SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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COMMISSION FILE NUMBER 0-10306
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INDEPENDENCE HOLDING COMPANY
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(Exact name of Registrant as specified in its charter)
DELAWARE 58-1407235
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(State of Incorporation) (I.R.S.Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
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(Address of Principal Executive Offices) (Zip Code)
(203) 358-8000
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(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
SHARE PURCHASE WARRANTS
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(Title of Class)
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 the 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. [X]
7,430,669 shares of common stock were outstanding as of
March 16, 1998.
The aggregate market value of the common stock held by non-
affiliates of the Registrant computed by reference to the average
bid and asked prices of such stock, as of March 16, 1998 was
$46,604,749.
The Exhibit Index is located on page 75 of this filing.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of
Stockholders scheduled for June 22, 1998 are incorporated by
reference into Part III of this filing.
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PART I
ITEM 1. BUSINESS
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Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance
Group) are collectively referred to as the "Company."
Standard Life, which has an A (Excellent) rating from A.M.
Best & Company, Inc. ("Best"), is domiciled in New York and
licensed as an insurance company in all 50 states, the District
of Columbia, the Virgin Islands and Puerto Rico. Madison Life,
which is domiciled in Wisconsin and licensed to sell insurance
products in 45 states, the District of Columbia and the Virgin
Islands, has a B++ (Very Good) rating from Best. First Standard
is domiciled in Delaware and licensed to write and reinsure
property and casualty insurance in Delaware and New York.
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC common stock as of December
20, 1996. Since December 1995, the Consolidated Financial
Statements of the Company have presented Zimmerman as
discontinued operations (see Notes 2 and 10 of Notes to
Consolidated Financial Statements).
For information pertaining to the Company's business
segments, reference is made to Note 18 of Notes to Consolidated
Financial Statements.
PRINCIPAL PRODUCTS AND SERVICES
Medical Stop-Loss
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Standard Life markets, throughout the United States, stop-
loss insurance for self-insured group medical plans. Stop-loss
insurance allows self-insured employers to manage the risk of
excessive health insurance exposures by limiting aggregate and
specific losses to a predetermined amount. Self-insured plans
permit employers flexibility in designing employee health
coverages at a cost that may be lower than that available through
other health care plans.
Medical stop-loss coverage is available on either a specific
or a specific and aggregate basis, although the majority of the
policies issued by Standard Life cover both specific and
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aggregate claims. Standard Life designs plans to fit the
identified needs of the self-insured employer by offering a
variety of attachment points with respect to aggregate coverage
(i.e., the level of claims after which the stop-loss benefits
become payable) and, with respect to specific coverage, various
deductible options.
Standard Life markets its medical stop-loss products through
a network of managing general underwriters ("MGUs") who are non-
salaried independent contractors that receive administrative
fees. During 1997, Standard Life marketed through ten different
MGUs. The MGUs are responsible for underwriting accounts in
accordance with guidelines formulated and approved by Standard
Life, billing and collecting premiums from the employers, paying
commissions to third party administrators ("TPAs") and/or
brokers, and adjudicating claims. Standard Life is responsible
for selecting MGUs, establishing underwriting guidelines and
reviewing employer's claims for reimbursement, as well as
establishing appropriate accounting procedures and reserves.
Standard Life has also begun marketing this product through its
HMO relationships, as further described below under "Managed
Health Care."
The Company believes that prospects for continued growth in
Standard Life's medical stop-loss business are favorable.
Although federal and state legislative and regulatory bodies have
proposed various healthcare initiatives in recent years, any such
initiatives that could ultimately be implemented should continue
to recognize employer's self-insurance of health care benefits as
a viable and cost-effective method of financing health care for
employees and their families.
New York Short-Term Disability
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Standard Life markets a short-term statutory disability
benefit product in New York State ("DBL"). All companies with
more than one employee in New York State are required to provide
DBL insurance for their employees. DBL coverage provides
temporary cash payments to replace wages lost as a result of
disability due to non-occupational injury or illness. The DBL
policy provides for (i) payment of 50% of salary to a maximum of
$170 per week; (ii) a maximum of 26 weeks in a consecutive 52
week period; and (iii) benefit commencement on the eighth
consecutive day of disability. Policies covering fewer than 50
employees have fixed rates approved by the New York State
Insurance Department. Policies covering 50 or more employees are
individually underwritten. The DBL business is marketed primarily
through independent general agents who are paid commissions based
upon the amount of premiums produced. The Company significantly
enhanced Standard Life's DBL administrative systems in 1997, and
anticipates continuing to expand its DBL business through the
addition of general agents and the acquisition of blocks of
business.
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Group Term Disability and Life
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Group Long-Term and Short-Term Disability
Madison Life sells group long-term and short-term disability
products to employers that wish to provide this benefit to their
employees. Depending on an employer's requirements, long-term
disability policies (i) cover between 50% and 70% of insurable
salary; (ii) have elimination periods (i.e., the period between
the commencement of the disability and the start of benefit
payments) of between 30 and 730 days; and (iii) terminate after
two, five or ten years or extend to age 65. Optional benefits
are available to employees, including coverage for partial or
residual disabilities, survivor benefits and cost of living
adjustments. Short-term disability policies provide a weekly
benefit to disabled employees until they are eligible for long-
term disability benefits or they are no longer disabled.
Madison Life's disability products are sold primarily in the
Midwest to school districts, municipalities and hospital employer
groups through a managing general agent ("MGA") that specializes
in these target markets. This MGA assists in the billing and
administration of the business, and is paid commissions based
upon the amount of premiums produced. Madison Life has expanded
its marketing to non-governmental businesses through non-salaried
independent general agents and agents who are paid commissions
based upon the amount of premiums produced. Madison Life has
also entered into an agreement with another insurer to sell group
long-term disability in markets in which Madison Life is not
currently established. Under the agreement, the other insurer
issues policies as to which the underwriting, claims processing
and related services are performed by Madison Life for a fee;
Madison Life has assumed 25% of the risk on this business.
Madison Life intends to increase sales by targeting non-
governmental business and maximizing its traditionally strong
sales to school districts, municipalities and hospital employer
groups.
Group Term Life
Madison Life sells group term life products which are
marketed primarily to the same customers that purchase its group
short-term and long-term disability products. These products
include group term life, accidental death and dismemberment
("AD&D"), supplemental life and AD&D and dependent life. In
order to enhance its marketing and retention of this line of
business, Madison Life also offers a paid-up life benefit for
eligible employees of schools and municipalities beginning at age
65, subject to a vesting schedule. Madison Life's group term life
products are distributed by the same MGA and independent general
agents and agents that distribute its group disability products,
with compensation based upon the amount of premium produced.
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As with its group disability business, Madison Life intends
to expand its sales of group life products to non-governmental
entities.
In 1997, Standard Life began to emphasize marketing group
term life insurance products through its existing distribution
channels, including its stop-loss and managed care MGUs, to
employers who self insure or who enroll in health maintenance
organizations ("HMOs"), as well as to the employees of such
employers and HMO's. In addition, in 1998, Standard Life intends
to appoint additional MGUs, independent general agents and
brokers to enhance its group term life business. The independent
general agents and agents or brokers who market these products
are paid commissions, and MGUs who market these products receive
administrative fees.
Credit Life and Disability
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Madison Life sells credit life and disability products
offered by entities that extend credit (e.g. banks, thrifts,
credit unions and finance companies) or arrange for the extension
of credit (e.g., automobile, marine and furniture dealerships)
insuring the debtor for a value and duration not to exceed the
amount and repayment term of the indebtedness. Credit insurance
is composed of two basic types of coverage: (i) credit life
insurance provides for a lump sum benefit paid to the creditor
upon the death of the insured debtor to extinguish or reduce the
balance of indebtedness; and (ii) credit disability insurance
provides a monthly benefit/indemnity (usually a sum equal to the
scheduled monthly loan payment) paid to the creditor in the event
of the insured debtor's total disability until the debtor
recovers, or is able to return to gainful employment or until the
scheduled expiration of the insurance coverage, whichever first
occurs.
Generally, Madison Life's coverage is limited as follows:
(i) at inception of coverage, insureds must be under age 70 for
life and under age 65 for disability; (ii) coverage terminates at
age 71 for life and age 66 for disability; (iii) maximum life
insurance or aggregate disability benefits are $110,000, and the
maximum monthly disability benefit is $1,000; and (iv) the
maximum term of coverage is 120 months.
Approximately 80% of Madison Life's credit insurance
premiums are written through credit unions. This business is
marketed by non-salaried independent general agents and agents
who are paid commissions based upon the amount of premiums
produced.
Madison Life intends to expand its credit life and
disability business through greater geographical diversification,
agreements to administer blocks of business for other insurers,
joint marketing alliances with other insurers and acquisitions.
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Managed Health Care
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HMO Reinsurance
Standard Life markets, throughout the United States,
reinsurance for HMOs that desire to reduce their risk assumption
and/or are required to purchase coverage by regulation. A
majority of state regulatory authorities responsible for HMO
oversight require such coverage. This coverage allows HMOs to
manage the risk of excessive exposures by limiting specific
losses to a pre-determined amount. Standard Life markets HMO
reinsurance through one specialized independent reinsurance
manager, with an experienced management and staff knowledgeable
in reinsurance issues specifically facing HMOs, which is
responsible for collecting premiums and adjudicating reinsurance
claims. Final authority for all financial decisions remains with
Standard Life, although financial reviews of each HMO are
performed on behalf of Standard Life by an independent firm whose
primary business is managed care. Standard Life maintains a low
risk profile by reducing its exposure through quota share
reinsurance arrangements.
HMO Point-of-Service (POS)
Standard Life has capitalized on the competitive pressures
in the HMO market by marketing point-of-service ("POS") coverage
throughout the United States through its HMO relationships. A POS
product allows a member greater freedom of choice of providers
and/or the ability to access care without a gatekeeper or primary
care physician referral; both mature and start-up HMOs are
experiencing difficulty in attracting and retaining members
unless they are able to offer such options. Most states require
that HMOs desiring to offer a POS product do so by partnering
with an indemnity carrier (such as Standard Life). While the
marketing of the POS product began in 1995 with its behavioral
health carve-out product, Standard Life accelerated its sales
efforts and committed more of its resources to this sector
commencing in 1996. With respect to the POS product, Standard
Life retains responsibility for underwriting, issuing policies,
billing and collecting of premiums, paying commissions and
servicing claims.
HMO Employer Stop-Loss
Standard Life markets its employer medical stop-loss
products (and certain other products including group life)
through its HMO distribution network. Like Standard Life's other
medical stop-loss product, these plans allow self insured
employers to manage the risk of excessive health insurance
exposures by limiting aggregate and specific losses to a
predetermined amount, as well as utilizing the managed care
expertise of the HMOs to manage losses. With respect to the HMO
employer stop-loss product, Standard Life retains responsibility
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for underwriting, issuing policies, billing and collecting of
premiums, paying commissions and servicing claims.
Provider-Excess
Standard Life markets provider-excess products to providers,
provider health care organizations ("PHOs"), hospital groups,
physician groups, individual practice associations ("IPAs") that
have assumed risk (through capitation by an HMO or otherwise) and
desire to reduce their risk assumption and/or are required to
purchase coverage by contract or regulation. Standard Life writes
these products through one specialized MGU with management and
staff experienced in provider-excess insurance. This MGU is
responsible for marketing, underwriting, administrating and
adjudicating claims. Standard Life maintains a low risk profile
by reducing its exposure through quota share reinsurance
arrangements.
Managed Care Investments
Madison Life and Standard Life, through investment
subsidiaries, participate on an equity basis in two development-
stage ventures which market provider-excess, HMO reinsurance and
HMO employer stop-loss products through their proprietary market
databases and alliances with various partners. In addition, the
Company acquired in 1997 a signficant interest in an MGU that
markets Standard Life products; the Company believes that this
acquisition will enable it to control a substantial portion of
Standard Life's distribution network for its core products, as
well as other products which the MGU may develop and/or market in
the future.
The Company is actively increasing its presence in managed
health care through Standard Life's HMO reinsurance, POS, HMO
employer stop-loss, provider-excess and related products and its
managed care investments. In addition, the Company actively seeks
opportunities to enter into cooperative underwriting and
reinsurance arrangements with other life and health insurers,
reinsurers, HMOs, and managed care companies that it believes
would augment its existing businesses.
Special Disability
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During the last half of 1996, Standard Life commenced
providing disability income, accident medical, accidental death,
and AD&D insurance to athletes, executives and entertainers. The
coverage is written for a limited term (5 years or less) and is
optionally renewable by Standard Life. The principal benefits
offered are permanent total disability ("PTD") and temporary
total disability ("TTD"). PTD is paid as a lump sum if caused by
either an injury or sickness which is career ending. TTD covers
the same risks as PTD, but is paid in installments until the
maximum limit of insurance is exhausted or the insured no longer
has a total disability. For these special risks, Standard Life
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has delegated marketing and underwriting authority to a
specialized MGU which has concentrated its efforts in these
markets for more than 15 years. Currently, Standard Life insures
no more than half of the value of the contract, thereby sharing
the risk with another party (e.g., a team or a corporate
sponsor). In addition, Standard Life has minimized its risk on
such business by obtaining reinsurance on a quota share or
facultative basis.
Acquired Blocks/Other Business
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This category includes: (i) insurance products which are in
runoff as a result of the Insurance Group's decision to
discontinue writing such products; (ii) blocks of business which
were acquired from other insurance companies but which are not of
the type currently being written by the Insurance Group (blocks
which are still being written are included within a specified
product group); and (iii) certain miscellaneous insurance
products.
The following lines of Standard Life's in-force business are
in runoff: individual accident and health, individual life,
single premium immediate annuities, and miscellaneous insurance
business. Madison Life's runoff in this category consists of
existing blocks of individual life (including pre-need (i.e.,
funeral expense coverage) and interest-sensitive life blocks
which were acquired in 1996 and 1997), individual accident and
health products, annual and single premium deferred annuity
contracts and individual annuity contracts.
____________________________________________
The following table sets forth gross direct and assumed
earned premiums, net premium income and operating income (before
net securities gains (losses)) of the Insurance Group by
principal product for the years indicated (in thousands):
GROSS DIRECT AND ASSUMED EARNED PREMIUMS
----------------------------------------
1997 1996 1995
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Medical Stop-Loss............$ 89,565 $ 84,228 $ 72,930
DBL.......................... 21,937 16,673 15,604
Group Term Disability and
Term Life................... 21,618 19,325 16,241
Credit Life and Disability... 20,115 13,931 13,677
Managed Health Care.......... 26,357 13,764 2,807
Special Disability........... 15,332 1,604 -
Acquired Blocks/Other
Business.................... 15,673 12,935 12,432
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TOTAL......................$ 210,597 $ 162,460 $ 133,691
========= ========= =========
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NET PREMIUM INCOME
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1997 1996 1995
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Medical Stop-Loss............$ 19,706 $ 20,272 $ 13,567
DBL.......................... 21,937 16,673 15,604
Group Term Disability and
Term Life................... 7,560 6,896 5,871
Credit Life and Disability... 17,946 11,549 10,916
Managed Health Care.......... 5,255 4,473 1,008
Special Disability........... 71 10 -
Acquired Blocks/Other
Business.................... 9,726 9,712 9,435
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TOTAL......................$ 82,201 $ 69,585 $ 56,401
========= ========= =========
OPERATING INCOME (BEFORE NET SECURITIES GAINS (LOSSES))
-------------------------------------------------------
1997 1996 1995
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Medical Stop-Loss............$ 2,315 $ 3,629 $ 2,889
DBL.......................... 1,259 730 619
Group Term Disability and
Term Life................... 779 501 598
Credit Life and Disability... 2,523 1,164 883
Managed Health Care.......... 924 735 188
Special Disability........... 344 (25) -
Acquired Blocks/Other
Business.................... 4,117 3,097 3,034
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TOTAL......................$ 12,261 $ 9,831 $ 8,211
========= ========= =========
__________________________________
The following table summarizes the aggregate life insurance
in-force of the Insurance Group (in thousands):
1997 1996 1995
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LIFE INSURANCE IN-FORCE:
Group.......................$4,322,371 $3,759,716 $3,211,771
Individual term............. 302,583 343,674 405,547
Individual permanent........ 446,015 454,386 438,900
Credit...................... 1,081,515 494,506 518,593
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TOTAL LIFE INSURANCE
IN-FORCE (1), (2).........$6,152,484 $5,052,282 $4,574,811
========= ========= =========
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1997 1996 1995
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NEW LIFE INSURANCE:
Group.......................$ 682,296 $ 953,327 $ 529,900
Individual term............. 11 91 536
Individual permanent........ 1,023 339 1,271
Credit...................... 268,682 233,066 258,493
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TOTAL NEW LIFE INSURANCE...$ 952,012 $1,186,823 $ 790,200
========= ========= =========
NOTES:
(1) Includes participating
insurance..............$ 59,897 $ 31,928 $ 30,637
========= ========= =========
(2) Includes ceded
reinsurance of:
Group.................$2,118,806 $1,828,969 $1,553,234
Individual............ 283,405 342,689 380,793
Credit................ 40,794 43,875 54,938
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Total ceded reinsurance.$2,443,005 $2,215,533 $1,988,965
========= ========= =========
_______________________________
Acquisitions
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The Company has assembled a team of senior executives which
is responsible for identifying, analyzing, negotiating, acquiring
and administering acquisitions of blocks of insurance business.
The team members, who have been involved with numerous
acquisitions, focus primarily on transactions involving the
purchase of blocks of policies, but also evaluate acquisitions of
entire companies. The Company's MIS and policyholder services
departments are experienced in converting the acquired policies
and assuming the daily servicing requirements related to the
acquisition of substantial blocks of policies. Significant
progress was made by the Company during 1997 in upgrading its
administrative systems, and efforts are continually focused
toward maintaining systems that can efficiently handle
sophisticated policies and contracts.
The Company believes that current trends in the life and
health insurance industry provide excellent opportunities for
more acquisitions and consolidations. Some companies are reducing
administrative costs by divesting of divisions, insurance
subsidiaries and blocks of business which do not fit their
overall strategies, or are disposing of non-core businesses in
order to focus capital on their primary lines. Other companies
are experiencing increased difficulty in remaining competitive
due to more stringent regulatory requirements (including risk
based capital ratios), downgrades by rating agencies, the
increased cost of sophisticated information processing systems
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and the inaccessibility to capital markets. With its upgraded
administrative systems, the Company is well-positioned to assume
blocks of business from insurers who do not wish to bear the cost
of becoming Year 2000 compliant with respect to such blocks.
Mutual companies and non-profit and fraternal entities, in
particular, may have difficulty accessing sources of capital.
Additionally, there are many small to medium sized closely held
insurance companies which are exploring divestiture options; the
Company believes that it is well positioned to compete for these
opportunities.
Historical
Madison Life acquired two single premium credit insurance
blocks and two individual life insurance blocks during 1997 with
aggregate reserves of $58,000,000. The two credit insurance
blocks had aggregate reserves of $31,600,000. One of the
individual life blocks was purchased from a company under court-
ordered liquidation and contained $23,000,000 of life/annuity
reserves and $300,000 of annual premium. The other life block was
a single premium book of business with $3,400,000 of reserves and
was acquired from a company being merged into its parent company.
Finally, a very small block of life policies was acquired from a
state guaranty fund as part of Madison Life's ongoing effort to
maintain a positive relationship with regulatory authorities in
the event that significant blocks from insolvent companies (such
as the $23,000,000 block) become available in the future.
Madison Life acquired three blocks of business in 1996, with
aggregate reserves of $41,000,000, including a block of pre-need
individual ordinary life insurance and annuity policies with
reserves of $33,000,000 from a large insurer, and a block of
interest-sensitive whole life insurance with reserves of
$7,500,000 from the National Organization of Life and Health
Insurance Guaranty Associations ("NOLHGA").
Madison Life acquired two blocks of business in 1995 with
aggregate reserves of over $2,700,000. One block, comprised of a
minimal number of policies, was acquired from a state guaranty
association, and favorably positioned Madison Life to acquire
blocks from troubled companies in the future. The other block was
acquired from a company exiting the ordinary life line of
business.
Madison Life acquired two blocks of business in 1994 with
aggregate reserves of over $1,400,000 and annualized aggregate
premiums of $925,000. These policies were acquired from companies
disposing of unwanted run-off blocks.
Standard Life actively seeks acquisition opportunities with
other insurance companies (i) whose DBL business no longer fits
their marketing strategy or (ii) that cannot administer their in-
force DBL block profitably. As a result, Standard Life has
reduced its administration costs on a per policy basis and gained
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access to new general agents and brokers. During 1997, Standard
Life acquired a DBL block of business with total estimated
annualized premiums of $3,500,000. In 1996, Standard Life
acquired two DBL blocks from two insurers with total annualized
premiums of $3,500,000.
Outlook
The Company positioned itself to increase its acquisition
activity by contributing $5,000,000 to Madison Life in the fourth
quarter of 1996 (following a contribution of $15,000,000 in
1993). These contributions served to further enhance the
Insurance Group's already superior capital ratios, broad
licensing and excellent asset quality. The Company currently has
no indebtedness, and anticipates that it can use its current
liquidity and/or raise additional capital in the public or
private markets to the extent determined necessary or desirable
in order to pursue acquisitions.
The Company is particularly interested in acquiring the
following types of policies: traditional and group life, interest-
sensitive life, credit life and health, limited benefit health
(e.g., cancer or hospital indemnity), medical stop-loss, DBL and
certain other disability. The Company would consider acquiring
annuities, but primarily only in order to effectuate an
acquisition of more desired types of policies.
REINSURANCE AND POLICY RETENTION LIMITS
Although the Company has more than sufficient capital to
retain greater risk, it has emphasized, in recent years,
maintaining a low risk profile on its insurance products, while
increasing fee income and reinsurance allowances generated by
underwriting, auditing, marketing, regulatory, administrative and
related services. During the past three years, such income and
allowances have grown as a result of an increase in the Company's
premium volume. The Company's low risk profile dictates
purchasing reinsurance and excess reinsurance. The Company
monitors its retention amounts by products, and can and does
adjust its retention as appropriate.
Reinsurance is used to reduce the potentially adverse
financial impact of large individual or group risks, and to
reduce the strain on statutory income and surplus related to new
business. By using reinsurance, the Insurance Group is able to
write policies in amounts larger than it could otherwise accept.
The amount reinsured is the portion of each policy in excess of
the retention limit on a particular policy. Retention limits for
Standard Life at December 31, 1997 were: (i) $210,000 per life on
individual life and corresponding disability waiver of premium;
(ii) no retention on accidental death benefits provided by rider
to individual life policies; (iii) $250,000 on any one stop-loss
claim; (iv) $2,500 of monthly benefits on disability income
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policies; and (v) $25,000 on its special disability business.
Standard Life has purchased excess reinsurance for its stop-loss
business on the portion of risks which it retains in order to
further limit its exposure. Standard Life also maintains stop-
loss and catastrophe reinsurance in order to protect against
particularly adverse mortality which might occur with respect to
its overall life business.
Current retention limits for Madison Life are: (i) $2,500
per month on group long-term and short-term disability insurance;
(ii) $60,000 on group term life, substandard ordinary life, group
credit single premium life, group family life and individual
ordinary life; (iii) $1,000 per month on individual substandard
long-term disability insurance; (iv) $1,000 per month on credit
single premium disability insurance; and (v) $1,000 monthly
benefit on individual accident and health insurance. There is no
retention on accidental death benefits provided by rider to group
life policies. In addition, Madison Life has purchased additional
reinsurance on the portion of risks which it retains, limiting
its exposure on a catastrophic (aggregate) loss.
The Insurance Group remains liable with respect to the
insurance in-force which has been reinsured in the unlikely event
that the assuming reinsurers are unable to satisfy their
obligations. The Insurance Group cedes business to individual
reinsurance companies, and reinsurance pools comprised of
companies, that are primarily rated A or better by Best, or upon
provision of adequate security. The ceding of reinsurance does
not discharge the primary liability of the original insurer to
the insured. Since the risks under the Insurance Group's business
are primarily short-term, there would be limited exposure as a
result of a change in a reinsurer's creditworthiness during the
term of the reinsurance. At December 31, 1997, the Insurance
Group's ceded reinsurance in-force was $2.4 billion.
For further information pertaining to reinsurance, reference
is made to Note 17 of Notes to Consolidated Financial Statements.
RESERVES AND INVESTMENTS
As required by insurance laws and regulations, the Insurance
Group establishes reserves to meet obligations on policies in-
force. These reserves are amounts which, with additions from
premiums expected to be received and with interest on such
reserves at certain assumed rates, are calculated to be
sufficient to meet anticipated future policy obligations.
Premiums and reserves are based upon certain assumptions with
respect to mortality, morbidity on health insurance, lapses and
interest rates effective at the time the polices are issued. The
Insurance Group also establishes appropriate reserves for
substandard business, annuities and additional policy benefits,
such as waiver of premium and accidental death. Standard Life
and Madison Life are also required by law to periodically have a
cash flow adequacy analysis, which projects the amount and timing
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of cash flows to the estimated maturity date of liabilities,
completed by the certifying actuary for each company. Standard
Life, Madison Life and First Standard invest their respective
assets which support the reserves and other funds in accordance
with applicable insurance law, under the supervision of their
respective Boards of Directors.
The following table reflects the asset value in dollars and
as a percentage of total investments of the Company as at
December 31, 1997 (in thousands):
INVESTMENTS BY TYPE
- -------------------
% OF TOTAL
ASSET VALUE INVESTMENTS
------------------------------
Fixed maturities:
Bonds:
United States Government
and authorities...................$168,890 54.7%
States, municipalities and
political subdivisions............ 2,315 0.8%
Public utilities................... 23,925 7.7%
All other corporate securities..... 6,194 2.0%
------- -----
Total fixed income securities...... 201,324 65.2%
------- -----
Equity securities:
Common stocks:
Public utilities................... 1,489 0.5%
Banks, trusts and insurance........ 167 0.1%
Industrial, miscellaneous
and other......................... 9,575 3.1%
Non-redeemable preferred stock..... 2,265 0.7%
------- -----
Total equity securities............ 13,496 4.4%
------- -----
Securities purchased under
agreements to resell............... 25,469 8.2%
Partnership interests............... 40,221 13.0%
Mortgage loans...................... 291 0.1%
Policy loans........................ 8,677 2.8%
Other............................... 1,270 0.4%
Short-term investments.............. 18,265 5.9%
------- -----
Total investments..................$309,013 100.0%
======= =====
At December 31, 1997, approximately 98% of the Company's
fixed maturities were investment grade. The composition of the
Company's fixed maturities at December 31, 1997, utilizing
Standard and Poor's rating categories, was as follows:
14
<PAGE>
GRADE % INVESTED
----- ----------
AAA 85.2%
AA 8.4%
A 0.8%
BBB 3.5%
BB or lower 2.1%
-----
100.0%
=====
COMPETITION AND REGULATION
The Company competes with many larger insurance companies,
HMOs and other managed care organizations. Although most life
insurance companies are stock companies, mutual companies also
write life insurance in the United States. Mutual companies may
have certain competitive advantages since profits inure directly
to the benefit of the policyholders. HMOs may also have certain
competitive advantages since they are subject to different
regulations than insurance companies. As more companies enter
the acquisition field, the Company may face increased competition
for future acquisitions.
IHC is an insurance holding company; as such, IHC and the
Insurance Group are subject to regulation and supervision by the
insurance supervisory agencies of New York in the case of
Standard Life, Wisconsin in the case of Madison Life, and
Delaware in the case of First Standard. Each of Standard Life,
Madison Life and First Standard is also subject to regulation and
supervision in all jurisdictions in which it is licensed to
transact business. These supervisory agencies have broad
administrative powers with respect to the granting and revocation
of licenses to transact business, the licensing of agents, the
approval of policy forms, the approval of commission rates, the
form and content of mandatory financial statements, reserve
requirements and the types of investments which may be made.
Such regulation is designed primarily for the benefit of
policyholders rather than the stockholders of an insurance
company or holding company.
Certain transactions within the holding company system are
also subject to regulation and supervision by such regulatory
agencies. All such transactions must be fair and equitable.
Notice to or prior approval by the insurance department is
required with respect to transactions affecting the ownership or
control of an insurer and of certain material transactions,
including dividend declarations, between an insurer and any
person in its holding company system. In addition, periodic
disclosure is required concerning the operations, management and
financial condition of the insurer within the holding company
system. An insurer is also required to file detailed annual
statements with each supervisory agency, and its affairs and
financial conditions are subject to periodic examination.
15
<PAGE>
Risk-based capital requirements are imposed on life and
property and casualty insurance companies. The risk-based capital
ratio is determined by dividing an insurance company's total
adjusted capital, as defined, by its authorized control level
risk-based capital. Companies that do not meet certain minimum
standards require specified corrective action. The risk-based
capital ratios for each of Standard Life, Madison Life and First
Standard significantly exceed such minimum ratios.
EMPLOYEES
At December 31, 1997, the Company had 119 employees.
16
<PAGE>
ITEM 2. PROPERTIES
----------
IHC
IHC has entered into a renewable short-term arrangement with
Geneve Corporation for the use of 6,500 square feet of office
space as its corporate headquarters in Stamford, Connecticut.
Standard Life
Standard Life leases 13,500 square feet of office space in
New York, New York as its corporate headquarters, and 3,000
square feet of office space in Rochester, New York for its DBL
claims processing center.
Madison Life
Madison Life leases 11,000 square feet of office space in
Middleton, Wisconsin as its corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company knows of no material pending legal proceedings
to which it is a party or of which any of its property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
IHC's common stock and share purchase warrants expiring June
30, 2001 ("Warrants") are traded over-the-counter. The common
stock trades on the Nasdaq National Market tier of the Nasdaq
Stock Market under the symbol INHO. Warrant prices are quoted on
the OTC Bulletin Board. The following tabulation shows the high
and low sales prices for IHC's common stock and the high and low
bid prices for the Warrants. The Warrant information was obtained
from the National Quotation Bureau.
COMMON STOCK WARRANTS
------------ -----------
HIGH LOW HIGH LOW
---- --- ---- ---
QUARTER ENDED:
December 31, 1997....... 14 11 1/4 1/32
September 30, 1997...... 13 1/2 9 1/4 1/32 1/32
June 30, 1997........... 10 1/4 6 3/8 1/32 1/32
March 31, 1997.......... 8 1/8 7 1/32 1/32
QUARTER ENDED:
December 31, 1996....... 9 6 3/4 1/16 1/32
September 30, 1996...... 9 5/8 8 1/4 1/16 1/16
June 30, 1996........... 9 5/8 7 7/8 1/16 1/16
March 31, 1996.......... 8 7 1/4 1/16 1/16
The foregoing prices for the Warrants do not necessarily
represent actual transactions, but rather the quoted prices
between dealers, excluding retail markup, markdown or commission.
At March 16, 1998, the number of record holders of IHC's (i)
common stock was 2,911 and (ii) Warrants was 1,261.
IHC declared a cash dividend of $.05 per share on its common
stock on each of December 30, 1997 and 1996.
Effective June 28, 1996, IHC declared a one-for-two reverse
stock split of its shares of common stock. The above table and
the per share dividend amounts reflect such transaction.
On December 31, 1996, IHC distributed the common stock of
Zimmerman on a pro rata basis to the holders of record of IHC's
common stock as of December 20, 1996. The ex-date for the
distribution was December 18, 1996.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a summary of selected consolidated financial data of
the Company for each of the last five years.
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA:
Total revenues..............$106,757 $ 89,344 $ 71,427 $ 61,504 $ 65,444
Net realized and
unrealized gains (losses).. 539 190 - (1,921) 835
Income applicable to
common shares from
continuing operations
before cumulative effect
of accounting changes...... 11,187 6,710 6,172 2,396 4,041
BALANCE SHEET DATA:
Total investments........... 309,013 249,008 185,867 179,856 184,790
Total assets................ 454,738 336,401 286,207 266,368 276,989
Insurance policy benefits,
claims and other policy
liabilities................ 278,092 202,278 158,233 150,988 159,090
Long-term debt.............. - - 12,111 14,111 15,161
Common stockholders' equity. 91,005(1) 76,856(1) 71,607 55,694 62,051
PER SHARE DATA:
Cash dividends declared
per common share........... .05 .05 .04 .04 .04
Diluted income per
common share from
continuing operations
before cumulative effect
of accounting changes...... 1.49 .90 .81 .31 .50
Book value per common
share...................... 12.25(1) 10.34(1) 9.63 7.17 7.84
(1) Excludes the credit of $7,905,000 to common stockholders' equity
(or $1.06 per common share) that would be recorded upon termination of the
guarantee of Zimmerman's indebtedness by a subsidiary of the Company (see
Note 10 of Notes to Consolidated Financial Statements).
The above table has been restated to reflect (i) the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," (ii) Zimmerman as discontinued operations as described in Note 2 of
Notes to Consolidated Financial Statements, (iii) the one-for-two reverse
stock split of IHC's common stock effective June 28, 1996 and (iv) the
adoption of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" in 1993.
The Selected Financial Data should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance
Group) are collectively referred to as the "Company." All
remaining income, principally income from parent company
liquidity (cash, cash equivalents, resale agreements and
marketable securities) and expense items associated with parent
company activities, the Company's remaining real estate holdings
and certain other investments of the Company, are included in
Corporate (see Item 1 for a discussion of the business).
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC's common stock as of
December 20, 1996. Since December 1995, the Consolidated
Financial Statements of the Company have presented Zimmerman as
discontinued operations (see Notes 2 and 10 of Notes to
Consolidated Financial Statements).
Additional information pertaining to the Company's business
segments is provided in Note 18 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
---------------------
1997 COMPARED TO 1996
- ---------------------
The Company's operating income from continuing operations
increased $6.5 million, or 95%, to $13.3 million in 1997 from
$6.8 million in 1996. The Company had net realized and unrealized
gains of $.5 million in 1997 and $.2 million in 1996. Excluding
net realized and unrealized gains, the Company had operating
income from continuing operations of $12.8 million in 1997
compared to $6.6 million for 1996. Net income applicable to
common shares was $11.2 million or $1.49 per share, diluted, for
the year ended December 31, 1997 compared to $7.8 million or
$1.04 per share, diluted, for the year ended December 31, 1996.
Income tax expense increased to $2.1 million from $.1 million in
1996; reference is made to Note 15 of Notes to Consolidated
Financial Statements for a reconciliation of the effective tax
rate. In December 1997, the Company adopted SFAS No. 128
"Earnings per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share; accordingly, all
prior earnings per share calculations have been restated to
reflect the new standard.
20
<PAGE>
Insurance Group
- ---------------
The Insurance Group's operating income increased 28% to
$12.8 million in 1997 from $10.0 million in 1996. Operating
income includes net realized and unrealized gains of $.5 million
in 1997 compared to $.2 million in 1996. Decisions to sell
securities are based on cash flow needs, investment opportunities
and economic and market conditions, thus creating fluctuations in
gains (losses) from year to year. Operating income excluding net
realized and unrealized gains was $12.3 million in 1997 compared
to $9.8 million in 1996.
Premium revenues increased $12.6 million or 18% to $82.2
million in 1997 from $69.6 million in 1996; premium revenues at
Madison Life increased $7.8 million while Standard Life showed a
$4.8 million increase in premiums. The increase at Madison Life
is comprised of: a $6.4 million increase in the credit lines of
business primarily due to the acquisitions of two single premium
blocks of business effective April 1 and October 1, 1997; a $.5
million increase in long-term disability premiums; a $.7 million
increase in dental premiums; and a $.2 million increase in group
term life premiums. The increase at Standard Life is comprised
of: a $5.3 million increase in its DBL line of business
primarily due to an acquisition and the continued growth in this
line; a $.8 million increase in HMO reinsurance business; and a
$.4 million combined increase in the provider-excess and special
disability business. These increases were offset by a $1.1
million decrease in the closed blocks of life, annuity and
individual and group accident and health lines of business and a
$.6 million decrease in the stop-loss line of business.
Total net investment income increased $3.7 million due to an
increase in assets at Madison Life related to acquisitions, and
higher returns on certain equity investments. The annualized
return on investments in 1997 was 7.6% compared to 7.2% in 1996.
Equity income increased $.4 million due to the increased
profitability of certain insurance related partnerships.
Other income decreased $1.6 million from 1996 to 1997
resulting from: a decrease of $.1 million in reinsurance
recoveries at Madison Life; and a decrease at Standard Life of
$1.5 million resulting from the surrender by a large group of
policyholders in a coinsurance treaty, offset by the credit to
reserves relating to the closed blocks of life, annuity and
individual and group accident and health lines of business
discussed below.
Insurance benefits, claims and reserves increased $8.8
million, or 18%, reflecting an increase of $5.4 million at
Madison Life and $3.4 million at Standard Life. Madison Life's
increase resulted from: a $.5 million increase in long-term
disability claims; a $.9 million increase in dental claims due to
the increase in premium volume; a $.9 million increase in
interest credited to universal life and annuity products; a $3.0
21
<PAGE>
million increase in the credit line of business due to
acquisitions and the addition of new accounts throughout the
current year; and a $.4 million increase in other life and health
lines of business, all of the foregoing offset by a $.3 million
decrease in ordinary life and individual accident and health
claims and reserves. The change at Standard Life is comprised of:
a $3.6 million increase in DBL claims and reserves due to
increased volume; a $2.0 million increase in medical stop-loss
reserves due to reserve strengthening; and a net $.8 million
increase in claims and reserves in the HMO reinsurance line of
business. Such change was offset by a $2.9 million decrease in
claims and reserves of the closed blocks of life, annuity and
individual and group accident and health lines of business due to
the surrender by a large group of policyholders in a coinsurance
treaty and a $.1 million decrease in POS claims and reserves.
Amortization of deferred acquisition costs and general and
administrative expenses increased $3.7 million at Madison Life
and $.1 million at Standard Life primarily due to increases in
net commission expense of $2.3 million, salary and related
expenses of $.7 million and other general expenses of $.8 million
related to the increase in premium volume at both insurance
companies, and the acquisition of new blocks of business at
Madison Life.
Corporate
- ---------
Operating income for the year ended December 31, 1997
increased by $3.7 million from 1996. Investment income increased
$1.0 million due to higher corporate liquidity in 1997. Other
income increased by $1.0 million due to the sale of the Company's
remaining real estate in Florida. Interest expense decreased $.7
million due to the repayment of all long-term debt during 1996.
Selling, general and administrative expenses decreased $1.0
million due to a reduction in expenses related to salaries, legal
fees and the Florida real estate.
1996 COMPARED TO 1995
- ---------------------
The Company's operating income from continuing operations
increased $2.0 million, or 42%, to $6.8 million in 1996 from $4.8
million in 1995. The Company had net realized and unrealized
gains of $.2 million in 1996. Excluding net realized and
unrealized gains, the Company had operating income from
continuing operations of $6.6 million in 1996 compared to $4.8
million for 1995. Net income applicable to common shares was $7.8
million or $1.04 per share, diluted, for the year ended December
31, 1996 compared to $8.2 million or $1.08 per share, diluted,
for the year ended December 31, 1995. Income tax expense
increased to $.1 million from a benefit of $1.4 million in 1995;
reference is made to Note 15 of Notes to Consolidated Financial
Statements for a reconciliation of the effective tax rate.
22
<PAGE>
Insurance Group
- ---------------
The Insurance Group's operating income increased 28% to
$10.0 million in 1996 from $7.8 million in 1995. Operating income
includes net realized and unrealized gains of $.2 million in 1996
compared to $.4 million of losses in 1995. Decisions to sell
securities are based on cash flow needs, investment opportunities
and economic and market conditions, thus creating fluctuations in
gains (losses) from year to year. Operating income excluding net
realized and unrealized gains (losses) was $9.8 million in 1996
compared to $8.2 million in 1995.
Premium revenues increased $13.2 million or 23% to $69.6
million in 1996 from $56.4 million in 1995; premium revenues at
Madison Life increased $2.5 million while Standard Life showed a
$10.7 million increase in premiums. The increase at Madison Life
is comprised of: a $.6 million increase in the credit lines of
business primarily due to new accounts added during 1996; a $.5
million increase in long-term disability premiums; a $.6 million
increase in the ordinary life and individual accident and health
lines of business primarily from the acquisition of a pre-need
(funeral expense coverage) block of business effective January 1,
1996; a $.4 million increase in group term life premiums; and a
$.4 million increase in other life and health lines of business.
The change at Standard Life is comprised of the following: $6.7
million in additional stop-loss premiums reflecting increased
retention along with the continued growth in this line of
business; $2.0 million from the development of a POS product;
$1.3 million from the development of an HMO reinsurance product;
and $1.1 million in its DBL business due to an acquisition of a
block in the third quarter of 1996. All of the foregoing were
offset by a $.4 million decrease due to the continuing runoff in
the closed blocks of life, annuity and individual and group
accident and health lines of business.
Total net investment income increased $2.9 million due to a
realignment of the securities portfolio, higher returns on
certain equity investments, an increase in assets at Madison Life
related to the acquisition of the pre-need and interest-sensitive
blocks of business, and the infusion of a $5.0 million surplus
note in the fourth quarter of 1996. The annualized return on
investments in 1996 was 7.2% compared to 7.4% in 1995. Equity
income increased $.4 million due to a reduction in expenses
sustained by certain start-up insurance related partnerships in
which the Insurance Group invested in 1995.
Other income increased $.9 million from 1995 to 1996
resulting from: an increase of $.6 million in reinsurance
recoveries at Madison Life; an increase at Standard Life in stop-
loss fee income earned of $.4 million; $.8 million of
administrative fee income received from International Benefits
Administrators L.L.C., a third party administrator, formerly
majority-owned by Standard Life (the "TPA"). The foregoing
23
<PAGE>
increases were offset by a $.9 million decrease in reinsurance
recoveries.
Insurance benefits, claims and reserves increased $12.5
million, or 33%, reflecting an increase of $4.7 million at
Madison Life and $7.8 million at Standard Life. Madison Life's
increase resulted from the following: a $.8 million increase in
ordinary life and individual accident and health claims and
reserves primarily due to the acquisition of the pre-need block
of business; a $.5 million increase in long-term disability
claims; a $.6 million increase in group term life claims; a $.3
million increase in claims and reserves in other life and health
lines of business; a $1.7 million increase in interest credited
to universal life and annuity products primarily as a result of
the acquisition of the pre-need block of business and the
interest sensitive whole life block of business; and a $.8
million increase in the credit line of business due to new
accounts. The change at Standard Life is comprised of the
following increases: $4.9 million in stop-loss claims incurred
as a result of the increased retention and the increased premiums
in this line of business; additional claims and reserves of $1.1
million relating to the POS product; $1.2 million in claims and
reserves from the HMO reinsurance product; $.6 million relating
to the assumed block of group accident and health line of
business; and $.9 million in DBL claims due to increased volume.
The foregoing increases were offset by a $.9 million decrease in
claims and reserves due to the continuing runoff of the closed
blocks of life, annuity and individual and group accident and
health lines of business.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $3.3
million. Madison Life's expenses increased $.6 million primarily
due to the acquisition of new business. Standard Life's expenses
increased $2.7 million as a result of: a $.5 million increase in
commissions from the growth in business; and a $2.2 million
increase in general expenses due to administrative fees
associated with the higher retention of the stop-loss business,
an increase in salary and consulting expenses, general expenses
attributable to the TPA, and expenses attributable to new product
development.
Corporate
- ---------
Operating losses for the year ended December 31, 1996
increased by $.2 million from 1995. Operating losses in 1995
include realized gains of $.4 million. Excluding net realized and
unrealized gains, operating losses decreased to $3.2 million in
1996 from losses of $3.4 million in 1995. Investment income
increased $.1 million, equity income increased $.1 million and
other income increased $.1 million from 1995. In connection with
the pro-rata distribution of Zimmerman's common stock in 1996,
the Company received a special cash dividend of $18.5 million, of
which $10.0 million was used to repay all of the Company's
24
<PAGE>
indebtedness; as a consequence, interest expense decreased $.4
million. Selling, general and administrative expenses increased
$.5 million.
LIQUIDITY
---------
Insurance Group
- ---------------
The Insurance Group normally provides cash flow from: (i)
operations; (ii) the receipt of scheduled principal payments on
its portfolio of fixed income securities; and (iii) earnings on
investments. Such cash flow is used partially to finance
liabilities for insurance policy benefits. These liabilities
represent long-term obligations which are calculated using
certain assumed interest rates.
Asset Quality
The nature and quality of insurance company investments must
comply with all applicable statutes and regulations which have
been promulgated primarily for the protection of policyholders.
Of the aggregate carrying value of the Company's investment
assets, approximately 83% was invested in investment grade fixed
income securities, resale agreements, policy loans and cash and
cash equivalents at December 31, 1997. Also at such date,
approximately 98% of the Company's fixed maturities were
investment grade. These investments carry less risk and,
therefore, lower interest rates than other types of fixed
maturity investments. At December 31, 1997, approximately 2% of
the carrying value of fixed maturities was invested in
diversified non-investment grade fixed income securities
(investments in such securities have different risks than
investment grade securities, including greater risk of loss upon
default, and thinner trading markets). Less than .1% of the
Company's total investments were in real estate, non-performing
fixed maturities and mortgage loans.
The Company monitors its investment portfolio on a
continuous basis and believes that the liquidity of the Insurance
Group will not be adversely affected by its current investments.
Corporate
- ---------
Corporate derives its funds principally from: (i) dividends
and interest income from the Insurance Group; (ii) tax payments
pursuant to tax sharing agreements with, and management fees
from, its subsidiaries; and (iii) investment income from
Corporate liquidity. Regulatory constraints historically have
not affected the Company's consolidated liquidity, although state
insurance laws have provisions relating to the ability of the
parent company to use cash generated by the Insurance Group to
fund operating expenses, interest and dividend payments at
25
<PAGE>
Corporate. The Company remains contingently liable in connection
with the guarantee of $10.0 million of subordinated indebtedness
of Zimmerman (see Note 10 of Notes to Consolidated Financial
Statements).
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $18.1 million
at December 31, 1997. At the present time, the Company is not in
need of any additional long-term financing.
OUTLOOK
Business
- --------
Although federal and state legislative and regulatory bodies
have proposed various health care and insurance reform
initiatives in recent years, the Company anticipates that its
insurance products will continue to be viable in any such changed
environment.
The Company anticipates increasing its premium volume
through (i) acquisitions; (ii) greater geographical diversity;
(iii) expansion of its network of MGUs, MGAs, HMOs, general
agents and agents; and (iv) its role as lead underwriter on
reinsurance facilities. The Company is particularly interested in
acquiring the following types of policies: traditional and group
life, interest sensitive life, credit life and health, limited
benefit health (e.g., cancer or hospital indemnity), medical
stop-loss, DBL blocks, and certain other disability. In
anticipation of increased acquisition opportunities, the Company
significantly improved its administration systems commencing in
the latter part of 1996, which enabled it to more efficiently
convert and manage acquired blocks.
The Company expects that its future results will be impacted
by a significantly higher effective income tax rate, principally
due to reduced benefits associated with the utilization of its
remaining tax loss carryforwards.
The Company has continued and will continue to take all
steps necessary to address Year 2000 compliance issues. Since
the Company has updated and enhanced many of its primary systems
in the past two years, it does not believe that the Year 2000
problem will pose operational difficulties. The cost of updating
the Company's remaining systems is not expected to have a
material effect on the Company or its results of operations, and
is expected to be completed by the beginning of 1999. The Company
has requested information from, among others, its MGUs, MGAs,
HMOs, agents and reinsurers regarding the status of their Year
2000 compliance programs, and is in the process of evaluating any
possible impact on the Company.
26
<PAGE>
This report and other reports and statements filed by the
Company with the Securities and Exchange Commission contain or
may contain certain forward looking statements (as that term is
defined in the Private Securities Litigation Reform Act of 1995),
and which are subject to certain risks and uncertainties. Among
those factors which could cause the actual results to differ
materially from those suggested by such statements are the
following: catastrophic losses in the Company's insurance lines
or a material aggregation of losses; changes in federal or state
law affecting the Company's insurance products; availability of
adequate retrocessional insurance coverage at appropriate prices;
stock and bond market volatility; the effect of changes required
by generally accepted accounting practices or statutory
accounting practices; and other risks which are described from
time to time in the Company's filings with the Securities and
Exchange Commission.
Capital Resources
- -----------------
Due to its superior capital ratios, broad licensing and
excellent asset quality and credit-worthiness, the Insurance
Group remains well positioned to increase or diversify its
current activities, and to raise additional capital in the public
or private markets to the extent determined to be necessary or
desirable, in order to pursue acquisitions or otherwise expand
its operations.
In accordance with SFAS No. 115, the Company may carry its
portfolio of fixed income securities either as held to maturity
(carried at amortized cost), as trading securities (carried at
fair market value) or as available-for-sale (carried at fair
market value); the Company has chosen to carry all of its debt
securities as available-for-sale. The Company experienced a
change in unrealized gains of $3.4 million, net of deferred taxes
of $1.0 million, in total stockholders' equity, reflecting
unrealized gains of $1.9 million at December 31, 1997 versus
unrealized losses of $1.5 million at December 31, 1996. From time
to time, as warranted, the Company employs investment strategies
to mitigate interest rate and other market exposures.
Accounting Pronouncements Not Yet Adopted
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No.'s 130 and 131 are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards for the
way that public business enterprises report information about
27
<PAGE>
operating segments in annual financial statements, and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders.
In June 1996, FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." In December 1996, FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." The requirements of SFAS No. 125 have been
deferred by SFAS No. 127, are effective after December 31, 1997,
and will be applied prospectively; earlier or retroactive
application is not permitted. The Company is evaluating SFAS No.
125, but does not believe it will have a material impact on the
Company.
DISTRIBUTION OF ZIMMERMAN
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman on a pro rata basis to holders of
record of IHC's common stock as of December 20, 1996.
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman Common Stock for each five
shares of IHC Common Stock, and cash in lieu of fractional
shares. IHC received a ruling from the Internal Revenue Service
that the distribution would be tax-free to IHC shareholders, and
that IHC would not recognize income, gain or loss as a result of
the transaction.
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33.0 million, of which $10.0 million consists of subordinated
debt guaranteed by a subsidiary of IHC. The proceeds of
borrowings by Zimmerman under such arrangements were used, among
other things, to repay all of its prior outstanding indebtedness
and to pay a $19.7 million special cash dividend to its
shareholders. From its $18.5 million portion of the special
dividend, the Company repaid all of its $10.0 million of
indebtedness, contributed $5.0 million to Madison Life in
exchange for a surplus note and used the balance for working
capital. Expenses of $1.1 million in connection with the
distribution transaction are recorded in discontinued operations,
net on the consolidated statement of operations.
As a result of the $10.0 million guarantee of Zimmerman's
subordinated debt, the credit to stockholders' equity of $7.9
million, or $1.06 per share, that would have been recorded upon
consummation of the distribution of Zimmerman has been deferred
until such time as the subordinated debt is repaid or the
guarantee is eliminated.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Index to Consolidated Financial Statements and Schedules
on page 32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information required by this Item is incorporated by
reference to "Election of Directors" and "Executive
Officers" in the Company's Proxy Statement for its 1998
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required by this Item is incorporated by
reference to "Executive Compensation" in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders,
except that the information required by paragraphs (i), (k)
and (l) of Item 402 Regulation S-K (229.402) and set forth
in such Proxy Statement is specifically not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
---------------------------------------------------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
-------------------------------------------------------
(a) (1) and (2) See Index to Consolidated Financial Statements
and Schedules on page 32.
(3) EXHIBITS See Index to Exhibits on page 75.
(b) A report on Form 8-K was filed on January 10, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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, on March 25, 1998.
INDEPENDENCE HOLDING COMPANY
(REGISTRANT)
By/s/ Edward Netter
-----------------
Edward Netter
Chairman and
Chief Executive Officer
Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated as of the 25th day of March, 1998.
/s/ Harold E. Johnson
- ---------------------
Harold E. Johnson
Director
/s/ Allan C. Kirkman
- --------------------
Allan C. Kirkman
Director
/s/ Steven B. Lapin
- -------------------
Steven B. Lapin
Director, President and
Chief Operating Officer
/s/ Donald T. Netter
- --------------------
Donald T. Netter
Director
30
<PAGE>
/s/ Edward Netter
- -----------------
Edward Netter
Director, Chairman
and Chief Executive Officer
(Principal Executive Officer)
/s/ Edward J. Scheider
- ----------------------
Edward J. Scheider
Director
/s/ F. Peter Zoch, III
- ----------------------
F. Peter Zoch, III
Director
/s/ Roy T.K. Thung
- ------------------
Roy T.K. Thung
Director, Executive
Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
/s/ Teresa A. Herbert
- ---------------------
Teresa A. Herbert
Vice President
and Controller
(Principal Accounting Officer)
31
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGES
- -----
INDEPENDENT AUDITORS' REPORT.............................. 33
CONSOLIDATED FINANCIAL STATEMENTS:
- ---------------------------------
Consolidated Balance Sheets at December 31, 1997
and 1996................................................. 34
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995......................... 35
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995..... 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.........................37 - 38
Notes to Consolidated Financial Statements................39 - 66
SCHEDULES:*
- ---------
Summary of investments - other than investments in
affiliates at December 31, 1997(Schedule I)..............67 - 68
Condensed financial information of parent company
(Schedule III)...........................................69 - 73
Supplementary insurance information (Schedule V).......... 74
EXHIBIT INDEX............................................. 75
*All other schedules have been omitted as they are not applicable
or not required, or the information is given in the consolidated
financial statements, notes thereto or in other schedules.
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INDEPENDENCE HOLDING COMPANY:
We have audited the consolidated financial statements of
Independence Holding Company and subsidiaries as listed in the
accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the 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 financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Independence Holding Company and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
New York, New York
March 23, 1998
33
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------
ASSETS:
Cash and cash equivalents.............$ 23,028,000 $ 10,361,000
Investments:
Short-term investments............... 18,265,000 10,316,000
Securities purchased under agreements
to resell (Note 3).................. 25,469,000 36,542,000
Fixed maturities (Note 4)............ 201,324,000 165,040,000
Equity securities (Note 4)........... 13,496,000 4,427,000
Other investments (Note 8)........... 50,459,000 32,683,000
----------- -----------
Total investments................... 309,013,000 249,008,000
Deferred insurance acquisition costs.. 13,611,000 11,221,000
Due and unpaid premiums............... 6,448,000 5,122,000
Due from reinsurers................... 92,990,000 50,877,000
Notes and other receivables........... 3,292,000 4,205,000
Other assets (Note 1)................. 6,356,000 5,607,000
----------- -----------
TOTAL ASSETS.........................$454,738,000 $336,401,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits (Note 1).......$169,082,000 $115,594,000
Unearned premiums..................... 27,893,000 11,654,000
Funds on deposit...................... 72,187,000 68,915,000
Insurance policy claims (Note 9)...... 6,279,000 3,914,000
Other policyholders' funds............ 2,651,000 2,201,000
Financial instruments sold, but not
yet purchased (Note 4)............... - 539,000
Due to brokers........................ 43,356,000 19,740,000
Due to reinsurers..................... 4,349,000 6,764,000
Accounts payable, accruals and other
liabilities.......................... 23,516,000 18,653,000
Liability for business transferred
(Note 10)............................ 7,905,000 7,905,000
Income taxes (Note 15)................ 6,515,000 3,666,000
----------- -----------
TOTAL LIABILITIES.................... 363,733,000 259,545,000
----------- -----------
STOCKHOLDERS' EQUITY: (NOTES 12, 13 and 14)
Preferred Stock (none issued).......... - -
Common stock, 7,430,169 and 7,431,769
shares issued and outstanding,
respectively, net of 2,188,950
shares in treasury.................... 7,430,000 7,432,000
Paid-in capital........................ 76,046,000 76,068,000
Unrealized gains (losses)on
investments, net of taxes............. 1,892,000 (1,466,000)
Retained earnings(accumulated deficit). 5,637,000 (5,178,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............ 91,005,000 76,856,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............$454,738,000 $336,401,000
=========== ===========
See accompanying notes to consolidated financial statements.
34
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------
REVENUES:
Insurance premiums (Note 17)......$ 82,201,000 $ 69,585,000 $ 56,401,000
Net investment income (Note 6).... 21,534,000 16,917,000 13,885,000
Net realized and unrealized
gains (Note 7)................... 539,000 190,000 -
Equity income (loss).............. 371,000 (33,000) (527,000)
Other income...................... 2,112,000 2,685,000 1,668,000
----------- ----------- -----------
106,757,000 89,344,000 71,427,000
----------- ----------- -----------
EXPENSES:
Insurance benefits, claims and
reserves......................... 58,561,000 49,788,000 37,345,000
Amortization of deferred
insurance acquisition costs...... 3,581,000 3,819,000 3,898,000
Interest expense.................. - 733,000 1,101,000
Selling, general and
administrative expenses.......... 31,327,000 28,184,000 24,311,000
----------- ----------- -----------
93,469,000 82,524,000 66,655,000
----------- ----------- -----------
Operating income before income
taxes............................ 13,288,000 6,820,000 4,772,000
Income tax expense (benefit)
(Note 15)........................ 2,101,000 110,000 (1,400,000)
----------- ----------- -----------
Income from continuing
operations....................... 11,187,000 6,710,000 6,172,000
Income from discontinued
operations, net (Note 2)......... - 1,048,000 2,028,000
----------- ----------- -----------
Net income........................$ 11,187,000 $ 7,758,000 $ 8,200,000
=========== =========== ===========
BASIC INCOME PER COMMON SHARE:
Income from continuing operations.$ 1.51 $ .90 $ .81
Income from discontinued
operations, net.................. - .14 .27
----------- ----------- -----------
Net income........................$ 1.51 $ 1.04 $ 1.08
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING....................... 7,431,000 7,432,000 7,597,000
=========== =========== ===========
DILUTED INCOME PER COMMON SHARE:
Income from continuing
operations......................$ 1.49 $ .90 $ .81
Income from discontinued
operations, net................. - .14 .27
----------- ----------- -----------
Net income........................$ 1.49 $ 1.04 $ 1.08
=========== =========== ===========
WEIGHTED AVERAGE DILUTIVE SHARES
OUTSTANDING....................... 7,509,000 7,486,000 7,602,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
35
<PAGE>
<TABLE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED GAINS RETAINED
(LOSSES) ON EARNINGS TOTAL
COMMON STOCK PAID-IN INVESTMENTS, (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL NET DEFICIT) EQUITY
----------------------- --------------------------------------------------------
BALANCE AT DECEMBER 31, 1994........ 7,764,364 $ 7,764,000 $77,565,000 $(9,168,000) $(20,467,000) $55,694,000
Purchase of common stock
and warrants...................... (332,090) (332,000) (1,919,000) (2,251,000)
Net change in unrealized gains..... 9,663,000 9,663,000
Net income......................... 8,200,000 8,200,000
Realization of tax benefit of
operating loss carryforwards
subsequent to reorganization...... 599,000 599,000
Common stock dividend.............. (298,000) (298,000)
--------- ---------- ---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1995........ 7,432,274 7,432,000 76,245,000 495,000 (12,565,000) 71,607,000
Purchase of common stock
and warrants...................... (505) (5,000) (5,000)
Net change in unrealized gains..... (1,961,000) (1,961,000)
Net income......................... 7,758,000 7,758,000
Capital transactions of subsidiary. (172,000) (172,000)
Common stock dividend.............. (371,000) (371,000)
--------- ---------- ---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1996........ 7,431,769 7,432,000 76,068,000 (1,466,000) (5,178,000) 76,856,000
Purchase of common stock
and warrants..................... (1,600) (2,000) (22,000) (24,000)
Net change in unrealized gains..... 3,358,000 3,358,000
Net income......................... 11,187,000 11,187,000
Common stock dividend.............. (372,000) (372,000)
--------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997....... 7,430,169 $ 7,430,000 $76,046,000 $ 1,892,000 $ 5,637,000 $91,005,000
========= ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
36
</TABLE>
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................$ 11,187,000 $ 7,758,000 $ 8,200,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of deferred
insurance acquisition costs.... 3,581,000 3,819,000 3,898,000
Realized (gains) losses on
sales of investment securities. (730,000) 30,000 44,000
Unrealized losses (gains) on
trading securities............. 191,000 (220,000) (44,000)
Equity (income)loss............. (371,000) 33,000 527,000
Depreciation.................... 440,000 335,000 286,000
Deferred tax expense (benefits). 206,000 (260,000) (1,586,000)
Income tax benefit credited
to paid-in capital............. - - 599,000
Income from discontinued
operations, net................ - (1,048,000) (2,028,000)
Other........................... (867,000) 6,000 185,000
Change in assets and
liabilities:
Net (purchases)sales of
trading securities............. (1,692,000) 905,000 188,000
Increase in future
insurance policy benefits,
claims and other policy
liabilities.................... 80,003,000 48,236,000 11,435,000
Additions to deferred insurance
acquisition costs.............. (5,971,000) (5,884,000) (2,075,000)
Change in net amounts due from
and to reinsurers.............. (44,528,000) (3,471,000) (5,531,000)
Change in income tax liability.. 1,107,000 (176,000) (507,000)
Other........................... 2,587,000 593,000 (737,000)
----------- ----------- -----------
Net cash provided by
operating activities........ 45,143,000 50,656,000 12,854,000
----------- ----------- -----------
(CONTINUED)
37
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from
and to brokers..................$ 23,569,000 $ (691,000) $ (980,000)
Sales and maturities of
short-term investments.......... 56,881,000 31,542,000 15,933,000
Purchases of short-term
investments..................... (64,793,000) (34,479,000) (22,609,000)
Net sales (purchases) of resale
and repurchase agreements....... 11,073,000 (31,348,000) 13,465,000
Sales of equity securities....... 31,299,000 23,313,000 83,611,000
Purchases of equity securities... (37,524,000) (20,723,000) (80,668,000)
Sales and maturities of fixed
maturities...................... 190,372,000 187,206,000 238,304,000
Purchases of fixed maturities....(222,672,000) (215,254,000) (243,118,000)
Proceeds on sales of other
investments..................... 3,970,000 8,488,000 5,539,000
Additional investments in
other investments, net of
distributions................... (20,327,000) (15,786,000) (7,217,000)
Discontinued operations, net..... - 18,470,000 984,000
Other............................ 262,000 (1,339,000) (1,156,000)
----------- ----------- -----------
Net cash (used) provided by
investing activities........ (27,890,000) (50,601,000) 2,088,000
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Repurchase of common stock and
warrants........................ (24,000) (5,000) (2,251,000)
Payments of investment-type
insurance contracts............. (4,190,000) (4,190,000) (4,190,000)
Repayment of long-term debt...... - (12,061,000) (2,000,000)
Dividends paid................... (372,000) (298,000) (311,000)
----------- ----------- -----------
Net cash used by
financing activities........ (4,586,000) (16,554,000) (8,752,000)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents............. 12,667,000 (16,499,000) 6,190,000
Cash and cash equivalents,
beginning of year................ 10,361,000 26,860,000 20,670,000
----------- ----------- -----------
Cash and cash equivalents,
end of year......................$ 23,028,000 $ 10,361,000 $ 26,860,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
38
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company
engaged principally in the life and health insurance business
through its wholly-owned subsidiaries, Standard Security Life
Insurance Company of New York ("Standard Life"), Madison National
Life Insurance Company, Inc. ("Madison Life") and First Standard
Security Insurance Company ("First Standard") and their
subsidiaries (collectively, the "Insurance Group"). IHC and its
subsidiaries (including the Insurance Group) are collectively
referred to as the "Company."
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC's common stock as of
December 20, 1996. The Consolidated Financial Statements of the
Company present Zimmerman as discontinued operations (see Notes 2
and 10).
Geneve Corporation, a diversified financial holding company,
and its affiliated entities (collectively, "Geneve") hold
approximately 55% of IHC's outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and
include the accounts of IHC and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Investments in partnerships which are not consolidated are
carried on the equity method, which approximates the Company's
equity in their underlying net book value.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect: (i) the reported
amounts of assets and liabilities; (ii) the disclosure of
contingent assets and liabilities at the date of the financial
statements; and (iii) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(C) ONE-FOR-TWO REVERSE STOCK SPLIT
A one-for-two reverse stock split (the "reverse stock
split") of IHC's common stock became effective on June 28, 1996;
accordingly, common shares outstanding and per share calculations
reflect the reverse stock split.
39
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) RECLASSIFICATION
Certain amounts in prior years' consolidated financial
statements and notes thereto have been reclassified to conform to
the 1997 presentation.
(E) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost which approximates fair
value and include principally interest-bearing deposits at
brokers, money market instruments and U.S. Treasury securities
with original maturities of less than 91-day maturity.
Investments with original maturities of 91-days to 1 year are
considered short-term investments and are carried at cost which
approximates fair value.
(F) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell ("resale
agreements") and securities sold under agreements to repurchase
("repurchase agreements") are treated as financing transactions
and are carried at the amounts at which the securities will be
subsequently resold or repurchased as specified in the
agreements.
(G) INVESTMENTS IN SECURITIES
(i) Investments in fixed income securities (bonds (including
Government National Mortgage Association ("GNMA") bonds)), notes
and redeemable preferred stock), equity securities, and
derivatives (options and options on future contracts) are valued
as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investments in fixed income and equity
securities are carried as follows:
(a) Fixed income securities which are being held to
maturity ("held to maturity") are carried at amortized cost.
(b) Securities which are held for trading purposes are
carried at estimated fair value ("fair value"). Unrealized gains
or losses are credited or charged, as appropriate, to the
Consolidated Statements of Operations.
(c) Securities which may or may not be held to maturity
("available-for-sale") are carried at fair value. Unrealized
gains or losses, net of deferred income taxes, are credited or
charged, as appropriate, directly to stockholders' equity.
Realized gains and losses on sales of available-for-sale
securities, and unrealized losses considered to be other than
temporary, are credited or charged to the Consolidated Statements
of Operations.
40
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(ii) Financial instruments sold, but not yet purchased,
represent obligations to replace borrowed securities that have
been sold. Such transactions occur in anticipation of declines
in the fair value of the securities. The Company's risk is an
increase in the fair value of the securities sold in excess of
the consideration received, but that risk is mitigated as a
result of relationships to certain securities owned. Unrealized
gains or losses on open transactions are credited or charged, as
appropriate, to the Consolidated Statement of Operations. While
the transaction is open, the Company will also incur an expense
for any accrued dividends or interest payable to the lender of
the securities. When the transaction is closed, the Company
realizes a gain or loss in an amount equal to the difference
between the price at which the securities were sold and the cost
of replacing the borrowed securities.
(iii) Gains or losses on sales of securities are determined
on the basis of specific identification.
(iv) The Company enters into derivative financial
instruments, such as put and call option contracts on interest
rate futures contracts, to minimize losses on portions of the
Company's fixed income portfolio in a rapidly changing interest
rate environment and equity index options to offset fluctuations
in the equity markets. The derivative financial instruments are
all readily marketable and are carried on the Consolidated
Balance Sheets at their current fair value with changes in
unrealized gains or losses, net of deferred income taxes,
credited or charged as appropriate directly to stockholders'
equity for investments carried as available-for-sale or to the
Consolidated Statement of Operations for investments carried as
trading. All realized gains and losses are reflected currently
in the Consolidated Statement of Operations.
(v) Fair value is determined by quoted market prices, where
available, or by independent pricing services.
(H) PARTNERSHIP INTERESTS
Partnership interests primarily consist of investments in
partnerships that have relatively "market neutral" arbitrage
strategies, and all securities held by these partnerships are
carried at fair value. All partnership investments are carried
on the equity method.
(I) MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are stated at their
aggregate unpaid balances.
41
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(J) DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new insurance business, principally
commissions and certain variable underwriting, agency and policy
issuance expenses, have been deferred and are being amortized,
with interest, over the premium paying period of the related
insurance policies in proportion to the ratio of the annual
premium revenue to the total anticipated premium revenue.
Anticipated premium revenue was estimated using assumptions as to
mortality (morbidity on health insurance) and withdrawals
consistent with those used in calculating future insurance policy
benefits. Credit life and credit accident and health deferred
insurance acquisition costs are amortized proportionally over the
period during which the premium is earned. Deferred insurance
acquisition costs are periodically reviewed to determine
recoverability from future income, including investment income,
and, if not recoverable, are charged to expense.
(K) PROPERTY AND EQUIPMENT
Property and equipment included in other assets are stated
at cost of $1,723,000 and $1,637,000 which is net of accumulated
depreciation and amortization of $1,734,000 and $1,498,000 in
1997 and 1996, respectively. Improvements are capitalized while
repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment has been
provided on the straight-line method over the estimated useful
lives of the respective assets. Amortization of leasehold
improvements has been provided on the straight-line method over
the shorter of the lease term or the estimated useful life of the
asset.
(L) FUTURE INSURANCE POLICY BENEFITS
Liabilities for future insurance policy benefits, including
future dividends on participating policies, have been computed
primarily using the net level premium method based on anticipated
investment yield, mortality (morbidity on health insurance) and
withdrawals. Life reserve interest rates are generally graded and
range from 2% to 9% per annum. Withdrawals are based on
experience.
Future policy benefits consist of the following at December
31, 1997 and 1996:
1997 1996
----------------------
(IN THOUSANDS)
Life.............................$ 67,028 $ 53,299
Accident and health.............. 102,054 62,295
------- -------
$169,082 $115,594
======= =======
42
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(M) FUNDS ON DEPOSIT
Funds received for certain long duration contracts
(principally, annuities and universal life policies) are credited
directly to a policyholder liability account-funds on deposit.
Withdrawals are recorded directly as a reduction of respective
policyholders' funds on deposit. Amounts on deposit were
credited at an annual rate of 4.5% to 13.9% in 1997 and 1996.
(N) INSURANCE PREMIUM REVENUE RECOGNITION
Insurance premiums, including reinsurance premiums assumed,
are recognized as revenue over the premium paying period of the
policies. Credit life and health premiums are recognized over the
term of the policy.
(O) PARTICIPATING POLICIES
Participating policies represent 12.9%, 7.0%, and 6.6% of
the individual life insurance in-force and .8%, 1.7%, and 2.0% of
the net premium income, as of and for the years ended December
31, 1997, 1996 and 1995, respectively, and provide for the
payment of dividends. Dividends to policyholders are determined
annually and are payable only upon declaration by the Board of
Directors of the insurance companies. With respect to Standard
Life, New York State Insurance Department requirements limit the
amount of profit on participating policies which can inure to
stockholders to 10% of such profits or $.50 per year per $1,000
of such insurance in-force, whichever is greater. At December
31, 1997, the stockholder's equity of the insurance companies was
not restricted because of participating policyholders' surplus.
(P) DEFERRED INCOME TAXES
The provision for deferred income taxes is based on the
asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized by applying
enacted statutory tax rates applicable to future years to
temporary differences related to amounts included in the
Consolidated Statement of Operations arising from differences
between amounts reported in the Consolidated Financial Statements
and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
(Q) INCOME PER COMMON SHARE
In December 1997, the Company adopted SFAS No. 128,
"Earnings per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share. Accordingly, all
prior earnings per share calculations have been restated to
43
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
reflect the new standard. Included in the diluted earnings per
share calculation for 1997, 1996 and 1995, respectively, are
78,000, 54,000 and 5,000 shares from the assumed exercise of
options using the treasury stock method. Net income does not
change as a result of the assumed dilution of options. Warrants
to purchase 1,965,697 shares of common stock at $16.37 per share
were not included in the computation of diluted earnings per
share because the warrants' purchase price was greater than the
average market price of the common shares during 1997, 1996 and
1995.
(R) REINSURANCE
Amounts paid for or recoverable under reinsurance contracts
are included in total assets as reinsurance balances, or
reinsurance prepaid. The cost of reinsurance related to long-
duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
(S) STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation
plan. Since stock options under the plan are issued at fair
market value on date of grant, no compensation cost has been
recognized in the Consolidated Statement of Operations.
Accordingly, the Company follows the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
(T) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No's. 130 and 131 are effective
for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. SFAS No. 131 establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders.
In June 1996, FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." In December 1996, FASB issued SFAS No. 127,
44
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." The requirements of SFAS No. 125 have been
deferred by SFAS No. 127, are effective after December 31, 1997,
and will be applied prospectively; earlier or retroactive
application is not permitted. The Company is evaluating the
Statement but does not expect it to have a material impact on the
Company.
NOTE 2. DISCONTINUED OPERATIONS
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman on a pro rata basis to holders of
record of IHC's common stock as of December 20, 1996.
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman common stock for each five
shares of IHC common stock, and cash in lieu of fractional
shares. IHC received a ruling from the Internal Revenue Service
that the distribution would be tax-free to IHC shareholders, and
that IHC would not recognize income, gain or loss as a result of
the transaction.
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33,000,000, of which $10,000,000 consists of subordinated
debt guaranteed by a subsidiary of IHC (see also Note 10). The
proceeds of borrowing by Zimmerman under such arrangements were
used, among other things, to repay all of its prior outstanding
indebtedness and to pay a $19,701,000 special cash dividend to
its shareholders. From its $18,470,000 portion of the special
dividend, IHC repaid all of its $10,000,000 of indebtedness,
contributed $5,000,000 to Madison Life in exchange for a surplus
note, and used the balance for working capital. Expenses of
$1,106,000 incurred in connection with the distribution
transaction are recorded in discontinued operations, net on the
Consolidated Statement of Operations.
Since Zimmerman has historically comprised all of the
Company's manufacturing segment, the Consolidated Financial
Statements and notes thereto of the Company reflect Zimmerman as
discontinued operations.
45
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
Income from discontinued operations for the years ended
December 31, 1996 and 1995 is summarized as follows:
1996 1995
-------------------
(IN THOUSANDS)
Revenues....................$41,277 $41,669
====== ======
Operating income from
discontinued operations,
net of minority interest...$ 1,709 $ 3,280
Income taxes................ 661 1,252
------ ------
Net income from
discontinued operations....$ 1,048 $ 2,028
====== ======
During 1996, Zimmerman was included in the consolidated
federal income tax return filed by the Company. On a separate
company basis, Zimmerman had a tax sharing agreement with IHC for
the periods presented; accordingly, discontinued operations are
shown net of applicable taxes in accordance with such agreement.
NOTE 3. RESALE AGREEMENTS
Resale agreements are utilized to invest excess funds on a
short-term basis. At December 31, 1997, the Company had
$25,469,000 in resale agreements outstanding, all of which
settled on January 2, 1998 and were subsequently reinvested. The
Company maintains control of securities purchased under resale
agreements and values the collateral on a daily basis and obtains
additional collateral, if necessary, to protect the Company in
the event of default by the counterparties.
NOTE 4. INVESTMENT SECURITIES
The cost, (amortized cost with respect to certain fixed
maturities) gross unrealized gains, gross unrealized losses and
fair value of investments in securities are as follows:
DECEMBER 31, 1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities...$ 29,974 $ 392 $ (247) $ 30,119
U.S. Government and
agencies obligations.. 43,510 690 (54) 44,146
GNMA's................. 123,464 1,287 (7) 124,744
46
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1997
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
Obligations of states
and political
subdivisions.......... 2,352 63 (100) 2,315
------- ------- ------- -------
Total fixed maturities..$199,300 $ 2,432 $ (408) $201,324
======= ======= ======= =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common stock...........$ 8,771 $ 786 $ (98) $ 9,459
Preferred stock........ 2,059 206 - 2,265
------- ------- ------- -------
10,830 992 (98) 11,724
======= ======= ======= =======
TRADING:
Common stock........... 1,832 71 (131) 1,772
------- ------- ------- -------
Total equity securities.$ 12,662 $ 1,063 $ (229) $ 13,496
======= ======= ======= =======
DECEMBER 31, 1996
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities...$ 30,204 $ 377 $ (1,311) $ 29,270
U.S. Government and
agencies obligations.. 28,832 180 (747) 28,265
GNMA's................. 106,701 69 (844) 105,926
Obligations of states
and political
subdivisions.......... 1,618 44 (83) 1,579
------- ------- ------- -------
Total fixed maturities...$167,355 $ 670 $ (2,985) 165,040
======= ======= ======= =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common stock...........$ 2,211 $ 283 $ (31) $ 2,463
Preferred stock........ 1,440 105 - 1,545
------- ------- ------- -------
3,651 388 (31) 4,008
------- ------- ------- -------
TRADING:
Common stock........... 335 84 - 419
------- ------- ------- -------
Total equity securities.$ 3,986 $ 472 $ (31) $ 4,427
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- --------------------------
TRADING:
Common stock............$ (585) $ 46 $ - $ (539)
======= ======= ======= =======
47
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of fixed income securities
at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Excluding extraordinary paydowns, the average life of GNMA's is
materially less than the stated maturity.
AMORTIZED FAIR
COST VALUE
-----------------
(IN THOUSANDS)
Due after one year through
five years...........................$ 4,753 $ 4,875
Due after five years through
ten years............................ 46,181 46,826
Due after ten years................... 24,902 24,879
------- -------
75,836 76,580
GNMA's - 15 year...................... 43,555 44,159
GNMA's - 30 year...................... 79,909 80,585
------- -------
$199,300 $201,324
======= =======
The average fair value of trading options and futures
contract sold, but not yet purchased was $85,000 and $97,000 for
1997 and 1996, respectively.
$3,971,000 of gross gains and $3,423,000 of gross losses
were realized on sales of available-for-sale securities for the
year ended December 31, 1997.
$4,187,000 of gross gains and $3,862,000 of gross losses
were realized on sales of available-for-sale securities for the
year ended December 31, 1996.
$9,543,000 of gross gains and $9,783,000 of gross losses
were realized on sales of available-for-sale securities for the
year ended December 31, 1995.
At December 31, 1997, the Company had no investments in
derivative financial instruments.
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of financial instruments not disclosed elsewhere
in the notes:
48
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
(CONTINUED)
(A) MORTGAGE LOANS
The fair value of mortgage loans is calculated by
discounting the scheduled cash flows at a current market interest
rate adjusted for credit risk. Prepayments were not assumed to
occur due to the low interest rates on the mortgages.
(B) POLICY LOANS
The fair value of policy loans is calculated by projecting
the current policy loans in the aggregate to the end of the
expected lifetime period of the life insurance business at the
average policy loan rates and discounting them at a current
market policy loan interest rate.
(C) FUNDS ON DEPOSIT
The Company has two types of funds on deposit. The first
type is credited with a current market interest rate, resulting
in a carrying value which approximates fair value. The second
type carries fixed interest rates which are currently higher than
current market interest rates. The fair value of these deposits
was determined by discounting the payments using current market
interest rates.
The estimate fair values of financial instruments are as
follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Fixed maturities.....$201,324 $201,324 $165,040 $165,040
Equity securities.... 13,496 13,496 4,427 4,427
Mortgage loans....... 291 313 373 431
Policy loans......... 8,677 8,327 6,582 6,085
FINANCIAL LIABILITIES:
Funds on deposit..... 72,187 74,280 68,915 71,429
Financial instruments
sold but not yet
purchased........... - - 539 539
49
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 6. NET INVESTMENT INCOME
Major categories of net investment income for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995
------------------------------
(IN THOUSANDS)
Fixed maturities................$12,471 $11,146 $ 9,328
Equity securities............... 406 404 681
Short-term investments.......... 1,444 1,437 1,371
Other........................... 500 521 441
Investment income from the
purchase of business........... 1,210 1,102 19
Investment income from
partnerships................... 5,831 2,644 2,257
Investment expenses............. (328) (337) (212)
------ ------ ------
NET INVESTMENT INCOME..........$21,534 $16,917 $13,885
====== ====== ======
NOTE 7. NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized and unrealized gains (losses) on investments
for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
------------------------------
(IN THOUSANDS)
Net realized gains (losses)
Fixed maturities................$ (209) $ (411) $ 1,258
Equity securities............... 1,544 937 4,283
Financial instruments sold,
but not yet purchased.......... 113 (75) (1,177)
Options - available for sale.... (328) (7) (3,006)
Options - trading............... - - (80)
Futures contracts............... (126) (477) (1,286)
Other........................... (264) 3 (36)
------ ------ ------
Net realized gains (losses)...... 730 (30) (44)
Net unrealized (losses) gains.... (191) 220 44
------ ------ ------
NET REALIZED AND UNREALIZED
GAINS..........................$ 539 $ 190 $ -
====== ====== ======
50
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 8. OTHER INVESTMENTS
Other investments consist of the following at December 31,
1997 and 1996:
1997 1996
---------------------
(IN THOUSANDS)
Partnership interests.................$ 40,221 $ 23,417
Policy loans.......................... 8,677 6,582
Mortgage loans........................ 291 373
Real estate........................... - 811
Other................................. 1,270 1,500
------- -------
$ 50,459 $ 32,683
======= =======
Included in partnership interests are the following significant
investments:
A) Dolphin Limited Partnership
The Company had invested $19,358,000 and $11,442,000 at
December 31, 1997 and 1996, respectively, in Dolphin Limited
Partnership ("Dolphin"), a limited partnership which invests in
relatively "market neutral" strategies, such as risk arbitrage,
convertible arbitrage and distressed situations.
The condensed balance sheets of Dolphin at December 31, 1997
and 1996 are as follows:
1997 1996
---------------------
(IN THOUSANDS)
Investments at market value................$ 40,563 $ 46,916
Due from brokers........................... 14,535 11,233
Other assets............................... 146 140
------- -------
Total assets..........................$ 55,244 $ 58,289
======= =======
Financial instruments sold, but not
yet purchased.............................$ 11,001 $ 12,769
Due to brokers............................. - 7,940
Other liabilities.......................... 71 151
------- -------
Total liabilities..................... 11,072 20,860
------- -------
Partners' capital
IHC....................................... 19,358 11,442
Other partners............................ 24,814 25,987
------- -------
Partners' capital.......................... 44,172 37,429
------- -------
Total liabilities and
partners' capital....................$ 55,244 $ 58,289
======= =======
51
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 8. OTHER INVESTMENTS (CONTINUED)
The condensed statements of operations for Dolphin for the
years ended December 31, 1997 and 1996 are as follows:
1997 1996
---------------------
(IN THOUSANDS)
Net realized and unrealized gains..........$ 10,459 $ 5,145
Net investment income...................... 1,592 1,123
------- -------
Total revenues............................ 12,051 6,268
Expenses................................... 1,387 859
------- -------
Net income.................................$ 10,664 $ 5,409
======= =======
IHC's share of net income..................$ 4,016 $ 1,681
======= =======
B) Incopoint Limited Partnership
The Company had invested $11,299,000 and $9,883,000 at
December 31, 1997 and 1996, respectively, in Incopoint Limited
Partnership ("Incopoint"), a limited partnership which invests in
relatively "market neutral" strategies, such as equity arbitrage
in the utility sector.
The condensed balance sheets of Incopoint at December 31,
1997 and 1996 are as follows:
1997 1996
---------------------
(IN THOUSANDS)
Cash and investments at market value.......$ 52,231 $ 42,453
Other assets............................... 1,854 3,876
------- -------
Total assets..........................$ 54,085 $ 46,329
======= =======
Financial instruments sold, but not
yet purchased.............................$ 27,703 $ 22,239
Other liabilities.......................... 2,526 2,828
------- -------
Total liabilities..................... 30,229 25,067
------- -------
Partners' capital
IHC....................................... 11,299 9,883
Other partners............................ 12,557 11,379
------- -------
Partners' capital.......................... 23,856 21,262
------- -------
Total liabilities and
partners' capital....................$ 54,085 $ 46,329
======= =======
52
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 8. OTHER INVESTMENTS (CONTINUED)
The condensed statements of operations for Incopoint for the
years ended December 31, 1997 and 1996 are as follows:
1997 1996
---------------------
(IN THOUSANDS)
Net realized and unrealized gains..........$ 3,002 $ 2,070
Net investment income (expense)............ (98) 56
------- ------
Total revenues............................ 2,904 2,126
Expenses................................... 135 142
------- ------
Net income.................................$ 2,769 $ 1,984
======= ======
IHC's share of net income..................$ 1,290 $ 922
======= ======
NOTE 9. LIABILITY FOR UNPAID CLAIMS
The liability for unpaid claims and claim adjustment
expenses represents amounts needed to provide for the estimated
cost of settling claims relating to insured events that have been
incurred prior to the balance sheet date which have not yet been
settled.
The change in the liability for unpaid claims and claim
adjustment expenses for the Insurance Group's health and
disability coverages for December 31, 1997, 1996 and 1995 is as
follows:
1997 1996 1995
-------------------------------
(IN THOUSANDS)
Balance at beginning of year.....$ 2,178 $ 3,403 $ 1,815
Less: reinsurance
recoverables.................... 512 531 327
------ ------ ------
Net balance at beginning
of year......................... 1,666 2,872 1,488
------ ------ ------
Amount incurred:
Current year..................... 35,426 26,997 20,234
Prior years...................... 6,550 7,003 4,530
------ ------ ------
Total........................... 41,976 34,000 24,764
------ ------ ------
Amount paid, related to:
Current year..................... 29,973 22,077 14,490
Prior years...................... 11,130 13,129 8,890
------ ------ ------
Total.......................... 41,103 35,206 23,380
------ ------ ------
Net balance end of year.......... 2,539 1,666 2,872
Plus: reinsurance recoverables.. 275 512 531
------ ------ ------
Balance at end of year........... 2,814 2,178 3,403
Unpaid life claims............... 3,465 1,736 1,759
------ ------ ------
Total insurance policy claims....$ 6,279 $ 3,914 $ 5,162
====== ====== ======
53
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 9. LIABILITY FOR UNPAID CLAIMS (CONTINUED)
The preceding schedule reflects the due and unpaid, in the
course of settlement and estimated incurred but not reported
components of the unpaid claims reserves for the Insurance
Group's health and disability coverages. Unpaid claims reserves
recorded in future policy benefits, which represent the present
value of amounts not yet due on claims, are not reflected in the
preceding schedule which accounts for a significant portion of
the incurred amounts related to prior years. The incurred and
paid data above reflects all activity for the year.
NOTE 10. LIABILITIES OF BUSINESS TRANSFERRED
In connection with the distribution of Zimmerman, a
subsidiary of the Company has guaranteed $10,000,000 of
subordinated debt of Zimmerman. Accordingly, the credit to
stockholders' equity of $7,905,000 or $1.06 per share that would
have been recorded upon consummation of the distribution of
Zimmerman has been deferred until such time as the subordinated
debt is repaid or the guarantee is eliminated. Such subordinated
debt matures on October 31, 2001. In conjunction with the
guarantee, such subsidiary entered into a $10,000,000 line of
credit on October 31, 1996 which may be drawn on in the event of
a default in repayment by Zimmerman of its subordinated debt. As
to such subsidiary, the line of credit (i) contains restrictions
with respect to, among other things, the creation of additional
indebtedness, the consolidation or merger with or into certain
corporations, the payment of dividends and the retirement of
capital stock, (ii) requires the maintenance of minimum amounts
of net worth, as defined, certain financial ratios, and certain
investment restrictions and (iii) is secured by the stock of
Madison Life and its immediate parent company and contribution
notes of Madison Life aggregating $25,000,000. At December 31,
1997, there were no amounts outstanding under the line of credit.
NOTE 11. LONG-TERM DEBT
Cash payments for interest were $764,000 and $1,241,000, for
the years ended December 31, 1996 and 1995, respectively. All
long-term debt was repaid during 1996.
NOTE 12. PREFERRED STOCK
During 1996, IHC reduced the number of authorized shares of
preferred stock, par value $1.00 per share, from 20,000,000 to
100,000.
54
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 13. COMMON STOCK
(A) IHC has reserved 2,745,890 shares of common stock for
issuance under its stock option plan and outstanding warrants at
December 31, 1997.
(B) In 1991, IHC initiated a program of repurchasing shares of
its common stock and warrants. From January 1, 1991 through
December 31, 1997, 2,132,322 common shares, or 23% of the amount
outstanding on January 1, 1991, were repurchased at a cost of
$10,957,000. All of such repurchased shares have either been
retired or reissued.
(C) During 1996, IHC reduced the number of authorized shares of
common stock, par value $1.00 per share, from 50,000,000 to
15,000,000.
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS
(A) STOCK OPTIONS
On May 25, 1988, the stockholders approved the amended and
restated Stock Option and Incentive Stock Option Plan (the
"Plan") under which 800,000 shares of common stock were reserved
for options and other common stock awards to be granted under the
Plan. On March 25, 1998, the Company's Board of Directors
approved certain amendments to the Plan, including eliminating
the prohibition on granting options after May 25, 1998. Under the
terms of the Plan, exercise prices are equal to the quoted market
value of the shares at the date of grant. Further, the options
will expire ten years from the date of grant; with regard to
employees, options will vest ratably over a three-year period
beginning on the first anniversary of the date of grant, and with
regard to directors, options will vest six months from the date
of grant. At December 31, 1997, options to purchase 394,942
shares were available for future grants under the plan.
As a result of the reverse stock split in 1996, the number
of shares of common stock reserved for issuance, the number of
options outstanding and the exercise price per share of the
outstanding options were adjusted correspondingly. As a result
of the spin-off of Zimmerman, the exercise price per share of all
options outstanding was reduced by $.59. Prior years have been
adjusted to reflect these changes.
55
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
The following table summarizes information with respect to stock
options granted under the plan for the years ended December 31, 1997, 1996
and 1995:
1997 1996 1995
------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding,
beginning of year 338,250 $ 6.52 316,250 $ 6.37 18,500 $ 7.48
Granted 62,000 $ 7.77 22,000 $ 8.58 300,750 $ 6.30
Forfeited (15,000) $ 6.10 - $ - (3,000) $ 5.94
------- ------- -------
Outstanding,
end of year 385,250 $ 6.73 338,250 $ 6.52 316,250 $ 6.37
======= ======= =======
Exercisable
at year end 216,167 118,750 20,000
======= ======= =======
The following table is a summary of stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
- ----------------------------------------------------- ---------------------
Remaining
Weighted Weighted Weighted
Range of Average Average Averaged
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
(In Years)
$ 1.91 - $ 3.28 4,500 3.8 $ 2.36 4,500 $ 2.36
$ 5.16 - $ 5.97 199,250 7.2 $ 5.96 134,667 $ 5.95
$ 7.09 - $10.25 176,000 8.2 $ 7.58 71,500 $ 7.43
$10.91 - $11.91 5,500 0.9 $11.29 5,500 $11.29
------- -------
$ 1.91 - $11.91 385,250 7.6 $ 6.73 216,167 $ 6.50
======= =======
56
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plan. Since stock options
under the Plan are issued at fair market value on date of the
grant, no compensation cost has been recognized in the
Consolidated Statement of Operations.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes a fair value based method of accounting for stock-
based compensation plans as an alternative to APB Opinion No. 25
whereby the compensation cost is measured at the grant date based
on the value of the award, and such cost is recognized over the
vesting period of the options. Had the Company applied SFAS No.
123 in accounting for stock options, net income and net income
per share, basic, for the years ended December 31, 1997, 1996 and
1995 would have been as follows:
1997 1996 1995
---- ---- ----
In Per In Per In Per
Thousands Share Thousands Share Thousands Share
--------- ----- --------- ----- --------- -----
Net income,
as reported $11,187 $1.49 $ 7,758 $1.04 $ 8,200 $1.08
SFAS No. 123
pro forma
adjustments (321) (.04) (287) (.04) (144) (.02)
------ ---- ------ ---- ------ ----
Net income,
pro forma $10,866 $ 1.45 $ 7,471 $1.00 $ 8,056 $1.06
====== ==== ====== ==== ====== ====
No tax has been provided on the calculation of SFAS No. 123
because a valuation allowance would have been provided for this
temporary difference.
The pro forma adjustments relate to options granted during
1997, 1996 and 1995 for which a fair value on the date of the
grant was determined using the Black-Scholes model of theoretical
options pricing, and were based on the following assumptions: (i)
expected volatility is based on the three year period, calculated
weekly, preceding the date of grant; (ii) the risk-free rate of
return is based on the 10-year U.S. Treasury Note yield to
maturity as at the date of grant; (iii) dividend yield assumes
that the current dividend rate paid on the Common Stock continues
unchanged until the expiration date of the options; (iv) an
expected life that coincides with the term of the option; and (v)
a three-year phased-in vesting period that averages two years.
No effect has been given to options granted prior to 1995. The
weighted average fair value of options granted during 1997, 1996
and 1995 was $2.95, $3.48 and $2.68 per share, respectively.
57
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
Valuation and related assumption information are presented below:
Weighted averages for options issued during
1997 1996 1995
-------------------------------------------
Valuation assumptions:
Expected life,
in years 10.0 10.0 10.0
Expected volatility 12.0% 12.8% 15.7%
Risk free interest
rate 6.4% 6.5% 6.6%
Expected annual
dividends per share $ .05 $ .05 $ .04
(B) SHARE PURCHASE WARRANTS
At December 31, 1997, 1,287,294 share purchase warrants were
outstanding. The warrants are exercisable through June 30, 2001
for a maximum of 1,965,697 shares of common stock at $25.00 for
1.527 shares of common stock (which equates to an exercise price
of $16.37 per share) (as adjusted for the reverse stock split and
the distribution of Zimmerman).
Since the inception of IHC's repurchase plan through
December 31, 1997, 404,491 warrants have been repurchased at a
cost of $131,000. All of such repurchased warrants have been
retired.
NOTE 15. INCOME TAXES
The provision for income tax expense (benefit) for the years
ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
---------------------------------------
(IN THOUSANDS)
CURRENT:
U.S. Federal........$ 1,834 $ 132 $ (45)
State and Local..... 61 238 231
----- ---- ----
1,895 370 186
----- ---- -----
DEFERRED:
U.S. Federal........ 106 (204) (1,415)
State and Local..... 100 (56) (171)
----- ---- -----
206 (260) (1,586)
----- ---- -----
Income tax expense
(benefit)..........$ 2,101 $ 110 $(1,400)
===== ==== =====
58
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 15. INCOME TAXES (CONTINUED)
The Federal statutory rate of 34% in 1997, 1996 and 1995 is
reconciled to the Company's effective income tax rate as follows:
1997 1996 1995
-----------------------------------
(IN THOUSANDS)
Tax computed at the
statutory rate........$ 4,518 $ 2,319 $ 1,623
Dividends received
deduction and tax
exempt interest....... (163) (131) (198)
Special life insurance
statutory deductions.. (369) (200) (918)
State income taxes, net
of Federal effect..... 107 120 (24)
Tax loss carryforwards
recognized for
financial reporting
purposes.............. (1,109) (1,922) (1,733)
Valuation allowance.... (860) (118) (132)
Other, net............. (23) 42 (18)
------ ------ ------
Income tax expense
(benefit).............$ 2,101 $ 110 $(1,400)
====== ====== ======
The income tax expense (benefit) for the year ended December
31, 1997 allocated to stockholders' equity for unrealized gains
on investment securities was $1,536,000, representing the change
in the deferred tax liability of $1,044,000 at December 31, 1997
from the deferred tax asset of $492,000 at December 31, 1996.
Temporary differences between the Consolidated Financial
Statement carrying amounts and tax bases of assets and
liabilities that give rise to the deferred tax assets and
liabilities at December 31, 1997 and 1996 relate to the
following:
1997 1996
---------------------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Loss carryforwards....................$ 1,462 $ 3,514
Other investments..................... 22 896
Unrealized losses on
investment securities................ 62 742
Deferred insurance policy
acquisition costs.................... 1,636 880
Future insurance policy benefits...... 1,197 1,801
Other................................. 3,228 2,517
------ ------
59
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________________________________________
NOTE 15. INCOME TAX (CONTINUED)
1997 1996
--------------------
(IN THOUSANDS)
Total gross deferred
tax assets........................ 7,607 10,350
Less valuation allowance............ (3,982) (7,191)
----- -----
Net deferred tax assets............. 3,625 3,159
----- -----
DEFERRED TAX LIABILITIES:
Other investments................... 982 481
Unrealized gains on
investment securities.............. 1,015 84
Deferred insurance policy
acquisition costs.................. 4,262 3,564
Future insurance policy
benefits........................... 262 -
Other............................... 890 1,074
----- -----
Total gross deferred
tax liabilities............... 7,411 5,203
----- -----
Net deferred tax
liability.....................$ (3,786) $(2,044)
===== =====
The $3,209,000 decrease in the valuation allowance for the
year ended December 31, 1997 is primarily attributable to net
changes in loss carryforwards and investment losses.
In 1988, the Company adopted SFAS No. 96 retroactive to
January 1, 1987. Accordingly, tax benefits of net operating loss
carryforwards that existed as of the date of the quasi-
reorganization were recognized in 1988 and 1987 as a reduction of
income tax expense. In September 1989, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 86 in which the SEC stated that registrants may no
longer treat the tax benefits of such net operating loss
carryforwards as prescribed by SFAS No. 96. Under SAB No. 86,
which was adopted prospectively in 1989, registrants are required
to record a charge in lieu of Federal income taxes in the
Consolidated Statement of Operations with a corresponding credit
to paid-in capital. For the year ended December 31, 1995, the
Company recorded $599,000 in accordance with SAB No. 86. There
was no impact on consolidated stockholders' equity related to the
adoption of SAB No. 86. As of December 31, 1995, there were no
remaining tax benefits to be recognized for net operating loss
carryforwards under SAB No. 86.
60
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 15. INCOME TAXES (CONTINUED)
The Company files a consolidated Federal income tax return
on a June 30 fiscal year. At December 31, 1997, IHC had no
consolidated net operating loss carryforwards; IHC did have
available on a separate return basis, however, acquired net
operating loss carryforwards of $4,300,000 on a tax return basis.
The utilization of acquired net operating loss carryforwards
is limited in any one year to the lesser of (i) the Company's
consolidated taxable income or (ii) IHC's parent only taxable
income computed on a separate return basis.
The net operating losses with their expiration dates are as
follows: (in thousands)
SEPARATE
EXPIRATION DATE RETURN
--------------- ------
1998.......................$ 2,500
1999.......................$ 1,800
Under provisions of the Life Insurance Company Tax Act of
1959, certain special deductions were allowed life insurance
companies for Federal income tax purposes and were accumulated in
a memorandum tax account designated as "policyholders' surplus."
Distributions of the untaxed amounts in this account will result
in the Company incurring an additional tax. The Company has
provided through its income tax provision on operations a tax
expense of $1,122,000 in 1992 and prior years for this additional
tax related to the policyholders' surplus account. A deferred
tax liability of $936,000, related to the $2,753,000 remaining
balance of the policyholders' surplus account, has not been
recognized. This liability will be recognized when the Company
expects that a transaction will occur which will give rise to a
tax on the remaining balance of the policyholders' surplus
account.
Net cash payments for income taxes were $866,000,
$1,211,000, and $1,355,000 in 1997, 1996 and 1995, respectively.
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
Certain subsidiaries of the Company are obligated under non-
cancelable operating lease agreements for office space. Total
rental expense for the years 1997, 1996 and 1995 for operating
leases was $707,000, $687,000, and $643,000, respectively.
61
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
The approximate minimum annual rental expense for operating
leases that have remaining non-cancelable lease terms in excess
of one year at December 31, 1997 are as follows (in thousands):
1998............$ 590
1999............ 589
2000............ 508
2001............ 423
2002............ 246
-----
Total $ 2,356
=====
The Company does not provide any post-retirement benefits to
its employees.
At December 31, 1997, the Company had no investment
securities of any one issuer or in any one industry which
exceeded 10% of stockholders' equity, except for investments in
obligations of the U.S. Government and its agencies.
A subsidiary of the Company is contingently liable as
guarantor of Zimmerman's $10,000,000 of subordinated debt. At
December 31, 1997, $7,905,000 of the $10,000,000 was recorded as
a liability for business transferred until such time as the
guarantee is eliminated (see Note 10).
Fixed maturities with a carrying value of $5,041,000 and
$5,340,000 were on deposit with various state insurance
departments at December 31, 1997 and 1996, respectively.
The Company knows of no material pending legal proceedings
to which the Company is a party or of which any of its property
is the subject.
NOTE 17. REINSURANCE
Standard Life and Madison Life reinsure portions of certain
business in order to limit the assumption of disproportionate
risks. Standard Life and Madison Life retain varying amounts of
individual life or group life insurance up to a maximum on any
one life of $210,000 and $25,000, respectively. Amounts not
retained are ceded to other companies on an automatic or
facultative basis. Standard Life and Madison Life are
contingently liable with respect to reinsurance in the unlikely
event that the assuming reinsurers are unable to meet their
obligations. In addition, Standard Life and Madison Life
participate in various coinsurance treaties. The ceding of
reinsurance does not discharge the primary liability of the
original insurer to the insured.
62
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 17. REINSURANCE (CONTINUED)
The effect of reinsurance on life insurance in-force,
benefits to policyholders and premiums earned is as follows:
ASSUMED CEDED
DIRECT FROM OTHER TO OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-----------------------------------------------
(IN THOUSANDS)
LIFE INSURANCE IN-FORCE:
- -----------------------
DECEMBER 31,1997 $5,365,058 $ 787,426 $2,443,005 $3,709,479 21.2%
DECEMBER 31,1996 4,563,520 488,762 2,215,533 2,836,749 17.2%
DECEMBER 31,1995 4,022,104 552,707 1,988,965 2,585,846 21.4%
BENEFITS TO POLICYHOLDERS:
- -------------------------
DECEMBER 31,1997 $ 117,477 $ 14,635 $ 75,962 $ 56,150 26.1%
DECEMBER 31,1996 95,567 7,867 58,193 45,241 17.4%
DECEMBER 31,1995 81,930 6,370 53,069 35,231 18.1%
PREMIUMS EARNED:
- ---------------
DECEMBER 31, 1997
Life...........$ 18,684 $ 4,792 $ 7,065 $ 16,411 29.2%
Health......... 160,699 26,422 121,331 65,790 40.2%
------- ------- ------- -------
$ 179,383 $ 31,214 $ 128,396 $ 82,201 38.0%
======= ======= ======= =======
DECEMBER 31, 1996
Life...........$ 17,948 $ 2,181 $ 6,974 $ 13,155 16.6%
Health......... 132,125 10,206 85,901 56,430 18.1%
------- ------- ------- -------
$ 150,073 $ 12,387 $ 92,875 $ 69,585 17.8%
======= ======= ======= =======
DECEMBER 31, 1995
Life...........$ 16,030 $ 2,821 $ 6,530 $ 12,321 22.9%
Health......... 111,154 3,686 70,760 44,080 8.4%
------- ------- ------- -------
$ 127,184 $ 6,507 $ 77,290 $ 56,401 11.5%
======= ======= ======= =======
NOTE 18. SEGMENT REPORTING
The Insurance Group engages principally in the life and
health insurance business. Interest expense, taxes, and general
expenses associated with parent company activities are included
in Corporate. Identifiable assets by segment are those assets
that are utilized in each segment. Corporate assets are composed
principally of cash equivalents, resale agreements, marketable
securities, the Company's remaining real estate holdings and
certain other investments. Information by business segment for
the years ended December 31, 1997, 1996 and 1995 is as follows:
63
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 18. SEGMENT REPORTING (CONTINUED)
1997 1996 1995
-----------------------------------
(IN THOUSANDS)
REVENUES:
Insurance...................$103,231 $ 87,784 $ 69,792
Corporate................... 3,526 1,560 1,635
------- ------- -------
$106,757 $ 89,344 $ 71,427
======= ======= =======
OPERATING INCOME FROM
CONTINUING OPERATIONS:
Insurance...................$ 12,800 $ 10,012 $ 7,797
Corporate................... 3,527 1,560 1,635
Less:
Corporate general expenses. 2,979 4,019 3,559
Corporate interest expense.. 60 733 1,101
------- ------- -------
$ 13,288 $ 6,820 $ 4,772
======= ======= =======
IDENTIFIABLE ASSETS AT YEAR-END:
Insurance..................$437,257 $320,169 $266,832
Corporate.................. 17,481 16,232 12,082
Discontinued operations.... - - 7,293
------- ------- -------
$454,738 $336,401 $286,207
======= ======= =======
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
Dividends from Madison Life are subject to the prior
notification to the Wisconsin Insurance Commissioner if such
dividend distribution exceeds 115% of the distribution for the
corresponding period of the previous year. In addition, if such
dividends, together with the fair market value of other dividends
paid or credited and distributions made within the preceding
twelve months, exceed the lesser of total net gain from
operations for the preceding calendar year minus realized capital
gains for that calendar year or 10% of surplus with regard to
policyholders as of December 31 of the preceding year, such
dividends may be paid so long as such dividends have not been
disapproved by the Wisconsin Insurance Commissioner within 30
days of its receipt of notice thereof. No dividends were paid by
Madison Life in 1997 or 1996. The payment of dividends by
Standard Life to its parent, Madison Life, requires prior
approval of the New York Superintendent of Insurance and is
limited by net income and capital and surplus. Dividends from
First Standard to its parent, a subsidiary of Standard Life, are
subject to the prior notification to the Delaware Insurance
Commissioner. If such dividends, together with the fair market
value of other dividends or distributions made within the
preceding twelve months does not exceed the greater of (i) 10% of
surplus as regards policyholders as of the preceding December 31
and (ii) net income, not including realized capital gains, for
64
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
(CONTINUED)
the twelve-month period ending the 31st day of December next
preceding, such dividends may be paid so long as they have not
been disapproved by the Delaware Insurance Commissioner within 30
days of its receipt of notice thereof. First Standard declared
and paid dividends of $2,340,000 and $2,129,000 in 1997 and 1996,
respectively.
Combined net income of the Insurance Group, as determined in
accordance with statutory accounting practices, was $5,706,000,
$4,378,000, and $6,926,000 for 1997, 1996 and 1995, respectively.
Statutory capital and surplus for the Insurance Group was
$59,438,000 and $55,682,000 at December 31, 1997 and 1996,
respectively.
NOTE 20. QUARTERLY DATA (UNAUDITED)
The quarterly results of operations for the years ended
December 31, 1997 and 1996 are summarized below:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Total Revenues........$ 24,404 $ 24,927 $ 29,206 $ 28,220
====== ====== ====== ======
Net income............$ 2,260 $ 3,191 $ 2,825 $ 2,911
====== ====== ====== ======
Net Income Per Common
Share - Basic.........$ .30 $ .43 $ .38 $ .39
====== ====== ====== ======
Net Income Per Common
Share - Diluted......$ .30 $ .43 $ .37 $ .39
====== ====== ====== ======
1996
Total Revenues........$ 21,845 $ 21,887 $ 21,700 $ 23,912
====== ====== ====== ======
Income from continuing
operations...........$ 1,363 $ 1,469 $ 1,956 $ 1,922
Income (loss) from
discontinued
operations, net...... 431 596 531 (510)
------ ------ ------ ------
Net income............$ 1,794 $ 2,065 $ 2,487 $ 1,412
====== ====== ====== ======
65
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________________________
NOTE 20. QUARTERLY DATA (UNAUDITED)(CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Net Income Per Common
Share - Basic and
Diluted...............
Income from continuing
operations...........$ 0.18 $ 0.20 $ 0.26 $ 0.26
Income (loss) from
discontinued
operations, net...... 0.06 0.08 0.07 (0.07)
------ ------ ------ ------
Net income............$ 0.24 $ 0.28 $ 0.33 $ 0.19
====== ====== ====== ======
In the fourth quarter of 1996, loss from discontinued
operations, net includes $1,106,000 of expenses, before tax,
attributable to the distribution of Zimmerman and related
transactions (see Note 2).
66
<PAGE>
SCHEDULE I
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT
SHOWN ON
BALANCE
TYPE OF INVESTMENT COST VALUE (1) SHEET (2)
- ------------------ ---- --------- ---------
FIXED MATURITIES:
BONDS:
United States
Government and
authorities............$166,974,000 $168,890,000 $168,890,000
States, municipalities
and political
subdivisions........... 2,352,000 2,315,000 2,315,000
Public utilities........ 24,104,000 23,925,000 23,925,000
All other corporate
securities............. 5,870,000 6,194,000 6,194,000
----------- ----------- -----------
TOTAL FIXED
MATURITIES............ 199,300,000 201,324,000 201,324,000
----------- ----------- -----------
EQUITY SECURITIES:
COMMON STOCKS:
Public utilities........ 1,190,000 1,489,000 1,489,000
Banks, trusts, and
insurance.............. 162,000 167,000 167,000
Industrial,
miscellaneous and
other.................. 9,251,000 9,575,000 9,575,000
NON-REDEEMABLE PREFERRED
STOCK.................... 2,059,000 2,265,000 2,265,000
----------- ----------- -----------
TOTAL EQUITY SECURITIES.. 12,662,000 13,496,000 13,496,000
----------- ----------- -----------
(CONTINUED)
67
<PAGE>
SCHEDULE I
(CONTINUED)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT
SHOWN ON
BALANCE
TYPE OF INVESTMENT COST VALUE (1) SHEET (2)
- ------------------ ---- --------- ---------
Securities purchased
under agreements to
resell................... 25,469,000 25,469,000 25,469,000
Partnership interests..... 40,221,000 40,221,000 40,221,000
Mortgage loans............ 291,000 291,000 291,000
Policy loans.............. 8,677,000 8,677,000 8,677,000
Other..................... 1,270,000 1,270,000 1,270,000
Short-term investments(3). 18,265,000 18,265,000 18,265,000
----------- ----------- -----------
TOTAL INVESTMENTS...$306,155,000 $309,013,000 $309,013,000
=========== =========== ===========
NOTES:
(1) Reflects fair value of fixed income securities and equity
securities at the balance sheet date.
(2) The total amounts of fixed income securities and equity
securities shown in Column D differs from the total amounts
shown in Column B as a result of unrealized gains (losses)
on equity and fixed income securities.
(3) Short-term investments consist of certificates of deposit
and U.S. Treasury Bills with original maturities of 91 days
to 1 year.
68
<PAGE>
SCHEDULE III
INDEPENDENCE HOLDING COMPANY
BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31,
1997 1996
----------- -----------
ASSETS:
Cash and cash equivalents.............$ 783,000 $ 451,000
Securities purchased under
agreements to resell................. 85,000 262,000
Equity Securities..................... 844,000 -
Other investments..................... 10,831,000 8,929,000
Investments in consolidated
subsidiaries......................... 81,800,000 69,491,000
Amounts due from consolidated
subsidiaries......................... 5,581,000 5,506,000
Notes and other receivables........... 4,000 8,000
Other assets.......................... 24,000 37,000
----------- -----------
TOTAL ASSETS......................$ 99,952,000 $ 84,684,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and other
liabilities.........................$ 6,778,000 $ 5,808,000
Amounts due to consolidated
subsidiaries........................ 1,797,000 1,648,000
Dividends payable.................... 372,000 372,000
----------- -----------
TOTAL LIABILITIES................. 8,947,000 7,828,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (none issued)......... - -
Common stock, 7,430,169 and 7,431,769
shares issued and outstanding,
respectively, net of 2,188,950
shares in treasury................... 7,430,000 7,432,000
Paid-in capital....................... 76,046,000 76,068,000
Unrealized gains (losses) on
investments, net..................... 1,892,000 (1,466,000)
Retained Earnings (accumulated
deficit)............................. 5,637,000 (5,178,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........ 91,005,000 76,856,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............$ 99,952,000 $ 84,684,000
=========== ===========
See Notes to Parent Company Only Financial Statements.
(CONTINUED)
69
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------------
REVENUES:
Net investment
income.................$ 2,347,000 $ 400,000 $ 18,000
Other income............ 683,000 497,000 529,000
---------- ---------- ----------
3,030,000 897,000 547,000
---------- ---------- ----------
EXPENSES:
General and adminis-
trative expenses....... 2,786,000 3,075,000 2,778,000
---------- ---------- ----------
Income (loss) before
income tax benefit...... 244,000 (2,178,000) (2,231,000)
Income tax benefit....... (1,771,000) (2,534,000) (1,995,000)
---------- ---------- ----------
Income (loss) before
equity in net income
of subsidiaries and
discontinued operations. 2,015,000 356,000 (236,000)
Equity in net income of
subsidiaries............ 9,172,000 6,354,000 6,408,000
Income from discontinued
operations, net......... - 1,048,000 2,028,000
---------- ---------- ----------
Net income...............$11,187,000 $ 7,758,000 $ 8,200,000
========== ========== ==========
See Notes to Parent Company Only Financial Statements.
(CONTINUED)
70
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income...............$11,187,000 $ 7,758,000 $ 8,200,000
Adjustments to reconcile
net income to net cash
used by operating
activities:
Equity in net income
of subsidiaries........ (9,172,000) (6,354,000) (6,408,000)
Income from dis-
continued operations,
net.................... - (1,048,000) (2,028,000)
Income tax benefit
credited to paid-in
capital................ - - 599,000
Change in other assets
and liabilities........ (3,444,000) (3,825,000) (3,759,000)
---------- ---------- ----------
Net cash used
by operating
activities.......... (1,429,000) (3,469,000) (3,396,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING
SECURITIES...............
Discontinued operations,
net..................... - - (301,000)
Decrease in investment
in and advances to
consolidated
subsidiaries............ 4,710,000 4,457,000 5,862,000
Purchases of equity
securities.............. (829,000) - -
Additional investments
in other investments,
net of distributions.... (1,724,000) (483,000) -
---------- ---------- ----------
Net cash provided by
investing activities.... 2,157,000 3,974,000 5,561,000
---------- ---------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repurchase of common
stock and warrants...... (24,000) (5,000) (2,251,000)
Dividends paid........... (372,000) (298,000) (311,000)
---------- ---------- ----------
Net cash used by
financing activities... (396,000) (303,000) (2,562,000)
---------- ---------- ----------
(CONTINUED)
71
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------------------------
Increase (Decrease) in
cash and cash
equivalents............. 332,000 202,000 (397,000)
Cash and cash
equivalents, beginning
of year................ 451,000 249,000 646,000
---------- ---------- ----------
Cash and cash
equivalents, end of
year....................$ 783,000 $ 451,000 $ 249,000
========== ========== ==========
See Notes to Parent Company Only Financial Statements.
72
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS
NOTE:
(A) In connection with the distribution of Zimmerman Sign
Company, two subsidiaries of IHC were merged into IHC during
1996.
(B) Cash payments for taxes were $861,000, $955,000 and
$1,233,000 in 1997, 1996 and 1995, respectively.
(C) Income tax benefits on the Statements of Operations include
a charge in lieu of Federal income taxes of $599,000 in
1995 with a corresponding credit to paid-in capital.
(D) The financial information of Independence Holding Company
(Parent Company Only) should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
73
<PAGE>
<TABLE>
SCHEDULE V
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUTURE
POLICY NET AMORTIZ-
BENEFITS, INVESTMENT ATION OF
CLAIMS INCOME AND DEFERRED
DEFERRED & OTHER GAINS, INSURANCE 0THER
INSURANCE POLICY- AND OTHER BENEFITS ACQUIS- OPERATING
ACQUISITION HOLDERS' UNEARNED PREMIUM INCOME AND ITION EXPENSES PREMIUMS
COSTS FUNDS PREMIUMS REVENUE (1) CLAIMS COSTS (2) WRITTEN
DECEMBER 31, 1997:
Life and
annuity.....$ 7,950 $145,321 $ 13,326 $ 16,411 $ 11,708 $ 12,722 $ 1,675 $ 6,966 $ 18,420
Health....... 5,661 104,878 14,567 65,790 9,322 45,839 1,906 21,322 70,205
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 13,611 $250,199 $ 27,893 $ 82,201 $ 21,030 $ 58,561 $ 3,581 $ 28,288 $ 88,625
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1996:
Life and
annuity.....$ 7,082 $126,129 $ 3,874 $ 13,155 $ 11,241 $ 13,113 $ 2,416 $ 5,793 $ 12,879
Health....... 4,139 64,495 7,780 56,430 7,525 36,675 1,403 18,939 56,035
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 11,221 $190,624 $ 11,654 $ 69,585 $ 18,766 $ 49,788 $ 3,819 $ 24,732 $ 68,914
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1995:
Life and
annuity.....$ 5,116 $ 91,310 $ 4,274 $ 12,321 $ 7,251 $ 9,998 $ 2,286 $ 4,690 $ 11,894
Health....... 4,040 54,258 8,391 44,080 6,140 27,347 1,612 16,062 43,756
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9,156 $145,568 $ 12,665 $ 56,401 $ 13,391 $ 37,345 $ 3,898 $ 20,752 $ 55,650
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net investment income is allocated between product lines based on the mean reserve method.
(2) Direct operating expenses are specifically identified and charged to product lines. Indirect
expenses are allocated based on time studies, however, other acceptable methods of allocation
might produce different results.
74
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
3(i) Restated Certificate of Incorporation of
Independence Holding Company.**
3(ii) By-laws of Independence Holding Company.*
4(i) Form of Warrrant Certificate to purchase shares
of Common Stock of Independence Holding Company,
expiring June 30, 2001.*
10(iii)(A) Executive Compensation Plans and Agreements
(1) Independence Holding Company 1988 Stock
Incentive Plan***
(2) Form of Independence Holding Company
Stock Option Agreement****
(3) Deferred Compensation Agreement*****
(4) Retirement Benefit Agreements*****
(5) Amendment No. 1 to 1988 Stock Incentive Plan
11 Statement re: computation of per share earnings for
the years ended December 31, 1997, 1996 and 1995.
21 Principal subsidiaries of Independence Holding Company,
as of March 16, 1998.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
99 Financial Statements of significant 50% or less owned person.
*Such exhibit is incorporated by reference to the Report on Form
10-K for the fiscal year ended December 31, 1987, as amended, of
Independence Holding Company.
**Such exhibit is incorporated by reference to the Report on Form
10-Q for the quarter ended June 30, 1996 of Independence Holding
Company.
***Such exhibit is incorporated by reference to the Proxy
Statement for the Annual Meeting of Stockholders held on May 25,
1988 of Independence Holding Company.
****Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1988 of
Independence Holding Company.
*****Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1993 of
Independence Holding Company.
Exhibits will be furnished upon request for a reasonable fee.
75
<PAGE>
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
------------------------------
INCOME:
Income from continuing
operations....................$ 11,187 $ 6,710 $ 6,172
Income from discontinued
operations, net............... - 1,048 2,028
-------- -------- --------
Net income.....................$ 11,187 $ 7,758 $ 8,200
======== ======== ========
SHARES:
Weighted average common
shares outstanding........... 7,431 7,432 7,597
======== ======== ========
BASIC INCOME PER SHARE:
Income per share from
continuing operations..........$ 1.51 $ .90 $ .81
Income per share from
discontinued operations........ - .14 .27
-------- -------- --------
Net income per share............$ 1.51 $ 1.04 $ 1.08
======== ======== ========
DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of options....$ 2,512 $ 2,092 1,406
Tax benefit from exercise
of options.................... 388 - -
Repurchase of treasury stock at
average market price of $9.67
$8.29 and $6.64, respectively. (2,900) (2,092) (1,406)
-------- -------- --------
Assumed balance to be invested.$ - $ - $ -
======== ======== ========
SHARES:
Weighted average shares
outstanding.................... 7,431 7,432 7,597
Shares assumed issued for
options........................ 378 306 217
Treasury stock assumed
purchased...................... (300) (252) (212)
-------- ------- --------
Adjusted average shares
outstanding.................... 7,509 7,486 7,602
======== ======== ========
DILUTED INCOME PER SHARE:
Income per share from
continuing operations..........$ 1.49 $ .90 $ .81
Income per share from
discontinued operations........ - .14 .27
-------- ------- --------
Net income per share............$ 1.49 $ 1.04 $ 1.08
======== ======= ========
(A) Warrants were not assumed to be exercised as the effect
would have been anti-dilutive.
EXHIBIT 21
INDEPENDENCE HOLDING COMPANY
Subsidiaries as of March 16, 1998
---------------------------------
Subsidiary Jurisdiction
- ---------- ------------
Independence Capital Corp. Delaware
Independence Financial Services Corp. Delaware
Madison National Life Insurance
Company, Inc. Wisconsin
Madison Investors Corporation Delaware
Standard Security Life Insurance
Company of New York New York
Standard Security Investors Corp. New York
Standard Life Asset Management Corp. New York
SSH Corp. Delaware
First Standard Security
Insurance Company Delaware
On-Line Brokerage, Inc. Delaware
Madison Standard Corp. Wisconsin
Independence Land and Capital, Inc. Delaware
R.H. Financial Corp. Delaware
Incopoint Limited Partnership Connecticut
Copoint L.P. Delaware
IFS Corp. Delaware
G.P. Associates Holding Corp. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INDEPENDENCE HOLDING COMPANY:
We consent to incorporation by reference in the registration
statement (No. 33-23302) on Form S-8 of Independence Holding
Company and subsidiaries of our report dated March 23, 1998,
relating to the consolidated balance sheets of Independence
Holding Company and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, and the related
financial statements schedules, which report appears in the 1997
annual report on Form 10-K of Independence Holding Company and
subsidiaries.
KPMG PEAT MARWICK LLP
New York, New York
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-K for the year ended December 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000701869
<NAME> INDEPENDENCE HOLDING COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 201,324,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,496,000
<MORTGAGE> 291,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 309,013,000
<CASH> 23,028,000
<RECOVER-REINSURE> 92,990,000
<DEFERRED-ACQUISITION> 13,611,000
<TOTAL-ASSETS> 454,738,000
<POLICY-LOSSES> 175,361,000
<UNEARNED-PREMIUMS> 27,893,000
<POLICY-OTHER> 72,187,000
<POLICY-HOLDER-FUNDS> 2,651,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,430,000
<OTHER-SE> 83,575,000
<TOTAL-LIABILITY-AND-EQUITY> 454,738,000
82,201,000
<INVESTMENT-INCOME> 21,534,000
<INVESTMENT-GAINS> 730,000
<OTHER-INCOME> 2,112,000
<BENEFITS> 58,561,000
<UNDERWRITING-AMORTIZATION> 3,581,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 13,288,000
<INCOME-TAX> 2,101,000
<INCOME-CONTINUING> 11,187,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,187,000
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.49
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
DOLPHIN LIMITED PARTNERSHIP
Financial Statements
December 31, 1997 and 1996
and for each of the years in the three-year period ended
December 31, 1997
(With Independent Auditors' Reports Thereon)
<PAGE>
CONTENTS
Page
----
Report of Independent Certified Public Accountants 3
Independent Auditors' Report 4
Financial Statements
Statements of Financial Condition 5
Condensed Schedule of Investments 6-7
Statements of Income 8
Statements of Changes in Partners' Capital 9
Statements of Cash Flows 10
Notes to Financial Statements 11-16
2
<PAGE>
Report of Independent Certified
Public Accountants
To the Partners of
Dolphin Limited Partnership:
We have audited the accompanying statement of financial
condition, including the condensed schedule of investments, of
Dolphin Limited Partnership, as of December 31, 1997, and the
related statements of income, changes in partners' capital, and
cash flows for the year then ended. These financial statements
are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the 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 financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Dolphin Limited Partnership as of December 31, 1997 and the
results of its operations, changes in partners' capital and cash
flows for the year then ended in conformity with generally
accepted accounting principles.
New York, New York Grant Thornton LLP
March 6, 1998
3
<PAGE>
Independent Auditors' Report
To the Partners of
Dolphin Limited Partnership:
We have audited the accompanying statement of financial condition
of Dolphin Limited Partnership as of December 31, 1996, and the
related statements of income, changes in partners' capital, and
cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the general
partner. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the 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 financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Dolphin Limited Partnership as of December 31, 1996, and the
results of its operations and cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
New York, New York KPMG Peat Marwick LLP
March 20, 1997
4
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Statements of Financial Condition
December 31, 1997 and 1996
Assets 1997 1996
----------- -----------
Financial instruments owned, at market value
(cost $32,603,883 and $45,834,788 in 1997
and 1996, respectively) $ 40,563,374 46,916,379
Due from brokers 14,534,742 11,233,410
Interest and dividends receivable 102,699 56,063
Other assets - 27,079
Organization costs, net of accumulated
amortization of $13,000 and $9,167 in
1997 and 1996, respectively 42,833 55,833
----------- -----------
Total assets $ 55,243,648 58,288,764
=========== ===========
Liabilities and Partners' Capital
Liabilities
Financial instruments sold, not yet
purchased, at market value (proceeds
$10,830,998 and $12,186,594 in 1997
and 1996, respectively) $ 11,000,807 12,769,117
Due to brokers - 7,940,100
Interest and dividends payable 24,296 64,854
Due to management company - 29,731
Accrued expenses 46,356 55,697
----------- -----------
Total liabilities 11,071,459 20,859,499
Partners' capital 44,172,189 37,429,265
----------- -----------
Total liabilities and partners' capital $ 55,243,648 58,288,764
=========== ===========
The accompanying notes are an integral part of this statement.
5
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Condensed Schedule of Investments
December 31, 1997
(expressed in U.S. dollars)
Shares Description Value
------- ------------------------------------- ----------
Common stocks owned (90.50%)
United States (90.50%):
Industrial companies (26.86%):
106,652 CTS Corp. (7.71%) $ 3,406,198
Others (19.15%) 8,458,296
----------
11,864,494
----------
Communications (16.55%):
70,500 MCI Communications Corp. (6.83%) 3,018,281
Others (9.72%) 4,292,244
----------
7,310,525
----------
Defense (5.21%):
20,000 Northrop Grumman Corp. (5.21%) 2,300,000
----------
Financial institutions (21.23%)
40,000 Corestates Financial (7.25%) 3,202,500
40,000 First Commerce Corp. (6.09%) 2,690,000
Others (7.89%) 3,483,263
----------
9,375,763
----------
Hotel and gaming (9.38%):
50,000 ITT Corp. (9.38%) 4,143,750
----------
Oil and gas (11.27%):
75,000 Reading & Bates Corp. (7.02%) 3,103,035
Others (4.25%) 1,876,716
----------
4,979,751
----------
Total Common Stock (cost $31,962,145) 39,974,283
Long Put and Call Options (1.33%)
(cost $641,738) 589,091
-----------
Total Financial Instruments Owned,
at market value (cost $32,603,883) $ 40,563,374
===========
The accompanying notes are an integral part of this schedule.
6
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Condensed Schedule of Investments (continued)
(expressed in U.S. dollars)
Shares Description Proceeds
------- ------------------------------------- ----------
Securities Sold, But Not Yet Purchased:
Common stocks sold, but not yet
purchased (19.94%)
United States (19.94%)
Industrial companies (4.10%) $ 1,812,439
Communications (1.37%) 605,000
Defense:
23,846 Lockheed Martin Corp. (5.32%) 2,348,831
Financial institutions (2.13%) 941,778
Oil and gas (7.02%)
88,500 Falcon Drilling (7.02%) 3,103,031
----------
Total Common Stocks Sold, But Not Yet
Purchased (proceeds $8,882,687) 8,811,079
----------
Short Put and Call Options (4.96%)
(proceeds $1,948,311) 2,189,728
----------
Total Financial Instruments Sold, But
Not Yet Purchased
(proceeds $10,830,998) $ 11,000,807
===========
The accompanying notes are an integral part of this schedule.
7
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Gain from investment transactions:
Net realized gain on securities sold $ 3,168,037 5,280,370 840,627
Unrealized appreciation on
investments:
Beginning of year 499,068 634,801 55,521
End of year 7,789,682 499,068 634,801
---------- ---------- ----------
Net change in unrealized
appreciation/(depreciation) 7,290,614 (135,733) 579,280
---------- ---------- ----------
Gain from investment
transactions 10,458,651 5,144,637 1,419,907
---------- ---------- ----------
Operating income and expenses:
Income:
Interest 769,351 403,385 272,467
Dividends 585,765 507,809 135,605
Commission rebates 236,883 212,600 -
---------- ---------- ----------
1,591,999 1,123,794 408,072
---------- ---------- ----------
Expenses:
Professional fees and other 75,500 59,907 7,836
Management fee 468,696 326,788 -
Dividend expense 208,568 124,916 125,237
Amortization 13,000 9,167 -
Interest expense 384,594 125,990 293,679
Reimbursable management company
investment and other expenses 236,755 212,600 -
---------- ---------- ----------
1,387,113 859,368 426,752
---------- ---------- ----------
Income (loss) from operations 204,886 264,426 (18,680)
---------- ---------- ----------
Net income $ 10,663,537 5,409,063 1,401,227
========== ========== ==========
The accompanying notes are an integral part of this statement.
8
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Statements of Changes in Partners' Capital
Years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1994 $ 41,494 $ 4,108,381 $ 4,149,875
Capital contributions 52,500 5,250,000 5,302,500
Allocation of net income 13,944 1,387,283 1,401,227
---------- ---------- ----------
Balance, December 31, 1995 107,938 10,745,664 10,853,602
Capital contributions 212,265 20,954,335 21,166,600
Allocation of net income:
Pro-rata 54,082 5,354,981 5,409,063
Incentive allocation 608,262 (608,262) -
---------- ---------- ----------
Balance, December 31, 1996 982,547 36,446,718 37,429,265
Capital contributions - 4,900,000 4,900,000
Capital withdrawals (608,262) (8,212,351) (8,820,613)
Allocation of net income:
Pro-rata 130,005 10,533,532 10,663,537
Incentive allocation 1,839,681 (1,839,681) -
---------- ---------- ----------
Balance, December 31, 1997 $ 2,343,971 $ 41,828,218 $ 44,172,189
========== ========== ==========
The accompanying notes are an integral part of this statement.
9
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net realized and unrealized gain
from investment transactions $ 10,458,651 5,144,637 1,419,907
Net investment income (loss) 204,886 264,426 (18,680)
----------- ----------- -----------
Net Income 10,663,537 5,409,063 1,401,227
----------- ----------- -----------
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization of organization costs 13,000 9,167 -
(Increase) decrease in operating
assets:
Financial instruments owned, at
market value 6,353,005 (26,826,949) (17,030,456)
Due from broker (3,301,332) (2,423,838) (5,612,703)
Interest and dividends receivable (46,636) (27,781) (30,586)
Other assets 27,079 (27,079) -
Organization costs - (65,000) -
Increase (decrease) in operating
liabilities:
Financial instruments sold, not
yet purchased at market value (1,768,310) 1,487,393 10,542,980
Due to broker (7,940,100) 1,178,740 5,394,136
Interest and dividend payable (40,558) 27,955 25,066
Accrued expenses (9,341) 61,998 7,836
Due to management company (29,731) 29,731 -
----------- ----------- -----------
Cash provided by (used in)
operating activities 3,920,613 (21,166,600) (5,302,500)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributions 4,900,000 21,166,600 5,302,500
Capital withdrawals (8,820,613) - -
----------- ----------- -----------
Cash (used in) provided by
financing activities (3,920,613) 21,166,600 5,302,500
----------- ----------- -----------
Change in cash - - -
Cash and cash equivalents at
beginning of year - - -
----------- ----------- -----------
Cash and cash equivalents at end
of year $ - - -
=========== =========== ===========
Supplemental disclosure of
cash flows information:
Cash paid during the year for
interest $ 391,350 115,591 291,374
=========== =========== ===========
The accompanying notes are an integral part of this statement.
10
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1996 and 1995
Note A - Organization
Dolphin Limited Partnership (the "Partnership") was formed as
a Delaware Limited Partnership on June 16, 1994 and was
initially capitalized on December 16, 1994. The purpose of
the Partnership is to realize total appreciation principally
by investing in relatively "market neutral" strategies such
as merger arbitrage, convertible arbitrage and distressed
credit reorganizations, bankruptcies and liquidations.
The partners entered into an Amended and Restated Agreement
of Dolphin Limited Partnership as of April 1, 1996 (the
"Agreement").
In March 1996, Dolphin Associates L.L.C., a Delaware limited
liability company, became the general partner as the
successor by merger to the former general partner, Dolphin
Associates, Inc. As of December 31, 1996, the general
partner and the Management Company were both indirect, wholly
owned subsidiaries of Geneve Corporation. As of January 1,
1997, the general partner and Management Company were
purchased by the management of the general partner.
The Principal Officer of the Managing Member of the General
Partner (the "Principal Officer") is affiliated with Geneve
Corporation and is a director of a publicly traded company,
both of which have limited partnership interests in the
Partnership. Geneve Corporation owns a controlling interest
in such publicly traded company. As of January 1, 1997, the
Principal Officer acquired the indirect parent of the General
Partner from Geneve Corporation.
Note B - Significant Accounting Policies
Transactions in securities and the related revenue and
expense are recorded on a trade-date basis.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions in determining the reported
amounts of assets and liabilities and disclosure 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.
Certain prior year amounts have been reclassified to conform
with the current year presentation.
11
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements, Continued
Note B (continued)
Financial instruments owned and financial instruments sold,
but not yet purchased, include securities and derivative
financial instruments listed on national exchanges and traded
on interdealer markets. Securities listed on a securities
exchange are stated at the last reported sales price on the
day of valuation. Securities traded in the over-the-counter
market or listed securities for which no sale was reported on
that date are valued at the last quoted bid price for
securities owned or the last quoted asked price for
securities sold, not yet purchased unless included in the
NASDAQ National Market System, in which case they are valued
based upon their last sales prices (if such prices are
available), provided that, if the last sales price of a
security does not fall between the last bid and asked price
on such date, then the security is valued at the mean between
the last bid and asked price. Securities for which no such
market prices are available are valued as the General Partner
may reasonably determine. Other financial instruments are
valued at market which is fair value.
Unrealized gains and losses are reflected in income for
financial instruments owned and financial instruments sold ,
but not yet purchased. Subsequent market fluctuations may
require purchasing or selling the financial instruments at
prices which may differ from the values reflected on the
statement of financial condition.
Dividend income (expense) is recognized on the ex-dividend
date and interest income (expense) is recognized on an
accrual basis.
No provision for Federal, state or local income taxes has
been made because the Partnership qualifies for the tax
treatment applicable to partnerships whereby all income will
be allocated to the individual partners for inclusion in
their respective tax returns.
Organization costs are being amortized on a straight-line
basis over 60 months.
Note C - Due From and Due to Brokers
The amount due from brokers primarily represents receivables
for funds held by securities brokers which result from
proceeds of short sales, amounts transferred to the brokers
to serve as deposits, amounts which have not yet been
invested and proceeds from realized securities transactions.
These funds are essentially restricted to the extent that
they serve as collateral against short sales. It is the
Partnership's policy to continuously monitor the credit
standing of the brokers with whom it conducts business.
The amount due to brokers represents obligations for
unsettled trades and margin borrowings which are
collateralized by the Partnership's marketable securities,
whose market values substantially exceed the amount borrowed.
12
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements, Continued
Note D - Related Party Transactions
As of December 31, 1997, a majority of the Limited Partners
are ultimately controlled by an individual who is related to
the General Partner. In accordance with the Agreement, to
the extent the Partnership received rebates from brokers
based on commissions generated, the Partnership used such
amounts to reimburse the Management Company for expenses such
as quotation equipment and services, news and information
services, compensation of research analysts and certain other
expenses incurred by the Management Company on behalf of the
Partnership.
Note E - Management Fees and Allocations
Pursuant to the Agreement, the Partnership pays quarterly, in
advance, a management fee, to Dolphin Management Company LLC,
of 0.3125% (1.25% on an annualized basis) of the
Partnership's net assets at the beginning of such quarter
that are allocable to limited partners.
At the end of each accounting period of the Partnership, any
net capital appreciation or depreciation will be allocated to
the capital accounts of all Partners in proportion to their
respective Partnership Percentages. Generally, at the end of
each fiscal year in which the return on Partners' investment
exceeds the Hurdle Rate, as defined, 20% of the excess of (i)
the net capital appreciation allocated to a Limited Partner's
Capital Account for such fiscal year over (ii) the Hurdle
Rate, will be reallocated to the General Partner's Capital
Account (the "Incentive Allocation"). In the event that the
Partnership's net capital appreciation is less than the
Hurdle Rate in any fiscal year, the difference between the
net capital appreciation and the Hurdle Rate for such fiscal
year shall be carried forward in calculating the Incentive
Allocation in the following year.
Note F - Financial Instruments With Off-Balance-Sheet Risk
Market Risk
In the normal course of business, the Partnership enters into
transactions in derivative financial instruments with off-
balance sheet risk. These instruments, primarily options,
forward currency contracts and options on futures contain
varying degrees of off-balance-sheet risk to the extent that
subsequent changes in the market value of the securities
underlying the instruments may be in excess of the amounts
recognized in the statement of financial condition. The
Partnership's exposure to market risk is influenced by a
number of factors, including the relationships among
financial instruments with off-balance-sheet risk and the
Partnership's investment portfolio, as well as the volatility
and liquidity in the markets in which the financial
instruments are traded.
13
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements, Continued
Note F (continued)
In many cases, the use of financial instruments serves to
modify or offset market risk associated with other
transactions and, accordingly, serves to decrease the
Partnership's overall exposure to market risk. The
Partnership seeks to limit its exposure to market risk
arising from the use of these financial instruments through
the use of hedging strategies and various analytical
monitoring techniques. In order to measure derivative
activity, notional or contract amounts are frequently
utilized. Notional/contract amounts, which are not included
on the Statements of Financial Condition, are used to
calculate contractual cash flows to be exchanged and are
generally not actually paid or received, with the exception
of foreign exchange forwards. The notional/contract amounts
of financial instruments that give rise to off-balance-sheet
market risk are indicative only of the extent of involvement
in the particular class of financial instrument and are not
necessarily an indication of overall market risk. In many
cases, the Partnership limits its risk by holding offsetting
security positions.
Listed in the table below are the notional/contract amounts,
fair value and average fair value of the Partnership's
derivative financial instruments as of and for the year ended
December 31, 1997:
Notional/
contract Average
amounts Fair value fair value
------- ---------- ----------
(in thousands)
Options:
Assets $ 1,484 123 552
Liabilities 16,508 2,465 1,382
Forward currency contracts:
Assets $ 71 71 282
Liabilities 503 503 3,455
Options on futures contracts:
Assets $ 6,365 46 12
Liabilities 6,365 145 136
14
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements, Continued
Note F (continued)
Listed in the table below are the notional/contract amounts,
fair value and average fair value of the Partnership's
derivative financial instruments as of and for the year ended
December 31, 1996:
Notional/
contract Average
amounts Fair value fair value
------- ---------- ----------
(in thousands)
Options:
Assets $ 1,112 22 150
Liabilities 14,219 1,493 1,226
Forward currency contracts:
Assets $ 254 254 63
Liabilities 1,941 1,941 1,393
Options on futures contracts:
Assets $ - - 6
Liabilities - - 11
The average fair value of the Partnership's derivative
financial instruments for the year ended December 31, 1995,
for option's included in assets were $99,000 and those
amounts included in liabilities were $265,000.
Credit Risk
The notional/contract amounts of these instruments do not
represent the Partnership's potential risk of loss due to
counterparty nonperformance. Credit risk arises from the
potential inability of counterparties to perform in
accordance with the terms of the contract. The Partnership's
exposure to credit risk associated with counterparty
nonperformance is limited to the net replacement cost of over-
the-counter contracts in a gain position which are recognized
in the Partnership's Statements of Financial Condition.
Substantially, all of the Partnership's derivative financial
instruments are exchange traded. Exchange traded financial
instruments, such as futures and options, generally do not
give rise to significant counterparty exposure due to the
margin requirements of the individual exchanges. Options
written generally do not give rise to counterparty credit
risk since they obligate the Partnership (not its
counterparty) to perform.
The Partnership seeks to limit credit exposures by limiting
transactions with specific counterparties, assessing the
future creditworthiness of such counterparties and requiring
collateral where appropriate.
15
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
Notes to Financial Statements, Continued
Note G - Subsequent Events
Effective January 1, 1998, contributions and withdrawals in
the amounts of $2,000,000 and $6,460,630, respectively, were
made.
EXHIBIT 10(iii)(A)(5)
AMENDMENT NO. 1
TO
INDEPENDENCE HOLDING COMPANY
1988 STOCK INCENTIVE PLAN
1. The first paragraph of Section 2 shall be amended to
read:
"The Plan shall be administered by the
Company's Compensation Committee (the
"Committee") who shall be appointed by the
Board and who shall serve at the pleasure of
the Board. To the extent required for
transactions under the Plan to qualify for
the exemptions available under Rule 16b-3
("Rule 16b-3") promulgated under the Act,
all actions relating to awards to persons
subject to Section 16 of the Act shall be
taken by the Board unless each person who
serves on the Committee is a "non-employee
director" within the meaning of Rule 16b-3
or such actions are taken by a sub-committee
of the Committee (or the Board) comprised
solely of "non-employee directors". No
member of the Committee shall have any
personal liability to the Company or any of
its Subsidiaries, the employees or Board of
Directors of the Company or any of its
Subsidiaries or the stockholders or
creditors of the Company or any of its
Subsidiaries for any action or determination
made in good faith by the Committee with
respect to the Plan."
2. Section 5(b) shall be deleted in its entirety.
3. The first sentence of the second paragraph of Section 6
shall be amended to read:
"Stock Options granted under the Plan may be
either Incentive Stock Options or Non-
Qualified Stock Options; provided, however,
no Incentive Stock Options shall be granted
more than 10 years after the effective date
of the Plan unless otherwise permitted under
the Code."
