to shareholders of record as at December 6,
1999.
We expect that our cash and investments, together with cash generated from our
businesses, will provide sufficient sources of liquidity and capital to meet our
needs for the next several years. In addition, we have access to a combined $70
million through available lines and letters of credit, none of which have been
utilized to date.
Year 2000 Risk
Many computer programs used only two digits to identify a year in the date
field prior to December 31, 1999. These programs, if not corrected, could have
failed or created erroneous results by or at the year 2000. This "Year 2000"
Issue was believed to affect virtually all companies and organizations,
including us. Because most of our computer hardware and software is less than
three years old, we believed that our exposure with respect to our own computer
systems to Year 2000-related problems was not significant, and we encountered no
Year 2000 related problems. We are continuing to monitor our systems and those
of our primary suppliers of data.
Changes in Accounting Standards
The Financial Accounting Standards Board's Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998 and
requires adoption no later than fiscal quarters of fiscal years beginning after
June 15, 2000. The new standard establishes accounting and reporting standards
for derivative instruments. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
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transaction. We have not yet completed our evaluation of the effect this
standard will have on us. We do not currently own any securities that would be
subject to this statement.
Forward Looking Statements
Some of the statements contained in this report are not historical facts and are
forward-looking within the meaning of the Private Securities Litigation Reform
Act. Forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results to differ materially from
the forward-looking statements. When used, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "plan," "intend" and similar
expressions identify forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: our ability to execute the business plan; changes in the general
economic conditions including the performance of the financial markets and
interest rates; changes in insurance regulations or taxes; changes in rating
agency policy; the loss of key executives; trends in the insurance and
reinsurance industries; government regulations; trends that may affect our
financial condition or results of operations; and the declaration and payment of
dividends. Potential investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties. Actual results may differ materially from those included within
the forward-looking statements as a result of various factors. Factors that
could cause or contribute to such differences include, but are not limited to,
those described in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under the heading "Risk
Factors of Investing in our Ordinary Shares" set forth below. We assume no
obligation to update any forward-looking statement to reflect actual results or
changes in or additions to the factors affecting such forward-looking
statements.
RISK FACTORS OF INVESTING IN OUR ORDINARY SHARES
Investing in our Ordinary Shares involves a high degree of risk. Potential
investors should consider carefully the following risk factors, in addition to
the other information set forth in this Form 10-K, prior to investing in the
Ordinary Shares.
When used, the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "plan," "intend" and similar expressions identify
forward-looking statements regarding among other things: (i) our business and
growth plans; (ii) our relationship with third-party service providers and
clients; (iii) trends in the insurance and reinsurance industries; (iv)
government regulations; (v) trends that may affect our financial condition or
results of operations; and (vi) the declaration and payment of dividends.
Potential investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties.
Actual results may differ materially from those included within the forward-
looking statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below and under the heading "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and elsewhere in this Form 10-K.
Our Variable Life & Annuity Insurance Business Is Dependent Upon Referral
Sources.
We will not be successful in our variable life and annuity insurance business if
we cannot get clients from referrals by financial advisors, investment managers,
private bankers, attorneys and other intermediaries in the United States and
elsewhere. Since Scottish Insurance and Scottish Annuity are not licensed or
registered to do business in the U.S., these referral sources may not act as our
agent, nor can they be compensated by us for any activities in the U.S. As a
result, we cannot assure you that we will be able to effectively implement our
insurance plans.
We can, however, pay non-U.S. referral sources for activities undertaken outside
the U.S. We expect to compensate referral sources based on a percentage of the
revenue received from referrals. Subject to any regulatory limitations, we may
provide referrals to persons or entities that provide referrals to us. We cannot
assure you that we will receive a significant amount of referrals or, if so,
that any referrals will result in actual sales of variable life and annuity
insurance policies.
Our Ability to Develop Our Reinsurance Business is Dependent Upon Building
Relationships.
We will not be successful in our non-traditional annuity and life reinsurance
businesses if we cannot develop business primarily through relationships with
reinsurance intermediaries, insurance consultants, members of the actuarial
profession and senior insurance company executives.
Our Reinsurance Business Targets a Competitive Market.
The Scottish Insurance business plan for reinsurance activities provides that
one of our principal targets is reinsuring blocks of in-force fixed annuities
issued by insurers that are no longer actively writing these contracts or that
want to lessen the reserve and capital requirements associated with these
contracts. Another principal target is reinsuring new issues of fixed annuities.
Reinsurance of new business can be used to increase capacity, lessen reserve and
capital requirements, improve the competativeness of the product, improve the
return to the insurance company, or some combination of the above.
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The Harbourton business plan primarily targets reinsurance of mortality risk
associated with life insurance products issued by U.S. direct writers. While
sales of life reinsurance have increased dramatically in recent years, the
market is also well-established and competitive.
As the business targets of both Scottish Insurance and Harbourton are addressed
by several domestic and international reinsurers, we cannot be certain that it
will meet our expectation.
Our Ability to Develop Our Business Plan is Dependent Upon Maintaining Our
Claims-Paying Ability Rating.
Potential purchasers of insurance policies, insurers, reinsurers and insurance
and reinsurance intermediaries use insurance ratings to assess the financial
strength and quality of insurers and reinsurers. In addition, an unfavorable
rating or the lack of a rating will adversely affect a company purchasing
reinsurance. Although Duff & Phelps has assigned Scottish Insurance and
Harbourton a claims-paying ability rating of "A" and A.M. Best has assigned both
companies a rating of "A-" (Excellent), we cannot assure you that we will be
able to maintain these ratings. If we are unable to maintain these ratings, we
cannot assure you that we will be able to obtain similar claims-paying ability
ratings from other major rating agencies.
Changes in U.S. Tax Laws With Respect to Variable Annuities and Life Insurance
Could Adversely Affect Our Product Sales
The tax treatment afforded annuity and life insurance products (both variable
and non-variable) by United States tax law is in many respects more favorable
than the tax treatment of certain other investment alternatives, and is
therefore a primary competitive feature of such products. Any material change in
the current tax treatment of annuity or life insurance products, including the
imposition of a "flat tax" or national sales tax in lieu of the current United
States federal income tax structure, could adversely affect the market for
variable annuities or life insurance products. In addition, elimination of the
federal estate tax has been proposed from time to time. Were the federal estate
tax to be eliminated, the sale of life insurance products could be adversely
affected.
The Clinton Administration's Fiscal Year 2000 Budget Proposal contains
provisions that, if enacted into law, could adversely affect the sale of
variable products. First, the Proposal would require the reporting of payments
of more than $10,000 made to entities in "identified tax havens." It is not
known if the Cayman Islands will be treated as an identified tax haven, but if
so purchasers of variable policies issued by Scottish Insurance or Scottish
Annuity will be required to provide certain information to the IRS.
Second, the Proposal would require insurance companies to report to the IRS
items of income and gain with respect to a "private separate account." Although
the reporting requirements that would be imposed under this proposal would
generally not apply to insurers that do not do business in the United States,
the proposal indicates that the IRS might take the position that a United States
taxpayer that is the owner of a variable contract that is based on a "private
separate account" (i.e., the separate account supports only a small number of
insurance or annuity contracts) will be treated as the owner of the assets held
in the separate account for federal income tax purposes.
Third, the Proposal would reduce or eliminate the tax advantages of
"corporate-owned life insurance."
Finally, the Proposal would eliminate the "Crummey" rule, pursuant to which
certain gifts to trusts for the payment of life insurance premiums are treated
as present interests that are eligible for the annual exclusion from the gift
tax. The elimination of this rule would eliminate the primary and most efficient
method of making premium payments by insurance trusts. Because we expect that
insurance trusts will purchase our variable life insurance policies, or such
policies will be contributed to trusts, to provide liquidity for estate taxes
and to effect the transfer of assets from one generation to another, adoption of
this proposal could adversely affect the sales of these policies, which could
adversely affect our results of operation and our financial condition.
In its most recent business plan, the IRS announced that it intends to issue
guidance as to whether an annuity that is issued by an insurer that is not an
"insurance company subject to tax under Subchapter L" (the provisions of the
United States Internal Revenue Code that apply to insurance companies that do
business in the United States) will be subject to the favorable tax treatment
generally afforded annuity contracts, or instead will be treated as "debt
instruments" that are not eligible for tax deferral. Were the IRS to adopt a
rule or regulation treating annuities issued by Scottish Insurance or Scottish
Annuity, which do not do business in the United States, as debt instruments, the
market for such annuities could be adversely affected.
Governmental Regulation Could Adversely Affect Our Business.
Scottish Insurance and Scottish Annuity.
Scottish Insurance and Scottish Annuity are licensed as unrestricted Class B
insurers and are subject to regulation and supervision by the Cayman Islands
Monetary Authority. They are not registered or licensed to do business in any
jurisdiction in the United States or any other country. Generally, the sale of
insurance within a jurisdiction where the insurer is not admitted to do business
is prohibited. Under the operating guidelines, Scottish Insurance and Scottish
Annuity do not operate in the United States or, to the extent prohibited, in any
other country. We can give no assurance that inquiries or challenges to our
insurance activities will not be raised in the future. Scottish Insurance's
variable life insurance products have customized features that are not typically
available from a company subject to those laws. If Scottish Insurance were to
become subject to those laws, our business, results of operations and financial
condition would likely be materially adversely affected.
In the past, federal and state governments have proposed to regulate foreign
insurers. While none of these proposals has been adopted, we cannot assure you
that federal or state legislation will not be enacted subjecting our business to
supervision and regulation in the United States.
Our Reinsurance Business Could Be Adversely Affected By Uncertainties of Letters
of Credit or Other Collateral Amounts.
Because many jurisdictions do not allow insurance companies to take credit for
reinsurance obtained from unlicensed or non-admitted insurers on their statutory
financial statements unless appropriate security measures are in place, we
anticipate that our reinsurance clients will typically require us to post a
letter of credit or provide other collateral through a funds withheld or trust
arrangement. If we are unable to obtain a letter of credit facility on
commercially acceptable terms or are unable to arrange for such other
collateral, our ability to operate our reinsurance business will be severely
limited.
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Our Products Carry With Them Inherent Insurance Industry Risks And Risks
Specific to Our Business Plan.
Life Reinsurance--Mortality Risk.
The principal risk associated with our planned life reinsurance business is
mortality risk. Harbourton will reinsure various forms of life insurance
products including term life, universal life and traditional life insurance.
Mortality risk typically is more stable when spread across large numbers of
insureds. As our life reinsurance business grows, we will initially have a
relatively small number of lives covered and as a result, our mortality risk
exposure is likely to be larger, and our probability of loss less predictable,
than an insurer with a larger risk pool. As a result, we cannot assure you that
our actual mortality experience will be consistent with our pricing expectation.
Mortality risk is also a factor in our variable life insurance product, however,
currently we reinsure 100% of the mortality risk on all variable life policies.
Fixed Annuity and Life Reinsurance--Investment Risk.
The principal risk associated with our fixed annuity reinsurance activities is
investment risk. Specifically, we are subject to the following risks:
. the risk that invested assets supporting the reinsured business will
decrease in value;
. the credit risk that the continued ability of a given obligor to make
timely payments of principal and interest;
. the risk that interest rates will decline and funds reinvested will
earn less than expected; and
. the risk that we may have to sell assets at a loss to provide for
policyholder withdrawals.
Universal life insurance and similar policies sensitive to interest rates
provide life insurance with adjustable rates of return based on applicable
interest rates in effect from time to time. As a result, the risks with respect
to reinsuring those kinds of policies may also include investment risks similar
to those for fixed annuities. In addition, like annuities, life insurance
policies and variable annuities are subject to surrender risk.
Reinsurance Business--Ceding Insurer Risk.
An additional risk associated with our reinsurance business is the risk that the
ceding insurer will be unable to pay to us amounts due because of its own
financial difficulties. We can give no assurance that the ceding insurers will
be able to pay amounts due to us, which could have a material adverse effect on
our business, results of operations or financial condition. In addition, we can
give no assurance that the ceding companies will maintain appropriate interest
crediting rates with respect to fixed annuities or interest rate-sensitive life
insurance policies.
Our Business is Dependent on Our Ability To Manage Risks In Our Investment
Activities.
Our fixed income investments are subject to the following two primary sources of
investment risk:
. credit risk, relating to the continued ability of a given obligor to
make timely payments of principal and interest; and
. interest rate risk, relating to the market price and/or cash flow
variability associated with changes in market interest rates.
We cannot assure you we will be able to effectively manage these risks. If we
are unable to effectively manage these risks, our ability to support our planned
variable insurance and reinsurance businesses, and our results of operations and
financial condition, will be adversely affected.
In addition, under our investment guidelines, we can invest up to 15% of our
investment portfolio in below investment grade fixed income securities. While
any investment carries some risk, the risks of investing in lower-rated
securities are greater than the risks of investing in investment grade
securities.
In addition, we seek to invest the assets transferred to us to match our
anticipated reinsurance liabilities. We expect to invest these assets in fixed
income and, to a lesser extent, equity securities. We may invest in foreign
denominated securities to manage currency risk if the coinsurance transaction
involves foreign currency. We may also enter into interest rate swaps and other
hedging transactions in an effort to manage interest rate risks. We can not
assure you that we will successfully structure our investments so as to match
our anticipated reinsurance liabilities. If our calculations are incorrect, or
if we improperly structure our investments to match these liabilities, we could
be forced to sell investments before they mature at a significant loss with the
result that our assets may not be adequate to meet our needed reserves, which
could adversely affect our business, results of operations and financial
condition.
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Our Success May Be Affected by Foreign Currency Fluctuations.
Our functional currency is the United States dollar. However, because a portion
of our planned business, including premiums, may be in currencies other than
United States dollars and because we may maintain a small portion of our
investment portfolio in investments denominated in currencies other than United
States dollars, we may have losses if we do not properly manage or otherwise
hedge, our currency risks.
We Have Limited Experience Competing With Established Companies in the Life
Insurance and Reinsurance Industry.
The life insurance and reinsurance industries are highly competitive and most of
the companies in these industries are significantly larger, have operating
histories and have access to significantly greater financial and other resources
than we do. We have limited experience competing with these companies.
Our Business Would Be Adversely Affected by the Imposition of or Increases in
United States Taxes.
As Cayman Islands companies, Scottish Insurance and Scottish Annuity, we operate
in a manner so that we are not subject to United States tax, other than
withholding tax on certain investment income from United States sources.
However, the Internal Revenue Service could contend that we are conducting
business in the United States. If the Internal Revenue Service were to prevail
in that contention, we would be subject to United States tax at regular
corporate rates on taxable income that is effectively connected with United
States business plus an additional 30% "branch profits" tax on the income
remaining after the regular tax, which could adversely affect our results of
operation.
Harbourton is a U.S. licensed insurance company and is therefore subject to
United States tax at regular corporate tax rates on taxable income. Any
increase in United States taxes on income in Harbourton could adversely affect
our results of operation.
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Insurance and reinsurance premiums that will be paid to Scottish Insurance and
Scottish Annuity will be subject to a U.S. excise tax to the extent the
underlying risks are located in the United States. In addition, our investment
income from United States sources could be subject to withholding tax. These
taxes could be increased and other taxes could be imposed on our business, which
could also adversely affect our results of operation.
Owners of Our Ordinary Shares May in Certain Circumstances Be Exposed to Adverse
Personal United States Tax Risks.
Controlled Foreign Corporation Rules. Each "United States shareholder" of a
"controlled foreign corporation" who owns shares in the controlled foreign
corporation on the last day of its taxable year generally must include in his
gross income for United States federal income tax purposes his pro-rata share of
the controlled foreign corporation's "subpart F income," even if the subpart F
income has not been distributed. For these purposes, any United States person
who owns directly or indirectly 10% or more of our ordinary shares will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as our subsidiary, Scottish Insurance, is treated as a controlled
foreign corporation only if such "United States shareholders" collectively own
more than 25% of the total combined voting power or total value of our stock for
an uninterrupted period of 30 days or more during any year. We believe that,
because of the anticipated dispersion of our share ownership among holders and
because of the restrictions in our Articles of Association on transfer, issuance
or repurchase of our ordinary shares, our shareholders will not be subject to
treatment as "United States shareholders" of a controlled foreign corporation.
In addition, because under the Articles of Association no single shareholder
will be permitted to exercise 10% or more of our total combined voting power,
our shareholders should not be viewed as "United States shareholders'" of a
controlled foreign corporation for purposes of these rules. There can be no
assurance, however, that these rules will not apply to our shareholders.
Related Person Insurance Income Risks. If our related person insurance income,
determined on a gross basis, were to equal or exceed 20% of our gross insurance
income in any taxable year, and direct or indirect insureds and persons related
to such insureds were directly or indirectly to own more than 20% of the voting
power or value of our capital stock, a United States person who directly or
indirectly owns our Ordinary Shares on the last day of the taxable year may be
required to include in his income for United States federal income tax purposes
the shareholder's pro-rata share of our related person insurance income for the
taxable year, determined as if this income were distributed proportionately to
the United States person at that date. Related person insurance income is
generally underwriting premium and related investment income attributable to
insurance or reinsurance policies where the direct or indirect insureds are
United States shareholders or are related to United States shareholders of the
insurance company issuing the policies.
If we have related person insurance income, and all United States persons own
25% or more of the voting power or value of our shares, any shareholder who is a
United States person who owns 10% or more of our shares and disposes of the
shares would have any gain from the disposition generally treated as ordinary
income to the extent of the shareholder's portion of our undistributed earnings
and profits that were accumulated during the period that the shareholder owned
the shares. The shareholder also will be required to follow certain reporting
requirements, regardless of the amount of shares owned by the shareholder. These
rules should not apply to sales of our shares because we are not directly
engaged in the insurance business and because proposed United States Treasury
regulations applicable to this situation appear to apply only in the case of
shares of corporations that are directly engaged in the insurance business. We
can give no assurances however, that the IRS will interpret the proposed
regulations in this manner or that the proposed regulations will not be
promulgated in final form in a manner that would cause these rules to apply to
dispositions of Ordinary Shares.
Passive Foreign Investment Company Risks. You will have adverse United States
federal income tax consequences if we are deemed a "passive foreign investment
company." In general, a foreign corporation is a passive foreign investment
company if 75% or more of its income constitutes "passive income" or 50% or more
of its assets produces passive income. "Passive income" generally includes
interest, dividends and other investment income. However, "passive income" does
not include income "derived in the active conduct of an insurance business by a
corporation which is predominantly engaged in an insurance business." This
exception is intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent this income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. Because we intend to continue to be in the insurance
business and do not intend to have financial reserves in excess of the
reasonable needs of our insurance business, we do not expect to be a "passive
foreign investment company." We can give no assurance, however, that the IRS or
a court will agree in this view.
Our Ability to Pay Dividends Is Dependent on the Success of Our Subsidiaries and
Regulatory Constraints.
We are a holding company engaged in the variable insurance and reinsurance
business through our wholly owned subsidiaries, Scottish Insurance, Scottish
Annuity, and Harbourton. Our principal source of income is dividends paid to us
by our subsidiaries. The payment of dividends is at the discretion of our Board
of Directors and depends largely on the ability of our subsidiaries to pay
dividends to us. Scottish Insurance and Scottish Annuity are subject to Cayman
Islands regulatory constraints which also affect their ability to pay dividends
to us. Specifically, Scottish Insurance and Scottish Annuity must keep enough
capital to support its variable insurance and reinsurance businesses and comply
with restrictions under Cayman Islands insurance corporate law. Accordingly,
there is no assurance that dividends will be declared or paid in the future.
Our Articles of Association Contain Substantial Limitations on Ownership,
Transfers and Voting Rights.
Except as described below with respect to the purchase and sale of our shares on
the Nasdaq National Market, our Articles of Association require our directors to
decline to register any transfer of our shares if they believe that the transfer
would result in a person (or any group of which such person is a member)
beneficially owning, directly or indirectly, 10% or more of our outstanding
shares. Similar restrictions apply to our issuance and repurchase of shares.
The directors also may, in their absolute discretion, decline to register the
transfer of any shares if they believe that the transfer may expose us, any
subsidiary or shareholder or any person insured or reinsured or proposing to be
insured or reinsured by us to adverse tax or regulatory treatment or if they
believe that registration of the transfer under any federal or state securities
law or under the laws of any other jurisdiction is required and the registration
has not been done. A transferor of Ordinary Shares will be deemed to own the
shares for dividend, voting and reporting purposes until a transfer of the
shares has been registered on our Register of Members. We are authorized to
request information from any holder or potential acquirer of our shares as
necessary and may decline to register any transaction if we do not receive
complete and accurate information.
Our directors will not decline to register any transfer of our shares executed
on the Nasdaq National Market. However, if any transfer results in the
transferee (or any group) beneficially owning, directly or indirectly, 10% or
more of any class of shares or causes our directors to have reason to believe
that a transfer may expose us, any subsidiary or shareholder thereof or any
person insured or reinsured or proposing to be insured or reinsured to adverse
tax or regulatory treatment in any jurisdiction, under our Articles of
Association, the directors have the power to deliver a notice to the transferee
demanding that the transferee surrender to an agent, designated by the
directors, certificates representing the shares and any dividends or
distributions that the transferee has received as a result of owning the shares.
A transferee who has resold the shares before receiving this notice will be
required to transfer to the agent the proceeds of the sale, to the extent such
proceeds exceed the amount that the transferee paid for such shares, together
with any dividends or distributions that the transferee received from us. As
soon as practicable after receiving the shares and any dividends or
distributions that the transferee received, the agent will use its best efforts
to sell the shares and any non-cash dividends or distributions to the extent
tradeable as market securities in an arm's-length transaction on the Nasdaq
National Market. After applying the proceeds from such sale toward reimbursing
the transferee for the price paid for such shares, the agent will pay any
remaining proceeds and any cash dividends and distributions to organizations
described in Section 501(c)(3) of the Code that the directors designate. The
proceeds of any such sale by the agent or the surrender of dividends or
distributions will not inure to our benefit or the agent's benefit, but the
amounts may be used to reimburse expenses incurred by the agent in performing
its duties.
In addition, the Articles of Association generally provide that any person (or
any group) holding 10% or more of the total voting rights of all of our
outstanding capital shares, will have the voting rights of its voting shares
reduced so that the person (or group) may not exercise more than approximately
9.9% of the total voting rights. Because of the attribution provisions of the
U.S. tax code and the rules of the Securities and Exchange Commission regarding
determination of beneficial ownership, this requirement may have the effect of
reducing the voting rights of a shareholder whether or not the shareholder
directly holds of record 10% or more of the voting shares. The directors also
have the authority to request from any shareholder certain information for the
purpose of determining whether such shareholder's voting rights are to be
reduced. If the shareholder fails to respond to the notice, or submits
incomplete or inaccurate information, the directors (or their designee) have the
discretion to disregard all votes attached to the shareholder's Ordinary Shares.
13
<PAGE>
Our Articles of Association and Cayman Islands Confidentiality Laws Have Anti-
takeover Effects.
Our Articles of Association contain provisions that make it more difficult to
acquire control of us by means of a tender offer, open market purchase, a proxy
fight or otherwise, including by reason of the limitation on transfers of
Ordinary Shares and voting rights described above. While these provisions are
designed to encourage persons seeking to acquire control to negotiate with our
Board of Directors, they could have the effect of discouraging a potential
purchaser from making a tender offer or otherwise attempting to obtain control.
Cayman Islands law restricts disclosure of, among other things, shareholder
lists. Accordingly, such laws may make the acquisition of control by means of a
tender offer or proxy fight more difficult.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our qualitative discussion about market risk is contained in the following
sections:
. Business--Underwriting;
. Business--Investment Portfolio;
. Management's Discussion and Analysis of Financial Condition and Results
of Operations;
. Risk Factors of Investing in Our Ordinary Shares--Our Products Carry
With Them Inherent Industry Risks and Risks Specific to Our Business
Plan;
. Risk Factors of Investing in Our Ordinary Shares--Our Business is
Dependent on Our Ability to Manage Risks in Our Investment Activities;
and
. Risk Factors of Investing in Our Ordinary Shares--Our Success May be
Affected by Foreign Currency Fluctuations.
Quantitative
Market risk relates to those financial instruments that are sensitive to changes
in interest rates, foreign exchange rates and equity price. Scottish Holdings'
portfolio is principally composed of fixed maturity bond investments. These
investments, by their nature, are subject to market value changes in relation to
interest rate changes.
Interest Rate Risk
Scottish Holdings could incur losses on securities if it were required to
liquidate during periods of volatile movements in interest rates. The Company
attempts to mitigate its exposure to adverse interest rate movement through
asset/liability duration matching exercises, and by staggering the maturities of
its fixed income investments to assure sufficient liquidity to meet its
obligations and to address reinvestment risk considerations.
Sensitivity Anaylsis
Scottish Holdings regularly conducts various analyses to gauge the financial
impact of changes in interest rates on its financial condition.
Quantitative Disclosure of Interest Rate Risk
The following table represents a summary of the par values of the Company's
financial investments at their expected maturity dates, the weighted average
coupons by those maturity dates and the estimated fair value of those
instruments for the period ended December 31, 1999. The expected maturity
categories take into consideration par amortization (for mortgage backed
securities), call features and sinking fund features.
The estimated market value of available-for-sale securities is based on bid
quotations from security dealers or on bid prices published in news quote
services. December 31, 1999 market interest rates were used as discounting
rates in the estimation of fair value.
(Dollars in millions, except average interest rate)
<TABLE>
<CAPTION>
Expected Maturity Date TOTAL
-------------------------------------------------- FAIR
Fixed Maturities (US $) 2000 2001 2002 2003 2004 Thereafter TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount 19.14 38.85 37.04 43.87 46.12 377.09 562.11 546.81
Book Value 19.11 38.87 37.21 43.84 46.25 377.61 562.89
Average Interest Rate (%) 6.55 7.06 6.66 6.65 6.68 7.12 6.99 7.62
</TABLE>
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth in "Item 14: Exhibits,
Financial Statements and Reports on Form 8-K".
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosure for the fiscal year ended December 31, 1999.
14
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item 10 will be set forth in the Company's
Proxy Statement for its 2000 Annual Meeting of Shareholders (the "2000 Proxy
Statement") under the captions "Proposal for Election of Directors," "Principal
Shareholders and Management Ownership" and "Section 16(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be set forth in the 2000
Proxy Statement under the captions "Management Compensation" and "Report on
Executive Compensation" and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be set forth in the 2000
Proxy Statement under the caption "Principal Shareholders and Management
Ownership" and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be set forth in the 2000
Proxy Statement under the caption "Certain Transactions" and is incorporated
herein by reference.
15
<PAGE>
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements of Scottish Annuity & Life
Holdings, Ltd.:
Report of Management
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are
either not applicable or the required information is included in the
balance sheet or notes thereto appearing elsewhere in this
Registration Statement.
(3) Exhibits
Except as otherwise indicated, the following Exhibits are filed herewith and
made a part hereof:
Exhibit
Number Description of Document
- ------- -----------------------------------------------------------------
3.1 Memorandum of Association of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
3.2 Articles of Association of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.1 Specimen Ordinary Share Certificate (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.2 Form of Amended and Restated Class A Warrant (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.3 Form of Amended and Restated Class B Warrant (incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.4 Form of Securities Purchase Agreement for the Class A Warrants
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.5 Form of Warrant Purchase Agreement for the Class B Warrants
(incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.6 Form of Registration Rights Agreement for the Class A Warrants
(incorporated herein by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.7 Form of Registration Rights Agreement for the Class B Warrants
(incorporated herein by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.8 Form of Securities Purchase Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit
4.10 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
4.9 Form of Registration Rights Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit
4.11 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
4.10 Form of Securities Purchase Agreement between the Company and the
Non-Shareholder Investors (incorporated herein by reference to
Exhibit 4.12 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.11 Form of Registration Rights Agreement between the Company and the
Non-Shareholder Investors (incorporated herein by reference to
Exhibit 4.13 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.1 Employment Agreement dated June 18, 1998 between the Company and
Michael C. French (incorporated herein by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.2 Second Amended and Restated 1998 Stock Option Plan effective October
22, 1998 (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.3 Form of Stock Option Agreement in connection with 1998 Stock Option
Plan (incorporated herein by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.4 Agreement dated June 30, 1998 between the Company and International
Risk Management (Cayman) Ltd. (incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.5 Amended and Restated Insurance Administration, Services and Referral
Agreement dated as of October 1, 1998 between the Company and The
Scottish Annuity Company (Cayman) Ltd. (incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
10.6 Employment Agreement dated July 20, 1998 between the Company and
Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.7 Form of Indemnification Agreement between the Company and each of
its directors and officers (incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.8 Investment Management Agreement dated October 22, 1998 between the
Company and Pacific Investment Management Company (incorporated
herein by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.9 Investment Management Agreement dated October 22, 1998 between the
Company and General Re-New England Asset Management, Inc.
(incorporated herein by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.10 Agreement dated October 23, 1998 between the Company and Westport
Partners (Bermuda), Ltd. (incorporated herein by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.11 Investment Management Agreement dated October 22, 1998 between the
Company and The Prudential Investment Corporation (incorporated
herein by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.12 Form of Omnibus Registration Rights Agreement (incorporated herein
by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.13 Investment Advisory Service between the Company and Prudential
Securities Corporation (incorporated herein by reference to Exhibit
10.15 to the Company's Registration Statement on Form 10-K filed
with the Securities Exchange Commission on March 30, 1999).
10.14 1999 Stock Option Plan.
10.15 Form of Stock Options Agreement in connection with 1999 Stock Option
Plan.
10.16 Employment Agreement dated March 08, 2000 between the Company amd
Scott E. Willkomm.
21.1 Subsidiaries of Registrant.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
(1) The Company filed a Report on Form 8-K on November 1, 1999 to report
that the Company acquired, through a wholly owned subsidiary, all of
the issued and outstanding shares of common stock of Harbourton
Reassurance, Inc.
(2) The Company filed a Report on Form 8-K/A on December 22, 1999 to
file the financial statements of Harbourton Reassurance, Inc. and
the Pro Forma Combined Condensed Financial Statements.
16
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Financial Statements
For the Year Ended December 31, 1999 and the Period from May 12, 1998 (date of
incorporation) to December 31, 1998
with Report of Independent Auditors
17
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Report of Management
Management of the Company has primary responsibility for preparing the
accompanying consolidated financial statements and for their integrity and
objectivity. The consolidated financial statements included in this report were
prepared in accordance with accounting principles generally accepted in the
United States applied on a consistent basis. The consolidated financial
statements include amounts that are based on management's best estimates and
judgements. Management also prepared the other information presented in the
annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
Management of the Company has established and maintains a system of internal
controls designed to provide reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition and the prevention and detection of fraudulent
financial reporting.
The Company's consolidated financial statements have been audited by independent
auditors. The independent auditors had unrestricted access to each member of
management in conducting their audit. Management has made available to the
independent auditors all of the Company's financial records and related data, as
well as the minutes of shareholders' and directors' meetings. Management
believes that all representations made to the independent auditors during their
audits were valid and appropriate.
The Audit Committee of the Board of Directors is comprised of certain directors
who are neither employees nor officers of the Company. The Audit Committee meets
periodically with management and independent auditors regarding independent
audit scope, timing, results and to discuss other auditing and financial
reporting matters. The independent auditors have direct access to and meet
privately with the Audit Committee.
Scott Willkomm
President
Bruce J. Crozier
Senior Vice President
and Chief Financial Officer
18
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors
Scottish Annuity & Life Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of Scottish Annuity
& Life Holdings, Ltd. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive loss,
shareholders' equity, and cash flows for the year ended December 31, 1999 and
for the period from May 12, 1998 (date of incorporation) through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Scottish Annuity & Life Holdings, Ltd. and subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the year ended December 31, 1999 and for the period from May 12, 1998 (date of
incorporation) to December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Ernst & Young
George Town, Grand Cayman
British West Indies
March 22, 2000
19
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Balance Sheets
(Stated in United States Dollars)
<TABLE>
<CAPTION>
December 31
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Fixed maturity investments $546,806,744 $178,520,719
Cash and cash equivalents 29,000,653 69,610,299
Receivables:
Reinsurance premiums 298,295 -
Risk fees 861,552 -
Due from investment brokers 109,891 3,060,543
Accrued interest 5,554,355 2,883,009
Policy loans 536,420 -
Deferred acquisition costs 1,919,528 -
Present value of inforce business 10,619,599 -
Other assets 740,116 271,669
Goodwill 200,000 -
Deferred tax benefit 2,218,077 -
Current income tax receivable 196,905 -
Fixed assets and leasehold improvements, net 1,026,820 -
Segregated assets 256,545,532 -
------------ ------------
Total assets $856,634,487 $254,346,239
============ ============
Liabilities
Reserves for future policy benefits $365,478,762 $ -
Accounts payable and accrued expenses 4,347,648 1,959,160
Due to related party 11,601,464 326,900
Segregated liabilities 256,545,532 -
------------ ------------
Total Liabilities 637,973,406 2,286,060
Shareholders' Equity
Share capital:
Issued and fully paid: 16,046,740 ordinary shares
(18,568,440 ordinary shares December 31,1998)
par value $0.01 per share 160,467 185,684
Additional paid in capital 227,534,287 252,291,320
Accumulated other comprehensive loss
Unrealized depreciation of investments (15,684,732) (853,146)
Retained Earnings 6,651,059 436,321
------------ ------------
Total shareholders' equity 218,661,081 252,060,179
------------ ------------
Total liabilities and shareholders' equity $856,634,487 $254,346,239
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statements of Income
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Year Ended The Period
December 31, Ended December
1999 31, 1998 *
----------- -----------
<S> <C> <C>
Revenues
Investment income, net $24,068,240 $ 1,142,501
Insurance administration fees 992,528 209,886
Variable life fees 21,438 -
Premiums and reinsurance fees, net 21,311 -
Realized losses on securites, net (2,638,506) (14,236)
----------- -----------
Total revenues 22,465,011 1,338,151
----------- -----------
Benefits and expenses
Interest credited and other policy benefits 7,200,135 -
Acquisition costs & other insurance expenses 2,225,613 -
Operating expenses 4,205,930 901,830
----------- -----------
Total benefits and expenses 13,631,678 901,830
----------- -----------
Net income before benefit ----------- -----------
for federal income taxes 8,833,333 436,321
----------- -----------
Benefit for federal income taxes
Current - -
Deferred (41,386) -
----------- -----------
(41,386) -
----------- -----------
Net income $ 8,874,719 $ 436,321
=========== ===========
Earnings per share
Basic and diluted net income $ 0.50 $ 0.12
=========== ===========
</TABLE>
* the period from May 12, 1998 (date of incorporation) to December 31, 1998
See accompanying notes to consolidated financial statements
21
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statements of Comprehensive Loss
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Year Ended The Period
December 31, Ended December
1999 31, 1998 *
------------ ---------------
<S> <C> <C>
Net income $ 8,874,719 $ 436,321
Other comprehensive loss
Unrealized depreciation on investments (17,470,092) (867,382)
Add: reclassification adjustment
for losses included in net income 2,638,506 14,236
------------ ---------
Unrealized depreciation on investments (14,831,586) (853,146)
------------ ---------
Comprehensive loss $ (5,956,867) $(416,825)
============ =========
</TABLE>
* the period from May 12, 1998 (date of incorporation) to December 31, 1998
See accompanying notes to consolidated financial statements
22
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statements of Shareholders' Equity
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Year Ended The Period
December 31, Ended December
1999 31, 1998 *
------------ ------------
<S> <C> <C>
Share:
Beginning of period 18,568,440 -
Issuance of founder shares - 1,500,000
Repurchase of shares (2,529,700) (1,100,000)
Issuance to executive officers 8,000 -
Sales to direct investors - 1,418,440
Initital public offering - 16,750,000
------------ ------------
End of period 16,046,740 18,568,440
============ ============
Share capital:
Beginning of period $ 185,684 $ -
Issuance of founder shares - 15,000
Repurchase of shares (25,297) (11,000)
Issuance to executive officers 80 -
Sales to direct investors - 14,184
Initial public offering - 167,500
------------ ------------
End of period 160,467 185,684
------------ ------------
Additional paid in capital:
Beginning of period 252,291,320 -
Issuance of founder shares - 485,000
Issuance of Class A warrants - 100,000
Issuance of Class B warrants - 302,000
Issuance of warrants - 11,000
Repurchase of shares (24,973,937) -
Issuance to executive officers 87,920 -
Sales to direct investors - 19,985,816
Initial public offering - 231,407,504
Issuance of equity options 128,984 -
------------ ------------
End of period 227,534,287 252,291,320
------------ ------------
Accumulated other comprehensive loss:
Beginning of period (853,146) -
Unrealized depreciation on investments (14,831,586) (853,146)
------------ ------------
End of period (15,684,732) (853,146)
------------ ------------
Retained earnings:
Beginning of period 436,321 -
Net income 8,874,719 436,321
Dividends paid (2,659,981) -
------------ ------------
End of period 6,651,059 436,321
------------ ------------
Total shareholders' equity $218,661,081 $252,060,179
============ ============
</TABLE>
* the period from May 12, 1998 (date of incorporation) to December 31, 1998
See accompanying notes to consolidated financial statements
23
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statements of Cash Flows
(Stated in United States Dollars)
<TABLE>
<CAPTION>
Year Ended The Period
December 31, Ended December
1999 31, 1998 *
------------- ---------------
<S> <C> <C>
Operating activities
Net income $ 8,874,719 $ 436,321
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Net realized losses on securities 2,638,506 14,236
Non cash salaries and professional fees 128,984 -
Depreciation 94,856 1,598
Amortization of deferred acquisition costs 165,389 -
Net change in policy benefit reserves 1,097,944 -
Changes in assets and liabilities, net of effects
of acquisitions:
Reinsurance premiums receivable 230,766 -
Policy loans 26,199 -
Other receivables 279,306 (5,943,552)
Deferred acquisition costs (2,084,917) -
Other assets (464,788) (271,669)
Goodwill (200,000) -
Deferred tax benefit (41,386) -
Accounts payable and accrued expenses (2,588,719) 1,959,160
Due to related party 11,274,564 326,900
------------- -------------
Net cash provided by (used in) operating activities 19,431,423 (3,477,006)
------------- -------------
Investing Activities
Cash acquired, net of payments for acquisitions 60,939,073 -
Purchase of securities (846,767,542) (179,388,101)
Proceeds on sales of securities 475,246,053 -
Purchase of fixed assets & leasehold improvements (1,121,676) (1,598)
------------- -------------
Net cash used in investing activities (311,704,092) (179,389,699)
------------- -------------
Financing activities
Deposits to insurance accounts 305,653,734 -
Withdrawals from insurance accounts (26,419,496) -
Issuance of company stock 88,000 -
Net cost of repurchase of company stock (24,999,234) -
Dividends paid (2,659,981) -
Issuance of share capital - 252,075,004
Issuance of Class A warrants - 100,000
Issuance of Class B warrants - 302,000
------------- -------------
Net cash provided by financing activities 251,663,023 252,477,004
------------- -------------
Net change in cash and cash equivalents (40,609,646) 69,610,299
Cash and cash equivalents, beginning of period 69,610,299 -
------------- -------------
Cash and cash equivalents, end of period $ 29,000,653 $ 69,610,299
============= =============
</TABLE>
* the period from May 12, 1998 (date of incorporation) to December 31, 1998
See accompanying notes to consolidated financial statements
24
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization, business, and basis of presentation
Organization
Scottish Annuity & Life Holdings, Ltd. ("Scottish Holdings") was incorporated as
an exempted company with limited liability on May 12, 1998 under the laws of the
Cayman Islands. Scottish Holdings has been organized to provide annuity
contracts and insurance policies, as discussed below, through its wholly-owned
subsidiaries, Scottish Annuity & Life Insurance Company (Cayman) Ltd. ("Scottish
Insurance"), The Scottish Annuity Company (Cayman) Ltd. ("Scottish Annuity"),
Scottish Holdings, Inc. ("SHI"), and Harbourton Reassurance, Inc. ("Harbourton")
(collectively referred to as the "Company", and additionally referred to as
"we", "our", and "us"). Prior to June 24, 1998, Scottish Holdings, Ltd.
("SHL"), a Cayman Islands company, owned all Ordinary Shares of Scottish
Holdings. On July 8, 1998, Scottish Insurance received an unrestricted Class
'B' insurer's license under the insurance laws of the Cayman Islands. Scottish
Holdings' initial public offering of its Ordinary Shares (the "IPO") was
completed on November 30, 1998. Scottish Annuity was acquired by Scottish
Holdings on December 31, 1999. The Company operates as an insurance company
and engages in writing deferred variable annuities with a fixed annuity option
with persons who are not resident in the Cayman Islands. Scottish Annuity also
operates under the provision of an unrestricted Class `B' insurer's license
under the insurance laws of the Cayman Islands. Scottish Holdings also acquired
Harbourton (a U.S. based reinsurer) effective on September 30, 1999. Harbourton
provides us with a United States platform to write insurance business.
Harbourton is licensed in 15 states and the District of Columbia and is an
authorized reinsurer in an additional 8 states.
Business
Our business activities currently consists of fee income from the administration
of variable annuities for Scottish Annuity (prior to its acquistion) and
includes life and annuity reinsurance and sales of variable life insurance
policies.
Variable life insurance is a separate account product where the net premium is
placed in a separate account for the policyholder that is not subject to the
claims of the Company's general creditors. Our product is targeted towards high
net worth individuals or families generally worth more than $10 million. A
private money manager manages the cash values. We do not provide any investment
management or advisory services to any individual variable life policyholder. We
also offer variable life insurance products to corporate customers in the form
of corporate owned life insurance, bank owned life insurance, and trust-owned
life insurance. These types of policies are primarily used in connection with
certain deferred compensation and bonus plans for executives. We also offer
variable life insurance policies under a group policy that is owned by an
employer to fund employee benefits.
Traditional reinsurance of life and annuity business is an arrangement under
which an insurance company (the reinsurer) agrees to insure (assume risks of)
another insurance company (the ceding company or cedent) for all or a portion of
the insurance underwritten by the ceding company. Our reinsurance activities
primarily focus on group and individual life and annuity type contracts.
Basis of presentation
Accounting Principles - Our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and all amounts are reported in United States dollars. We
follow the accounting standards established by the Financial Accounting
Standards Board and the American Institute of Certified Public Accountants.
Consolidation - We consolidate our results and have eliminated all significant
intercompany transactions.
25
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
1. Organization, business, and basis of presentation (continued)
Estimates, risks and uncertainties - The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported on the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Our most significant assumptions are for assumed reinsurance
liabilities. We review and revise these estimates as appropriate. Any
adjustments made to these estimates are reflected in the period the estimates
are revised.
2. Summary of significant accounting policies
As previously stated the consolidated financial statements are prepared in
accordance with GAAP. The following are the significant accounting policies
adopted by the Company:
Investments - Fixed maturities are classified as available for sale, and
accordingly, we carry these investments at fair values on our consolidated
balance sheets. The cost of fixed maturities is adjusted for prepayments and
the amortization of premiums and discounts. The unrealized appreciation
(depreciation) is the difference between fair value and amortized cost and is
recorded directly to equity with no impact to net income. The change in
unrealized appreciation (depreciation) is included in accumulated other
comprehensive loss, unrealized depreciation on investments.
Short-term investments are carried at cost, which approximates fair value.
Realized gains (losses) on securities are determined on a specific
identification method which means that we track the cost of each security
purchased so that we are able to identify and record a gain or loss when it is
subsequently sold. In addition, declines in fair value that are determined to
be other than temporary are included in realized gains (losses).
Investment transactions are accounted for on a trade date basis. Interest is
recorded on the accrual basis.
Insurance administration fees - We collected insurance administration fees for
the administration of a variable annuity book of business, which was written by
Scottish Annuity. These fees are recognized ratably over the year based on the
fair value of the underlying investments. (See note 11 for further discussion.)
Due from brokers - Due from brokers includes amounts receivable from our brokers
for investment transactions that have not settled at year end.
Organizational and offering expenses - All formation and organization costs
incurred have been expensed in the period ending December 31, 1998. All offering
costs incurred in connection with the IPO, including certain amounts payable for
investment banking and financial advisory services, have been deducted from the
gross proceeds of the IPO.
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.
Policy revenues and related expenses - Our policy revenues are generated from
reinsurance and variable life activities. The reinsurance revenues are derived
from interest sensitive life products and traditional life reinsurance. The
premium on interest sensitive products is reported as a deposit on the
consolidated balance sheet with a corresponding liability. Revenues are
reported periodically for the mortality, policy administration and surrender
charges. The related policy benefits and claims expenses include benefit claims
incurred in excess of deposits and interest credited to the policyholder for the
period. The premiums from traditional reinsurance transactions are included in
revenues over the premium paying period of the underlying policies. The related
policy benefits and expenses are provided against the revenues to recognize
profits over the estimated lives of the policies. Variable life insurance
policies are also interest sensitive products and are reported like the
reinsurance interest rate sensitive products except that the assets are reported
in a separate account for the benefit of the policyholder.
26
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued)
Deferred policy acquisition costs - The costs of acquiring new business such as
commissions, certain internal expenses related to policy issuance and
underwriting departments, and certain variable selling expenses are capitalized
and amortized in future periods. For variable life insurance and reinsurance of
investment type fixed annuity contracts and reinsured variable annuity
contracts, deferred policy acquisition costs will be amortized over the expected
average life of the contracts as a constant percentage of the present value of
estimated gross profits arising principally from investment results, mortality
and expense margins, and surrender charges based on historical and anticipated
future experience, which will be updated at the end of each accounting period.
In computing amortization, interest will accrue to the unamortized balance of
capitalized acquisition costs at the rate used to discount expected gross
profits.
The effect on the amortization of deferred policy acquisition costs of revisions
to estimated gross profits will be reflected in earnings in the period such
estimated gross profits are revised.
For reinsured fixed immediate annuity policies and traditional life insurance
contracts, deferred policy acquisition costs are charged to expense using
assumptions consistent with those used in computing policy reserves. Assumptions
as to anticipated premiums are estimated at the date of the policy issuance and
are consistently applied during the life of the policies. Deviations from
estimated experience are reflected in earnings in the period such deviations
occur. For these policies, the amortization periods generally are for the
estimated lives of the policies.
When the liabilities for future policy benefits plus the present value of
expected future gross premiums for a policy are insufficient to provide for
expected future benefits and expenses for that policy, a premium deficiency
reserve will be established by a charge to income.
Present value of inforce business - The present value of the inforce business
will be amortized over the expected life of the business at the time of
acquisition. The amortization each year will be a function of the gross profits
each year in relation to the total gross profits expected over the life of the
business, discounted at the assumed net credit rate.
Fixed assets and leasehold improvements - Fixed assets and leasehold
improvements are recorded at cost and are depreciated over their estimated
useful lives using the straight-line method.
Policyholders' benefit liabilities - The liabilities for interest sensitive
products equal the accumulated account values of the policies or contracts as of
the valuation date.
Liabilities for future benefits under traditional life insurance contracts
reinsured are estimated using actuarial assumptions for mortality, morbidity,
terminations, investment yields, and expenses applicable at the time the
insurance contracts were entered into. Benefit liabilities for fixed annuities
during the accumulation period equal their account values and, after
annuitization equal the accumulated present value of expected future payments.
Separate account assets and liabilities - Separate account investments are
recorded at the net asset values of the underlying funds invested in plus
separate cash and cash equivalent balances, less separate account fees payable
to the Company. The funds in the separated accounts are not part of the
Company's general funds and are not available to meet the general obligations of
the Company.
Separate account liabilities are the amounts set aside to pay the deferred
variable annuities. They consist of the initial premiums paid after
consideration of the net investment gains/losses attributable to each separate
account, less fees and withdrawals.
Separate account fees - Scottish Annuity charges separate account fees quarterly
in advance. Such fees are recognized into income ratably. Separate account fees
consist of Mortality, Expense and Distributions Risk Charges, Set-Up, and
Maintenance and Supervisory Fees based on total assets in each contract holder's
separate account. During 1996, Scottish Annuity ceased charging Maintenance and
Supervisory Fees to substanially all contract holders and added an annual flat
fee for contract administration. In addition, a contract holder may be charged a
fee upon a partial or total surrender of the policy.
Fair value of financial instruments - The fair value of the consolidated balance
sheets which qualify as financial instruments under Statement of Financial
Accounting Standards ("SFAS") No. 107 "Disclosure About Fair Value of Financial
Instruments", approximates the carrying amount presented in the consolidated
financial statements.
27
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued)
Accounting Standards - The Financial Accounting Standards Board has issued the
following accounting standard that will affect us.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998 and requires adoption no later than fiscal quarters of
fiscal years beginning after June 15, 2000. The new standard establishes
accounting and reporting standards for derivative instruments. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-currency-
denominated forecasted transaction.
We have not yet completed our evaluation of the effect this standard will have
on us.
3. Business Acquisitions
SHI, a wholly owned subsidiary was formed on August 18, 1999, for the sole
purpose of the purchase of Harbourton for a purchase price of $25,183,372. This
transaction provides us with a United States platform to write insurance
business. Harbourton is licensed in 15 states and the District of Columbia and
is an authorized reinsurer in an additional 8 states.
On December 31, 1999, Scottish Holdings entered into an agreement with SHL to
purchase all the outstanding shares of Scottish Annuity. Scottish Holdings paid
SHL $11,601,464, subject to adjustment for the value of its net assets per its
year end audited financial statements. Scottish Annuity operates as a life
insurance company and engages in writing deferred variable annuities with a
fixed annuity option with persons who are not resident in the Cayman Islands. It
does not provide any investment management or advisory services.
The acquisitions described above were accounted for by the purchase method of
accounting. In accordance with Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations", the accompanying consolidated statements of
income do not include any revenues or expenses related to these acquisitions
prior to the respective closing dates.
The following unaudited consolidated pro forma information utilizes our audited
information for 1999 and 1998 and unaudited information for Scottish Annuity and
Harbourton for the same periods. The proforma data assumes that both
acquisitions had occurred on January 1, 1999 and May 12, 1998 respectively.
<TABLE>
<CAPTION>
Year ended December Period from May 12, 1998* to
31, 1999 December 31, 1998
--------------------------------------------------------
<S> <C> <C>
Revenues $ 25,661,173 $ 5,899,127
Net income (loss) $ 5,859,259 $ (2,124,277)
Net income (loss) per share $ 0.33 $ (0.59)
</TABLE>
* Date of incorporation
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the acquisitions been in effect on January 1,
1999 or May 12, 1998 or of future results of operations.
4. Information Concerning Business Segments
We record segmental reporting in accordance with SFAS No.131 "Disclosures about
Segments of an Enterprise and Related Information". The reportable lines of
business offer different products and services. The Company's main lines of
business are Reinsurance and Variable Products. Reinsurance and Variable
Products activities have been defined in Note 1.
28
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
4. Information Concerning Business Segments (continued)
The segmental reporting for the lines of business is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------
Variable
Reinsurance Products Other Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and reinsurance fees, net $ 21,311 $ - $ - $ 21,311
Investment income, net 9,723,710 - 14,344,530 24,068,240
Realized gains (losses) on securities 191,213 - (2,829,719) (2,638,506)
Variable products fees - 21,438 - 21,438
Insurance administration fees - 992,528 - 992,528
-------------------------------------------------------------------------------
Total revenues 9,936,234 1,013,966 11,514,811 22,465,011
BENEFITS AND EXPENSES
Interest credited and other policy benefits 7,200,135 - - 7,200,135
Acquisition costs and other
insurance expenses 1,905,048 320,565 - 2,225,613
Operating expenses 70,854 10,519 4,124,557 4,205,930
-------------------------------------------------------------------------------
Total benefits and expenses 9,176,037 331,084 4,124,557 13,631,678
Benefit for federal income taxes
Current - - - -
Deferred (41,386) - - (41,386)
-------------------------------------------------------------------------------
Net income $ 801,583 $ 682,882 $ 7,390,254 $ 8,874,719
===============================================================================
</TABLE>
Our activities for the period ended December 31, 1998 were limited to investment
income on capital and operating expenses not specifically allocated to a line of
business and therefore, no comparative information has been provided. For 1999,
the "Other" category includes investment income and realized losses on capital
and operating expenses not specifically allocated to a line of business.
Assets as of December 31, 1999 for the Reinsurance and Variable Products lines
of business were $407,057,362 and $268,174,719, respectively. Assets of
$181,402,406 were not specifically allocated to a line of business. Deferred
acquisition costs for the Reinsurance line was $1,851,893 and for the Variable
line was $67,635. Present value of inforce business for the Reinsurance line was
$119,599 and for the Variable line was $10,500,000. Reserves for future policy
benefits relate to the Reinsurance line of business. Segregated assets and
liabilities relate to the Variable Products line of business. As of December 31,
1998, all assets and liabilities were not specifically allocated to a line of
business.
5. Earnings per Ordinary Share
We calculate earnings per ordinary share in accordance with SFAS No. 128
"Earnings per Share" (EPS). Basic EPS excludes the dilutive effect of options
and warrants. Diluted EPS includes the dilutive effect of these securities
under the treasury stock method.
The weighted-average number of shares is determined by the number of days the
shares have been outstanding over the accounting period.
The dilutive impact of our warrants and options is not material and therefore,
has no effect on EPS.
29
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
5. Earnings per Ordinary Shares (continued)
<TABLE>
<CAPTION>
Year Ended Period
December ended December
31, 1999 31, 1998*
----------------------------------------
<S> <C> <C>
Net income $ 8,874,719 $ 436,321
Weighted average number of shares outstanding 17,919,683 3,586,788
Basic and diluted net income per ordinary share $ 0.50 $ 0.12
Actual shares outstanding 16,046,740 18,568,440
</TABLE>
* the period from May 12, 1998 (date of incorporation) to December 31, 1998
At December 31, 1998, the Company had a relatively small number of shares
outstanding from the date of incorporation through the initial public offering
on November 30, 1998. As a result, the weighted average number of shares
outstanding for the period ended December 31, 1998 and the related EPS are not
meaningful, in the opinion of management.
6. Fixed Maturities
The amortized cost, gross unrealized appreciation and depreciation, and
estimated fair values of our fixed maturity investments are as follows:
<TABLE>
<CAPTION>
December 31, 1999
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Appreciation Depreciation Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities and
obligations of U.S. government
agencies $ 21,375,543 $ 646 $ (2,072,729) $ 19,303,460
U.S. corporate securities 190,641,123 112,606 (7,226,609) 183,527,120
Mortgage and asset backed
securities 350,474,810 113,767 (6,612,413) 343,976,164
-----------------------------------------------------------------------
$ 562,491,476 $ 227,019 $(15,911,751) $ 546,806,744
=======================================================================
December 31, 1998
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Appreciation Depreciation Value
----------------------------------------------------------------------
U.S. treasury securities and
obligations of U.S. government
agencies $ 77,060,078 $ 885 $ (632,945) $ 76,428,018
U.S. corporate securities 64,174,716 106,203 (256,058) 64,024,861
Mortgage and asset backed
securities 38,139,071 23,992 (95,223) 38,067,840
-----------------------------------------------------------------------
$ 179,373,865 $ 131,080 $ (984,226) $ 178,520,719
=======================================================================
</TABLE>
30
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
6. Fixed Maturities (continued)
The contractual maturities of the fixed maturities are as follows. Actual
maturities may differ as a result of calls and prepayments.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------
Amortized Estimated
Cost Fair Value
-----------------------------------
<S> <C> <C>
Due in one year or less $ 4,196,759 $ 4,200,585
Due in one year through five years 102,304,343 100,215,581
Due in five years through ten years 79,773,425 75,975,816
Due after ten years 25,742,139 22,438,598
-----------------------------------
212,016,666 202,830,580
Mortgage and asset backed securities 350,474,810 343,976,164
-----------------------------------
$ 562,491,476 $ 546,806,744
===================================
December 31, 1998
-----------------------------------
Amortized Estimated
Cost Fair Value
-----------------------------------
Due in one year or less $ 2,500,000 $ 2,500,000
Due in one year through five years 77,113,324 76,730,208
Due in five years through ten years 30,084,831 30,049,753
Due after ten years 31,536,639 31,172,918
-----------------------------------
141,234,794 140,452,879
Mortgage and asset backed securities 38,139,071 38,067,840
-----------------------------------
$ 179,373,865 $ 178,520,719
===================================
</TABLE>
Gross gains and gross losses for the periods are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Period from May 12, 1998*
1999 to December 31, 1998
-------------- -------------------------
<S> <C> <C>
Gross realized gains $ 765,011 $ 88,368
Gross realized losses $ 3,403,517 $ 102,604
</TABLE>
* Date of incorporation
At December 31, 1999 and 1998, investments owned by the Company for which no
readily available market quotation exists were valued at $8,647,037 and $nil,
respectively. Our investment manager obtains prices for these investments from a
third party source. The realizable value of the securities may differ from the
amount recorded in the consolidated balance sheets.
7. Present Value of Inforce Business
Total amortization of the present value of inforce business was $ nil for the
year ended December 31, 1999 and $ nil for the period ended December 31, 1998.
Based on the amortization method and expected gross profits, the following chart
provides the percentage of the present value of inforce business that we expect
to amortize each year for the next 5 years:
<TABLE>
<CAPTION>
Percent Amortized
Year In the Year
---- -----------------
<S> <C>
2000 0.64%
2001 1.96%
2002 3.41%
2003 5.13%
2004 7.18%
</TABLE>
8. Reserves
Activity in the liability for unpaid claims and claim adjustment expense is
summarized below.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Balance at the beginning of the year $ -
Liabilities assumed 105,653,734
------------
105,653,734
------------
Adjustments to reserves (1,861,689)
Amortization of discount 3,497,514
------------
Total incurred liabilities 1,635,825
------------
107,289,559
Benefits paid in the current year 12,133,782
------------
Balance at the end of the year $ 95,155,777
============
</TABLE>
During the year, the Company reinsured a closed block of long-term disability
claims. Our adjustment to reserves reflects changes in the estimates underlying
the initial reserves and improvements in our case management.
As of December 31, 1999, the unpaid claims and claim adjustment liability for
these contracts is included in reserves for future policy benefits.
We had no reserves for future policy benefits for the period ended December 31,
1998.
The Company has entered into a reinsurance funding agreement that features put
options for the ultimate insureds. If executed, these options would require the
Company to repay liabilities within seven or thirty days. Total liabilities
subject to the put options total $185,714,286. The Company holds marketable
securities to meet these obligations.
9. Shareholders' Equity
Effective June 24, 1998, SHL transferred to its shareholders all of its ordinary
shares in Scottish Holdings by way of a distribution. On October 22, 1998, we
paid nominal consideration and issued 900,000 Class A warrants to reacquire and
cancel 1,100,000 of our issued and outstanding ordinary shares.
On November 30, 1998, we closed our IPO of 16,750,000 ordinary shares for
proceeds received net of underwriting discounts and commissions totaling
$235,375,000. Simultaneous with the initial closing of the IPO, direct sales of
1,418,440 ordinary shares and 400,000 Class A warrants were made to Direct
Investors for net proceeds of $20,000,000.
31
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
9. Shareholders' Equity (continued)
Common shares
We are authorized to issue 100,000,000 ordinary shares of par value $0.01 each.
At December 31, 1998, 18,568,440 ordinary shares were outstanding. In January
1999, 8,000 shares were issued as non-monetary compensation to an executive
officer.
On September 1, 1999, it was agreed by the directors of the Company to enter
into a share repurchase program. This was completed November 2, 1999, resulting
in 2,529,700 shares being repurchased for a total amount of $24,999,234.
As at December 31, 1999, 16,046,740 ordinary shares were outstanding.
Preferred shares
We are authorized to issue 50,000,000 preferred shares of par value $0.01 each.
At the balance sheet dates there were no preferred shares issued or outstanding.
Warrants
In connection with our initial capitalization, we issued Class A warrants to
purchase an aggregate of 1,550,000 ordinary shares to related parties. The
aggregate consideration of $100,000 paid for these warrants is reflected as
additional paid-in-capital. The Class A warrants were issued on June 9, 1998 at
the initial stage of the development of our business plan when the feasibility
of proceeding with the offering was uncertain. The consideration paid for the
Class A warrants was determined to be fair value in the judgement of management
in light of such uncertainty. Effective September 3, 1998, the Class A warrant
agreements were superseded by Amended and Restated Class A warrant agreements
with no material impact on the operation of the agreements. The exercise price
of the Class A warrants is $15 per share of the Company's ordinary shares. The
Class A warrants become exercisable in equal amounts over a three-year period
commencing on the first anniversary of the consummation of the Offering. The
Class A warrants will expire on the tenth anniversary of the consummation of the
Offering.
We entered into Warrant Purchase Agreements whereby The Roman Arch Fund L.P. and
The Roman Arch Fund II L.P. purchased an aggregate of 200,000 Class B warrants
for an aggregate purchase price of $302,000 which is reflected as additional
paid-in-capital. Class B Warrants are exercisable at $15 per ordinary share, in
equal amounts over a three-year period commencing one year after the Offering
and expire ten years after the consummation of the Offering. Management is of
the view that the agreed sale price of the Class B Warrants represented fair
value at the time of purchase. The Roman Arch Fund L.P. and the Roman Arch Fund
II L.P. are each limited partnerships and affiliates of Prudential Securities
Incorporated, one of the underwriters of the IPO, and make investments for the
benefit of limited partners who are employees of Prudential Securities
Incorporated.
The Class B warrants were issued after our business plan underwent further
development and we were in a position to proceed with the Offering. As a
result, the Class B warrants were issued for greater consideration. Effective
September 3, 1998, the Class B warrant agreements were superseded by Amended and
Restated Class B warrant agreements with no material impact on the operation of
the agreements. As of December 31, 1999, no Class A or Class B warrants have
been executed.
We have entered into an agreement with Westport Partners (Bermuda), Ltd.
("Westport"), a developer and administrator of insurance products for
international insurance brokers, insurance companies and corporations, pursuant
to which Westport will provide non-exclusive distribution services with respect
to the Company's variable life insurance products. In addition, Westport may be
retained to provide administration services for certain variable life insurance
products that the Company issues.
For its distribution activities, we are authorized to issue up to 750,000 Class
C warrants to Westport at an exercise price equal to $15 per ordinary share. The
warrants are issuable over a four-year period beginning on January 1, 2000 and
on each anniversary thereafter in an amount to be determined by a formula, as
defined, in the agreement. The Class C warrants, if issued, will be for a term
expiring ten years from the date of the Offering. We apply the fair value method
of SFAS Statement No. 123, "Accounting for Stock-Based Compensation," in
accounting for these warrants. No Class C warrants had been issued as of
December 31, 1999.
32
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
10. Stock Option Plan
The Company has two stock option plans (the "1998 Plan" and the "1999 Plan")
which allows us to grant non-statutory options, subject to certain restrictions,
to certain eligible employees, non-employee Directors, advisors and consultants.
The minimum exercise price of the options will be equal to the fair market
value, as defined in the Plan, of our ordinary shares at the date of grant. The
term of the options shall not be more than ten years from the date of grant.
Unless otherwise provided in the option agreement, the options shall become
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
Option activity under the 1998 Plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Available Number of Exercise Price of
for Grant Shares Options Outstanding
--------------------------------------------------------------------
<S> <C> <C> <C>
Balance, May 12, 1998* - - $ -
Authorized 1,600,000 - -
Granted (1,070,000) 1,070,000 15.0000
Exercised - - -
Canceled - - -
Unvested shares repurchased - - -
--------------------------------------------------------------------
Balance, December 31, 1998 530,000 1,070,000 15.0000
Authorized - - -
Granted (545,600) 545,600 15.0000
Exercised - - -
Canceled 233,333 (233,333) 15.0000
Unvested shares repurchased - - -
--------------------------------------------------------------------
Balance, December 31, 1999 217,733 1,382,267 15.0000
====================================================================
</TABLE>
* Date of incorporation
Option activity under the 1999 Plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Available Number of Exercise Price of
for Grant Shares Options Outstanding
-------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 - - $ -
Authorized 750,000 - -
Granted (325,000) 325,000 8.0625
Exercised - - -
Canceled - - -
Unvested shares repurchased - - -
-------------------------------------------------------------------
Balance, December 31, 1999 425,000 325,000 8.0625
===================================================================
</TABLE>
In addition to the Company's stock option plans, 750,000 options were authorized
to be issued to new employees of our U.S. operations by the Board of Directors
at an exercise price to be determined on the date of the grant. The term of the
options shall be seven years from the date of grant. The options shall become
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date. Of the 750,000 options authorized, 586,000 have
been granted to new employees of our U.S. operations, pursuant to a resolution
of the Board of Directors, at an exercise price equal to the fair market value
of our ordinary shares at the date of the grant. The options that have been
granted are reflected in the pro forma and outstanding options calculations
below.
Subsequent to year end, 300,000 options under the 1998 Plan were canceled and
400,000 options were granted to our President under the 1998 Plan.
We have adopted the disclosure provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for employee stock options. Since the exercise
price of the stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if we accounted for the employee stock
options under the fair value method of that Statement.
33
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (continued)
10. Stock Option Plan (continued)
The Binomial option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because our
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Our pro forma
information follows:
<TABLE>
<CAPTION>
Period from
Year ended May 12, 1998*
December 31, to December
1999 31, 1998
--------------------------------------
<S> <C> <C>
Net income - as reported $8,874,719 $436,321
Net income - pro forma $7,037,799 $331,699
Basic and diluted net income per share - as reported $ 0.50 $ 0.12
Basic and diluted net income per share - pro forma $ 0.39 $ 0.09
</TABLE>
* Date of incorporation
The fair value for the options was estimated at the date of grant using the
Binomial option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------
<S> <C> <C>
Expected dividend yield 2.44 % 1.33 %
Risk free interest rate 6.44 % 5.52 %
Expected volatility 0.667 0.22
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.00 - 8.20 911,000 8.06 $ 8.0861 - $ -
$ 12.00 - 15.00 1,382,267 8.99 $15.0000 267,333 $15.0000
----------------------------------------------------------------- ---------------------------------
2,293,267 8.62 $11.5503 267,333 $15.0000
----------------------------------------------------------------- ---------------------------------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$ 12.00 - 15.00 1,070,000 9.92 $15.0000 - $ -
----------------------------------------------------------------- ---------------------------------
</TABLE>
As of December 31, 1999, options for 203,267 ordinary shares, exercisable at a
price of $15 per share, have been granted to certain non-employee participants
in the Plan (160,000 at December 31, 1998). The Company applies the fair value
method of SFAS No. 123, in accounting for stock options granted to non-employees
who provide services to the Company.
Note 11: Pension Contributions
The Company has a defined contribution retirement plan covering substantially
all employees. Company contributions to the plan are two times the employee
contribution. Employee contributions are defined by legislation in the Cayman
Islands, and vary between 2% and 5% of salary. Amounts charged to operations
under this plan were $114,759 for the year ended December 31, 1999 and $ nil for
the period ended December 31, 1998.
12. 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, Scottish
Holdings and Scottish Insurance have been granted exemptions therefrom until
2018 and Scottish Annuity has been granted exemptions therefrom until 2014.
These companies operate in a manner such that they will owe no United States tax
other than premium excise taxes and withholding taxes on certain investment
income.
Both Harbourton and SHI are U.S. corporations and therefore are liable for
Federal Income Tax. The valuation allowances for December 31, 1999 are related
primarily to the tax benefit of the unrealized depreciation on securities and
realized capital loss carryforwards of Harbourton.
34
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (continued)
12. Taxation (continued)
Undistributed earnings of the Company's foreign subsidiaries are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal
withholding taxes has been provided thereon. Upon distribution of current or
accumulated earnings and profits in the form of dividends or otherwise, the
Company would be subject to U.S. withholding taxes at a 30% rate.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $3.3 million for income tax purposes that expire in years 2012
through 2014. The Company also has capital loss carryforwards of approximately
$3.7 million for income tax purposes that expire in years 2002 through 2004.
Those carryforwards resulted primarily from the Company's 1999 acquisition of
Harbourton. For financial reporting purposes, a valuation allowance of
approximately $1.2 million has been recognized to offset the deferred tax assets
related to the capital loss carryforwards acquired. When realized, the tax
benefit for those items will be applied to reduce intangible value related to
the acquisition of Harbourton.
Significant components of our deferred tax assets and liabilites are as
follows:
Deferred tax assets
Net operating losses $ 1,126,031
Capital losses 1,258,717
Alternative minimum tax credits 20,083
Unrealized depreciation on investments 366,211
Accrued market discount 82,985
Negative proxy deferred acquisition costs 993,732
------------
Total deferred tax assets 3,847,759
Valuation allowance (1,624,928)
------------
Deferred tax assets net of valuation allowance 2,222,831
Deferred tax liabilities:
Reserves for future policy benefits 4,754
------------
Total deferred tax liabilities 4,754
------------
Net deferred tax asset $ 2,218,077
============
For the year ended December 31, 1999 we have income tax benefits from operations
as follows:
Current tax benefit $ -
Deferred tax benefit (41,386)
------------
Total tax benefit $ (41,386)
------------
Income tax expenses attributable to continuing operations differs from the
amount of income tax expense that would result from applying the federal
statutory rates to pretax income from operating due to the following:
Pretax GAAP income at 34% $ 3,003,333
Income not subject to tax at 34% (3,095,668)
Other 50,949
------------
Tax benefit $ (41,386)
============
35
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (continued)
13. Statutory Requirements and Dividend Restrictions
Under The Insurance Law of the Cayman Islands, Scottish Insurance and Scottish
Annuity must each maintain a minimum net capital worth of $240,000.
Our ability to pay dividends depends on the ability of Scottish Insurance and
Scottish Annuity pay dividends to Scottish Holdings. While we are not subject to
any significant legal prohibitions on the payment of dividends, Scottish
Insurance and Scottish Annuity will be subject to Cayman Islands regulatory
constraints, which affect its ability to pay dividends. Scottish Insurance and
Scottish Annuity are prohibited from declaring or paying a dividend if such
payment would reduce their net capital worth below $240,000.
14. Related Parties
Scottish Annuity agreement - Prior to our acquisition of Scottish Annuity,
Scottish Insurance entered into an Insurance Administration, Services and
Referral Agreement (the "Agreement") with Scottish Annuity effective October 1,
1998. Scottish Insurance provided Scottish Annuity with a variety of insurance
administration, accounting and other services. Scottish Insurance received
compensation equal to 0.50% per annum of the quarterly separate account value of
each annuity contract issued by Scottish Annuity subject to a minimum of
US$25,000 per year
In addition, pursuant to this agreement (i) Scottish Annuity refrained from the
direct or indirect offer or sale of any life insurance products and refered only
to Scottish Insurance any opportunity or inquiry that it received to issue and
sell any life insurance products, and (ii) Scottish Insurance refrained from the
direct or indirect offer or sale of any variable annuity products and refered
only to Scottish Annuity any opportunity or inquiry that it received to issue
and sell any variable annuity products.
The agreement remained in effect until December 31, 1999.
Purchase of Scottish Annuity - On December 31, 1999 Scottish Holdings purchased
all of the outstanding shares of Scottish Annuity from SHI. Our Chief Executive
Officer and certain members of our board of directors own 95% of SHI. The
purchase price paid was assessed for fairness by an independent party and
therefore, management believes it represents a value that would have been
reached at arms-length.
DC Planning agreement - We entered into a consulting services agreement with DC
Planning, an insurance consulting firm that develops life insurance products and
acts as a consultant on insurance matters for high net worth families, trust
companies and other fiduciaries. Under the terms of the agreement, DC Planning
provided certain consulting services to the Company, including with respect to
the development and implementation of its business plan. This agreement ceased
with the death of Howard Shapiro who was the managing partner of DC Planning.
15. Credit Arrangements
At December 31, 1999 the Company had in place a $50 million revolving line of
credit with a U.S. bank. Under the agreement, the Company has the option to
borrow at a predetermined interest rate of 40 basis points over LIBOR. The
terms of the agreement expire on December 22, 2000 but are renewable with the
agreement of both parties.
Additionally, the Company has entered into a stand-by letter of credit agreement
the terms of which allow the Company to issue letters of credit up to $25
million dollars. The terms of the stand-by letter of credit agreement expire
July 13, 2000. In January, 2000, the amount available to the Company was reduced
to $20 million to reflect the availability of credit under the revolving letter
of credit.
As of December 31, 1999 and 1998, the Company had not utilized either of the
above credit facilities.
36
<PAGE>
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (continued)
16. Quarterly Financial Data (Unaudited)
Quarterly financial data for the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and reinsurance fees, net $ - $ - $ - $ 21,311
Investment income, net 3,321,252 4,124,756 7,145,693 9,476,539
Realized losses on securities, net (963,914) (518,911) (1,014,444) (141,237)
Insurance administration and
variable life fees 225,785 250,495 267,998 269,688
------------------------------------------------------
Total revenues 2,583,123 3,856,340 6,399,247 9,626,301
BENEFITS AND EXPENSES
Interest credited and other policy benefits - 319,666 2,660,664 4,219,805
Acquisition costs and other
insurance expenses 255,100 423,517 570,537 976,459
Operating expenses 710,898 922,350 902,944 1,669,738
------------------------------------------------------
Total benefits and expenses 965,998 1,665,533 4,134,145 6,866,002
Net income before benefit for income taxes 1,617,125 2,190,807 2,265,102 2,760,299
Deferred benefit for federal income taxes - - - (41,386)
------------------------------------------------------
Net Income $1,617,125 $2,190,807 $ 2,265,102 $2,801,685
======================================================
EARNINGS PER SHARE
------------------------------------------------------
Basic and diluted net income $ 0.09 $ 0.12 $ 0.12 $ 0.18
======================================================
</TABLE>
Quarterly financial data for the period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
June 30 September 30 December 31
---------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and reinsurance fees, net $ - $ - $ -
Investment income, net 1,501 - 1,126,764
Insurance administration and
variable life fees - - 209,886
---------------------------------------------------------------
Total revenues 1,501 - 1,336,650
BENEFITS AND EXPENSES
Interest credited and other policy benefits - - -
Acquisition costs and other
insurance expenses - - -
Operating expenses 22,578 98,153 781,099
---------------------------------------------------------------
Total benefits and expenses 22,578 98,153 781,099
---------------------------------------------------------------
Net (loss) income $(21,077) $(98,153) $ 555,551
===============================================================
EARNINGS PER SHARE
---------------------------------------------------------------
Basic and diluted net (loss) income $(0.01) $ (0.07) $0.08
===============================================================
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By: /s/ Michael C. French
--------------------------------
Michael C. French
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- ------------------------ ---------------------------------- ---------------
/s/ Michael C. French Chief Executive Officer and April 3, 2000
- ------------------------ Director (Principal Executive
Michael C. French Officer)
/s/ Bruce J. Crozier Senior Vice President-Chief April 3, 2000
- ------------------------ Financial Officer and Secretary
Bruce J. Crozier (Principal Financial Officer
and Principal Accounting Officer)
* Director April 3, 2000
- ------------------------
Sam Wyly
* Director April 3, 2000
- ------------------------
Michael Austin
* Director April 3, 2000
- ------------------------
R. Duke Buchan III
* Director April 3, 2000
- ------------------------
Robert M .Chmely
* Director April 3, 2000
- ------------------------
David Matthews
* Director April 3, 2000
- ------------------------
Bill Caulfeild-Browne
* Director April 3, 2000
- ------------------------
Charles J. Wyly, Jr.
</TABLE>
38
<PAGE>
* The undersigned, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of
the above-named officers and directors of the Registrant and contemporaneously
filed herewith with the Securities and Exchange Commission.
/s/ Michael C. French
---------------------
Michael C. French
Attorney-in-Fact
39
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
SEQUENTIAL
NUMBER
PAGE NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------
- --------------------------------------------------------------------------------
3.1 Memorandum of Association of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
3.2 Articles of Association of the Company (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.1 Specimen Ordinary Share Certificate (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.2 Form of Amended and Restated Class A Warrant (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.3 Form of Amended and Restated Class B Warrant (incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
4.4 Form of Securities Purchase Agreement for the Class A Warrants
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.5 Form of Warrant Purchase Agreement for the Class B Warrants
(incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.6 Form of Registration Rights Agreement for the Class A Warrants
(incorporated herein by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.7 Form of Registration Rights Agreement for the Class B Warrants
(incorporated herein by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.8 Form of Securities Purchase Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit
4.10 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
4.9 Form of Registration Rights Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit
4.11 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
4.10 Form of Securities Purchase Agreement between the Company and the
Non-Shareholder Investors (incorporated herein by reference to
Exhibit 4.12 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.11 Form of Registration Rights Agreement between the Company and the
Non-Shareholder Investors (incorporated herein by reference to
Exhibit 4.13 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.1 Employment Agreement dated June 18, 1998 between the Company and
Michael C. French (incorporated herein by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.2 Second Amended and Restated 1998 Stock Option Plan effective October
22, 1998 (incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.3 Form of Stock Option Agreement in connection with 1998 Stock Option
Plan (incorporated herein by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.4 Agreement dated June 30, 1998 between the Company and International
Risk Management (Cayman) Ltd. (incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.5 Amended and Restated Insurance Administration, Services and Referral
Agreement dated as of October 1, 1998 between the Company and The
Scottish Annuity Company (Cayman) Ltd. (incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19,
1998, as amended).
10.6 Employment Agreement dated July 20, 1998 between the Company and
Henryk Sulikowski (incorporated herein by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.7 Form of Indemnification Agreement between the Company and each of
its directors and officers (incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.8 Investment Management Agreement dated October 22, 1998 between the
Company and Pacific Investment Management Company (incorporated
herein by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.9 Investment Management Agreement dated October 22, 1998 between the
Company and General Re-New England Asset Management, Inc.
(incorporated herein by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.10 Agreement dated October 23, 1998 between the Company and Westport
Partners (Bermuda), Ltd. (incorporated herein by reference to
Exhibit 10.15 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.11 Investment Management Agreement dated October 22, 1998 between the
Company and The Prudential Investment Corporation (incorporated
herein by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.12 Form of Omnibus Registration Rights Agreement (incorporated herein
by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission
on June 19, 1998, as amended).
10.13 Investment Advisory Service between the Company and Prudential
Securities Corporation (incorporated herein by reference to Exhibit
10.15 to the Company's Registration Statement on Form 10-K filed
with the Securities Exchange Commission on March 30, 1999).
10.14 1999 Stock Option Plan.
10.15 Form of Stock Options Agreement in connection with 1999 Stock Option
Plan.
10.16 Employment Agreement dated March 08, 2000 between the Company amd
Scott E. Willkomm.
21.1 Subsidiaries of Registrant.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
40
<PAGE>
Exhibit 10.14
-------------
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
1999 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, employees, directors, advisors and consultants, and to provide them
with incentives to put forth maximum efforts for the success of Scottish Annuity
& Life Holdings, Ltd.'s business, in order to serve the best interests of
Scottish Annuity & Life Holdings, Ltd. and its stockholders. All options
granted under the Plan are intended to be nonstatutory stock options.
2. Definitions. The following terms, when used in the Plan with initial
capital letters, shall have the following meanings:
(a) "Act" means the Securities Exchange Act of 1934, as in effect from
time to time.
(b) "Board" means the Board of Directors of the Company and, to the
extent of any delegation by the Board to a committee (or subcommittee
thereof) pursuant to Paragraph 9 of this Plan, such committee (or
subcommittee).
(c) "Change in Control" shall have the meaning provided in Paragraph
11 of this Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(e) "Company" means Scottish Annuity & Life Holdings, Ltd., a Cayman
Islands limited liability company.
(f) "Date of Grant" means the date specified by the Board on which a
grant of Stock Options shall become effective (which date shall not be
earlier than the date on which the Board takes action with respect
thereto).
(g) "Director" means a member of the Board of Directors of the Company.
(h) "Eligible Person" means a person who may be awarded Stock Options
under this Plan and includes executive officers, any other employee,
directors, advisors and consultants of the Company and of any Subsidiary.
(i) "Eligible Non-Employee Director" means any person, not an employee
of the Company or any Subsidiary, who is a Director.
(j) "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>
(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.
(l) "Option Price" means the purchase price per Ordinary Share payable
on exercise of a Stock Option.
(m) "Optionee" means the optionee named in an agreement evidencing an
outstanding Stock Option or a permitted transferee of a Stock Option.
(n) "Ordinary Shares" means the ordinary shares, par value $0.01 per
share, of the Company or any security into which such Ordinary Shares may
be changed by reason of any transaction or event of the type described in
Paragraph 7 of this Plan.
(o) "Participant" means an Eligible Person who is selected by the
Board to receive Stock Options under Paragraph 5 of this Plan.
(p) "Plan" means this 1999 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 750,000 shares, subject to
adjustment as provided in this Paragraph 3. Such shares may be shares of
original issuance or treasury shares or a combination of the foregoing.
(a) Any Ordinary Shares which are subject to Stock Options that are
terminated unexercised, forfeited or surrendered or that expire for any
reason shall again be available for issuance under the Plan.
(b) The shares available for issuance under the Plan also shall be
subject to adjustment as provided in Paragraph 7 of this Plan.
2
<PAGE>
4. Individual Limitation on Stock Options. Notwithstanding anything in
this Plan to the contrary, and subject to adjustment as provided in Paragraph 7
of this Plan, no individual Participant shall be granted Stock Options under
this Plan, during the term of this Plan, for more than 300,000 Ordinary Shares.
5. Grants of Stock Options to Participants. The Board may from time to
time authorize grants to any Participant of Stock Options upon such terms and
conditions as the Board may determine in accordance with the provisions set
forth below.
(a) Each grant shall specify the number of Ordinary Shares to which it
pertains, subject to the limitations set forth in Paragraphs 3 and 4 of
this Plan.
(b) Each grant shall specify the Option Price, which shall not be less
than 100% of the Market Value Per Share on the Date of Grant.
(c) Each grant shall specify whether the Option Price shall be payable
(i) in cash or by check acceptable to the Company or (ii) deferred payment
of the Option Price from the proceeds of sale through a bank or broker of
some or all of the shares to which such exercise relates or (iii) by a
combination of methods (i) or (ii).
(d) Successive grants may be made to the same Participant whether or
not any Stock Options previously granted to such Participant remain
unexercised.
(e) Each grant shall specify the required period or periods (if any) of
continuous service by the Participant with the Company or any Subsidiary
and/or any other conditions to be satisfied before the Stock Options or
installments thereof shall become exercisable, and any grant may provide
for the earlier exercise of the Stock Options in the event of a Change in
Control of the Company or in the event of any other similar transaction or
event. Unless otherwise provided in the option agreement evidencing a
grant, a grant shall become exercisable in three equal annual installments,
commencing on the first anniversary of the grant.
(f) Each grant shall specify whether or not a Stock Option is
transferable, and the conditions, if any, of such transferability.
(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.
3
<PAGE>
(j) The Board may permit Optionees to elect to defer the issuance of
Ordinary Shares under this Plan pursuant to such rules, procedures or
programs as it may establish for purposes of this Plan. The Board may also
provide that deferred issuances and settlements include the payment or
crediting of dividend equivalents or interest on the deferred amounts.
(k) Each grant shall be evidenced by a stock option agreement executed
on behalf of the Company by the Chief Executive Officer (or another officer
designated by the Board) and delivered to the Participant and containing
such further terms and provisions, consistent with the Plan, as the Board
may approve.
6. Grants of Stock Options to Eligible Non-Employee Directors. Each
Eligible Non-Employee Director will be granted a Stock Option to purchase 2,000
Ordinary Shares at each successive annual general meeting, provided that (i)
such individual continues to be an Eligible Non-Employee Director at the close
of business of each such annual general meeting and (ii) if such Eligible Non-
Employee Director receives a grant at such time of options under Paragraph 6 of
the Company's Second Amended and Restated 1998 Stock Option Plan the grant of
options at such time under such 1998 Stock Option Plan and this Plan shall not
exceed in the aggregate options to purchase 2,000 Ordinary Shares. The Stock
Options granted under this Paragraph 6 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. For purposes of this Paragraph 6, the date of an annual
general meeting is the date on which the meeting is convened or, if later, the
date of the last adjournment thereof.
7. Adjustments. The Board may make or provide for such adjustments in the
maximum number of shares specified in Paragraphs 3 or 4 of this Plan, in the
number of Ordinary Shares covered by outstanding Stock Options granted
hereunder, in the Option Price applicable to any such Stock Options, and/or in
the kind of shares covered thereby (including shares of another issuer), as the
Board in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the rights of
Participants that otherwise would result from any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Company, merger, consolidation, spin-off, reorganization, partial or
complete liquidation, issuance of rights or warrants to purchase securities or
any other corporate transaction or event having an effect similar to any of the
foregoing. Any fractional shares resulting from the foregoing adjustments shall
be eliminated.
8. Withholding of Taxes. To the extent that the Company is required to
withhold federal, state, local or foreign taxes in connection with any benefit
realized by an Optionee under the Plan, or is requested by an Optionee to
withhold additional amounts with respect to such taxes, and the amounts
available to the Company for such withholding are insufficient, it shall be a
condition to the realization of such benefit that the Optionee make arrangements
satisfactory to the Company for payment of the balance of such taxes required or
requested to be withheld. In addition, if permitted by the Board, an Optionee
may elect to have any withholding obligation of the Company satisfied with
Ordinary Shares that would otherwise be transferred to the Optionee on exercise
of the Stock Option.
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<PAGE>
9. Administration of the Plan. (a) The Plan shall be administered by the
Board, which from time to time may delegate all or any part of its authority
under this Plan to a committee (the "Stock Option Committee") of not less than
two Directors appointed by the Board. The members of the Stock Option Committee
shall be "Non-Employee Directors" within the meaning of Rule 16b-3. To the
extent of any such delegation, references in this Plan to the Board shall also
refer to the Stock Option Committee. A majority of the members of the Stock
Option Committee shall constitute a quorum, and any action taken by a majority
of the members of the Stock Option Committee who are present at any meeting of
the Stock Option Committee at which a quorum is present, or any actions of the
Stock Option Committee that are unanimously approved by the members of the Stock
Option Committee in writing, shall be the acts of the Stock Option Committee.
The Board shall have the authority to delegate responsibility and authority for
the operation and administration of this Plan, appoint employees and officers of
the Company and Subsidiaries to act on its behalf, and employ persons to assist
in fulfilling its responsibilities under this Plan.
(b) The Board has the full authority and discretion to interpret and
construe any provision of this Plan or of any agreement, notification or
document evidencing the grant of a Stock Option. The interpretation and
construction by the Board of any such provision and any determination by the
Board pursuant to any provision of the Plan or of any such agreement,
notification or document shall be final and conclusive. No member of the Board
shall be liable for any such action or determination made in good faith.
10. Amendments, Etc. (a) The Board may, without the consent of the
Optionee, amend any agreement evidencing a Stock Option granted under the Plan,
or otherwise take action, to accelerate the time or times at which the Stock
Option may be exercised, to extend the expiration date of the Stock Option, to
waive any other condition or restriction applicable to such Stock Option or to
the exercise of such Stock Option and to reduce the exercise price of such Stock
Option and may amend any such agreement in any other respect with the consent of
the Optionee.
(b) The Plan may be amended from time to time by the Board or any duly
authorized committee thereof. In the event any law, or any rule or regulation
issued or promulgated by the Internal Revenue Service, the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., any
stock exchange upon which the Ordinary Shares are listed for trading, or any
other governmental or quasi-governmental agency having jurisdiction over the
Company, the Common Stock or the Plan, requires the Plan to be amended, or in
the event Rule 16b-3 is amended or supplemented (e.g., by addition of
---
alternative rules) or any of the rules under Section 16 of the Act are amended
or supplemented, in either event to permit the Company to remove or lessen any
restrictions on or with respect to Stock Options, the Board reserves the right
to amend the Plan to the extent of any such requirement, amendment or
supplement, and all Stock Options then outstanding shall be subject to such
amendment.
(c) The Plan may be terminated at any time by action of the Board. The
termination of the Plan shall not adversely affect the terms of any outstanding
Stock Option.
(d) The Plan shall not confer upon any Participant any right with
respect to continuance of employment or other service with the Company or any
Subsidiary, nor shall it
5
<PAGE>
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 December 20, 1999.
(f) No Stock Option shall be granted pursuant to this Plan on or after
the tenth anniversary of the date of effectiveness of this Plan, but awards
granted prior to such tenth anniversary may extend beyond that date.
11. Change in Control. For purposes of this Plan, a "Change in Control"
shall mean the occurrence of any of the following events shall have occurred:
(a) The Company is merged or consolidated or reorganized into or with
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than a majority of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders
of Ordinary Shares immediately prior to such transaction;
(b) The Company sells or otherwise transfers all or substantially all
of its assets to any other corporation or other legal person, and less than
a majority of the combined voting power of the then-outstanding securities
of such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Ordinary Shares immediately prior
to such sale or transfer;
(c) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Act disclosing in response to Form
8-K or Schedule 14A (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,
1999, individuals who at the beginning of any such period constitute the
Directors cease for any reason to constitute at least a majority thereof,
unless the election, or the nomination for election by the Company's
shareholders, of each Director first elected during such period was
approved by a vote of at least two-thirds of the Directors then still in
office who were Directors at the beginning of any such period.
Notwithstanding the foregoing provisions of Paragraph 11(c) above, a
"Change in Control" shall not be deemed to have occurred for purposes of this
Plan (i) 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 (ii) solely
because of a change in control of any Subsidiary other than Scottish Annuity &
Life Insurance Company (Cayman), Ltd.
6
<PAGE>
Exhibit 10.15
-------------
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
This AGREEMENT (the "Agreement") is made as of ___________, 1999 by and
between SCOTTISH ANNUITY & LIFE HOLDINGS, LTD., a Cayman Islands company (the
"Company"), and __________ (the "Optionee").
1. Grant of Share Option. Subject to and upon the terms, conditions, and
restrictions set forth in this Agreement and in the Company's 1999 Employee
Stock Option Plan (the "1999 Plan"), the Company hereby grants to the Optionee a
stock option (the "Option") to purchase _______ of the Company's Ordinary Shares
(the "Optioned Shares"). The Option may be exercised from time to time in
accordance with the terms of this Agreement. The price at which the Optioned
Shares may be purchased pursuant to this Option shall be $______ per share,
subject to adjustment as hereinafter provided (the "Option Price"). The Option
is intended to be a nonqualified stock option and shall not be treated as an
"incentive stock option" within the meaning of that term under Section 422 of
the Code, or any successor provision thereto.
2. Term of Option. The term of the Option shall commence on the date set
forth above (the "Date of Grant") and, unless earlier terminated in accordance
with Section 6 hereof, shall expire ten (10) years from the Date of Grant.
3. Right to Exercise. Subject to expiration or earlier termination, on
each anniversary of the Date of Grant the number of Optioned Shares equal to
thirty-three and one-third percent (33 1/3%) multiplied by the initial number of
Optioned Shares specified in this Agreement shall become exercisable on a
cumulative basis until the Option is fully exercisable. To the extent the Option
is exercisable, it may be exercised in whole or in part. In no event shall the
Optionee be entitled to acquire a fraction of one Optioned Share pursuant to
this Option. The Optionee shall be entitled to the privileges of ownership with
respect to Optioned Shares purchased and delivered to him upon the exercise of
all or part of this Option.
4. Transferability. The Option granted hereby shall be transferable, in
whole or part, by the Optionee upon five business days prior notice to the
Company.
5. Notice of Exercise; Payment.
(a) To the extent then exercisable, the Option may be exercised by
written notice to the Company stating the number of Optioned Shares for which
the Option is being exercised and the intended manner of payment. The date of
such notice shall be the exercise date. Payment equal to the aggregate Option
Price of the Optioned Shares being exercised shall be tendered in full with the
notice of exercise to the Company in cash in the form of currency or check or
other cash equivalent acceptable to the Company. The requirement of payment in
cash shall be deemed satisfied if, with the consent of the Board, the Optionee
makes arrangements that are satisfactory to the Company with a broker that is a
member of the National Association of Securities Dealers, Inc. to sell a
sufficient number of Optioned Shares which are being purchased pursuant to the
exercise, so that the net proceeds of the sale transaction will at least equal
the amount of the aggregate Option Price, and pursuant to which the broker
undertakes to deliver to the Company the amount of the aggregate Option Price
not later than the date on
<PAGE>
which the sale transaction will settle in the ordinary course of business. The
Optionee may also, with the consent of the Board, tender the Option Price by a
combination of the foregoing methods of payment.
(b) Within ten (10) days after notice, the Company shall direct the
due issuance of the Optioned Shares so purchased.
(c) As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and the requirements of any
regulatory authority having control of, or supervision over, the issuance of
Ordinary Shares and in connection therewith shall execute any documents which
the Board shall in its sole discretion deem necessary or advisable.
6. Termination of Agreement. The Agreement and the Option granted hereby
shall terminate automatically and without further notice on the earliest of the
following dates:
(a) Sixty (60) days after the Optionee's death if the Optionee dies
while in the employ of the Company;
(b) Two (2) years after the date of the Optionee's permanent and
total disability if the Optionee becomes permanently and totally disabled while
an employee of the Company;
(c) Except as provided on a case-by-case basis, 60 days after the
date the Optionee ceases to be an employee of the Company, or a Subsidiary, for
any reason other than as described in this Section 6; or
(d) Ten (10) years from the Date of Grant.
In the event that the Optionee's employment is terminated for cause, the
Agreement shall terminate at the time of such termination notwithstanding any
other provision of this Agreement. For purposes of this provision, "cause"
shall mean the Optionee shall have committed prior to termination of employment
any of the following acts:
(i) an intentional act of fraud, embezzlement, theft, or any
other material violation of law in connection with the Optionee's duties or in
the course of the Optionee's employment;
(ii) intentional wrongful damage to material assets of the
Company;
(iii) intentional wrongful disclosure of material confidential
information of the Company;
(iv) intentional wrongful engagement in any competitive activity
that would constitute a material breach of the duty of loyalty; or
(v) intentional breach of any stated material employment policy
of the Company.
2
<PAGE>
Any determination of whether an Optionee's employment was terminated for cause
shall be made by the Board, whose determination shall be binding and conclusive.
This Agreement shall not be exercisable for any number of Optioned Shares in
excess of the number of Optioned Shares for which this Agreement is then
exercisable, pursuant to Sections 3 and 7 hereof, on the date of termination of
employment. For the purposes of this Agreement, the continuous employment of
the Optionee with the Company shall not be deemed to have been interrupted, and
the Optionee shall not be deemed to have ceased to be an employee of the
Company, by reason of the transfer of his employment among the Company and its
Subsidiaries or a leave of absence approved by the Board.
7. Acceleration of Option. Notwithstanding Section 3, but subject to
earlier termination, the Option granted hereby shall become immediately
exercisable in full in the event of a Change of Control, as defined in the 1999
Plan.
8. No Employment Contract. Nothing contained in this Agreement shall
confer upon the Optionee any right with respect to continuance of employment by
the Company, nor limit or affect in any manner the right of the Company to
terminate the employment or adjust the compensation of the Optionee.
9. Taxes and Withholding. If the Company shall be required to withhold
any federal, state, local or foreign tax in connection with the exercise of the
Option, and the amounts available to the Company for such withholding are
insufficient, the Optionee shall pay the tax or make provisions that are
satisfactory to the Company for the payment thereof. The Company will pay any
and all issue and other taxes in the nature thereof which may be payable by the
Company in respect of any issue or delivery upon a purchase pursuant to this
Option.
10. Compliance with Law. The Company shall make reasonable efforts to
comply with all applicable federal and state securities laws; provided, however,
notwithstanding any other provision of this Agreement, the Option shall not be
exercisable if the exercise thereof would result in a violation of any such law.
11. Adjustments. The Board may make or provide for such adjustments in
the number of Optioned Shares covered by this Option, in the Option Price
applicable to such Option, and in the kind of shares covered thereby, as the
Board in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the Optionee's rights
that otherwise would result from (a) any stock dividend, stock split,
combination of shares, recapitalization, or other change in the capital
structure of the Company, (b) any merger, consolidation, spin-off,
reorganization, partial or complete liquidation, or issuance of rights or
warrants to purchase securities, or (c) any other corporate transaction or event
having an effect similar to any of the foregoing. In the event of any such
transaction or event, the Board may provide in substitution for this Option such
alternative consideration as it may determine to be equitable in the
circumstances and may require in connection therewith the surrender of this
Option. Any fractional shares resulting from the foregoing adjustments shall be
eliminated.
12. Relation to Other Benefits. Any economic or other benefit to the
Optionee under this Agreement shall not be taken into account in determining any
benefits to which the
3
<PAGE>
Optionee may be entitled under any profit-sharing, retirement, or other benefit
or compensation plan maintained by the Company and shall not affect the amount
of any life insurance coverage available to any beneficiary under any life
insurance plan covering employees of the Company.
13. Amendments. Any amendment to the 1999 Plan shall be deemed to be an
amendment to this Agreement to the extent that the amendment is applicable
hereto; provided, however, that no amendment shall adversely affect the rights
of the Optionee under this Agreement without the Optionee's consent.
14. Severability. In the event that one or more of the provisions of this
Agreement shall be invalidated for any reason by a court of competent
jurisdiction, any provision so invalidated shall be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof shall continue
to be valid and fully enforceable.
15. Relation to 1999 Plan. This Agreement is subject to the terms and
conditions of the 1999 Plan. In the event of any inconsistent provisions between
this Agreement and the 1999 Plan, the 1999 Plan shall govern. Capitalized terms
used herein without definition shall have the meanings assigned to them in the
1999 Plan. The Board acting pursuant to the 1999 Plan, as constituted from time
to time, shall, except as expressly provided otherwise herein, have the right to
determine any questions which arise in connection with this option or its
exercise.
16. Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the successors, administrators, heirs,
legal representatives, and assigns of the Optionee, and the successors and
assigns of the Company.
17. Governing Law. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the Cayman Islands, without
giving effect to the principles of conflict of laws thereof.
18. Notices. Any notice to the Company provided for herein shall be in
writing to the Company, marked Attention: Chief Executive Officer, and any
notice to the Optionee shall be addressed to said Optionee at his or her address
currently on file with the Company. Except as otherwise provided herein, any
written notice shall be deemed to be duly given if and when delivered personally
or deposited in the mail, postage and fees prepaid, and addressed as aforesaid.
Any party may change the address to which notices are to be given hereunder by
written notice to the other party as herein specified (provided that for this
purpose any mailed notice shall be deemed given on the third business day
following deposit of the same in the United States mail).
[Remainder of page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Optionee has also
executed this Agreement as of the day and year first above written. If this
Agreement is executed in duplicate counterparts, each counterpart shall be
deemed an original, but the duplicate counterparts together constitute one and
the same instrument.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By:
------------------------------------------
Name: Michael C. French
Title: President and Chief Executive Officer
---------------------------------------------
5
<PAGE>
Exhibit 10.16
-------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of March 8,
2000, is made and entered into by and between Scottish Annuity & Life Holdings,
Ltd., a Cayman Islands company (the "Company"), and Scott E. Willkomm (the
"Executive").
WITNESSETH:
WHEREAS, the Executive has agreed to serve as President of the Company
and is expected to make major contributions to the short- and long-term
profitability, growth and financial strength of the Company; and
WHEREAS, the Company wishes to employ the Executive, and the Executive
is willing to be employed by the Company, both on the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms. In addition to terms defined elsewhere herein,
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Base Pay" means the Executive's annual base salary rate as in
effect from time to time, as set forth in Section 5(a).
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means that the Executive shall have committed any of the
following:
(i) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment with the
Company or any Subsidiary;
(ii) intentional wrongful damage to any material property of
the Company or any Subsidiary;
(iii) intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary; or
(iv) conviction of a felony or other crime involving moral
turpitude;
and any such act shall have been materially harmful to the Company. For
purposes of this Agreement, no act or failure to act on the part of the
Executive shall be deemed "intentional" if it was due primarily to an error
in judgment or negligence, but shall be deemed "intentional" only if done
or omitted to be done by the Executive not in good
<PAGE>
faith and without reasonable belief that his action or omission was in the
best interest of the Company. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for "Cause" hereunder unless
and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than two-thirds
of the Board then in office at a meeting of the Board called and held for
such purpose, after reasonable notice to the Executive and an opportunity
for the Executive, together with his counsel (if the Executive chooses to
have counsel present at such meeting), to be heard before the Board,
finding that, in the good faith opinion of the Board, the Executive had
committed an act constituting "Cause" as herein defined and specifying the
particulars thereof in detail. Nothing herein will limit the right of the
Executive or his beneficiaries to contest the validity or propriety of any
such determination.
(e) "Change in Control" means the occurrence of any of the following
events:
(i) the Company is merged or consolidated or reorganized into
or with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in the
aggregate by the holders of Ordinary Shares immediately prior to such
transaction;
(ii) the Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal
person, and less than a majority of the combined voting power of the then-
outstanding securities of such corporation or person immediately after such
sale or transfer is held in the aggregate by the holders of Ordinary Shares
immediately prior to such sale or transfer;
(iii) the Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Act disclosing in
response to Form 8-K or Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of the Company has or may
have occurred or will or may occur in the future pursuant to any then-
existing contract or transaction; or
(iv) if during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Directors cease for
any reason to constitute at least a majority thereof, unless the election,
or the nomination for election by the Company's shareholders, of each
Director first elected during such period was approved by a vote of at
least two-thirds of the Directors then still in office who were Directors
at the beginning of any such period.
Notwithstanding the foregoing provisions of Paragraph (iii) above, a
"Change in Control" shall not be deemed to have occurred for purposes of
this Agreement: (i) solely because (A) the Company, (B) a Subsidiary or
(C) any Company-sponsored employee stock ownership plan or other employee
benefit plan of the Company either files or becomes obligated to file a
report or proxy statement under or in response to Schedule 13D, 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
2
<PAGE>
the Company reports that a change of control of the Company has or may have
occurred or will or may occur in the future by reason of such beneficial
ownership; or (ii) solely because of a change in control of any Subsidiary
other than Scottish Annuity & Life Insurance Company (Cayman) Ltd.
(f) "Competitive Activity" means the Executive's participation,
without the written consent of an officer of the Company, in the management of
any business enterprise if such enterprise engages in substantial and direct
competition with the Company. "Competitive Activity" will not include the mere
ownership of securities in any such enterprise and the exercise of rights
appurtenant thereto.
(g) "Director" means a member of the Board.
(h) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under any and all employee retirement income and
welfare benefit policies, plans, programs or arrangements in which senior
officers of the Company are entitled to participate, including without
limitation any stock option, performance share, performance unit, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement, or other retirement income or welfare benefit, deferred
compensation, incentive compensation, group or other life, health,
medical/hospital or other insurance (whether funded by actual insurance or self-
insured by the Company or a Subsidiary), disability, salary continuation,
expense reimbursement and other employee benefit policies, plans, programs or
arrangements that may now exist or may be adopted hereafter by the Company or a
Subsidiary.
(i) "Incentive Pay" means an annual bonus, incentive or other payment
of compensation, in addition to Base Pay, made or to be made in regard to
services rendered in any year or other period pursuant to any bonus, incentive,
profit-sharing, performance, discretionary pay or similar agreement, policy,
plan, program or arrangement (whether or not funded) of the Company or a
Subsidiary, or any successor thereto.
(j) "Ordinary Shares" means the ordinary shares, par value $.01 per
share, of the Company.
(k) "Retirement Plans" means the retirement income, supplemental
executive retirement, excess benefits and retiree medical, life and similar
benefit plans providing retirement perquisites, benefits and service credit for
benefits for senior officers of the Company now existing or hereafter adopted.
(l) "Subsidiary" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting Stock.
(m) "Term" means the period commencing as of the date of this
Agreement and expiring on the second anniversary of this Agreement; provided,
however, that commencing on the second anniversary of the date of this Agreement
and each anniversary thereafter, the term of this Agreement will automatically
be extended for an additional one year unless, not later than 90 days before any
such anniversary date, the Company or the Executive shall have given written
notice that it or the Executive, as the case may be, does not wish to have the
Term extended.
3
<PAGE>
(n) "Termination Date" means the date on which the Executive's
employment is terminated (the effective date of which shall be the date of
termination, or such other date that may be specified by the Executive if the
termination is pursuant to Section 6(b)).
(o) "Voting Stock" means securities entitled to vote generally in the
election of directors.
2. Employment. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to be employed with the Company for the Term, upon
the terms and conditions herein set forth.
3. Positions and Duties.
(a) During the Term, the Executive will serve in the position of
President of the Company, or such other position as may be agreed upon by the
Company and the Executive, and will have such duties, functions,
responsibilities and authority as are (i) reasonably assigned to him by the
Board, consistent with the Executive's position as the Company's President or
(ii) assigned to his office in the Company's articles of association. The
Executive will report directly to the Chief Executive Officer of the Company.
(b) During the Term, the Executive will be the Company's full-time
employee and, except as may otherwise be approved in advance in writing by the
Board, and except during vacation periods and reasonable periods of absence due
to sickness, personal injury or other disability, the Executive will devote
substantially all of his business time and attention to the performance of his
duties to the Company. Notwithstanding the foregoing, the Executive may (i)
subject to the approval of the Board, serve as a director of a company, provided
such service does not constitute a Competitive Activity, (ii) serve as an
officer, director or otherwise participate in purely educational, welfare,
social, religious and civic organizations, (iii) serve as an officer, director
or trustee of, or otherwise participate in, any organizations and activities
with respect to which the Executive's participation was disclosed to the Company
in writing prior to the date hereof and (iv) manage personal and family
investments.
4. Place of Performance. In connection with his employment during the
Term, unless otherwise agreed by the Executive, the Executive will be based at
the Company's principal executive offices in the Cayman Islands. The Executive
will undertake normal business travel on behalf of the Company.
5. Compensation and Related Matters.
(a) Annual Base Salary. During the Term, the Company will pay to the
Executive an annual base salary of not less than US $408,000, which annual base
salary may be increased (but not decreased) from time to time by the Board (or a
duly authorized committee thereof) in its sole discretion, payable at the times
and in the manner consistent with the Company's general policies regarding
compensation of executive employees. The Board may from time to time authorize
such additional compensation to the Executive, in cash or in property, as the
Board may determine in its sole discretion to be appropriate.
4
<PAGE>
(b) Annual Incentive Compensation. If the Board (or a duly
authorized committee thereof) authorizes any cash incentive compensation or
approves any other management incentive program or arrangement, the Executive
will be eligible to participate in such plan, program or arrangement under the
general terms and conditions applicable to executive and management employees.
The annual cash incentive compensation paid to the Executive will be paid in
accordance with the Company's annual incentive compensation plan. Nothing in
this Section 5(b) will guarantee to the Executive any specific amount of
incentive compensation, or prevent the Board (or a duly authorized committee
thereof) from establishing performance goals and compensation targets applicable
only to the Executive.
(c) Retirement Account. During the Term, the Company shall fund a
retirement account for the Executive in an amount not less than 10% of
Executive's Base Pay for each year during the Term. The Company shall provide
for the Executive and his dependents medical and health care benefits standard
for executive officers of the Company.
(d) Executive Benefits. In addition to the compensation described in
Sections 5(a) and 5(b), the Company will make available to the Executive and his
eligible dependents, subject to the terms and conditions of the applicable
plans, including without limitation the eligibility rules, participation in all
Company-sponsored employee benefit plans including all employee retirement
income and welfare benefit policies, plans, programs or arrangements in which
senior executives of the Company participate, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental executive
retirement or other retirement income or welfare benefit, disability, salary
continuation, and any other deferred compensation, incentive compensation, group
and/or executive life, health, medical/hospital or other insurance (whether
funded by actual insurance or self-insured by the Company), expense
reimbursement or other employee benefit policies, plans, programs or
arrangements, including without limitation financial counseling services or any
equivalent successor policies, plans, programs or arrangements that may now
exist or be adopted hereafter by the Company.
(e) Expenses. The Company will promptly reimburse the Executive for
all business expenses the Executive incurs in order to perform his duties to the
Company under this Agreement in a manner commensurate with the Executive's
position and level of responsibility with the Company, and in accordance with
the Company's policy regarding substantiation of expenses.
(f) Options. The Company shall grant Executive, upon the execution
of this Agreement, an option ("Option") to purchase up to 400,000 Ordinary
Shares of the Company, such Option to be exercisable at a per share price equal
to the Market Value Per Share (as defined in the Company's Second Amended and
Restated 1998 Stock Option Plan) on the date of grant and to be governed by the
option agreement, a form of which is attached hereto as Exhibit A.
6. Termination Following the Date of this Agreement.
(a) The Executive's employment may be terminated by the Company
during the Term and the Executive shall be entitled to the severance
compensation provided by
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Section 7 unless such termination is the result of the occurrence of one or more
of the following events:
(i) The Executive's death;
(ii) If the Executive becomes permanently disabled within the
meaning of, and begins actually to receive disability benefits pursuant to,
the long-term disability plan in effect for, or applicable to, the
Executive; or
(iii) Cause.
If, during the Term, the Executive's employment is terminated by the Company or
any Subsidiary other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii),
the Executive will be entitled to the benefits provided by Section 7 hereof.
(b) The Executive may terminate employment with the Company during
the Term with the right to severance compensation as provided in Section 7 upon
the occurrence of one or more of the following events (regardless of whether any
other reason, other than Cause as hereinabove provided, for such termination
exists or has occurred, including without limitation other employment):
(i) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company (or any successor thereto by
operation of law of or otherwise), which the Executive held pursuant to,
and upon the date of, this Agreement;
(ii) (A) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties attached to
the position with the Company which the Executive held pursuant to, and
upon the date of, this Agreement, (B) a reduction in the aggregate of the
Executive's Base Pay received from the Company and any Subsidiary or (C)
the termination or denial of the Executive's rights to Employee Benefits or
a reduction in the scope or value thereof, unless such reduction is
applicable to all employees of the Company on a pro rata basis, any of
which is not remedied by the Company within 30 calendar days after receipt
by the Company of written notice from the Executive of such change,
reduction or termination, as the case may be;
(iii) A determination by the Executive (which determination will
be conclusive and binding upon the parties hereto provided it has been made
in good faith and in all events will be presumed to have been made in good
faith unless otherwise shown by the Company by clear and convincing
evidence) that a change in circumstances has occurred following this
Agreement, including, without limitation, a change in the scope of the
business or other activities for which the Executive was responsible
immediately prior to the date of this Agreement, which has rendered the
Executive substantially unable to carry out, has substantially hindered the
Executive's performance of, or has caused the Executive to suffer a
substantial reduction in, any of the authorities, powers, functions,
responsibilities or duties attached to the position held by the Executive
pursuant to, and upon the date of, this Agreement, which situation is not
remedied within
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<PAGE>
30 calendar days after written notice to the Company from the Executive of
such determination;
(iv) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer or otherwise)
to which all or substantially all of its business and/or assets have been
transferred (by operation of law or otherwise) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 13(a);
(v) A Change in Control has occurred and Executive, within one
year thereafter, gives the notice of termination of his employment with the
Company contemplated in this Section 6(b); or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor thereto which is not remedied by the Company within 30 calendar
days after receipt by the Company of written notice from the Executive of
such breach.
(c) A termination by the Company pursuant to Section 6(a) or by the
Executive pursuant to Section 6(b) will not affect any rights that the Executive
may have pursuant to any agreement, policy, plan, program or arrangement of the
Company or any Subsidiary providing Employee Benefits, which rights shall be
governed by the terms thereof.
7. Severance Compensation.
(a) If the Company shall terminate the Executive's employment during
the Term other than pursuant to Section 6(a)(i), 6(a)(ii) or 6(a)(iii), if the
Executive shall terminate his employment pursuant to Section 6(b), or if the
Company shall give Executive written notice not later than 90 days prior to the
second anniversary or any subsequent anniversary of this Agreement of non-
renewal of this Agreement, the Company shall pay to the Executive the amount
specified herein upon the later of (i) five business days after the Termination
Date or date of expiration of this Agreement, as the case may be, (ii) the
effective date of a release executed by the Executive and the Company in the
form attached hereto as Exhibit B or (iii) , at the Executive's option, a date
later than the dates specified in clauses (i) and (ii). In lieu of any further
payments to the Executive for periods subsequent to the Termination Date or such
expiration date, except in the event of a termination by the Executive of his
employment pursuant to Section 6(b)(v), the Company shall make a lump sum
payment (the "Severance Payment"), in an amount equal to 200% of the sum of (i)
an amount equal to the aggregate annual Base Pay (at the highest rate in effect
for any year prior to the Termination Date) and (ii) the aggregate Incentive Pay
(based upon the greatest amount of Incentive Pay paid or payable to the
Executive for any year prior to the Termination Date). If the Executive shall
terminate his employment pursuant to Section 6(b)(v), his Severance Payment
shall be an amount equal to 300% of the sum of the amounts described in clauses
(i) and (ii) of the immediately preceding sentence of this Section 7(a).
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(b) There shall be no right of set-off or counterclaim in respect of
any claim, debt or obligation against any payment to or benefit for the
Executive provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment required to be made hereunder on a
timely basis, the Company shall pay interest on the amount thereof at an
annualized rate of interest equal to the then-applicable interest rate
prescribed by the Pension Benefit Guarantee Corporation for benefit valuations
in connection with non-multiemployer pension plan terminations assuming the
immediate commencement of benefit payments.
8. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event that this Agreement shall become operative and it shall be determined
(as hereafter provided) that any payment (other than the Gross-Up payments
provided for in this Section 8) or distribution by the Company or any of its
affiliates to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement, including without limitation any stock option, performance
share, performance unit, stock appreciation right or similar right, or the lapse
or termination of any restriction on or the vesting or exercisability of any of
the foregoing (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or
any successor provision thereto) by reason of being considered "contingent on a
change in ownership or control" of the Company, within the meaning of Section
280G of the Code (or any successor provision thereto)or to any similar tax
imposed by state or local law, or any interest or penalties with respect to such
tax (such tax or taxes, together with any such interest and penalties, being
hereafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment or payments (collectively, a
"Gross-Up Payment"); provided; however, that no Gross-up Payment shall be made
with respect to the Excise Tax, if any, attributable to (i) any incentive stock
option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement, or (ii) any stock appreciation or similar right,
whether or not limited, granted in tandem with any ISO described in clause (i).
The Gross-Up Payment shall be in an amount such that, after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payment.
(b) Subject to the provisions of Section 8(f), all determinations
required to be made under this Section 8, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a Gross-
Up Payment is required to be paid by the Company to the Executive and the amount
of such Gross-Up Payment, if any, shall be made by a nationally recognized
accounting firm (the "Accounting Firm") selected by the Executive in his sole
discretion. The Executive shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within 30 calendar days after the Termination Date, if applicable, and
any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is
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<PAGE>
payable by the Executive, the Company shall pay the required Gross-Up
Payment to the Executive within five business days after receipt of such
determination and calculations with respect to any Payment to the
Executive. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall, at the same time as it makes such
determination, furnish the Company and the Executive an opinion that the
Executive has substantial authority not to report any Excise Tax on his
federal, state or local income or other tax return. As a result of the
uncertainty in the application of Section 4999 of the Code (or any
successor provision thereto) and the possibility of similar uncertainty
regarding applicable state or local tax law at the time of any
determination by the Accounting Firm hereunder, it is possible that Gross-
Up Payments which will not have been made by the Company should have been
made (an "Underpayment"), consistent with the calculations required to be
made hereunder. In the event that the Company exhausts or fails to pursue
its remedies pursuant to Section 8(f) and the Executive thereafter is
required to make a payment of any Excise Tax, the Executive shall direct
the Accounting Firm to determine the amount of the Underpayment that has
occurred and to submit its determination and detailed supporting
calculations to both the Company and the Executive as promptly as possible.
Any such Underpayment shall be promptly paid by the Company to, or for the
benefit of, the Executive within five business days after receipt of such
determination and calculations.
(c) The Company and the Executive shall each provide the Accounting
Firm access to and copies of any books, record and documents in the possession
of the Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by Section 8(b). Any determination by the Accounting Firm as to the
amount of the Gross-Up Payment shall be binding upon the Company and the
Executive.
(d) The federal, state and local income or other tax returns filed by
the Executive shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Executive. The Executive shall make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and such
other documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting Firm
determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.
(e) The fees and expenses of Accounting Firm for its services in
connection with the determinations and calculations contemplated by Section 8(b)
shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within five business days after receipt from the Executive of
a statement therefor and reasonable evidence of his payment thereof.
(f) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if successful,
would require the
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<PAGE>
payment by the Company of a Gross-Up Payment. Such notification shall be given
as promptly as practicable but no later than 30 business days after the
Executive actually receives notice of such claim and the Executive shall further
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid (in each case, to the extent known by the Executive).
The Executive shall not pay such claim prior to the earlier of (i) the
expiration of the 30-calendar-day period following the date on which he gives
such notice to the Company and (ii) the date that any payment of amount with
respect to such claim is due. If the Company notified the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) provide the Company with any written records or documents
in his possession relating to such claim reasonably requested by the
Company;
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with respect to
such claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of
this Section 8(f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section 8(f) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested
claim shall be limited to issues with respect to which a Gross-Up Payment would
be payable hereunder and the Executive shall be
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<PAGE>
entitled to settle or contest as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(g) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 8(f), the Executive receives any refund with
respect to such claim, the Executive shall (subject to the Company's complying
with the requirements of Section 8(f)) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 8(f), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 8.
9. No Mitigation Obligation. The Company hereby acknowledges that it will
be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date and that the non-
competition covenant in Section 10 will further limit the employment
opportunities for the Executive. In addition, the Company acknowledges that its
severance pay plans applicable in general to its salaried employees do not
provide for mitigation, offset or reduction of any severance payment received
thereunder. Accordingly, the payment of the severance compensation by the
Company to the Executive in accordance with the terms of this Agreement is
hereby acknowledged by the Company to be reasonable, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income, earnings
or other benefits from any source whatsoever create any mitigation, offset,
reduction or any other obligation on the part of the Executive hereunder or
otherwise.
10. Competitive Activity; Confidentiality; Nonsolicitation.
(a) The Executive acknowledges that during the course of his
employment with the Company the Executive will learn business information
valuable to the Company and will form substantial business relationships with
the Company's clients. To protect the Company's legitimate business interests in
preserving its valuable confidential business information and client
relationships, the Executive shall not without the prior written consent of the
Company, which consent shall not be unreasonably withheld, (i) engage in any
Competitive Activity during the Term and (ii) if the Executive shall have
received or shall be receiving benefits under Section 7, engage in any
Competitive Activity for a period ending on the first anniversary of the
Termination Date or date of expiration of this Agreement, as the case may be.
(b) During the Term, the Company agrees that it will disclose to
Executive its confidential or proprietary information (as defined in this
Section 10(b)) to the extent necessary for Executive to carry out his
obligations to the Company. The Executive hereby acknowledges the Company has a
legitimate business interest in protecting its confidential and proprietary
information and hereby covenants and agrees that he will not, without the prior
written consent of the Company, during the Term or thereafter (i) disclose to
any person not employed by the
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Company, or use in connection with engaging in competition with the Company, any
confidential or proprietary information of the Company or (ii) remove, copy or
retain in his possession any Company files or records. For purposes of this
Agreement, the term "confidential or proprietary information" will include all
information of any nature and in any form that is owned by the Company and that
is not publicly available (other than by Executive's breach of this Section
10(b)) or generally known to persons engaged in businesses similar or related to
those of the Company. Confidential or proprietary information will include,
without limitation, the Company's financial matters, customers, employees,
industry contracts, strategic business plans, product development (or other
proprietary product data), marketing plans, and all other secrets and all other
information of a confidential or proprietary nature. For purposes of the
preceding two sentences, the term "Company" will also include any Subsidiary
(collectively, the "Restricted Group"). The foregoing obligations imposed by
this Section 10(b) will not apply (i) during the Term, in the course of the
business of and for the benefit of the Company, (ii) if such confidential or
proprietary information will have become, through no fault of the Executive,
generally known to the public or (iii) if the Executive is required by law to
make disclosure (after giving the Company notice and an opportunity to contest
such requirement).
(c) The Executive hereby covenants and agrees that during the Term
and for one year thereafter Executive will not, without the prior written
consent of the Company, which consent shall not unreasonably be withheld, on
behalf of Executive or on behalf of any person, firm or company, directly or
indirectly, attempt to influence, persuade or induce, or assist any other person
in so persuading or inducing, any employee of the Restricted Group to give up
employment or a business relationship with the Restricted Group.
(d) The Executive agrees that on or before the Termination Date the
Executive shall return all Company property, including without limitation all
credit, identification and similar cards, keys and documents, books, records and
office equipment. The Executive agrees that he shall abide by, through the
Termination Date, the Company's policies and procedures for worldwide business
conduct.
11. Legal Fees and Expenses. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should appear to the Executive that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such
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counsel, and in that connection the Company and the Executive agree that a
confidential relationship shall exist between the Executive and such counsel.
Without respect to whether the Executive prevails, in whole or in part, in
connection with any of the foregoing, the Company will pay and be solely
financially responsible for any and all attorneys' and related fees and expenses
incurred by the Executive in connection with any of the foregoing.
12. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any applicable law, regulation or
ruling.
13. Successors and Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company, by agreement
in form and substance reasonably satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent the Company would be required to perform if no such succession had taken
place. This Agreement will be binding upon and inure to the benefit of the
Company and any successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business or assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise be
assignable, transferable or delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 13(a) and 13(b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will or
by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 13(c), the Company shall have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
14. Notices. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder will be in writing and will be deemed to have
been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or five business days
after having been mailed by, or three business days after having been sent by an
internationally recognized overnight courier service such as FedEx or UPS,
addressed to the Company (to the attention of the Chief Executive Officer of the
Company) at its principal executive office and to the Executive at his principal
residence, or to such other address as any
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party may have furnished to the other in writing and in accordance herewith,
except that notices of changes of address shall be effective only upon receipt.
15. Governing Law. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the Cayman Islands, British West Indies, without
giving effect to the principles of conflict of laws.
16. Validity. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, unenforceable
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances will not be affected, and
the provision so held to be invalid, unenforceable or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid or legal.
17. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. References to Sections are references to Sections of this Agreement.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
19. Entire Agreement. This Agreement sets forth the entire understanding
between the Company and the Executive, and all oral or written agreements or
representations, express or implied, with respect to the subject matter of this
Agreement are set forth in this Agreement. All prior employment agreements,
understandings and obligations (whether written, oral, express or implied)
between the Company and the Executive are, without further action, terminated as
of the date of this Agreement and are superseded by this Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
/s/ Scott E. Willkomm
---------------------------------------------
Scott E. Willkomm
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By: /s/ Michael C. French
------------------------------------------
Name: Michael C. French
Title: Chairman of the Board and
Chief Executive Officer
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Exhibit A
---------
Form of
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
This AGREEMENT (the "Agreement") is made as of _________________, 2000
by and between SCOTTISH ANNUITY & LIFE HOLDINGS, LTD., a Cayman Islands company
(the "Company") and Scott E. Willkomm (the "Optionee").
1. Grant of Share Option. Subject to and upon the terms, conditions,
and restrictions set forth in this Agreement and in the Company's Second Amended
and Restated 1998 Stock Option Plan (the "Plan"), the Company hereby grants to
the Optionee a stock option (the "Option") to purchase 400,000 of the Company's
Ordinary Shares (the "Optioned Shares"). The Option may be exercised from time
to time in accordance with the terms of this Agreement. The price at which the
Optioned Shares may be purchased pursuant to this Option shall be $____ per
share, subject to adjustment as hereinafter provided (the "Option Price"). The
Option is intended to be a nonqualified stock option and shall not be treated as
an "incentive stock option" within the meaning of that term under Section 422 of
the Code, or any successor provision thereto.
2. Term of Option. The term of the Option shall commence on the date
set forth above of the grant (the "Date of Grant") and, unless earlier
terminated in accordance with Section 6 hereof, shall expire ten (10) years from
the Date of Grant.
3. Right to Exercise. Subject to expiration or earlier termination,
on each anniversary of the Date of Grant the number of Optioned Shares equal to
thirty-three and one-third percent (33 %) multiplied by the initial number of
Optioned Shares specified in this Agreement shall become exercisable on a
cumulative basis until the Option is fully exercisable. To the extent the
Option is exercisable, it may be exercised in whole or in part. In no event
shall the Optionee be entitled to acquire a fraction of one Optioned Share
pursuant to this Option. The Optionee shall be entitled to the privileges of
ownership with respect to Optioned Shares purchased and delivered to him upon
the exercise of all or part of this Option.
4. Transferability. The Option granted hereby shall be transferable
in whole or part, by the Optionee upon five business days prior notice to the
Company.
5. Notice of Exercise; Payment.
(a) To the extent then exercisable, the Option may be exercised by
written notice to the Company stating the number of Optioned Shares for which
the Option is being exercised and the intended manner of payment. The date of
such notice shall be the exercise date. Payment equal to the aggregate Option
Price of the Optioned Shares being exercised shall be tendered in full with the
notice of exercise to the Company in cash in the form of currency or check or
other cash equivalent acceptable to the Company. The requirement of payment in
cash shall be deemed satisfied if, with the consent of the Board, the Optionee
makes arrangements
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that are satisfactory to the Company with a broker that is a member of the
National Association of Securities Dealers, Inc. to sell a sufficient number of
Optioned Shares which are being purchased pursuant to the exercise, so that the
net proceeds of the sale transaction will at least equal the amount of the
aggregate Option Price, and pursuant to which the broker undertakes to deliver
to the Company the amount of the aggregate Option Price not later than the date
on which the sale transaction will settle in the ordinary course of business.
The Optionee may also, with the consent of the Board, tender the Option Price by
a combination of the foregoing methods of payment.
(b) Within ten (10) days after notice, the Company shall direct the
due issuance of the Optioned Shares so purchased.
(c) As a further condition precedent to the exercise of this Option,
the Optionee shall comply with all regulations and the requirements of any
regulatory authority having control of, or supervision over, the issuance of
Ordinary Shares and in connection therewith shall execute any documents which
the Board shall in its sole discretion deem necessary or advisable.
6. Termination of Agreement. The Agreement and the Option granted
hereby shall terminate automatically and without further notice on the earliest
of the following dates:
(a) Two (2) years after the Optionee's death if the Optionee dies
while in the employ of the Company;
(b) Two (2) years after the date of the Optionee's permanent and
total disability if the Optionee becomes permanently and totally disabled while
an employee of the Company;
(c) Except as provided on a case-by-case basis, 60 days after the
date the Optionee ceases to be an employee of the Company, or a Subsidiary, for
any reason other than as described in this Section 6; or
(d) Ten (10) years from the Date of Grant.
In the event that the Optionee's employment is terminated for cause, the
Agreement shall terminate at the time of such termination notwithstanding any
other provision of this Agreement. For purposes of this provision, "cause"
shall mean the Optionee shall have committed prior to termination of employment
any of the following acts:
(i) an intentional act of fraud, embezzlement, theft, or any
other material violation of law in connection with the Optionee's duties or in
the course of the Optionee's employment;
(ii) intentional wrongful damage to material assets of the
Company;
(iii) intentional wrongful disclosure of material confidential
information of the Company;
A-2
<PAGE>
(iv) intentional wrongful engagement in any competitive
activity that would constitute a material breach of the duty of loyalty; or
(v) intentional breach of any stated material employment
policy of the Company.
Any determination of whether an Optionee's employment was terminated for cause
shall be made by the Board, whose determination shall be binding and conclusive.
This Agreement shall not be exercisable for any number of Optioned Shares in
excess of the number of Optioned Shares for which this Agreement is then
exercisable, pursuant to Sections 3 and 7 hereof, on the date of termination of
employment. For the purposes of this Agreement, the continuous employment of
the Optionee with the Company shall not be deemed to have been interrupted, and
the Optionee shall not be deemed to have ceased to be an employee of the
Company, by reason of the transfer of his employment among the Company and its
Subsidiaries or a leave of absence approved by the Board.
7. Acceleration of Option. Notwithstanding Section 3, but subject to
earlier termination, the Option granted hereby shall become immediately
exercisable in full in the event of a Change of Control, as defined in the Plan.
8. No Employment Contract. Nothing contained in this Agreement shall
confer upon the Optionee any right with respect to continuance of employment by
the Company, nor limit or affect in any manner the right of the Company to
terminate the employment or adjust the compensation of the Optionee.
9. Taxes and Withholding. If the Company shall be required to
withhold any federal, state, local or foreign tax in connection with the
exercise of the Option, and the amounts available to the Company for such
withholding are insufficient, the Optionee shall pay the tax or make provisions
that are satisfactory to the Company for the payment thereof. The Company will
pay any and all issue and other taxes in the nature thereof which may be payable
by the Company in respect of any issue or delivery upon a purchase pursuant to
this Option.
10. Compliance with Law. The Company shall make reasonable efforts
to comply with all applicable federal and state securities laws; provided,
however, notwithstanding any other provision of this Agreement, the Option shall
not be exercisable if the exercise thereof would result in a violation of any
such law.
11. Adjustments. The Board may make or provide for such adjustments
in the number of Optioned Shares covered by this Option, in the Option Price
applicable to such Option, and in the kind of shares covered thereby, as the
Board in its sole discretion, exercised in good faith, may determine is
equitably required to prevent dilution or enlargement of the Optionee's rights
that otherwise would result from (a) any stock dividend, stock split,
combination of shares, recapitalization, or other change in the capital
structure of the Company, (b) any merger, consolidation, spin-off,
reorganization, partial or complete liquidation, or issuance of rights or
warrants to purchase securities, or (c) any other corporate transaction or event
having an effect similar to any of the foregoing. In the event of any such
transaction or
A-3
<PAGE>
event, the Board may provide in substitution for this Option such alternative
consideration as it may determine to be equitable in the circumstances and may
require in connection therewith the surrender of this Option. Any fractional
shares resulting from the foregoing adjustments shall be eliminated.
12. Relation to Other Benefits. Any economic or other benefit to the
Optionee under this Agreement shall not be taken into account in determining any
benefits to which the Optionee may be entitled under any profit-sharing,
retirement or other benefit or compensation plan maintained by the Company and
shall not affect the amount of any life insurance coverage available to any
beneficiary under any life insurance plan covering employees of the Company.
13. Amendments. Any amendment to the Plan shall be deemed to be an
amendment to this Agreement to the extent that the amendment is applicable
hereto; provided, however, that no amendment shall adversely affect the rights
of the Optionee under this Agreement without the Optionee's consent.
14. Severability. In the event that one or more of the provisions of
this Agreement shall be invalidated for any reason by a court of competent
jurisdiction, any provision so invalidated shall be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof shall continue
to be valid and fully enforceable.
15. Relation to Plan. This Agreement is subject to the terms and
conditions of the Plan. In the event of any inconsistent provisions between
this Agreement and the Plan, the Plan shall govern. Capitalized terms used
herein without definition shall have the meanings assigned to them in the Plan.
The Board acting pursuant to the Plan, as constituted from time to time, shall,
except as expressly provided otherwise herein, have the right to determine any
questions which arise in connection with this option or its exercise.
16. Successors and Assigns. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the successors, administrators,
heirs, legal representatives and assigns of the Optionee, and the successors and
assigns of the Company.
17. Governing Law. The interpretation, performance, and enforcement
of this Agreement shall be governed by the laws of the Cayman Islands, without
giving effect to the principles of conflict of laws thereof.
18. Notices. Any notice to the Company provided for herein shall be
in writing to the Company, marked Attention: Chief Executive Officer, and any
notice to the Optionee shall be addressed to said Optionee at his or her address
currently on file with the Company. Except as otherwise provided herein, any
written notice shall be deemed to be duly given if and when delivered personally
or deposited in the mail, postage and fees prepaid, and addressed as aforesaid.
Any party may change the address to which notices are to be given hereunder by
written notice to the other party as herein specified (provided that for this
purpose any mailed notice shall be deemed given on the third business day
following deposit of the same in the United States mail).
A-4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Optionee has also
executed this Agreement as of the day and year first above written. If this
Agreement is executed in duplicate counterparts, each counterpart shall be
deemed an original, but the duplicate counterparts together constitute one and
the same instrument.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
---------------------------------------------
Scott E. Willkomm
A-5
<PAGE>
Exhibit B
---------
Form of Release
---------------
WHEREAS, Scott E. Willkomm's (the "Executive") employment has been
terminated either by (a) the Company other than pursuant to Section 6(a)(i),
6(a)(ii) or 6(a)(iii) in accordance with the Employment Agreement, dated as of
_____________, 2000, by and between the Executive and Scottish Annuity & Life
Holdings, Ltd. (the "Agreement"), (b) the Executive pursuant to Section 6(b) of
the Agreement or (c) the Company giving the Executive written notice of
nonrenewal of the Agreement no later than 90 days prior to the second
anniversary or any subsequent anniversary of the Agreement.
WHEREAS, the Executive is required to sign this Release in order to
receive the Severance Payment as described in Section 7 of the Agreement and the
other benefits described in the Agreement.
NOW, THEREFORE, in consideration of the promises and agreements
contained herein and other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, and intending to be legally bound, the
Executive agrees as follows:
1. This Release is effective on the date hereof and will continue in
effect as provided herein.
2. In consideration of the payments to be made and the benefits to be
received by the Executive pursuant to the Agreement, which the Executive
acknowledges are in addition to payments and benefits which the Executive would
be entitled to receive absent the Agreement, the Executive, for himself and his
dependents, successors, assigns, heirs, executors and administrators (and his
and their legal representatives of every kind), hereby releases, dismisses,
remises and forever discharges Scottish Annuity & Life Holdings, Ltd., its
predecessors, parents, subsidiaries, divisions, related or affiliated companies,
officers, directors, stockholders, members, employees, heirs, successors,
assigns, representatives, agents and counsel (the "Company") from any and all
arbitrations, claims, including without limitation claims for attorney's fees,
demands, damages, suits, proceedings, actions and/or causes of action of any
kind and every description, whether known or unknown, which Executive now has or
may have had for, upon, or by reason of any cause whatsoever ("claims"), against
the Company, including but not limited to:
(a) any and all claims arising out of or relating to the Executive's
employment by or service with the Company and his termination from the
Company;
(b) any and all claims of discrimination, including without
limitation claims of discrimination on the basis of sex, race, age,
national origin, marital status, religion or handicap, including,
specifically, but without limiting the generality of the foregoing, any
claims under the Age Discrimination in Employment Act, as amended, Title
VII of the Civil Rights Act of 1964, as amended, and the Americans with
Disabilities Act; and
(c) any and all claims of wrongful or unjust discharge or breach of
any contract or promise, express or implied.
B-1
<PAGE>
3. The Executive understands and acknowledges that the Company does not
admit any violation of law, liability or invasion of any of his rights and that
any such violation, liability or invasion is expressly denied. The consideration
provided for this Release is made for the purpose of settling and extinguishing
all claims and rights (and every other similar or dissimilar matter) that the
Executive ever had or now may have against the Company to the extent provided in
this Release. The Executive further agrees and acknowledges that no
representations, promises or inducements have been made by the Company other
than as appear in the Agreement.
4. The Executive further agrees and acknowledges that:
(a) The release provided for herein releases claims to and including
the date of this Release;
(b) He has been advised by the Company to consult with legal counsel
prior to executing this Release, has had an opportunity to consult with and
to be advised by legal counsel of his choice, fully understands the terms
of this Release, and enters into this Release freely, voluntarily and
intending to be bound;
(c) He has been given a period of 21 days to review and consider the
terms of this Release, prior to its execution and that he may use as much
of the 21 day period as he desires; and
(d) He may, within seven days after execution, revoke this Release.
Revocation shall be made by delivering a written notice of revocation to
the Company. For such revocation to be effective, written notice must be
actually received by the Company no later than the close of business on the
seventh day after the Executive executes this Release. If the Executive
does exercise his right to revoke this Release, all of the terms and
conditions of the Release shall be of no force and effect and the Company
shall not have any obligation to make payments or provide benefits to the
Executive as set forth in Section 7 of the Agreement.
5. The Executive agrees that he will never file a lawsuit or other
complaint asserting any claim that is released in this Release.
6. The Executive waives and releases any claim that he has or may have to
reemployment after __________________.
IN WITNESS WHEREOF, the Executive has executed and delivered this
Release on the date set forth below.
Dated:_____________________ ___________________________________
Scott E. Willkomm
B-2
<PAGE>
Exhibit 21.1
Subsidiaries of Registrant
Scottish Annuity & Life Insurance Company (Cayman) Ltd.
Scottish Annuity Company (Cayman) Ltd.
Scottish Holdings, Inc.
Harbourton Reassurance, Inc.
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Scottish Annuity & Life Holdings, Ltd., a Cayman Islands company (the
"Company"), hereby constitutes and appoints Michael C. French and Bruce Crozier,
and each of them, the true and lawful attorney or attorneys-in-fact, with full
power of substitution and resubstitution, for the Company, to sign on behalf of
the Company and on behalf of the undersigned in his or her capacity as an
officer and/or a director of the Company, the Company's Annual Report on Form
10-K for the year ended December 31, 1999, and to sign any or all amendments
thereto, and to file the same, with all exhibits thereto, and other documents in
connection therewith, to or with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, as amended, and the regulations
promulgated thereunder, granting unto said attorney or attorneys-in-fact, and
each of them with or without the others, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully to all intents and
purposes as the undersigned might or could in person, hereby ratifying and
confirming all that said attorney or attorneys-in-fact, or any of them or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of
March ___, 2000.
- ------------------------ ------------------------ ------------------------
Sam Wyly Michael Austin R. Duke Buchan III
- ------------------------ ------------------------ ------------------------
William Caulfeild-Browne Robert M. Chmely Michael C. French
- ------------------------ ------------------------ ------------------------
David S. Matthews Charles J. Wyly, Jr. Bruce Crozier
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 546,806,744
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
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<MORTGAGE> 0
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<TOTAL-INVEST> 546,806,744
<CASH> 29,000,653
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,919,528
<TOTAL-ASSETS> 856,634,487
<POLICY-LOSSES> 365,478,762
<UNEARNED-PREMIUMS> 0
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<NOTES-PAYABLE> 0
0
0
<COMMON> 160,467
<OTHER-SE> 218,500,614
<TOTAL-LIABILITY-AND-EQUITY> 856,634,487
21,311
<INVESTMENT-INCOME> 24,068,240
<INVESTMENT-GAINS> (2,638,506)
<OTHER-INCOME> 1,013,966
<BENEFITS> 7,200,135
<UNDERWRITING-AMORTIZATION> 165,389
<UNDERWRITING-OTHER> 2,060,224
<INCOME-PRETAX> 8,833,333
<INCOME-TAX> (41,386)
<INCOME-CONTINUING> 8,874,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 8,874,719
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
<RESERVE-OPEN> 0
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