Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
For Annual and Transition Reports Pursuant
to Sections 13 or 15(d) of the Securities Exchange Act of 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ____ to ______
Commission File Number 0-29788
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
(Exact Name of Registrant as Specified in Its Charter)
Cayman Islands Not Applicable
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
P.O. Box 10657 APO
2 Artillery Courts
Shedden Road
George Town, Grand Cayman
Cayman Islands, British West Indies Not Applicable
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (345) 949-2800
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None
Securities Registered Pursuant to Section 12(g) of the Act:
Ordinary Shares, par value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 26, 1999 was $173,213,904.30
As of March 26, 1999, Registrant had 18,568,440 Ordinary Shares outstanding.
- --------------------------------------------------------------------------------
PART I
Item 1: BUSINESS
General
Scottish Annuity & Life Holdings, Ltd. completed its initial public
offering on November 30, 1998. Scottish Holdings, and its wholly owned
subsidiary, Scottish Annuity & Life Insurance Company (Cayman) Ltd. were formed
in 1998 as offshore companies principally to provide customized variable life
insurance products to high net worth individuals and families who are or may
become U.S. taxpayers and to provide reinsurance of annuities and life insurance
products to insurance and reinsurance companies.
Through our variable life insurance business, we are responding to what we
believe are increasing demands of high net worth individuals and families for
customized life insurance products for use as part of sophisticated estate
planning strategies. For us, high net worth generally means individuals and
families with a liquid net worth in excess of $10.0 million.
Variable life insurance offers a death benefit and a cash value component
which is placed in a separate account and invested on behalf of the policyholder
by a money manager. As a Cayman Islands insurance company, we have the
flexibility to offer policies that permit the use of private independent money
managers to manage the separate account and who utilize investment strategies
not typically available in variable life insurance policies issued to the
general public. We will also seek to leverage our expertise with respect to
variable life insurance products by offering structured life insurance products,
such as corporate-owned life insurance, which target the deferred compensation
market.
We seek to focus our reinsurance business on what we believe are meaningful
opportunities to reinsure lines of business that are subject to significant
reserve or capital requirements under regulatory and rating agency requirements.
We believe that, in response to heightened regulatory and rating agency
scrutiny, insurers are increasingly seeking reinsurance as a means to improve
earnings, risk-based capital or other financial ratios. Our reinsurance
business is targeted towards insurance companies that have discontinued writing
such business or that seek relief from the reserve and capital requirements
associated with such business. We focus our reinsurance activities principally
on opportunities in the U.S., although we also expect to target opportunities in
the United Kingdom, Western Europe, Canada and Australia.
In our planned reinsurance activities we concentrate on blocks of existing
annuity type contracts such as deferred annuities, payout annuities, funding
agreements and similar contracts, because we believe that the reserve and
capital requirements associated with these products have made reinsurance an
attractive option for issuers and reinsurers of these products and because the
market for such reinsurance is not currently adequately served. We may also
reinsure various forms of life insurance products. We believe that reinsurance
of these products will enable us to more effectively capitalize on potential
relationships with other insurers and reinsurers.
Products Offered by Scottish Insurance
Variable Life Insurance
Variable life insurance is a "separate account" product under which the net
premiums paid, after deducting expenses, including the costs of insurance, are
placed in a separate account for the policyholder's benefit that is not subject
to claims of the insurance company's general creditors. The cash values of this
separate account will be then invested for the policyholder by a private
independent money manager. We will not provide any investment management or
advisory services to any variable life policyholder. Our revenues to be earned
from these policies will consist of amounts assessed during the period against
policyholders' separate account balances for mortality and expense fees and
policy administration and surrender charges. Our variable life insurance
contracts will have no guaranteed rate of return on the cash values. The cash
value will vary based on the investment results on the policy's assets managed
by the policy's private independent money manager.
In addition to offering variable life insurance policies to high net worth
individuals and families, we offer structured life insurance products that are
targeted to the deferred compensation market. We offer variable life insurance
to corporate customers in the form of corporate-owned life insurance, bank-owned
life insurance and trust-owned life insurance. These types of policies are
primarily expected to be used in connection with certain deferred compensation
and bonus plans for executive officers and as part of "split-dollar"
arrangements in which the premiums on the life insurance policies are paid in
part or in whole by the employer. We may also issue variable life insurance
policies under a group policy that is owned by the employer and used to fund
employee benefits.
Reinsurance
Reinsurance is an arrangement under which an insurance company, called the
reinsurer, agrees to indemnify another insurance company, called the ceding
company or cedent, for all or a portion of the insurance risks underwritten by
the ceding company. It is standard industry practice for primary insurers to
reinsure portions of their insurance risks with other insurance companies. This
practice permits primary insurers to write insurance policies in amounts larger
than they would be willing or able to retain. Reinsurers may also purchase
reinsurance, or "retrocession" coverage, to limit their own risk exposure. We
expect to assume risks from both primary insurers as well as reinsurers.
We will focus our reinsurance activities principally on the reinsurance of
annuity type products. For these products, we intend to write reinsurance
generally as coinsurance or modified coinsurance, whereby we will assume all of
the liability for the reinsured business. Under coinsurance, ownership of the
assets supporting the reserves is transferred to the reinsurer, whereas in
modified coinsurance arrangements, the ceding company retains ownership of the
assets supporting the reserves. Under a coinsurance or modified coinsurance
arrangement, the reinsurer will generally share in all material risks inherent
in the underlying policies.
-2-
We will also reinsure life insurance products, which may include products
written on a yearly renewable term basis. Under the yearly renewable term
structure, premium rates are generally adjusted annually based on the age and
underwriting classification of each insured and the age of the policies and the
reinsurer assumes only the mortality risk associated with the underlying
policies.
On September 18, 1998, we executed a binder with a U.S. reinsurer to
provide reinsurance, on a retrocession basis, for approximately 35,000 in force
universal life insurance policies. We proposed a transaction structured on a
monthly renewable term basis, whereby we would reinsure only the mortality risk
on the policies. During the fourth quarter of 1998, we delayed closing on the
transaction because of concerns about the mortality experience that arose as we
completed our due diligence review prior to closing. We and the original
reinsurer are presently engaged in negotiations with respect to the binder.
Marketing
Under our marketing plan with respect to variable life insurance policies,
we rely primarily on referrals by financial advisors, investment managers,
private bankers, attorneys and other intermediaries in the U.S. to generate
clients. So that we will not be subject to U.S. state insurance regulations,
none of these intermediaries represent us or receive any commissions or other
remuneration from us for activities undertaken in the U.S.
As part of our marketing plan, we have entered into an agreement with The
Scottish Annuity Company (Cayman) Ltd., which provides, among other things, that
The Scottish Annuity Company will refer potential clients to us as partial
consideration for our providing certain insurance administrative services to The
Scottish Annuity Company. Additionally, we have retained Westport Partners
(Bermuda), Ltd., a developer and administrator of insurance products for
international insurance brokers, insurance companies and corporations and an
affiliate of Westport Worldwide, pursuant to which Westport provides non-
exclusive distribution services with respect to our variable life insurance
products.
Our marketing plan with respect to our reinsurance business seeks to
capitalize on the relationships developed by our Senior Vice President and Chief
Insurance Officer with members of the actuarial profession and senior insurance
company executives, at both primary insurers and other reinsurers. Given the
focus of our reinsurance business (i.e., blocks of in-force contracts), we
target a limited number of potential ceding insurers that we believe would
benefit from our reinsurance products based on our analysis of publicly
available information and other industry data. In addition, reinsurance
transactions are often placed by reinsurance intermediaries, brokers and
consultants. A significant component of our marketing program involves working
with such third party marketers in an effort to maintain a high degree of
visibility in the reinsurance marketplace.
-3-
Underwriting
Variable Life Insurance
The principal risk associated with our variable life insurance policies is
mortality risk. The death benefit provided by our variable life insurance
policies will vary based on the investment return of the underlying separate
account of policy assets invested by the policy's private independent money
manager. The difference between the value of the assets in the underlying
separate account and the policy's stated death benefit, known as the "net amount
at risk," represents a general liability. In accordance with generally accepted
accounting principles, commonly called GAAP, and any additional Cayman Islands
regulatory requirements, we are required to establish and record policy reserves
designed to meet our estimated future life insurance death benefit obligations.
Mortality risk tends to be more stable when spread across large numbers of
insureds. We expect to write our variable life insurance policies, which
provide substantial death benefits given expected initial premiums of at least
$1.0 million for single premium policies and $500,000 for multiple premium
policies, with a relatively small number of high net worth policyholders.
Consequently, our associated mortality risk exposure will be greater in the
aggregate, and our probability of loss less predictable, than an insurer with a
broader risk pool. As a result we will allocate a portion of our capital, in
addition to any policy reserves required by GAAP or any additional Cayman
Islands regulatory requirements, to cover possible volatility in mortality
experience. Furthermore, pursuant to our Underwriting Guidelines, we seek to
reinsure a significant portion of the mortality risk associated with our
variable life insurance business with the objective of limiting the net amount
of risk to $100,000 per insured. Our Underwriting Guidelines provide that any
reinsurer to whom we cede business must have a financial strength rating of at
least "A-" or higher from A.M. Best or an equivalent rating by another major
rating agency.
Reinsurance
The principal risk associated with our planned fixed annuity reinsurance
activities is investment risk. Specifically, we will be subject to the
following:
. asset value risk, which is the risk that invested assets supporting
the reinsured business will decrease in value;
. credit risk, relating to the uncertainty associated with the continued
ability of a given obligor to make timely payments of principal and
interest;
. reinvestment risk, which is the risk that interest rates will decline
and funds reinvested will earn less than is necessary to match
anticipated liabilities; and
. disintermediation risk, which is the risk that we may have to sell
assets at a loss to provide for policyholder withdrawals or to satisfy
liabilities not otherwise properly matched.
-4-
We may also be subject to mortality risk with respect to the fixed
annuities we reinsure, although our exposure to such risk is expected to be
generally immaterial as compared to the investment risk associated with these
products.
We may reinsure various forms of life insurance products, including
universal, variable and whole life insurance. The primary risk under life
insurance policies is mortality risk. Our Underwriting Guidelines limit such
risk to $500,000 per insured and we intend to reinsure, or retrocede, any
liability for amounts in excess of $500,000 per insured in order to comply with
such guidelines. Universal life insurance and similar interest-rate sensitive
policies provide life insurance with adjustable rates of return based on
applicable interest rates in effect from time to time. As a consequence, the
risks reinsured by us may also include investment risks similar to those for
fixed annuities. As with annuities, all life insurance policies are subject to
surrender risk.
We will generally assume all of the liabilities under the contracts we
reinsure, although, in certain circumstances, we may require the ceding company
to retain a portion of such liabilities, typically not to exceed 10%. We expect
to retrocede to professional reinsurers, on a case by case basis, certain risks
associated with our reinsurance business, although no such arrangements are
currently in place.
Investment Portfolio
General
We seek to generate attractive levels of investment income through a
professionally managed investment portfolio. If we are unable to effectively
manage our investment portfolio and the risks associated with such investments,
our ability to support our variable life insurance and reinsurance businesses,
and our results of operations and financial condition, will be adversely
affected.
Investment Guidelines
Our investment activities are governed by the Investment Guidelines as
approved by the Board of Directors. Our investment portfolio, excluding assets
transferred and invested as part of any reinsurance transaction, principally
consists of fixed income securities with a weighted average investment rating of
"A." A fixed income security rated "A" by Standard & Poor's is somewhat
susceptible to the adverse effects of changes in circumstances and economic
conditions; however, the issuer's capacity to meet its financial commitment on
the security is still strong. We will not invest in any fixed income securities
in emerging markets or which are not rated by a major rating agency. The
Investment Guidelines provide that we may purchase, among other things,
securities issued by the United States government and its agencies and
instrumentalities, securities issued by foreign governments if rated "A" or
better by at least one major rating agency, certain asset backed securities,
preferred stocks, mortgage backed securities and corporate debt securities
(which may include convertible debt securities, but may not include payment-in-
kind corporate securities), including fixed income securities that are rated
below investment grade. The Investment Guidelines also provide that the fixed
income investment portfolio may not be
-5-
leveraged and that purchases of securities on margin and short sales may not be
made without approval of the Board of Directors.
We are exposed to two primary sources of investment risk on fixed income
investments: credit risk, relating to the uncertainty associated with the
continued ability of a given obligor to make timely payments of principal and
interest, and interest rate risk, relating to the market price and/or cash flow
variability associated with changes in market interest rates. We seek to manage
credit risk through industry and issuer diversification and asset allocation and
interest rate risk through interest rate swaps and other hedging techniques.
Our investments in fixed income securities that are rated below investment
grade, are subject to greater risks than our investments in investment grade
securities. The risk of loss of principal or interest through default is
greater with lower-rated securities because they are usually unsecured and are
often subordinated to an issuer's other obligations. Additionally, issuers of
these securities frequently have higher debt levels making them more susceptible
to adverse economic developments, individual corporate developments and rising
interest rates which could impair their ability to meet their financial
commitments. Consequently, the market price of these securities may be quite
volatile, and the risk of loss is greater. As a result, the Investment
Guidelines provide that no more than 15% of our investment portfolio may be
invested in fixed income securities that are rated below investment grade.
We will manage the investment risks on the assets received from reinsurance
transactions by matching anticipated payout patterns of the reinsurance
liabilities. We invest such assets principally in fixed income and, to a
lesser extent, equity securities. We may invest in foreign denominated
securities to manage currency risk if the reinsurance transaction has a foreign
currency component. We may also enter into interest rate swap and other hedging
transactions in an effort to manage interest rate risks associated with such
transactions. Although the total investment in derivatives may be substantial,
any use of derivatives is expected to be incidental to our efforts to manage
interest rate risk rather than a speculative investment. Any investment in
equity securities (expected to be typically not more than 10% of the assets
transferred to us in a reinsurance transaction) will be made in an effort to
enhance our overall return on such assets.
Investment Managers
On October 22, 1998 we entered into investment advisory agreements with
Pacific Investment Management Company, General Re-New England Asset Management,
Inc. and Prudential Investment Corporation to manage our fixed income investment
portfolio. As of December 31, 1998, Pacific Investment Management Company
managed approximately 50% of our investment portfolio and General Re and
Prudential Investment each managed approximately 25% of our investment
portfolio.
We expect that one or more of the Investment Managers will manage the
investment of any assets transferred to us in any reinsurance transaction.
-6-
Investment Oversight
Our Board of Directors, from time to time, reviews our investment portfolio
and the performance of our investment managers. The Board of Directors can
approve exceptions to our Investment Guidelines and periodically reviews our
Investment Guidelines in light of prevailing market conditions. The investment
managers and our Investment Guidelines may change from time to time as a result
of such reviews.
Competition and Ratings
The insurance and reinsurance industries are highly competitive and most of
the companies in such industries are significantly larger, have operating
histories and have access to significantly greater financial and other resources
than we do.
Our variable life insurance products will primarily compete with those
issued by U.S. insurance companies. To the extent that our variable life
insurance policies provide for management of the underlying separate accounts by
private independent money managers, our variable life insurance policies compete
with mutual funds and other investment or savings vehicles. We believe that the
most important competitive factor affecting the marketability of our variable
life insurance products is the degree to which these products meet customer
expectations, both in terms of low expenses, returns (after fees and expenses)
and service. Competition in the reinsurance business is based on price, ratings,
perceived financial strength and service. Because we expect to rely at least
initially on a small number of clients in both our variable life insurance and
reinsurance businesses, such businesses may be more susceptible to the adverse
effects of competition.
Insurance ratings are used by prospective purchasers of insurance policies
as well as insurers and reinsurance intermediaries as an important means of
assessing the financial strength and quality of insurers and reinsurers. In
addition, a ceding company's own rating may be adversely affected by an
unfavorable rating or the lack of a rating of its reinsurer. Duff & Phelps has
assigned Scottish Insurance a rating of "A" and A.M. Best has assigned Scottish
Insurance a Best Rating of "A-" (Excellent). Duff & Phelps assigns an "A"
rating to companies that it characterizes as having, in its opinion, high claims
paying ability, average protection factors and an expectation of variability in
risk over time due to economic or underwriting conditions. A.M. Best assigns an
"A- " (Excellent) rating to companies that have, in its opinion, on balance,
excellent financial strength, operating performance and market profile, as well
as strong abilities to meet their ongoing obligations to policyholders. These
ratings represent each rating agency's opinion of Scottish Insurance's ability
to meet its obligations to its policyholders.
Employees
We currently employ nine full time employees.
-7-
Regulation
Cayman Islands
Scottish Holdings is a holding company owning all of the outstanding
Ordinary Shares of Scottish Insurance. Scottish Insurance is subject to
regulations as a licensed insurance business under Cayman Islands law.
Scottish Insurance holds an unrestricted Class B insurance license under
Cayman Islands Insurance Law (1998 Revision) and may therefore carry on an
insurance business from within the Cayman Islands, but may not engage in any
Cayman Islands domestic insurance business.
Unless specifically exempted, a Cayman Islands insurance company must
engage a licensed insurance manager operating in the Cayman Islands to provide
insurance expertise and oversight. Scottish Insurance has engaged International
Risk Management (Cayman) Ltd. as its licensed insurance manager in the Cayman
Islands.
In addition, under the Insurance Law, Cayman Islands insurance companies
carrying on long term business (which includes the writing of life insurance
policies) must place all receipts by such company of funds in respect of its
long-term business in a separate long-term business fund and payments from such
long-term business fund may not be made directly or indirectly for any purpose
other than those of the insurer's long-term business. Every Cayman Island
insurance company carrying on long-term business may establish any number of
separate accounts in respect of respective premiums paid to it to provide (i)
annuities on human life and (ii) contracts of insurance on human life, and such
respective premiums shall be kept segregated one from the other and independent
of all other funds of the Cayman Islands insurer, and, notwithstanding the
provisions of any other written law to the contrary, are not chargeable with any
liability arising from any other business of the insurer. The scope and the
validity of the Cayman Islands law regarding separate accounts has not been
tested in the courts of the Cayman Islands.
United States and Other
Neither Scottish Holdings nor Scottish Insurance are licensed to do
business in any jurisdiction other than the Cayman Islands. The insurance laws
of each state of the United States and of many foreign countries regulate the
sale of insurance and reinsurance within their jurisdictions by alien insurers,
such as Scottish Insurance, that are not admitted to do business within such
jurisdictions. With some exceptions, the sale of insurance within a
jurisdiction where the insurer is not admitted to do business is generally
prohibited.
Scottish Insurance conducts its insurance and reinsurance business through
its executive offices in the Cayman Islands and does not maintain an office, and
its personnel will not solicit, advertise, underwrite, settle claims or conduct
other insurance or reinsurance activities in the United States or in any other
jurisdiction where such activities are prohibited. All of Scottish Insurance's
insurance and reinsurance contracts will be negotiated, executed, and issued,
and all premiums are received, at the office of Scottish Insurance in George
Town, Grand Cayman or in such other offices outside the United States as
Scottish Insurance may establish or designate.
-8-
Item 2: PROPERTY
We currently lease, for a 6 month term expiring on July 1, 1999, a 740
square foot office space in George Town, Grand Cayman, Cayman Islands, British
West Indies, where our principal offices are currently located. The rent for
the six month term is $10,824. Effective May 1, 1999, we will lease
approximately 3,600 square feet of office space in George Town, Grand Cayman
where our executive and principal offices will be located. The base term of the
lease is seven years. The annual rent will be $97,956 for the first three years
and $102,854, $108,006, $113,412, and $119,108, for years four through seven,
respectively. We also lease approximately 1,000 square feet of office space in
George Town pursuant to a lease with Queensgate Bank and Trust Company Limited.
This lease has a one year term which is automatically extended annually for an
additional year unless either party gives written notice to the other at least
90 days prior to the end of the then current term. Our annual rent under this
lease is $25,000, which is paid on a quarterly basis. We believe that these
properties are adequate to meet our needs for the foreseeable future.
Item 3: LEGAL PROCEEDINGS
The Company is not currently involved in any litigation or arbitration.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Scottish Holdings did not submit any matter to a vote of securities holders
during the fourth quarter of the year covered by this Form 10-K.
PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
a. Market for the Ordinary Shares
The Ordinary Shares, par value $0.01 per share, of Scottish Holdings are
quoted on the Nasdaq Stock Market National Market under the symbol "SCTLF." The
Ordinary Shares commenced trading on November 24, 1998. The high and low bid
prices for the Ordinary Shares are shown below:
High Low
------- -------
November 24-December 31 $14.50 $11.375
January 1-January 31 14.25 11.25
February 1-February 28 11.50 9.438
March 1-March 15 9.875 8.625
-9-
As of March 26, 1998, Scottish Holdings had approximately 23 holders of its
Ordinary Shares. Approximately 16,741,300 Ordinary Shares are held in street
name. No cash dividends were paid by Scottish Holdings in 1998, although,
subject to Board approval, we intend to declare and pay out of earnings a
dividend at the quarterly rate of $0.05 per Ordinary Share beginning with our
first quarter of 1999.
b. Recent Sales of Unregistered Securities
Through December 31, 1998, Scottish Holdings issued the following
securities that were not registered under the Securities Act:
(a) On June 9, 1998, Scottish Holdings sold 1,500,000 Ordinary Shares to
its former parent company, Scottish Holdings, Ltd., for an aggregate
purchase price of $500,000.
(b) On June 9, 1998, Scottish Holdings sold Class A Warrants to purchase
an aggregate of 1,550,000 Ordinary Shares to Michael C. French,
Michelle L. Boucher, Audubon Asset Limited and Soulieana Limited for
an aggregate purchase price of $100,000.
(c) On June 18, 1998, Scottish Holdings sold Class B Warrants to purchase
an aggregate of 200,000 Ordinary Shares to The Roman Arch Fund L.P.
and The Roman Arch Fund II L.P. for an aggregate purchase price of
$302,000.
(d) On October 22, 1998, Scottish Holdings issued Class A Warrants to
purchase an aggregate of 900,000 Ordinary Shares to Audubon Asset
Limited, Soulieana Limited and The South Madison Trust in exchange for
1,100,000 Ordinary Shares.
(e) On October 27, 1998, Scottish Holdings entered into securities
purchase agreements with Audubon Asset Limited, Soulieana Limited,
Maverick Fund USA, Ltd., Maverick Fund, L.D.C. and Maverick Fund II,
Ltd., pursuant to which Scottish Holdings sold, simultaneously with
the closing of our initial public offering, an aggregate of 1,418,440
Ordinary Shares and Class A Warrants to purchase an aggregate of
400,000 Ordinary Shares.
The Class A Warrants and Class B Warrants are exercisable for $15.00 per
share in three equal annual installments commencing November 30, 1999. Upon a
change in control, however, the Class A Warrants and Class B Warrants become
immediately exercisable.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof
relative to sales by an issuer not involving a public offering. All of the
foregoing securities are restricted securities for purposes of the Securities
Act.
-10-
c. Use of Proceeds
On November 30, 1998, Scottish Holdings completed its initial public
offering of Ordinary Shares. The effective date of its Registration Statement on
Form S-1 (Commission File No. 333-57227) was November 23, 1998, pursuant to
which Scottish Holdings registered the offer and sale of 16,750,000 Ordinary
Shares at $15.00 per share for an aggregate offering price of $251,250,000.
Scottish Holdings completed the Offering, selling 16,750,000 Ordinary Shares for
the aggregate offering price of $251,250,000. The managing underwriters were
Prudential Securities Incorporated, CIBC Oppenheimer Corp., ING Baring Furman
Selz LLC and Warburg Dillon Read LLC.
The expenses incurred in the initial public offering were as follows:
Printing $ 1,100,000
Stock Certificates 6,019
Accountant's Fees 333,864
Attorneys' Fees 1,340,924
Nasdaq Fees 123,394
SEC Fees 85,237
Rating Agency Fees 52,500
Advisors' Fees 939,222
Travel and other 618,836
Underwriting discount $15,075,000
-----------
Total fees & expenses $19,674,996
===========
Included in the Advisors' Fees listed above is the payment of an advisory
fee to Prudential Securities Incorporated in the amount of $800,000 (plus
reimbursement of related out-of-pocket expenses) for investment banking and
financial advisory services in connection with the Offering. Separately,
Scottish Holdings has entered into an investment advisory agreement with
Prudential Investment, as one of the Investment Managers. Prudential Securities
Incorporated and Prudential Investment are wholly owned subsidiaries of The
Prudential Insurance Company of America.
Additionally, included in the Advisors' Fees listed above is the payment of
$80,506 to D.C. Planning, an insurance consulting firm with which Scottish
Holdings has a consulting relationship. Mr. Howard Shapiro, who is on our Board
of Directors, is the managing partner of D.C. Planning. See "Certain
Relationships and Related Party Transactions."
The net proceeds from the initial public offering after deducting expenses
and the underwriting discount was $231,575,004. The full amount of net proceeds
were contributed to our wholly-owned subsidiary Scottish Annuity & Life
Insurance Company (Cayman) Ltd., which has fully invested the contribution with
its investment managers pursuant to its investment guidelines.
-11-
Item 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
December 31, 1998
---------------------------------
(Stated in United States Dollars)
Statement of Income Data:
Total revenues $ 1,338,151
Total expenses $ 901,830
Net income $ 436,321
Basic and diluted earnings per share $ 0.12
Book value per share $ 13.57
Market value per share $ 13.750
------------
Actual number of ordinary shares 18,568,440
outstanding
Balance Sheet Data:
Total investments $244,267,976
Total assets $254,346,239
Total liabilities $ 2,286,060
Total shareholders' equity $252,060,179
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
We are an insurance holding company, and our principal asset is ownership
of Scottish Insurance. We were formed on May 12, 1998, and Scottish Insurance
was formed on June 3, 1998, under the laws of the Cayman Islands. We commenced
our insurance operations on November 30, 1998, immediately following our initial
public offering. Consequently, we have a very short operating history in 1998,
and we are still in the start up phase of our operations.
Results of operations
The following table summarizes our operating earnings for the period from
May 12, 1998 to December 31,1998. Operating earnings, which excludes realized
investment gains (losses) is a common measure used in the insurance industry.
-12-
Revenues
Interest income, net $1,142,501
Insurance administration fee 209,886
-------------
Total revenues 1,352,387
Expenses
Salaries and benefits 319,170
Professional fees 235,824
Miscellaneous expenses 230,567
Recruitment expenses 104,835
Administrative expenses 11,434
-------------
Total expenses 901,830
-------------
Operating earnings $ 450,557
=============
Basic and diluted operating earnings per $0.13
ordinary share
=============
Overview
Our operating earnings of $450,557 or $0.13 per share were driven by
revenues from our investment portfolio and insurance administration fees. The
expenses incurred include nonrecurring startup costs. Since we are in a start-
up phase, the revenues and expenses set forth above should not be used to
project future periods.
Investments
Our investment portfolio is managed by three professional investment
managers, Pacific Investment Management Company, Prudential Investment
Corporation and Gen Re - New England Asset Management, Inc. Our investment
guidelines are designed to diversify the portfolio to maximize investment income
while minimizing risk. At December 31, 1998, the portfolio had an average
quality rating of AA+, an average duration of 3.67 years and an average book
yield of 5.50%. We anticipate that the average yield will go up in 1999 when
the proceeds are fully deployed. At year-end our investment mangers were still
in the process of deploying the proceeds from the stock offering. A realized
loss of $14,236 and net unrealized depreciation of $853,146 was recognized on
investments during the period.
Insurance operations
Our business consists of three lines of business, variable life insurance,
reinsurance and insurance administration. Our 1998 results only reflect one of
these lines of business, our insurance administration business. The insurance
administration business consists of a variety of insurance administration,
accounting and other services on an annuity block of business originally written
by Scottish Annuity.
-13-
Outlook
We are currently reviewing a number of variable life and reinsurance
transactions and expect to finalize some of them during the first half of 1999.
Our variable life insurance product is targeted at high net worth individuals
with liquidity in excess of $10 million. Our variable life insurance product
offers an unusual feature, independent investment management, which we believe
will differentiate us in the market. Our reinsurance focus is on the annuity
business although we will consider life reinsurance.
On September 18, 1998, we executed a binder with a U.S. reinsurer to
provide reinsurance, on a retrocession basis, for approximately 35,000 in force
universal life insurance policies. We proposed a transaction structured on a
monthly renewable term basis, whereby we would reinsure only the mortality risk
on the policies. During the fourth quarter of 1998, we delayed closing on the
transaction because of concerns about the mortality experience that arose as we
completed our due diligence review prior to closing. We and the original
reinsurer are presently engaged in negotiations with respect to the binder.
Capital Resources and Liquidity
We completed our initial public offering of 16,750,000 Ordinary Shares on
November 30,1998 for net proceeds after offering expenses and commissions paid
to underwriters of $231,575,004. Simultaneously with this offering we raised
$20,000,000 from direct sales to strategic investors of 1,418,440 of Ordinary
Shares and Class A Warrants for 400,000 Ordinary Shares. We also raised
$402,000 from the sale of other Class A Warrants and B Warrants. Substantially
all of the net proceeds were used to capitalize Scottish Insurance.
At December 31, 1998, total capitalization was $252,060,179. We currently
have no material commitments for capital expenditures and do not anticipate
incurring material indebtedness other than letters of credit, which may be
required in the ordinary course of our planned reinsurance business.
We expect that our cash and investments, together with cash generated from
our businesses, will provide sufficient sources of liquidity and capital to meet
our needs for the next several years.
Year 2000 Risk.
Many existing computer programs use only two digits to identify a year in
the date field. These programs, if not corrected, could fail or create erroneous
results by or at the year 2000. This "Year 2000" issue is believed to affect
virtually all companies and organizations, including us. Because most of our
computer hardware and software is less than three years old, we believe that our
exposure with respect to our own computer systems to Year 2000-related problems
is not significant. In addition, we recently upgraded our principal accounting
software from a DOS-based version which was not Year 2000 compliant to a Windows
NT version which is certified Year 2000 compliant by the software vendor.
-14-
We rely significantly on a number of third party service providers, such as
Westport, IRM Cayman, Milliman & Robertson, PIMCO, General Re and Prudential
Investment, each of whom confirmed to us, or is in the process of confirming, is
Year 2000 compliant. We also intend to require that any new investment managers
or other third party service providers be or become Year 2000 compliant in a
timely manner. There can be no assurance, however, that our operations will not
experience disruptions due to the failure of third parties, including
reinsurance counter parties, to become fully Year 2000 compliant in a timely
manner or that a failure will not otherwise have an adverse effect on our
business, results of operations or financial condition. In the event our plans
with respect to Year 2000 readiness fail to protect our operations from
disruptions or its business, results of operations or financial condition from
adverse effect, we have no contingency plan other than the replacement of
existing third party service providers which are not Year 2000 compliant with
comparable third party service providers who are Year 2000 compliant. We may
also have an exposure to Year 2000 issues from reinsurance business we write in
the future. Since we have not written any reinsurance business we do not know
what these exposures are or whether they will be material.
Changes in Accounting Standards.
The Financial Accounting Standards Board's Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
requires adoption no later than fiscal quarters or fiscal years beginning after
June 15, 1999. The new standard establishes accounting and reporting standards
for derivative instruments. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. We have not yet completed our evaluation of the effect this
standard will have on us.
Forward Looking Statements
Some of the statements contained in this report are not historical facts
and are forward-looking within the meaning of the Private Securities Litigation
Reform Act. Forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results to differ
materially from the forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: our ability to execute the business plan; changes in the general
economic conditions including the performance of the financial markets and
interest rates; changes in insurance regulations or taxes; changes in rating
agency policy; the loss of key executives; and Year 2000 issues. We assume no
obligation to update any forward-looking statement to reflect actual results or
changes in or additions to the factors affecting such forward-looking
statements.
-15-
RISK FACTORS OF INVESTING IN OUR ORDINARY SHARES
Investing in our Ordinary Shares involves a high degree of risk. Potential
investors should consider carefully the following risk factors, in addition to
the other information set forth in this Form 10-K, prior to investing in the
Ordinary Shares.
When used, the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "plan," "intend" and similar expressions identify
forward-looking statements regarding among other things: (i) our business and
growth plans; (ii) our relationship with third-party service providers and
clients; (iii) trends in the insurance and reinsurance industries; (iv)
government regulations; (v) trends that may affect our financial condition or
results of operations; and (vi) the declaration and payment of dividends.
Potential investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties.
Actual results may differ materially from those included within the forward-
looking statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below and under the heading "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and elsewhere in this Form 10-K.
Our Variable Life Insurance Business Is Dependent Upon Referral Sources.
We will not be successful in our variable life insurance business if we
cannot get clients from referrals by financial advisors, investment managers,
private bankers, attorneys and other intermediaries in the United States. Since
we are not licensed or registered to do business in the U.S., these referral
sources cannot represent us and cannot be compensated by us for any activities
in the U.S. As a result, we cannot assure you that we will be able to
effectively implement our insurance and reinsurance plans.
We can, however, pay non-U.S. referral sources for activities undertaken
outside the U.S. We expect to compensate referral sources based on a percentage
of the revenue received from referrals. Subject to any regulatory limitations,
we may provide referrals to persons or entities that provide referrals to us.
We cannot assure you that we will receive a significant amount of referrals or,
if so, that any referrals will result in actual sales of variable life insurance
policies.
Our Ability to Develop Our Reinsurance Business is Dependent Upon Building
Relationships.
We will not be successful in our fixed annuity and other reinsurance
businesses if we cannot develop business primarily through our executive
officers' relationships with international insurance brokers, insurance
consultants, members of the actuarial profession and senior insurance company
executives.
Our Reinsurance Business Targets an Unexplored Market.
Our business plan for our reinsurance activities provides that one of our
principle targets is reinsuring blocks of in-force fixed annuities issued by
insurers that are no longer actively writing
-16-
these contracts or that want to lessen the reserve and capital requirements
associated with these contracts. Since this market is largely unaddressed by
other reinsurers, we consider it an attractive niche opportunity. Since this
target business represents an unexploited market, however, we cannot be certain
that it will meet our expectations.
Annuities in the accumulation phase are subject to surrender risk.
Although we will take this into account when negotiating prices, we cannot
assure you that we will succeed in negotiating prices that actually take into
account such risk. Nor can we assure you that, as these fixed annuities or
similar contracts are surrendered, terminate or expire, we will have enough
reinsurance business to sustain our growth or that there will be enough
reinsurance business in our target market to replace these fixed annuities or
similar contracts.
Our Ability to Develop Our Business Plan is Dependent Upon Maintaining Our
Claims-Paying Ability Rating.
Potential purchasers of insurance policies, insurers, reinsurers and
insurance and reinsurance intermediaries use insurance ratings to assess the
financial strength and quality of insurers and reinsurers. In addition, an
unfavorable rating or the lack of a rating will adversely affect a company
purchasing reinsurance. Although Duff & Phelps has given us a claims-paying
ability rating of "A" and A.M. Best has given us Best Rating of "A-"
(Excellent), we cannot assure you that we will be able to maintain these
ratings. If we are unable to maintain these ratings, we cannot assure you that
we will be able to obtain similar claims-paying ability ratings from other major
rating agencies.
Changes in U.S. Tax Laws With Respect To Variable Life Insurance Could
Adversely Affect Our Product Sales.
The favorable tax treatment for variable life insurance products in the
United States compared to certain other investment alternatives is the reason
for the variable life insurance market. Any material change in this tax
treatment, including the imposition of a "flat tax" or a national sales tax in
lieu of the current federal income tax structure in the United States, would
adversely affect the market for variable life insurance products.
Past legislative proposals would have limited the ability of policyholders
to change private independent money managers without triggering adverse tax
consequences. If any of these proposals were enacted into law, they could
adversely affect our variable life insurance business.
In addition, certain past proposals would have eliminated transfers to
trusts from the annual present interest exclusion from the gift tax. The
enactment of these proposals into law would eliminate the primary and most tax-
efficient method of making premium payments by insurance trusts. Because we
expect that insurance trusts will purchase our variable life insurance (or our
variable life insurance will be contributed to insurance trusts) to provide
liquidity for estate taxes and to effect the tax-free transfer of the proceeds
from one generation to another, adoption of these tax proposals would adversely
affect sales of these policies and, as a consequence, would adversely affect our
business, results of operations and financial condition. In addition, recent tax
changes have adversely affected corporate owned life insurance products. Any
-17-
additional changes in the tax laws that reduce or eliminate any remaining
favorable tax treatment for these products would adversely affect the market for
such products.
Governmental Regulation of Our Business Could Adversely Affect Our Business.
We are licensed as an unrestricted Class B insurer and are subject to
regulation and supervision by the Cayman Islands Monetary Authority. We are not
registered or licensed to do business in any jurisdiction in the United States
or any other country. Generally, the sale of insurance within a jurisdiction
where the insurer is not admitted to do business is prohibited. Under our
operating guidelines, we do not operate in the United States or, to the extent
prohibited, in any other country. We can give no assurance that inquiries or
challenges to our insurance activities will not be raised in the future. Our
variable life insurance products have customized features that are not typically
available from a company subject to those laws. If we were to become subject to
those laws, our business, results of operations and financial condition would
likely be materially adversely affected.
In the past, federal and state governments have proposed to regulate
foreign insurers more than currently regulated. While none of these proposals
has been adopted, we cannot assure you that federal or state legislation will
not be enacted subjecting our business to supervision and regulation in the
United States.
Our Reinsurance Business Could Be Adversely Affected By Uncertainties of
Letters of Credit or Other Collateral Amounts.
Because many jurisdictions do not allow insurance companies to take credit
for reinsurance obtained from unlicensed or non-admitted insurers on their
statutory financial statements unless appropriate security measures are in
place, we anticipate that our reinsurance clients will typically require us to
post a letter of credit or provide other collateral through a funds withheld or
trust arrangement. If we are unable to obtain a letter of credit facility on
commercially acceptable terms or are unable to arrange for such other
collateral, our ability to operate our reinsurance business will be severely
limited.
Our Products Carry With Them Inherent Insurance Industry Risks And Risks
Specific to Our Business Plan.
Variable Life Insurance--Mortality Risk. The principal risk associated
with our planned variable life insurance policies is mortality risk. Mortality
risk typically is more stable when spread across large numbers of insureds. We
expect to place our policies with a relatively small number of high net worth
policyholders and to provide substantial death benefits with expected initial
premiums of at least $1.0 million for single premium policies and $500,000 for
multiple premium policies. As a result, our mortality risk exposure is likely
to be larger, and our probability of loss is less predictable, than an insurer
with a larger risk pool. As a result, we cannot assure you that our planned
policy reserves will be adequate, that we will properly match our assets to meet
anticipated liabilities, that we will not need to liquidate our assets at a
substantial loss to meet our liabilities or that, to the extent we seek to
reinsure mortality risk, this
-18-
reinsurance will be available on commercially acceptable terms or that the
reinsurers will perform under their reinsurance agreements.
Fixed Annuity Reinsurance--Investment Risk. The principal risk associated
with our planned fixed annuity reinsurance activities is investment risk.
Specifically, we will be subject to the following risks:
. the risk that invested assets supporting the reinsured business
will decrease in value;
. the credit risk that the continued ability of a given obligor to
make timely payments of principal and interest;
. the risk that interest rates will decline and funds reinvested
will earn less than expected; and
. the risk that we may have to sell assets at a loss to provide for
policyholder withdrawals.
Other Reinsurance Businesses--Mortality, Investment and Surrender Risk. We
may also reinsure various forms of life insurance products, including universal
life insurance, variable life insurance and traditional whole life insurance.
The primary risk under life insurance policies is mortality risk. Our
underwriting guidelines limit this risk to $500,000 per insured and we intend to
reinsure, or retrocede, any liability for amounts in excess of $500,000 per
insured to comply with these guidelines.
Universal life insurance and similar policies sensitive to interest rates
provide life insurance with adjustable rates of return based on applicable
interest rates in effect from time to time. As a result, the risks with respect
to reinsuring those kinds of policies may also include investment risks similar
to those for fixed annuities. In addition, like annuities, life insurance
policies and variable annuities are subject to surrender risk.
Reinsurance Business--Ceding Insurer Risk. An additional risk associated
with our planned reinsurance business is the risk that the ceding insurer will
be unable to pay to us amounts due because of its own financial difficulties.
We can give no assurance that the ceding insurers will be able to pay amounts
due to us, which could have a material adverse effect on our business, results
of operations or financial condition. In addition, we can give no assurance
that the ceding companies will maintain appropriate interest crediting rates
with respect to fixed annuities or interest rate-sensitive life insurance
policies.
-19-
Our Business is Dependent on Our Ability To Manage Risks In Our Investment
Activities.
Our fixed income investments are subject to the following two primary
sources of investment risk:
. credit risk, relating to the continued ability of a given
obligor to make timely payments of principal and interest; and
. interest rate risk, relating to the market price and/or cash flow
variability associated with changes in market interest rates.
We cannot assure you we will be able to effectively manage these risks. If we
are unable to effectively manage these risks, our ability to support our planned
variable life insurance and reinsurance businesses, and our results of
operations and financial condition, will be adversely affected.
In addition, under our investment guidelines, we can invest up to 15% of
our investment portfolio in below investment grade fixed income securities.
While any investment carries some risk, the risks of investing in lower-rated
securities are greater than the risks of investing in investment grade
securities.
In addition, if we enter into a coinsurance transaction, we will seek to
invest the assets transferred to us to match our anticipated reinsurance
liabilities. We expect to invest these assets in fixed income and, to a lesser
extent, equity securities. We may invest in foreign denominated securities to
manage currency risk if the coinsurance transaction involves foreign currency.
We may also enter into interest rate swaps and other hedging transactions in an
effort to manage interest rate risks.
Our ability to match our anticipated reinsurance liabilities has not been
tested. Therefore, we can not assure you that we will successfully structure
our investments so as to match our anticipated reinsurance liabilities. If our
calculations are incorrect, or if we improperly structure our investments to
match these liabilities, we could be forced to sell investments before they
mature at a significant loss with the result that our assets may not be adequate
to meet our needed reserves, which could adversely affect our business, results
of operations and financial condition.
Our Success May Be Affected by Foreign Currency Fluctuations.
Our functional currency is the United States dollar. However, because a
portion of our planned business, including premiums, may be in currencies other
than United States dollars and because we may maintain a small portion of our
investment portfolio in investments denominated in currencies other than United
States dollars, we may have losses if we do not properly manage or otherwise
hedge, our currency risks.
-20-
We Have No Experience Competing With Established Companies in the Life
Insurance and Reinsurance Industry.
The life insurance and reinsurance industries are highly competitive and
most of the companies in these industries are significantly larger, have
operating histories and have access to significantly greater financial and other
resources than we do. We have no experience competing with these companies.
Our Business Would Be Adversely Affected by the Imposition of or Increases in
United States Taxes.
As a Cayman Islands company, we plan to operate in a manner so that we are
not subject to United States tax, other than withholding tax on certain
investment income from United States sources. However, the Internal Revenue
Service could contend that we are conducting business in the United States. If
the Internal Revenue Service were to prevail in that contention, we would be
subject to United States tax at regular corporate rates on taxable income that
is effectively connected with United States business plus an additional 30%
"branch profits" tax on the income remaining after the regular tax, which could
adversely affect our results of operation.
Insurance and reinsurance premiums that will be paid to us will be subject
to a U.S. excise tax for risks located in the United States. In addition, our
investment income from United States sources could be subject to withholding
tax. These taxes could be increased and other taxes could be imposed on our
business, which could also adversely affect our results of operation.
Owners of Our Ordinary Shares May in Certain Circumstances Be Exposed to
Adverse Personal United States Tax Risks.
Controlled Foreign Corporation Rules. Each "United States shareholder" of
a "controlled foreign corporation" who owns shares in the controlled foreign
corporation on the last day of its taxable year generally must include in his
gross income for United States federal income tax purposes his pro-rata share of
the controlled foreign corporation's "subpart F income," even if the subpart F
income has not been distributed. For these purposes, any United States person
who owns directly or indirectly 10% or more of our ordinary shares will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as our subsidiary, Scottish Annuity & Life Insurance, is treated as
a controlled foreign corporation only if such "United States shareholders"
collectively own more than 25% of the total combined voting power or total value
of our stock for an uninterrupted period of 30 days or more during any year. We
believe that, because of the anticipated dispersion of our share ownership among
holders and because of the restrictions in our Articles of Association on
transfer, issuance or repurchase of our ordinary shares, our shareholders will
not be subject to treatment as "United States shareholders" of a controlled
foreign corporation. In addition, because under the Articles of Association no
single shareholder will be permitted to exercise 10% or more of our total
combined voting power, our shareholders should not be viewed as "United States
shareholders' of a controlled foreign corporation for purposes of these rules.
There can be no assurance, however, that these rules will not apply to our
shareholders.
-21-
Related Person Insurance Income Risks. If our related person insurance
income, determined on a gross basis, were to equal or exceed 20% of our gross
insurance income in any taxable year, and direct or indirect insureds and
persons related to such insureds were directly or indirectly to own more than
20% of the voting power or value of our capital stock, a United States person
who directly or indirectly owns our Ordinary Shares on the last day of the
taxable year may be required to include in his income for United States federal
income tax purposes the shareholder's pro-rata share of our related person
insurance income for the taxable year, determined as if this income were
distributed proportionately to the United States person at that date. Related
person insurance income is generally underwriting premium and related investment
income attributable to insurance or reinsurance policies where the direct or
indirect insureds are United States shareholders or are related to United States
shareholders of the insurance company issuing the policies.
If we have related person insurance income, and all United States persons
own 25% or more of the voting power or value of our shares, any shareholder who
is a United States person who owns 10% or more of our shares and disposes of the
shares would have any gain from the disposition generally treated as ordinary
income to the extent of the shareholder's portion of our undistributed earnings
and profits that were accumulated during the period that the shareholder owned
the shares. The shareholder also will be required to follow certain reporting
requirements, regardless of the amount of shares owned by the shareholder.
These rules should not apply to sales of our shares because we, as Scottish
Holdings, are not directly engaged in the insurance business and because
proposed United States Treasury regulations applicable to this situation appear
to apply only in the case of shares of corporations that are directly engaged in
the insurance business. We can give no assurances however, that the IRS will
interpret the proposed regulations in this manner or that the proposed
regulations will not be promulgated in final form in a manner that would cause
these rules to apply to dispositions of Ordinary Shares.
Passive Foreign Investment Company Risks. You will have adverse United
States federal income tax consequences if we are deemed a "passive foreign
investment company." In general, a foreign corporation is a passive foreign
investment company if 75% or more of its income constitutes "passive income" or
50% or more of its assets produces passive income. "Passive income" generally
includes interest, dividends and other investment income. However, "passive
income" does not include income "derived in the active conduct of an insurance
business by a corporation which is predominantly engaged in an insurance
business." This exception is intended to ensure that income derived by a bona
fide insurance company is not treated as passive income, except to the extent
this income is attributable to financial reserves in excess of the reasonable
needs of the insurance business. Because we intend to continue to be in the
insurance business and do not intend to have financial reserves in excess of the
reasonable needs of our insurance business, we do not expect to be a "passive
foreign investment company." We can give no assurance, however, that the IRS or
a court will agree in this view.
Our Ability to Pay Dividends Is Dependent on the Success of Our Subsidiary and
Regulatory Constraints.
We are a holding company engaged in the variable life insurance and
reinsurance business through our wholly owned subsidiary, Scottish Insurance.
Our principal source of income is
-22-
dividends paid to us by Scottish Insurance. The payment of dividends is at the
discretion of our Board of Directors and depends largely on the ability of
Scottish Insurance to pay dividends to us. Scottish Insurance is subject to
Cayman Islands regulatory constraints which also affect its ability to pay
dividends to us. Specifically, Scottish Insurance must keep enough capital to
support its variable life insurance and reinsurance businesses and comply with
restrictions under Cayman Islands insurance corporate law. Accordingly, there is
no assurance that dividends will be declared or paid in the future.
Our Articles of Association Contain Substantial Limitations on Ownership,
Transfers and Voting Rights.
Except as described below with respect to the purchase and sale of our
shares on the Nasdaq National Market, our Articles of Association require our
directors to decline to register any transfer of our shares if they believe that
the transfer would result in a person (or any group of which such person is a
member) beneficially owning, directly or indirectly, 10% or more of our
outstanding shares. Similar restrictions apply to our issuance and repurchase
of shares. The directors also may, in their absolute discretion, decline to
register the transfer of any shares if they believe that the transfer may expose
us, any subsidiary or shareholder or any person insured or reinsured or
proposing to be insured or reinsured by us to adverse tax or regulatory
treatment or if they believe that registration of the transfer under any federal
or state securities law or under the laws of any other jurisdiction is required
and the registration has not been done. A transferor of Ordinary Shares will be
deemed to own the shares for dividend, voting and reporting purposes until a
transfer of the shares has been registered on our Register of Members. We are
authorized to request information from any holder or potential acquirer of our
shares as necessary and may decline to register any transaction if we do not
receive complete and accurate information.
Our directors will not decline to register any transfer of our shares
executed on the Nasdaq National Market. However, if any transfer results in the
transferee (or any group) beneficially owning, directly or indirectly, 10% or
more of any class of shares or causes our directors to have reason to believe
that a transfer may expose us, any subsidiary or shareholder thereof or any
person insured or reinsured or proposing to be insured or reinsured to adverse
tax or regulatory treatment in any jurisdiction, under our Articles of
Association, the directors have the power to deliver a notice to the transferee
demanding that the transferee surrender to an agent, designated by the
directors, certificates representing the shares and any dividends or
distributions that the transferee has received as a result of owning the shares.
A transferee who has resold the shares before receiving this notice will be
required to transfer to the agent the proceeds of the sale, to the extent such
proceeds exceed the amount that the transferee paid for such shares, together
with any dividends or distributions that the transferee received from us. As
soon as practicable after receiving the shares and any dividends or
distributions that the transferee received, the agent will use its best efforts
to sell the shares and any non-cash dividends or distributions to the extent
tradeable as market securities in an arm's-length transaction on the Nasdaq
National Market. After applying the proceeds from such sale toward reimbursing
the transferee for the price paid for such shares, the agent will pay any
remaining proceeds and any cash dividends and distributions to organizations
described in Section 501(c)(3) of the Code that the directors designate. The
proceeds of any such sale by the agent or the surrender of dividends
-23-
or distributions will not inure to our benefit or the agent's benefit, but the
amounts may be used to reimburse expenses incurred by the agent in performing
its duties.
In addition, the Articles of Association generally provide that any person
(or any group) holding 10% or more of the total voting rights of all of our
outstanding capital shares, will have the voting rights of to its voting shares
reduced so that the person (or group) may not exercise more than approximately
9.9% of the total voting rights. Because of the attribution provisions of the
U.S. tax code and the rules of the Securities and Exchange Commission regarding
determination of beneficial ownership, this requirement may have the effect of
reducing the voting rights of a shareholder whether or not the shareholder
directly holds of record 10% or more of the voting shares. The directors also
have the authority to request from any shareholder certain information for the
purpose of determining whether such shareholder's voting rights are to be
reduced. If the shareholder fails to respond to the notice, or submits
incomplete or inaccurate information, the directors (or their designee) have the
discretion to disregard all votes attached to the shareholder's Ordinary Shares.
Our Articles of Association and Cayman Islands Confidentiality Laws Have Anti-
takeover Effects.
Our Articles of Association contain provisions that make it more difficult
to acquire control of us by means of a tender offer, open market purchase, a
proxy fight or otherwise, including by reason of the limitation on transfers of
Ordinary Shares and voting rights described above. While these provisions are
designed to encourage persons seeking to acquire control to negotiate with our
Board of Directors, they could have the effect of discouraging a potential
purchaser from making a tender offer or otherwise attempting to obtain control.
Cayman Islands law restricts disclosure of, among other things, shareholder
lists. Accordingly, such laws may make the acquisition of control by means of a
tender offer or proxy fight more difficult.
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our qualitative discussion about market risk is contained in the following
sections:
. Business--Underwriting;
. Business--Investment Portfolio;
. Management's Discussion and Analysis of Financial Condition and
Results of Operations;
. Risk Factors of Investing in Our Ordinary Shares--Our Products Carry
With Them Inherent Industry Risks and Risks Specific to Our Business
Plan;
-24-
. Risk Factors of Investing in Our Ordinary Shares--Our Business is
Dependent on Our Ability to Manage Risks in Our Investment Activities;
and
. Risk Factors of Investing in Our Ordinary Shares--Our Success May be
Affected by Foreign Currency Fluctuations.
Quantitative Disclosure of Interest Rate Risk
The following table represents a summary of the par values of the Company's
financial investments at their expected maturity dates, the weighted average
coupons by those maturity dates and the estimated fair value of those
instruments for the period ended December 31, 1998. The expected maturity
categories take into consideration par amortization (for mortgage backed
securities), call features and sinking fund features.
The estimated market value of available-for-sale securities is based on bid
quotations from security dealers or on bid prices published in news quote
services. December 31, 1998 market interest rates were used as discounting
rates in the estimation of fair value.
SCOTTISH ANNUITY LIFE GRP
-------------------------
EXPECTED MATURITY DATE
----------------------
(Dollars in millions, except average interest rate)
TOTAL
-----
FAIR
----
1999 2000 2001 2002 2003 Thereafter TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
LONG-TERM DEBT (US $)
Principal Amount 18.32 7.56 13.37 8.17 53.81 78.84 179.26 191.30
Book Value 18.28 7.78 13.63 8.43 55.83 88.20 192.16
Average Interest Rate (%) 5.32 5.50 6.22 5.82 4.72 6.07 5.58 5.64
SHORT-TERM DEBT (US $)
Principal Amount 56.14 0.00 0.00 0.00 0.00 0.00 56.14 56.03
Book Value 56.03 0.00 0.00 0.00 0.00 0.00 56.03
Average Interest Rate (%) 5.19 0.00 0.00 0.00 0.00 0.00 5.19 5.19
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is set forth in "Item 14: Exhibits,
Financial Statements and Reports on Form 8-K".
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants or accounting and
financial disclosure for the fiscal year ended December 31, 1998.
-25-
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names, ages and titles of the directors of
Scottish Holdings and the executive officers of Scottish Holdings and Scottish
Insurance.
Name Age Position
- ---- --- --------
Sam Wyly/(3)/ 64 Chairman of the Board and Director
Michael C. French/(3)/ 56 Chief Executive Officer, President and Director
Peter W. Presperin 42 Senior Vice President - Chief Financial Officer and Secretary
Henryk Sulikowski 39 Senior Vice President and Chief Insurance Officer
Michael Austin/(2)(4)/ 63 Director
R. Duke Buchan III/(2)(4)/ 35 Director
Robert M. Chmely/(1)(4)/ 64 Director
David Matthews/(1)/ 36 Director
Howard Shapiro/(2)/ 53 Director
Charles J. Wyly, Jr./(3)/ 65 Director
____________________
/(1)/ Term as a director expires at the 1999 annual meeting of stockholders.
/(2)/ Term as a director expires at the 2000 annual meeting of stockholders.
/(3)/ Term as a director expires at the 2001 annual meeting of stockholders.
/(4)/ Member of the Audit Committee.
SAM WYLY was elected a director of Scottish Holdings on October 27, 1998.
Mr. Wyly was also elected Chairman of the Board of Scottish Holdings on October
27, 1998. Mr. Wyly serves as Chairman of the Board, since 1981, of Sterling
Software, Inc., a supplier of software products and services, which he co-
founded in 1981. In addition, Mr. Wyly currently serves as a director of
Sterling Commerce, Inc., a provider of electronic commerce software and network
services, as Chairman of Michaels Stores, Inc., a specialty retail chain, and as
a non-managing partner of the General Partner of Maverick. In 1963, Mr. Wyly
founded University Computing Company, a computer services and software company.
MICHAEL C. FRENCH was elected a director and Scottish Holding's Chairman of
the Board and Chief Executive Officer upon its formation. Mr. French is
currently Scottish Holding's Chief Executive Officer and President. Mr. French
was also elected Chairman of the Board and Chief Executive Officer of Scottish
Insurance upon its formation. Mr. French is a founder and a director of The
Scottish Annuity Company (Cayman) Ltd. Mr. French serves as a consultant to the
law firm of Jones, Day, Reavis & Pogue. Mr. French was a Managing Director of
Maverick from 1993 to 1996. He practiced law from 1970 to 1992 with the law
firm of Jackson & Walker, L.L.P. where he served as Chairman of the Management
Committee from 1988 to 1992. Mr. French also serves as a director of Sterling
Software, Inc., a computer software provider, and
-26-
Michaels Stores, Inc., a national specialty retail chain. He received a B.B.A.
and a J.D. (cum laude) from Baylor University.
PETER W. PRESPERIN was elected Scottish Holding's Senior Vice President -
Chief Financial Officer and Secretary on January 26, 1999. Since 1996, Mr.
Presperin has been Senior Vice President and Chief Financial Officer of Cologne
Life Reinsurance Company, in Stamford, Connecticut. Prior to that, Mr.
Presperin worked for the St. Paul Companies from 1983 through 1996 in a variety
of capacities, the most recent being Financial Reporting Control Officer. Mr.
Presperin received his Bachelor of Science, Accounting from the University of
Illinois. He is a member of the AICPA and the AICPA Insurance Companies
Committee.
HENRYK SULIKOWSKI became Senior Vice President and Chief Insurance Officer
of Scottish Holdings and Scottish Insurance on July 20, 1998. From February
1997 to July 1998, Mr. Sulikowski served as a Director of Swiss Re New Markets
as well as Senior Vice President of Atlantic International Reinsurance Company
(Barbados) and a Vice President of Swiss Re Atrium Corporation, companies which
are all affiliated with Swiss Reinsurance Company. During 1995 and 1996, Mr.
Sulikowski was Vice President of Cologne Re and also served as a senior officer
of Cologne Re's Barbados subsidiary. From 1991 to 1995, Mr. Sulikowski was
employed by Guardian Life Insurance Company of America, where he served as
Assistant Vice President in the reinsurance division. Since 1991, Mr.
Sulikowski has been actively involved in regulatory affairs affecting the
insurance and reinsurance industries, both individually and through life
insurance trade associations such as the American Council of Life Insurance and
the National Alliance of Life Companies. He has served as a member of the State
Activities Task Force of the American Council of Life Insurance's Reinsurance
Committee and was instrumental in establishing the Reinsurance Committee of the
National Alliance of Life Companies, having served as its first chairman during
1994 and 1995. Mr. Sulikowski has been an associate of the Society of Actuaries
since 1986 and a member of the American Academy of Actuaries since 1987. He
received a Bachelor of Science Degree, with honors, from the State University of
New York at Stony Brook.
MICHAEL AUSTIN was elected a director of Scottish Holdings on October 27,
1998. Mr. Austin retired in 1992 as the Managing Partner of the Cayman Islands
office of KPMG Peat Marwick, an international accounting and consulting firm.
Mr. Austin was a partner resident in the Cayman Islands office for over 20
years. Since 1992, Mr. Austin has been self-employed as a chartered accountant.
Mr. Austin currently serves as a Director of the Cayman Monetary Authority for a
three- year term expiring on December 31, 1999.
R. DUKE BUCHAN III was elected a director of Scottish Holdings on October
27, 1998. Mr. Buchan has been Managing Director of Maverick, an investment
management firm, since July 1997. From 1992 until joining Maverick in 1997, he
was a Vice President in Investment Banking at Merrill Lynch, Pierce, Fenner &
Smith Incorporated in New York, specializing in corporate finance and mergers
and acquisitions in the financial services sector in the United States, Latin
America and Europe. He received a B.A. in Economics and Spanish with Honors
from the University of North Carolina and an M.B.A. from Harvard Business
School.
-27-
ROBERT M. CHMELY was elected a Director of Scottish Holdings on October 27,
1998. Mr. Chmely has been a consultant since the beginning of 1997 when he
retired from The Prudential Insurance Company of America, where from January
1988 to his retirement he served as Senior Vice President. From December 1995
to November 1997, Mr. Chmely was President of Prudential Asset Management Group,
the corporate pension business of The Prudential Insurance Company of America,
and from December 1994 to December 1995, he was Chief Financial Officer of
Prudential Asset Management Group. From December 1990 to December 1994, Mr.
Chmely served as Senior Managing Director of Portfolio Management at The
Prudential Insurance Company of America. He is a Fellow of the Society of
Actuaries and a Chartered Financial Analyst.
DAVID MATTHEWS was elected a director of Scottish Holdings on October 27,
1998. Mr. Matthews has been a director, since 1991, of Intelecon Services, Inc.
("Intelecon"), a provider of audio-visual services for corporate meetings and
events, a company he co-founded, and General Manager of the Outsourcing
Department of Intelecon, since 1997. He served as Chief Financial Officer of
Intelecon from 1991 to 1997 and General Manager of the Install Department of
Intelecon from 1993 to 1996. Mr. Matthews is Sam Wyly's son-in-law.
HOWARD SHAPIRO was elected a director of Scottish Holdings on October 27,
1998. Shapiro is the managing partner of DC Planning and has been since 1975,
when he founded DC Planning, an insurance consulting firm that develops life
insurance products and acts as a consultant on insurance matters for high net
worth families, trust companies and other fiduciaries.
CHARLES J. WYLY, JR. was elected a director of Scottish Holdings on October
27, 1998. Mr. Wyly also serves as a director, since 1981, and Vice Chairman,
since 1984, of Sterling Software, Inc. which he co-founded in 1981.
Additionally, Mr. Wyly currently serves as Vice Chairman of Michaels Stores,
Inc. and as a director of Sterling Commerce, Inc. He served as an officer and
director of University Computing Company, from 1964 to 1975, and President from
1969 to 1973. Mr. Wyly served as Chairman of the Board of Earth Resources
Company, an oil refining and silver mining company which he co-founded, from
1968 to 1980. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse, a
restaurant chain, from 1967 to 1989. Mr. Wyly is Sam Wyly's brother.
Item 11: EXECUTIVE COMPENSATION
The following table includes certain summary information concerning the
compensation awarded to, earned by or paid for services rendered to Scottish
Annuity in all capacities during 1998, by our President and Chief Executive
Officer and our two other Executive Officers who were serving as executive
officers at the end of 1998.
-28-
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- Awards
-----------------
Other Annual Shares Underlying All Other
Name and Principal Position Year/1/ Salary Bonus Compensation/2/ Options/SARs/3/ Compensation
- -------------------------------- ------- ------- ------- --------------- ----------------- ---------------
Michael C. French(4) 1998 $37,500 $ 0 $ 0 400,000 $ 0
President and
Chief Executive Officer
Henryk Sulikowski(5) 1998 91,667 75,000 0 300,000 100,286(6)
Senior Vice President and
Chief Insurance Officer
Michelle C. Boucher(7) 1998 14,583 50,000 0 200,000(8) 8,958(9)
Senior Vice President, Chief
Financial Officer and
Secretary
- ---------------
(1) Scottish Holdings was formed on May 12, 1998 and, therefore, had no
operations prior to 1998.
(2) Perquisites and personal benefits furnished to the named executive officers
that do not meet the disclosure thresholds established under SEC
regulations are not included in this column.
(3) Grants of stock options in 1998 vest one-third each year commencing on the
first anniversary of the grant.
(4) Mr. French became the President and Chief Executive Officer as of June 18,
1998, but his salary did not commence until December 1, 1998, immediately
following completion of our initial public offering. Mr. French's
annualized salary is $450,000.
(5) Mr. Sulikowski became Senior Vice President and the Chief Insurance Officer
on July 20, 1998. Mr. Sulikowski's annualized salary is $200,000.
(6) Represents expenses related to Mr. Sulikowski's relocation to the Cayman
Islands in the amount of $33,859, payments for a housing allowance in the
amount of $49,500, payments to our retirement plan in the amount of $9,167,
payments for health insurance in the amount of $510, and payments for air
transportation to and from the United States in the amount of $7,250.
(7) Ms. Boucher became the Senior Vice President, Chief Financial Officer and
Secretary on June 18, 1998. Ms. Boucher's annualized salary was $175,000.
Ms. Boucher resigned as of February 1, 1999.
(8) Ms. Boucher has entered into a Consulting Agreement with the Company
pursuant to which Ms. Boucher has agreed to return to the Company for
cancellation the Stock Option, originally granted to Ms. Boucher in June,
1998, exercisable for 200,000 Ordinary Shares in exchange for a Stock
Option exercisable for 66,600 Ordinary Shares, exercisable in full on
November 30, 1999.
(9) Represents payments for a housing allowance in the amount of $7,500 and
payments to our retirement plan in the amount of $1,458.
-29-
Option Grants Summary -- 1998 Fiscal Year
The following table sets forth information concerning the stock options
granted by Scottish Holdings to its executive officers during fiscal year 1998.
Potential Realizable
Individual Grants Value at
-------------------------------------------------------------- Assumed Annual Rate
of Ordinary Share Price
Appreciation for
Number of Exercise Option Term(2)
Ordinary Shares Percent of Total Price -----------------------
Underlying Options Granted Per Expiration
Name Options Granted to Employees Share Date 5% 10%
- ---- --------------- ---------------- -------- ---------- ---------- ----------
Michael C. French 400,000 37.74% $15.00(1) 11/30/08 $3,773,368 $9,562,455
Henryk Sulikowski 300,000 28.30 15.00(1) 11/30/08 2,830,026 7,171,841
Michelle L. Boucher 200,000(3) 18.87(3) 15.00(3) 11/30/08(3) 1,886,684(3) 4,781,227(3)
- ---------------
(1) The stock options are exercisable in three equal installments commencing
November 30, 1999.
(2) The potential realizable value columns of the table above illustrate the
value that might be realized upon exercise of the options immediately prior
to the expiration of their terms, assuming the specified compounded rates
of appreciation of the price of the Ordinary Shares over the terms of the
options. These amounts do not take into account provisions of certain
options providing for termination of the options following termination of
employment or vesting over periods of up to three years. The use of the
assumed 5% and 10% returns is established by the Commission and is not
intended by the Company to forecast possible future appreciation of the
price of the Ordinary Shares.
(3) Ms. Boucher resigned, effective February 1, 1999. Ms. Boucher has entered
into a Consulting Agreement with the Company pursuant to which Ms. Boucher
has agreed to return to the Company for cancellation a Stock Option,
originally granted to Ms. Boucher in June, 1998, exercisable for 200,000
Ordinary Shares in exchange for a Stock Option exercisable for 66,600
Ordinary Shares, exercisable in full on November 30, 1999.
-30-
Aggregated Options/SAR Exercises in 1998 and December 31, 1998 Option/SAR
Values
The following table provides information, for each of the named executive
officers, regarding the exercise of options during 1998 and unexercised options
held as of December 31, 1998.
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs at
at December 31, 1998 December 31, 1998
--------------------------- ------------------------------
Shares Value
Name Acquired On Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------- Exercise -------- ----------- ------------- ----------- -------------
-------------
Michael C. French 0 0 0 400,000 0 0
Henryk Sulikowski 0 0 0 300,000 0 0
Michelle L. Boucher 0 0 0 200,000(1) 0 0
- ---------------
(1) Ms. Boucher has entered into a Consulting Agreement with the Company
pursuant to which Ms. Boucher has agreed to return to the Company for
cancellation the Stock Option, originally granted to Ms. Boucher in June,
1998, exercisable for 200,000 Ordinary Shares in exchange for a Stock
Option exercisable for 66,600 Ordinary Shares, exercisable in full on
November 30, 1999.
Compensation of Directors
Directors who are employees of Scottish Holdings are not paid any fees or
additional compensation for services as members of Scottish Holding's Board of
Directors or any committee thereof. Non-employee Directors receive cash in the
amount of $20,000 per annum and $1,000 per board or committee meeting attended.
On November 30, 1998, each non-employee Director was granted an option to
purchase 10,000 Ordinary Shares pursuant to Scottish Holding's Second Amended
and Restated 1998 Stock Option Plan with an exercise price per share equal to
the initial public offering price of $15.00. Subject to certain conditions,
each non-employee Director will be granted an option to purchase 2,000 Ordinary
Shares at each successive annual general meeting after December 31, 1998 with an
exercise price equal to the fair market value of the Ordinary Shares at the date
of grant.
Employment and Change of Control Agreements
Michael C. French. Under his employment agreement, Mr. French has agreed to
serve as Chief Executive Officer and President for an initial term ending on
June 18, 2001 to be automatically extended on June 18, 2001 and each anniversary
thereafter for an additional year, subject to 90 days advance notice before June
18, 2001 or any subsequent anniversary by either us or Mr. French of an
intention not to renew. Mr. French receives an annual salary of $450,000 and is
eligible to participate in all of our employee benefit programs and to receive
an annual performance-based bonus in an amount to be determined by our Board of
Directors. Mr. French is entitled to a gross-up of certain excise taxes and to
the payment or reimbursement of any legal fees or related expenses incurred by
Mr. French with respect to the interpretation, enforcement or defense of his
rights under his
-31-
employment agreement. Upon execution of the employment agreement, Mr. French
received stock options exercisable for 400,000 Ordinary Shares.
Peter W. Presperin. Under his employment agreement, Mr. Presperin has
agreed to serve as Senior Vice President - Chief Financial Officer and Secretary
for an initial term commencing on February 2, 1999 and ending on February 2,
2002, to be automatically extended on February 2, 2002 and each anniversary
thereafter for an additional year, subject to 90 days advance notice before
February 2, 2002 or any subsequent anniversary by us or Mr. Presperin of an
intention not to renew. Mr. Presperin receives an annual salary of $250,000 and
is eligible to participate in all of our employee benefit programs. Mr.
Presperin received a one-time bonus of 8,000 Ordinary Shares of the Company
valued at a per share price of $11. Mr. Presperin is also eligible to receive
an annual performance-based bonus to be determined by our Board of Directors.
In addition, during the term of employment, Mr. Presperin is eligible to
participate in all of our employee benefit programs, and we must fund a
retirement account for Mr. Presperin in an amount not less than 10% of annual
salary for each year during the term of his employment. We must also pay or
reimburse any legal fees or related expenses incurred by Mr. Presperin with
respect to the interpretation, enforcement or defense of his rights under his
employment agreement. Upon execution of the employment agreement, Mr. Presperin
received stock options exercisable for 300,000 Ordinary Shares.
Henryk Sulikowski. Under his employment agreement, Mr. Sulikowski agreed to
serve as Senior Vice President and Chief Insurance Officer for an initial term
ending on July 20, 2001, to be automatically extended for an additional year, at
the expiration of the initial term and each anniversary thereafter, subject to
90 days advance notice before such expiration or anniversary by either us or Mr.
Sulikowski of an intention not to renew. Mr. Sulikowski receives an annual
salary of $200,000 and is eligible to participate in all of our employee benefit
programs. Mr. Sulikowski received a one-time cash bonus of $75,000 on November
30, 1998. Mr. Sulikowski is eligible to receive an annual performance-based
bonus in an amount to be determined by our Board of Directors and receives a
monthly housing and travel allowance of $9,000. In addition, during the term of
Mr. Sulikowski's employment, Mr. Sulikowski is eligible to participate in all of
our employee benefit programs, and we must fund a retirement account for Mr.
Sulikowski in an amount not less than 10% of Mr. Sulikowski's annual salary for
each year during the term of his employment. We must also pay or reimburse Mr.
Sulikowski for any legal fees or related expenses incurred by Mr. Sulikowski
with respect to the interpretation, enforcement or defense of his rights under
his employment agreement. Upon execution of the employment agreement, Mr.
Sulikowski received stock options exercisable for 300,000 Ordinary Shares.
Mr. French's, Presperin's and Sulikowski's employment agreements each
provide that the executive will maintain in confidence all confidential matters
and that each will not:
. during their employment or, if they receive severance compensation upon
termination of their employment, for one year thereafter, participate in
the management of any business enterprise that engages in substantial and
direct competition with us; or
. during his employment or for one year thereafter, attempt to influence,
persuade or induce (or assist any other person in so persuading or
inducing) any employee to leave us.
-32-
In addition, pursuant to each executive's employment agreement, each is
entitled to severance compensation
. if we terminate his employment in any case other than death,
disability or cause;
. if the executive terminates his employment upon our failure to keep
the executive in his office or position (or a substantially equivalent
office or position);
. an adverse change affecting the authorities, powers, functions,
responsibilities or duties attaching to his position with us;
. a reduction in his compensation;
. the failure of any of our successors to assume our duties and
obligations under the executive's employment agreement;
. a relocation of the principal location of the executive's work in
excess of 25 miles of its original location (or for Mr. Sulikowski, to
any location other than the Cayman Islands);
. a change in control of Scottish Holdings (provided the executive
terminates his employment within one year of such change in control);
. an unremedied breach of the executive's employment agreement by us or
any successor; or
. if we notify the executive of our intent not to renew the executive's
employment agreement at the expiration of its initial term or any
anniversary thereafter.
The severance compensation that Mr. French will be entitled to upon any
termination referred to above includes a lump sum payment equal to three times
the sum of his annual base salary and incentive compensation at the highest
respective rates in effect for any year prior to the termination. The severance
compensation that each of Mr. Presperin and Mr. Sulikowski will be entitled to
upon any such termination includes a lump sum payment equal to the sum of
. the greater of any amounts of his respective annual base salary relating
to the first three years of the term of his employment not paid prior to
the termination of their employment;
. his respective annual base salary at the highest rate in effect for
any year prior to the termination;
. the annual incentive compensation at the highest rate in effect for any
year prior to the termination; and
-33-
. the transportation expenses for his and his immediate family's
relocation to the United States.
Insider Participation in Compensation Decisions and Board Interlocks
Our Board of Directors does not have a compensation committee. Instead,
compensation is determined by the full Board of Directors. Mr. Michael C.
French is a director and is our President and Chief Executive Officer. No other
directors are officers.
Mr. French is an executive officer and director of our company and a
director and executive officer of The Scottish Annuity Company (Cayman) Ltd.
Mr. French participated in decisions related to compensation of executive
officers of each of our company and The Scottish Annuity Company. Effective
October 1, 1998, we entered into an agreement with The Scottish Annuity Company
for Scottish Insurance to provide The Scottish Annuity Company with a variety of
insurance administration, accounting and other services. For these services,
The Scottish Annuity Company pays Scottish Insurance quarterly, for each annuity
contract issued by Scottish Annuity, an amount equal to 0.50% per annum of the
separate account value of such contracts, except that such amount will not be
less than $25,000 per year. In addition, The Scottish Annuity Company must
refrain
. from the direct or indirect offer or sale of any life insurance products
and must refer only to Scottish Insurance any opportunity or inquiry that
it may receive to issue and sell any life insurance products, an d
. from the direct or indirect offer or sale of any variable annuity
products and must refer only to The Scottish Annuity Company any
opportunity or inquiry that it may receive to issue and sell any annuity
products.
Under separate agreements and as partial consideration for entering into
the agreement described above, Scottish Insurance also subleases to The Scottish
Annuity Company a portion of its leased space in the Cayman Islands, and The
Scottish Annuity Company sold certain of its computer hardware and software to
Scottish Insurance. Ms. Boucher, formerly the Senior Vice President, Chief
Financial Officer and Secretary of Holdings, is a consultant to our Company, and
is the former Manager of Finance and Administration of, and now a consultant to
Scottish Annuity.
Mr. French is also a director of Michaels Stores, Inc. and Sterling
Software, Inc. Each of Sam Wyly and Charles J. Wyly, Jr., each a director of
our company, is also an executive officer of both Michaels Stores and Sterling
Software. Sam Wyly and Charles J. Wyly, Jr. participate in compensation
decisions related to executive officers of our company. Mr. French does not
participate in compensation decisions related to executive officers of Michaels
Stores and Sterling Software.
-34-
REPORT ON EXECUTIVE COMPENSATION
The Board of Directors has responsibility for our executive compensation
practices and policies. Of the eight directors on the Board, seven are outside
directors who are not officers or employees. The executive compensation for
1998 was established by the Board of Directors prior to our initial public
offering, and the sole Board Member at that time was Michael C. French.
Executive Pay Policy
Our compensation is intended to attract, retain and motivate the key people
necessary to lead us to achieve our strategic objective of increased stockholder
value over the long term, reflecting our belief that executive compensation
should seek to align the interests of our executives with those of our
stockholders. The program utilizes three components: base salary, short-term
incentives and long-term compensation in the form of stock options.
In establishing base salaries, we have adopted a strategy of setting
executive salaries at or above market to retain and attract key executives,
while providing incentive compensation pay opportunities, based on performance
achievement. We set the salary ranges in this manner to ensure that our base
salary practices do not put us at a competitive disadvantage in retaining and
attracting key executives while ensuring an appropriate cost structure.
We believe that our current program of a base salary and long- and short-
term performance-based compensation which can be earned by our executive
officers will increase long-term stockholder value.
Base Salary
Mr. French's, Presperin's and Sulikowski's current annual base salary is
$450,000, $250,000 and $200,000, respectively. As of the date of this report,
the Board of Directors has not reviewed or adjusted the salaries of its
executive officers for 1999.
Short-Term Incentive and Stock Options
Under their respective employment contracts, each executive is eligible to
receive a cash bonus at the sole discretion of the Board of Directors.
Additionally, the Second Amended and Restated 1998 Stock Option Plan is
administered by the Board of Directors and is designed to provide incentive
compensation to our directors, executive officers, and other key employees,
consultants and advisors.
The Board of Directors
Sam Wyly, Chairman of the Board Michael C. French
Michael Austin David Matthews
R. Duke Buchan III Howard Shapiro
Robert M. Chmely Charles J. Wyly, Jr.
-35-
Performance Graph
The following graph compares the cumulative stockholder return on our
Ordinary Shares with the Nasdaq Composite Index and the Nasdaq Insurance Index.
The comparison assumes $100 was invested as of November 24, 1998 (the date our
Ordinary Shares began trading on a "when issued" basis) and the reinvestment of
all dividends.
Comparison of Cumulative Shareholder Return
[Graph]
Nov. 24, 1998 Dec. 31, 1998
------------- -------------
Scottish Annuity & Life Holdings, Ltd. $100 $ 91.67
Nasdaq Composite Index $100 $111.80
Nasdaq Insurance Index $100 $100.01
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Ordinary Shares
of Scottish Holdings by all persons who beneficially own 5% or more of the
Ordinary Shares and by each director and executive officer of Scottish Holdings
and by all directors and executive officers as a group as of March 26, 1999.
Name and Address of Beneficial Owners(1) Number of Percent of
--------------------------------------- --------- ----------
Shares Class
------ -----
Michael C. French(2)(3)(4)................................ 172,000 *
Peter W. Presperin(4)..................................... 15,500 *
Michelle L. Boucher(3)(4)................................. 12,000 *
Henryk Sulikowski(4)...................................... 1,000 *
Michael Austin(4)......................................... - -
R. Duke Buchan(4)......................................... - -
Robert M. Chmely(4)....................................... - -
David Matthews(4)(5)...................................... 2,050 *
Howard Shapiro(4)(6)...................................... 3,500 *
Charles J. Wyly, Jr.(4)(7)................................ 312,047 1.68%
Sam Wyly(4)(8)............................................ 632,013 3.40%
Maverick Capital, Ltd.(9)................................. 1,688,220 9.09%
All directors and executive officers as a group (eleven
persons)................................................. 1,138,110 6.13%
-36-
- ---------------
*Less than 1%.
(1) Except as otherwise indicated, the address for each beneficial owner is c/o
Scottish Annuity & Life Holdings, Ltd., P.O. Box 10657APO, 2 Artillery
Courts, Shedden Road, George Town, Grand Cayman, Cayman Islands, British
West Indies.
(2) 152,000 of these Ordinary Shares are beneficially owned by an irrevocable
trust of which Mr. French and certain family members are beneficiaries. Mr.
French disclaims beneficial ownership of such Ordinary Shares.
(3) Does not include Ordinary Shares issuable upon exercise of the Class A
Warrants not exercisable within 60 days.
(4) Does not include Ordinary Shares issuable upon exercise of stock options not
exercisable within 60 days.
(5) 500 of these Ordinary Shares are beneficially owned by a family partnership,
of which Mr. Matthews is the general partner. 800 of these Ordinary Shares
are owned by Mr. Matthews' wife, and Mr. Matthews disclaims beneficial
ownership of these shares.
(6) All of these shares are beneficially owned by the D.C. Planning retirement
plan, a qualified plan, of which Mr. Shapiro is a Trustee and beneficiary.
Mr. Shapiro disclaims beneficial ownership of these shares.
(7) All 312,407 Ordinary Shares are beneficially owned by an irrevocable trust
of which Charles J. Wyly, Jr. and certain family members are beneficiaries.
Charles J. Wyly, Jr. disclaims beneficial ownership of such Ordinary Shares.
(8) All 632,013 Ordinary Shares are beneficially owned by an irrevocable trust
of which Sam Wyly and certain family members are beneficiaries. Sam Wyly
disclaims beneficial ownership of such Ordinary Shares.
(9) Based on a Schedule 13G filed by Maverick Capital, Ltd. with the Securities
and Exchange Commission on February 26, 1999 and subsequent information
provided by Maverick Capital, Ltd. to our counsel on March 16, 1999. The
address of Maverick Capital, Ltd. is 300 Crescent Court, Suite 1850, Dallas,
TX 75201.
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DC Planning Relationships
On August 13, 1998, we entered into a consulting services agreement with DC
Planning, an insurance consulting firm that develops life insurance products and
acts as a consultant on insurance matters for high net worth families, trust
companies and other fiduciaries. Under the terms of this agreement, DC Planning
provides to us certain consulting services, including with respect to the
development and implementation of our business plan. DC Planning is paid
$180,000 a year for a term of three years under the agreement. Howard Shapiro,
who is on our Board of Directors, is the managing partner of DC Planning. On
November 30, 1998, we granted Mr. Shapiro, in his capacity as a consultant,
stock options exercisable for 100,000 Ordinary Shares. These options are in
addition to the stock options exercisable for 10,000 Ordinary Shares granted to
Mr. Shapiro in his capacity as a non-employee director.
-37-
Direct Investors Relationship
Two trusts purchased Ordinary Shares and Class A Warrants exercisable for
Ordinary Shares in a private placement in November, 1998. The two trusts
purchased an aggregate of 709,220 Ordinary Shares and Class A Warrants
exercisable for 200,000 Ordinary Shares at an exercise price of $15.00 per
share. The aggregate purchase price for the Ordinary Shares and Class A
Warrants was $10 million, or $14.10 for one Ordinary Share and a warrant to
purchase 0.282 Ordinary Shares. One of the trusts is an irrevocable trust of
which Sam Wyly and certain family members are beneficiaries. The other trust is
an irrevocable trust of which Charles J. Wyly, Jr. and certain family members
are beneficiaries. Sam Wyly, who is the Chairman of the Board and a Director,
and Charles J. Wyly, Jr., who is a Director, both disclaim beneficial ownership
of such Ordinary Shares and Class A Warrants.
Pre-IPO Equity Adjustment
On October 22, 1998, we redeemed 1,100,000 Ordinary Shares of the 1,500,000
Ordinary Shares issued upon our formation. Shareholders participating in the
redemption exchanged these shares for either Class A Warrants (exercisable for
an aggregate 900,000 Ordinary Shares) or nominal consideration. The
shareholders who received Class A Warrants in the redemption are three
irrevocable trusts of which, respectively, Sam Wyly, the Chairman of the Board
and a Director, Charles J. Wyly, Jr., a Director, and Michael C. French, our
Chief Executive Officer, President and a Director, and certain family members of
each are beneficiaries. These trusts received Class A Warrants to purchase an
aggregate of 466,667 Ordinary Shares, 233,333 Ordinary Shares and 200,000
Ordinary Shares, respectively. Messrs. French, Sam Wyly and Charles J. Wyly,
Jr. each disclaim beneficial ownership of such Class A Warrants. The Class A
Warrants received in the redemption are exercisable for a price per share equal
to the $15 initial public offering price. The shareholders that received
nominal consideration in the redemption are two irrevocable trusts of which Sam
Wyly and certain family members are beneficiaries and a corporation wholly-owned
by Michelle L. Boucher, the former Senior Vice President, Chief Financial
Officer and Secretary of the Company.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
(1) Audited Consolidated Financial Statements of Scottish Annuity &
Life Holdings, Ltd. and its subsidiary:
Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Loss
Consolidated Statement of Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
-38-
(2) Consolidated Financial Statement Schedules
All financial statement schedules are omitted because they are
either not applicable or the required information is included in
the balance sheet or notes thereto appearing elsewhere in this
Registration Statement.
(3) Exhibits
Except as otherwise indicated, the following Exhibits are filed herewith
and made a part hereof:
Exhibit
Number Description of Document
- ------- -----------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement between the Company and the Underwriters
(incorporated herein by reference to Exhibit 1.1 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission on
June 19, 1998, as amended).
3.1 Memorandum of Association of the Company (incorporated herein by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
3.2 Articles of Association of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
4.2 Form of Amended and Restated Class A Warrant (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
4.3 Form of Amended and Restated Class B Warrant (incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated
herein by reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated
herein by reference to Exhibit 4.5 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
-39-
Exhibit
Number Description of Document
- ------- -----------------------------------------------------------------------------------
4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated
herein by reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated
herein by reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.8 Form of Securities Purchase Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.9 Form of Registration Rights Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.10 Form of Securities Purchase Agreement between the Company and the Non-
Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.11 Form of Registration Rights Agreement between the Company and the Non-
Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.1 Employment Agreement dated June 18, 1998 between the Company and Michael
C. French (incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22,
1998 (incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan
(incorporated herein by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission on
June 19, 1998, as amended).
-40-
Exhibit
Number Description of Document
- ------- -----------------------------------------------------------------------------------
10.4 Agreement dated June 30, 1998 between the Company and International Risk
Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.5 Amended and Restated Insurance Administration, Services and Referral
Agreement dated as of October 1, 1998 between the Company and The Scottish
Annuity Company (Cayman) Ltd. (incorporated herein by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk
Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.7 Form of Indemnification Agreement between the Company and each of its
directors and officers (incorporated herein by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.8 Investment Management Agreement dated October 22, 1998 between the
Company and Pacific Investment Management Company (incorporated herein by
reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
10.9 Investment Management Agreement dated October 22, 1998 between the
Company and General Re--New England Asset Management, Inc. (incorporated
herein by reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.10 Agreement dated October 23, 1998 between the Company and Westport Partners
(Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.11 Investment Management Agreement dated October 22, 1998 between the
Company and The Prudential Investment Corporation (incorporated herein by
reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by
reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
-41-
Exhibit
Number Description of Document
- ------- -----------------------------------------------------------------------------------
10.13 Employment Agreement, dated February 2, 1999 between the Company and
Peter W. Presperin.
10.14 Consulting Agreement dated February 1, 1999 between the Company and
Michelle L. Boucher.
10.15 Investment Advisory Service Agreement between the Company and Prudential
Securities Corporation.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young.
24.1 Powers of Attorney.
(b) Reports on Form 8-K
None.
-42-
Audited Consolidated Financial Statements
Scottish Annuity & Life Holdings, Ltd.
Period from May 12, 1998 (date of incorporation)
to December 31, 1998
with Report of Independent Auditors
Scottish Annuity & Life Holdings, Ltd.
Audited Consolidated Financial Statements
Period from May 12, 1998 (date of incorporation)
to December 31, 1998
Contents
Report of Independent Auditors.............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet.................................................. 2
Consolidated Statement of Income............................................ 3
Consolidated Statement of Comprehensive Loss................................ 4
Consolidated Statement of Shareholders' Equity.............................. 5
Consolidated Statement of Cash Flows........................................ 6
Notes to Consolidated Financial Statements.................................. 7
Report of Independent Auditors
To the Shareholders and Board of Directors
Scottish Annuity & Life Holdings, Ltd.
We have audited the accompanying consolidated balance sheet of Scottish Annuity
& Life Holdings, Ltd. (the "Company") as of December 31, 1998, and the related
consolidated statements of income, comprehensive loss, shareholders' equity, and
cash flows for the period from May 12, 1998 (date of incorporation) through
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Scottish Annuity & Life Holdings, Ltd. at December 31, 1998, and the
consolidated results of its operations and its cash flows for the period from
May 12, 1998 (date of incorporation) to December 31, 1998 in conformity with
accounting principles generally accepted in the United States of America.
George Town, Grand Cayman
British West Indies
March 25, 1999
1
Scottish Annuity & Life Holdings, Ltd.
Consolidated Balance Sheet
(Stated in United States Dollars)
December 31, 1998
Assets
Investments:
Fixed maturities $ 229,756,293
Short-term investments 14,511,683
---------------
Total investments 244,267,976
Cash 3,863,042
Receivables:
Due from brokers 3,060,543
Accrued interest receivable 2,883,009
Other assets 271,669
---------------
Total assets $ 254,346,239
===============
Liabilities
Accounts payable and accrued expenses $ 1,959,160
Due to related party 326,900
---------------
Total liabilities 2,286,060
Shareholders' Equity
Share capital , par value $0.01 per share:
Issued and fully paid: 18,568,440 ordinary shares 185,684
Additional paid in capital 252,291,320
Accumulated other comprehensive loss -
Unrealized depreciation of investments (853,146)
Retained earnings 436,321
---------------
Total shareholders' equity 252,060,179
---------------
Total liabilities and shareholders' equity $ 254,346,239
===============
See accompanying notes.
2
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statement of Income
(Stated in United States Dollars)
Period from May 12, 1998 (date of incorporation) to December 31, 1998
Revenues
Interest income, net $ 1,142,501
Realized losses on securities, net (14,236)
Insurance administration fees 209,886
---------------
Total revenues 1,338,151
Expenses
Salaries and benefits 319,170
Professional fees 235,824
Miscellaneous expenses 230,567
Recruitment expenses 104,835
Administrative expenses 11,434
---------------
Total expenses 901,830
---------------
Net income $ 436,321
===============
Basic and diluted earnings per ordinary share $ 0.12
===============
See accompanying notes.
3
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statement of Comprehensive Loss
(Stated in United States Dollars)
Period from May 12, 1998 (date of incorporation)
to December 31, 1998
Net income $ 436,321
Other comprehensive loss:
Unrealized depreciation on investments:
Unrealized holding depreciation arising during the period (867,382)
Add: reclassification adjustment for losses included in net income 14,236
---------------
Unrealized depreciation on investments (853,146)
---------------
Comprehensive loss $ (416,825)
===============
See accompanying notes.
4
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statement of Shareholders' Equity
(Stated in United States Dollars)
Period from May 12, 1998 (date of incorporation)
to December 31, 1998
Accumulated
other
comprehensive
loss -
Unrealized
Additional depreciation
Class A Class B Share paid in on Retained
Shares warrants warrants capital capital investments earnings Total
-----------------------------------------------------------------------------------------------------
Beginning balance -- -- -- $ -- $ -- $ -- $ -- $ --
Issuance of founder shares 1,500,000 15,000 485,000 500,000
Issuance of Class A warrants 1,550,000 100,000 100,000
Issuance of Class B warrants 200,000 302,000 302,000
Repurchase of shares and
issuance of warrants (1,100,000) 900,000 (11,000) 11,000 --
Sales to direct investors 1,418,440 400,000 14,184 19,985,816 20,000,000
Initial public offering 16,750,000 167,500 231,407,504 231,575,004
Unrealized depreciation on
investments (853,146) (853,146)
Net Income 436,321 436,321
-----------------------------------------------------------------------------------------------------
Ending balance 18,568,440 2,850,000 200,000 $185,684 $252,291,320 $ (853,146) $ 436,321 $ 252,060,179
=====================================================================================================
See accompanying notes.
5
Scottish Annuity & Life Holdings, Ltd.
Consolidated Statement of Cash Flows
(Stated in United States Dollars)
Period from May 12, 1998 (date of incorporation)
to December 31, 1998
Operating activities
Net income $ 436,321
Adjustments to reconcile net income to net cash used in operating activities:
Net realized losses on securities 14,236
Changes in assets and liabilities:
Receivables (5,943,552)
Other assets (271,669)
Accounts payable and accrued expenses 1,959,160
Due to related party 326,900
-----------------
Net cash used in operating activities (3,478,604)
Investing activities
Purchase of securities (1,792,519,289)
Proceeds on sales of securities 1,547,383,931
-----------------
Net cash used in investing activities (245,135,358)
Financing activities
Net proceeds from sale of company stock 252,075,004
Issuance of Class A warrants 100,000
Issuance of Class B warrants 302,000
-----------------
Net cash provided by financing activities 252,477,004
-----------------
Net change in cash and cash equivalents, being cash and
cash equivalents at end of period $ 3,863,042
=================
See accompanying notes.
6
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization, business, and basis of presentation
Organization
Scottish Annuity & Life Holdings, Ltd. ("Holdings") was incorporated as an
exempted company with limited liability on May 12, 1998 under the laws of the
Cayman Islands. Holdings has been organized to provide insurance policies, as
discussed below, through its wholly-owned subsidiary, Scottish Annuity & Life
Insurance Company (Cayman) Ltd. ("Scottish Insurance", and together with
Holdings, the "Company", and additionally referred to throughout the notes as
"We", "Our", and "Us"). Prior to June 24, 1998, all Ordinary Shares of Holdings
were owned by Scottish Holdings, Ltd., a Cayman Islands company ("SHL"). On July
8, 1998, Scottish Insurance received an unrestricted Class `B' insurer's license
under the insurance laws of the Cayman Islands. Holdings' initial public
offering of its Ordinary Shares (the "Offering") was completed on November 30,
1998.
Business
Our business activities currently consists of fee income from the administration
of variable annuities for Scottish Annuity Company (Cayman) Ltd. ("Scottish
Annuity") and will, in the future, include sales of life and annuity reinsurance
and variable life insurance policies.
Variable life insurance is a separate account product where the net premium is
placed in a separate account for the policyholder that is not subject to the
claims of Scottish Insurance general creditors. Our product will be targeted
towards high net worth individuals or families generally worth more than $10
million. A private money manager will manage the cash values on behalf of the
variable life policy holder. We will not provide any investment management or
advisory services to any individual variable life policyholder. We also will
offer variable life insurance products to corporate customers in the form of
corporate owned life insurance ("COLI"), bank owned life insurance ("BOLI"), and
trust-owned life insurance "TOLI"). These types of policies are primarily used
in connection with certain deferred compensation and bonus plans for executives.
We may also issue variable life insurance policies under a group policy that is
owned by an employer to fund employee benefits.
Traditional reinsurance of life and annuity business is an arrangement under
which an insurance company (the reinsurer) agrees to insure (assume risks of)
another insurance company (the ceding company or cedent) for all or a portion of
the insurance underwritten by the ceding company. Our reinsurance activities
will primarily be focused on group and individual annuity type contracts.
7
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
1. Organization, business, and basis of presentation (continued)
Basis of presentation
Accounting Principles - Our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and all amounts are reported in U.S. dollars. We follow the
accounting standards established by the Financial Accounting Standards Board and
the American Institute of Certified Public Accountants.
Consolidation - We consolidate our results and have eliminated all significant
intercompany transactions.
Estimates, risks and uncertainties - The preparation of GAAP financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Our most significant assumptions will be for
assumed reinsurance liabilities, which will be provided by the ceding companies.
It is typical for these ceding companies to periodically review and revise these
estimates. We also will review and revise these estimates as appropriate. Any
adjustments made to these estimates will be reflected in the period the
estimates are revised.
2. Summary of significant accounting policies
Our accounting policies for current and future activities are as follows.
Current activities
Investments -Fixed maturities are classified as available for sale, which means
that we carry these investments at estimated fair values on our balance sheet.
The cost of fixed maturities is adjusted for prepayments and the amortization of
premiums and discounts. The unrealized appreciation (depreciation) is the
difference between market and amortized cost and is recorded directly to equity
with no impact to net income. The change in unrealized appreciation
(depreciation) is included in accumulated other comprehensive loss - unrealized
depreciation on investments.
Short-term investments are carried at cost, which approximates fair value.
Realized gains (losses) on securities are determined on a specific
identification method which means that we track the cost of each security
purchased so that we are able to identify and record a gain or loss when it is
subsequently sold. In addition, declines in fair value that are determined to
be other than temporary are included in realized gains (losses).
8
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued)
Insurance administration fees - We collect insurance administration fees for the
administration of a variable annuity book of business, which was written by
Scottish Annuity. These fees are recognized ratably over the year based on the
fair value of the underlying investments. (See note 9 for further discussion.)
Due from brokers - Due from brokers includes amounts receivable from one of the
Company's brokers for investment transactions that had not settled at December
31, 1998.
Organizational and offering expenses - All formation and organization costs
incurred have been expensed in the period ending December 31, 1998. All offering
costs incurred in connection with the Offering, including certain amounts
payable for investment banking and financial advisory services, have been
deducted from the gross proceeds of the Offering.
Cash and cash equivalents - Cash and cash equivalents include fixed deposits
with an original maturity, when purchased, of three months or less. Cash and
cash equivalents are recorded at face value, which approximates fair value. All
cash and cash equivalents are held with a single financial institution in the
Cayman Islands. Management does not anticipate any material losses as a result
of this credit concentration.
Accounting for future activities
Policy revenues and related expenses - Our policy revenues will be generated
from reinsurance and variable life activities. The reinsurance revenues will be
derived from interest sensitive life products and traditional life reinsurance.
The premium on interest sensitive products will be reported as a deposit on the
balance sheet with a corresponding liability. Revenues will be reported
periodically for the mortality, policy administration and surrender charges. The
related policy benefits and claims expenses will include benefit claims incurred
in excess of deposits and interest credited to the policyholder for the period.
The premiums from traditional reinsurance transactions will be included in
revenues over the premium paying period of the underlying policies. The related
policy benefits and expenses will be provided against the revenues to recognize
profits over the estimated lives of the policies. Variable life insurance
policies are also interest sensitive products and will be reported like the
reinsurance interest rate sensitive products except that the assets will be
reported in a separate account for the benefit of the policyholder.
9
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued)
Deferred policy acquisition costs - The cost of acquiring new business such as
commissions, certain internal expenses related to policy issuance and
underwriting departments and certain variable selling expenses will be
capitalized and amortized in future periods. For variable life insurance and
reinsurance of investment type fixed annuity contracts and reinsured variable
annuity contracts, deferred policy acquisition costs will be amortized over the
expected average life of the contracts as a constant percentage of the present
value of estimated gross profits arising principally from investment results,
mortality and expense margins, and surrender charges based on historical and
anticipated future experience, which will be updated at the end of each
accounting period. In computing amortization, interest will accrue to the
unamortized balance of capitalized acquisition costs at the rate used to
discount expected gross profits. The effect on the amortization of deferred
policy acquisition costs of revisions to estimated gross profits will be
reflected in earnings in the period such estimated gross profits are revised.
For reinsured fixed immediate annuity policies and traditional life insurance
contracts, deferred policy acquisition costs will be charged to expense using
assumptions consistent with those used in computing policy reserves. Assumptions
as to anticipated premiums will be estimated at the date of the policy issuance
and will be consistently applied during the life of the policies. Deviations
from estimated experience will be reflected in earnings in the period such
deviations occur. For these policies, the amortization periods generally will be
for the estimated lives of the policies.
When the liabilities for future policy benefits plus the present value of
expected future gross premiums for a policy are insufficient to provide for
expected future benefits and expenses for that policy, a premium deficiency
reserve will be established by a charge to income. The deferred policy
acquisition costs incurred through December 31, 1998 have been written off
because there is no business to amortize it against.
Policyholders' benefit liabilities - The liabilities for interest sensitive
products will equal the accumulated account values of the policies or contracts
as of the valuation date.
Liabilities for future benefits under traditional life insurance contracts
reinsured will be estimated using actuarial assumptions for mortality,
morbidity, terminations, investment yields, and expenses applicable at the time
the insurance contracts were entered into. Benefit liabilities for fixed
annuities during the accumulation period will be equal to their account values
and, after annuitization equal to the accumulated present value of expected
future payments.
10
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
2. Summary of significant accounting policies (continued)
Separate account assets and liabilities - Separate account assets will be
recorded at the fair value of the underlying investments less mortality, policy
administration and surrender charges. The funds in the separate accounts will
not be available to meet the general obligations of the Company.
Separate account liabilities will represent the policyholders' separate account
values. They will consist of the initial premiums paid after consideration of
net investment gains (losses) attributable to each separate account, less fees
and withdrawals.
Accounting Standards - The Financial Accounting Standards Board has issued the
following accounting standard that will affect us.
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and requires adoption no later than fiscal
quarters or fiscal years beginning after June 15, 1999. The new standard
establishes accounting and reporting standards for derivative instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction.
We have not yet completed our evaluation of the effect this standard will have
on us.
3. Earnings per ordinary share
We calculate earnings per ordinary share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"(EPS). Basic
EPS excludes the dilutive effect of options and warrants. Diluted EPS includes
the dilutive effect of these securities using the treasury stock method. The
weighted-average number of shares is calculated by weighting how long the shares
have been outstanding over the accounting period.
11
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
3. Earnings per ordinary share (continued)
Our warrants and options were not deemed to be dilutive as of December 31, 1998
because the strike price of $15 was greater than our market value.
Period from
May 12, 1998 (date of Three months ended
incorporation) to December 31, 1998
December 31, 1998 (Unaudited)
------------------------------------------------
Net income $ 436,321 $ 555,551
Weighted average number of shares outstanding 3,586,788 6,785,018
------------------------------------------------
Basic and diluted earnings per ordinary share $ 0.12 $ 0.08
===============================================
Actual shares outstanding at December 31, 1998 18,568,440
==================
The Company had a relatively small number of shares outstanding from the date of
incorporation through the initial public offering on November 30, 1998. As a
result the inception to date weighted average number of shares outstanding and
the related EPS are not meaningful, in the opinion of management.
4. Fixed maturities
The amortized cost, gross unrealized appreciation and depreciation, and
estimated fair values of our fixed maturity investments are as follows:
December 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost appreciation depreciation fair value
--------------------------------------------------------------------
U.S. treasury securities and
obligations of U.S. government
agencies $ 97,674,991 $ 885 $ (633,455) $ 97,042,421
U.S. corporate securities 94,795,887 106,205 (256,060) 94,646,032
Mortgage and asset backed
securities 38,138,561 20,102 (90,823) 38,067,840
--------------------------------------------------------------------
Total fixed maturities $ 230,609,439 $ 127,192 $ (980,338) $ 229,756,293
====================================================================
12
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
4. Fixed maturities (continued)
The contractual maturities of the fixed maturities are as follows. Actual
maturities may differ as a result of calls and prepayments.
Amortized Estimated
cost fair value
-----------------------------
Due in one year or less $ 56,736,454 $ 56,737,338
Due in one year through five years 74,431,349 73,728,443
Due in five years through ten years 32,165,658 31,636,454
Due after ten years 29,137,417 29,586,218
-----------------------------
192,470,878 191,688,453
Mortgage and asset backed securities 38,138,561 38,067,840
-----------------------------
$230,609,439 $229,756,293
=============================
Proceeds from sales of securities in the period ended December 31, 1998 were
$1,547,383,931. Gross gains of $88,368 and gross losses of $102,604 were
realized on those sales.
5. Shareholder's equity
Effective June 24, 1998, SHL transferred to its shareholders all of its ordinary
shares in Holdings by way of a distribution.
On October 22, 1998, we paid nominal consideration and issued 900,000 Class A
warrants to reacquire and cancel, 1,100,000 of our issued and outstanding
ordinary shares.
On November 30, 1998, we closed our Offering of 16,750,000 ordinary shares for
proceeds received net of underwriting discounts and commissions totaling
$235,375,000. Simultaneous with the initial closing of the Offering, direct
sales of 1,418,440 ordinary shares and 400,000 Class A warrants were made to
Direct Investors for net proceeds of $20,000,000.
Common shares
We are authorized to issue 100,000,000 ordinary shares of par value $0.01 each.
At the balance sheet date 18,568,440 ordinary shares were outstanding.
Preferred shares
We are authorized to issue 50,000,000 preferred shares of par value $0.01 each.
At the balance sheet date there were no preferred shares issued or outstanding.
13
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
5. Shareholder's equity(continued)
Warrants
In connection with our initial capitalization, we issued Class A warrants to
purchase an aggregate of 1,550,000 ordinary shares to related parties. The
aggregate consideration of $100,000 paid for these warrants is reflected as
additional paid-in-capital. The Class A warrants were issued on June 9, 1998 at
the initial stage of the development of our business plan when the feasibility
of proceeding with the offering was uncertain. The consideration paid for the
Class A warrants was determined to be fair value in the judgment of management
in light of such uncertainty. Effective September 3, 1998, the Class A warrant
agreements were superseded by Amended and Restated Class A warrant agreements
with no material impact on the operation of the agreements. The exercise price
of the Class A warrants is $15 per share of the Company' ordinary shares. The
Class A warrants become exercisable in equal amounts over a three-year period
commencing on the first anniversary of the consummation of the Offering. The
Class A warrants will expire on the tenth anniversary of the consummation of the
Offering.
We entered into Warrant Purchase Agreements whereby The Roman Arch Fund L.P. and
The Roman Arch Fund II L.P. purchased an aggregate of 200,000 Class B warrants
for an aggregate purchase price of $302,000 which is reflected as additional
paid-in-capital. Class B Warrants are exercisable at $15 per ordinary share, in
equal amounts over a three-year period commencing one year after the Offering
and expire ten years after the consummation of the Offering. Management is of
the view that the agreed sale price of the Class B Warrants represented fair
value at the time of purchase. The Roman Arch Fund L.P. and the Roman Arch Fund
II L.P. are each limited partnerships and affiliates of Prudential Securities
Incorporated, one of the underwriters of the initial public offering, and make
investments for the benefit of limited partners who are employees of Prudential
Securities Incorporated.
The Class B warrants were issued after our business plan underwent further
development and we were in a position to proceed with the Offering. As a
result, the Class B warrants were issued for greater consideration. Effective
September 3, 1998, the Class B warrant agreements were superseded by Amended and
Restated Class B warrant agreements with no material impact on the operation of
the agreements.
14
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
5. Shareholder's equity (continued)
We have entered into an agreement with Westport Partners (Bermuda), Ltd.
("Westport"), a developer and administrator of insurance products for
international insurance brokers, insurance companies and corporations, pursuant
to which Westport will provide non-exclusive distribution services with respect
to the Company's variable life insurance products. In addition, Westport may be
retained to provide administration services for certain variable life insurance
products that the Company issues.
For its distribution activities, we are authorized to issue up to 750,000 Class
C warrants to Westport at an exercise price equal to $15 per ordinary share. The
warrants are issuable over a four-year period beginning on January 1, 2000 and
on each anniversary thereafter in an amount to be determined by a formula, as
defined, in the agreement. The Class C warrants, if issued, will be for a term
expiring ten years from the date of the Offering. The Company applies the fair
value method of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") in accounting for these warrants. No Class C
warrants had been issued as of December 31, 1998.
6. Stock option plan
We have a stock option plan (the "Plan") which allows us to grant non-statutory
options, subject to certain restrictions, to certain eligible employees, non-
employee Directors, advisors and consultants. The aggregate number of options
which may be granted under the Plan is limited to 1,600,000 shares with no
individual being granted more than 1,000,000 shares.
The minimum exercise price of the options will be equal to the fair market
value, as defined in the Plan, of our ordinary shares at the date of grant. The
term of the options shall not be more than ten years from the date of grant.
Unless otherwise provided in the option agreement, the options shall become
exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations in accounting for
employee stock options. Since the exercise price of the stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
As of December 31, 1998, options for 960,000 ordinary shares, exercisable at a
price of $15 per share, had been granted to certain employee participants in the
Plan.
15
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
6. Stock option plan (continued)
Proforma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if we accounted for the employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Binomial option pricing
model with the following weighted-average assumptions; risk-free interest rate
of 5.52%; dividend yield of 1.33%; volatility factor of the expected market
price of our common stock of 0.22; and a weighted-average expected life of the
option of 10 years.
The Binomial option pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected price volatility. Because our
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
For purposes of proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. Our proforma information
follows:
December 31, 1998
-----------------
Proforma net income $ 331,699
=================
Proforma basic and diluted earnings per ordinary share $ 0.09
=================
As of December 31, 1998, options for 100,000 ordinary shares, exercisable at a
price of $15 per share, had been granted to certain non-employee participants
in the Plan. The Company applies the fair value method of SFAS 123, in
accounting for stock options granted to non-employees who provide services to
the Company.
On February 2, 1999, options for 300,000 ordinary shares, exercisable at a price
of $15 per share, were granted to an employee participant in the Plan.
7. Taxation
There is presently no taxation imposed on income or capital gains by the
Government of the Cayman Islands. If any taxation were to be enacted, Holdings
and Scottish Insurance have been granted exemptions therefrom until 2018. We
operate in a manner such that we will owe no United States tax other than
premium excise taxes and withholding taxes on certain investment income.
16
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
8. Statutory requirements and dividend restrictions
Under The Insurance Law of the Cayman Islands (1998 Revision), Scottish
Insurance must maintain a minimum net capital worth of $240,000.
Our ability to pay dividends depends on the ability of Scottish Insurance to pay
dividends to us. While we are not subject to any significant legal prohibitions
on the payment of the dividends, Scottish Insurance will be subject to Cayman
Islands regulatory constraints, which affect its ability to pay dividends.
Scottish Insurance is prohibited from declaring or paying a dividend if such
payment would reduce its net capital worth below $240,000.
9. Related parties
Scottish Annuity agreement - We entered into an Insurance Administration,
Services and Referral Agreement (the "Agreement") with Scottish Annuity
effective October 1, 1998. We provide Scottish Annuity with a variety of
insurance administration, accounting and other services. We receive
compensation equal to 0.50% per annum of the quarterly separate account value of
each annuity contract issued by Scottish Annuity subject to a minimum of
US$25,000 per year
In addition, pursuant to this agreement (i) Scottish Annuity will refrain from
the direct or indirect offer or sale of any life insurance products and will
refer only to Scottish Insurance any opportunity or inquiry that it may receive
to issue and sell any life insurance products, and (ii) Scottish Insurance will
refrain from the direct or indirect offer or sale of any variable annuity
products and will refer only to Scottish Annuity any opportunity or inquiry that
it may receive to issue and sell any variable annuity products.
The agreement will continue in effect until December 31, 1999 and will
thereafter be automatically renewed for successive one-year periods, unless
canceled by either party prior to the commencement of a renewal term. In
addition, the agreement may terminate earlier under specified circumstances
(e.g. bankruptcy or uncured defaults under the agreement). Scottish Annuity and
Scottish Insurance have agreed to indemnify each other and their respective
employees for certain liabilities.
DC Planning agreement - The Company has entered into a consulting services
agreement with DC Planning, an insurance consulting firm that develops life
insurance products and acts as a consultant on insurance matters for high net
worth families, trust companies and other fiduciaries. Under the terms of the
agreement, DC Planning provides certain consulting services to the Company,
including with respect to the development and implementation of its business
plan. DC Planning is paid $180,000 a year for a term of three years under the
agreement. Howard Shapiro, who is a Director of Holdings, is the managing
partner of DC Planning.
17
Scottish Annuity & Life Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
10. Quarterly Financial Data (Unaudited)
Quarterly financial data for the period from May 12, 1998 (date of
incorporation) through
December 31, 1998 follows:
Quarter ended Quarter ended Quarter ended
June 30, 1998 September 30, 1998 December 31, 1998
------------------------------------------------------------------
Investment income, net of
related expenses $ 1,501 $ $ 1,126,764
Insurance administration fee 209,886
General and administrative
expenses 22,578 98,153 781,099
------------------------------------------------------------------
Net (loss) income $ (21,077) $ (98,153) $ 555,551
==================================================================
Basic and diluted earnings
per ordinary share $ (0.01) $ (0.07) $ 0.08
==================================================================
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCOTTISH ANNUITY & LIFE HOLDINGS, LTD.
By: /s/ Michael C. French
----------------------------------------
Michael C. French
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael C. French President, Chief Executive Officer March 29, 1999
- ------------------------ and Director (Principal Executive
Michael C. French Officer)
/s/ Peter W. Presperin Senior Vice President-Chief March 29, 1999
- ------------------------ Financial Officer and Secretary
Peter W. Presperin (Principal Financial Officer
and Principal Accounting Officer)
* Chairman of the Board and Director March 29, 1999
- ------------------------
Sam Wyly
* Director March 29, 1999
- ------------------------
Michael Austin
* Director March 29, 1999
- ------------------------
R. Duke Buchan III
* Director March 29, 1999
- ------------------------
Robert M .Chmely
* Director March 29, 1999
- ------------------------
David Matthews
* Director March 29, 1999
- ------------------------
Howard Shapiro
* Director March 29, 1999
- ------------------------
Charles J. Wyly, Jr.
* The undersigned, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of
the above-named officers and directors of the Registrant and contemporaneously
filed herewith with the securities and exchange Commission.
/s/ Michael C. French
----------------------------------------
Michael C. French
Attorney-in-Fact
EXHIBIT INDEX
Exhibit
Sequential
Number
Page No. Description of Document
- ---------- -----------------------
1.1 Form of Underwriting Agreement between the Company and the Underwriters
(incorporated herein by reference to Exhibit 1.1 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission on
June 19, 1998, as amended).
3.1 Memorandum of Association of the Company (incorporated herein by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed with
the Securities Exchange Commission on June 19, 1998, as amended).
3.2 Articles of Association of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
4.2 Form of Amended and Restated Class A Warrant (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
4.3 Form of Amended and Restated Class B Warrant (incorporated herein by
reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
4.4 Form of Securities Purchase Agreement for the Class A Warrants (incorporated
herein by reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.5 Form of Warrant Purchase Agreement for the Class B Warrants (incorporated
herein by reference to Exhibit 4.5 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.6 Form of Registration Rights Agreement for the Class A Warrants (incorporated
herein by reference to Exhibit 4.6 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.7 Form of Registration Rights Agreement for the Class B Warrants (incorporated
herein by reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
4.8 Form of Securities Purchase Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended)
Exhibit
Sequential
Number
Page No. Description of Document
- ---------- -----------------------
4.9 Form of Registration Rights Agreement between the Company and the
Shareholder Investors (incorporated herein by reference to Exhibit 4.11 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended)
4.10 Form of Securities Purchase Agreement between the Company and the Non-
Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
4.11 Form of Registration Rights Agreement between the Company and the Non-
Shareholder Investors (incorporated herein by reference to Exhibit 4.13 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.1 Employment Agreement dated June 18, 1998 between the Company and Michael
C. French (incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.2 Second Amended and Restated 1998 Stock Option Plan effective October 22,
1998 (incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.3 Form of Stock Option Agreement in connection with 1998 Stock Option Plan
(incorporated herein by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 filed with the Securities Exchange Commission on
June 19, 1998, as amended).
10.4 Agreement dated June 30, 1998 between the Company and International Risk
Management (Cayman) Ltd. (incorporated herein by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.5 Amended and Restated Insurance Administration, Services and Referral
Agreement dated as of October 1, 1998 between the Company and The Scottish
Annuity Company (Cayman) Ltd. (incorporated herein by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1 filed with the
Securities Exchange Commission on June 19, 1998, as amended).
10.6 Employment Agreement dated July 20, 1998 between the Company and Henryk
Sulikowski (incorporated herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 filed with the Securities Exchange
Commission on June 19, 1998, as amended).
10.7 Form of Indemnification Agreement between the Company and each of its
directors and officers (incorporated herein by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
Exhibit
Sequential
Number
Page No. Description of Document
- ---------- -----------------------
10.8 Investment Management Agreement dated October 22, 1998 between the
Company and Pacific Investment Management Company (incorporated herein by
reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
10.9 Investment Management Agreement dated October 22, 1998 between the
Company and General Re--New England Asset Management, Inc. (incorporated
herein by reference to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 filed with the Securities Exchange Commission on June 19, 1998, as
amended).
10.10 Agreement dated October 23, 1998 between the Company and Westport Partners
(Bermuda), Ltd. (incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 filed with the Securities
Exchange Commission on June 19, 1998, as amended).
10.11 Investment Management Agreement dated October 22, 1998 between the
Company and The Prudential Investment Corporation (incorporated herein by
reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
10.12 Form of Omnibus Registration Rights Agreement (incorporated herein by
reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1
filed with the Securities Exchange Commission on June 19, 1998, as amended).
10.13* Employment Agreement, dated February 2, 1999 between the Company and
Peter W. Presperin.
10.14* Consulting Agreement dated as of February 1, 1999 between the Company and
Michelle L. Boucher.
10.15* Investment Advisory Service Agreement between the Company and Prudential
Securities Corporation.
21.1* Subsidiaries of Registrant.
23.1* Consent of Ernst & Young.
24.1* Powers of Attorney.
__________________
* Filed herewith.