UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of Registrant as specified in its charter)
Indiana No. 35-1773567
(State of incorporation) (I.R.S. employer
identification no.)
9100 Keystone Crossing
Indianapolis, Indiana 46240
(Address of principal executive offices)
(317) 574-6200
(Telephone number)
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 [*] No [ ]
As of July 31, 1996, the Registrant had 4,526,522 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION:
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995
3
Consolidated Statements of Operations -
For the Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
5
Consolidated Statements of Shareholders' Equity
For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
6
Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
7
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
11
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders
21
Item 6. Exhibits and Reports on Form 8-K
22
Signatures
23
Exhibit 11 - Statement re: Computation of Per Share Earnings -
24
For the Three and Six Months Ended June 30, 1996 and 1995 (Unaudited)
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C>
1996 1995
(Unaudited) (Audited)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost: $236,465 in 1996 and $225,584 in 1995) $231,377 $232,092
Equity securities, at fair value (cost: $55 in 1996 and $52 in 1995) 64 52
Mortgage loans on real estate, at unpaid principal balances 3,049 2,963
Policy loans, at unpaid principal balances 7,225 8,509
Real estate, at depreciated cost 550 556
Other invested assets 1,014 1,367
Short-term investments, at cost, which approximates fair value 9,294 35,058
Total investments 252,573 280,597
Cash 3,876 5,762
Amounts due and recoverable from reinsurers 64,714 33,419
Deferred policy acquisition costs 16,225 10,054
Present value of future profits, less accumulated amortization of
$2,615 in 1996 and $2,803 in 1995 15,330 15,246
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $259 in 1996 and $393 in 1995 2,307 3,175
Other assets 12,400 8,640
Assets held in separate accounts 125,432 122,705
Total assets $492,857 $479,598
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1996 1995
<S> <C> <C>
(UNAUDITED) (Audited)
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial products $230,548 $212,500
Traditional life insurance 81,215 82,762
Total future policy benefits 311,763 295,262
Policy claims and other policyholders' benefits and funds 2,438 2,572
314,201 297,834
Accounts payable and accrued expenses 4,613 4,880
Class action litigation and settlement liability - 3,000
Obligations under capital lease 867 1,084
Notes payable 5,682 3,107
Deferred federal income taxes 9 2,583
Excess of net assets acquired over acquisition cost, less
accumulated amortization of $3,145 in 1996 and
$2,451 in 1995 3,469 4,163
Liabilities related to separate accounts 125,432 122,705
Total liabilities 454,273 439,356
Class S Cumulative Convertible Redeemable Preferred Stock,
par value $10 per share:
Authorized 300,000 shares; issued and outstanding 230,279
shares, redemption value of $10 per share plus
accumulated and unpaid dividends
2,403 -
Shareholders' equity:
Preferred stock, no par value:
Authorized 700,000 shares; none issued and outstanding - -
Common stock, no par value:
Authorized 20,000,000 shares; issued 5,752,499 shares
in 1996 and 5,459,573 shares in 1995 40,758 39,808
Treasury stock, at cost, 974,104 shares in 1996 and
502,025 shares in 1995 (deduction) (4,723) (2,621)
Unrealized gain (loss) on securities available for sale (2,013) 2,582
Foreign currency translation adjustment 937 1,159
Retained earnings (deficit) 1,222 (686)
Total shareholders' equity 36,181 40,242
Total liabilities, redeemable securities
and shareholders' equity $492,857 $479,598
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues:
<S> <C> <C> <C> <C>
Premium income $5,630 $946 $7,129 $2,340
Net investment income 4,731 4,500 9,391 9,179
Net realized investment gains 218 279 456 334
Gain on disposal of subsidiaries - - 886 -
Policy charges 690 505 1,214 1,104
Amortization of excess of net assets acquired over 347 347 694 694
acquisition cost
Management fees and similar income from separate accounts 452 222 836 488
Other income 597 111 915 149
Total revenues 12,665 6,910 21,521 14,288
Benefits and expenses:
Benefits and claims 6,396 950 7,223 2,761
Interest credited on interest-sensitive annuities and other
financial products 2,358 2,564 5,004 5,127
Salaries and wages 1,255 1,165 2,463 2,205
Amortization 712 565 1,159 921
Other operating expenses 1,795 1,619 3,910 2,940
Interest expense and financing costs 154 36 277 53
Class action litigation and settlement costs (credit) - (314) - (314)
Total benefits and expenses 12,670 6,585 20,036 13,693
Income (loss) before federal income taxes, extraordinary gain
on early
redemption of redeemable preferred stock and preferred (5) 325 1,485 595
stock dividends
Federal income tax expense (credit) 57 77 (1,118) 61
Income (loss) before extraordinary gain on early redemption
of redeemable preferred stock and preferred stock dividends (62) 248 2,603 534
Extraordinary gain on early redemption of redeemable
preferred stock, 166 - 267 -
net of $- federal income tax
NET INCOME 104 248 2,870 534
Preferred stock dividends 66 - 112 -
Earnings available to common shareholders $38 $248 $2,758 $534
Earnings per share:
Income before extraordinary gain on early redemption of
redeemable preferred stock and preferred stock dividends $(.01) $.05 $.50 $.10
Extraordinary gain on early redemption of redeemable
preferred stock .03 - .05 -
NET INCOME .02 .05 .55 .10
Preferred stock dividends .01 - .01 -
Earnings available to common shareholders $.01 $.05 $.54 $.10
Weighted average number of shares outstanding:
Common shares 4,760,656 5,276,428 4,866,850 5,281,983
Common equivalent shares 126,815 83,695 612,358 41,454
4,887,471 5,360,123 5,479,208 5,323,437
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
Amounts Shares
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Common stock:
Balance, beginning of period $39,808 $39,695 5,459,573 5,457,906
Issuance of common stock 100 - 20,000 -
5% common stock dividend 850 - 272,926 -
Balance, end of period 40,758 39,695 5,752,499 5,457,906
Treasury stock (at cost):
Balance, beginning of period (2,621) (2,221) (502,025) (418,425)
Treasury stock acquired (2,104) (255) (426,026) (53,900)
5% common stock dividend - - (46,402) -
Reissuance of treasury stock in connection
with 2 - 349 -
exercise of stock options
Balance, end of period (4,723) (2,476) (974,104) (472,325)
Unrealized gain (loss) on securities:
Balance, beginning of period 2,582 (13,411)
Change in unrealized gain (loss) on
securities available for sale, net (4,595) 13,280
Balance, end of period (2,013) (131)
Foreign currency translation adjustments:
Balance, beginning of period 1,159 546
Translation adjustments for the period (222) 909
Balance, end of period 937 1,455
Retained earnings (deficit):
Balance, beginning of period (686) (1,999)
Net income 2,870 534
5% common stock dividend, plus cash in lieu
of fractional shares (850) -
Preferred stock dividend (112) -
Balance, end of period 1,222 (1,465)
Total shareholders' equity and common shares $36,181 $37,078 4,778,395 4,985,581
outstanding
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
JUNE 30,
<S> <C> <C>
1996 1995
OPERATING ACTIVITIES
Net income $2,870 $534
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Amortization of deferred policy acquisition costs 575 510
Policy acquisition costs deferred (2,506) (617)
Class action litigation and settlement liability - (633)
Deferred income taxes (244) 435
Depreciation and amortization 200 14
Change in future policy benefits 658 1,936
Net increase (decrease) in policy claims and
other policyholders' benefits and funds (405) (300)
Net realized investment gains (456) (334)
Decrease (increase) in accrued investment income (535) 57
Extraordinary gain on early redemption of redeemable
preferred stock (267) -
Other 1,744 3,723
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,634 5,325
FINANCING ACTIVITIES
Borrowings 2,600 200
Repayments on borrowings and capital lease obligation (239) (721)
Premiums received on interest-sensitive annuities
and other financial products credited to
policyholder account balances, net of premiums ceded 18,796 7,017
Return of policyholder account balances on
interest-sensitive annuities and other
financial products, net of premiums ceded (9,403) (8,952)
Redemption of redeemable preferred stock (442) -
Proceeds from common and treasury stock sales 102 -
Purchase of common stock for treasury (2,104) (255)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 9,310 (2,711)
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purc hases (107,403) (100,591)
Sales 77,578 103,030
Maturities 3,562 1,223
Short-term investments, net 5,423 (7,380)
Other investments, net (3,218) 500
Proceeds from sale of property and equipment under
capital lease - 1,396
Proceeds from sale of First International Life Insurance
Company, less cash transferred to seller of $265 11,228 -
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (12,830) (1,822)
Net increase (decrease) in cash (1,886) 792
Cash at beginning of period 5,762 1,604
Cash at end of period $3,876 $2,396
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
Such principles were applied on a basis consistent with those reflected in the
Standard Management Corporation ("SMC") Annual Report on Form 10-K for the year
ended December 31, 1995. However, certain reclassifications have been made in
the 1995 financial statements to conform with the 1996 presentation.
The results of operations for the interim periods shown in this report
are not necessarily indicative of the results that may be expected for the
fiscal year. This is particularly true in the life insurance industry, where
mortality results in interim periods can vary substantially from such results
over a longer period. In the opinion of management, the information
contained herein reflects all adjustments necessary to make the results of
operations for the interim periods a fair statement of such operations. All
such adjustments are of a normal recurring nature.
The nature of the insurance business of Standard Management Corporation
and its consolidated subsidiaries ("SMC" or "the Company") requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company uses significant estimates and assumptions in calculating deferred
policy acquisition costs, present value of future profits, goodwill, future
policy benefits and deferred federal income taxes. Such estimates and
assumption could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
The consolidated financial statements as of and for the three months and
six months ended June 30, 1996 include the assets and liabilities and results
of operations of Dixie National Life Insurance Company ("Dixie National Life")
which was acquired on October 2, 1995.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Annual Report on Form 10-K of SMC for the
year ended December 31, 1995.
NOTE 2 - COMMON STOCK
SMC declared a 5% stock dividend on shares of its common stock for
shareholders of record on May 17, 1996 which was distributed to shareholders on
June 21, 1996. All applicable number of shares and per share amounts included
in the consolidated financial statements have been retroactively adjusted to
reflect this stock dividend for all periods presented.
NOTE 3 - NOTES PAYABLE
SMC has outstanding borrowings at June 30, 1996 pursuant to a Revolving
Line of Credit Agreement with a bank (the "Credit Agreement") which provides
for it to borrow up to $6,000 in the form of a five-year reducing revolving
loan arrangement, which may be extended to seven years at the discretion of the
bank. At June 30, 1996, the total principal balance borrowed under the Credit
Agreement was $5,600. SMC had borrowed an additional $2,600 since December 31,
1995 to repurchase its Common Stock and Class S Cumulative Convertible
Redeemable Preferred Stock ("Class S Preferred Stock") and for general
corporate purposes. Borrowings under this Credit Agreement may be used for
contributions to surplus of insurance subsidiaries, acquisition financing, and
repurchases of Class S Preferred Stock and Common Stock of SMC. Interest on
the borrowings under the Credit Agreement is determined, at the option of SMC,
to be: (I) a fluctuating rate of interest to the corporate base rate announced
by the bank from time to time plus 1% per annum, or (ii) a rate at LIBOR plus
3.25%. The debt is also subject to certain restrictions and covenants
considered ordinary for this type of borrowing. They include, among others,
minimum consolidated equity, positive net income, and minimum consolidated
statutory surplus for SMC's insurance subsidiaries. Additional covenants
include limitations on acquisitions, additional indebtedness, investments, and
mergers, consolidations and sales of assets. As of June 30, 1996, SMC was in
compliance with all restrictions and covenants in the Credit Agreement.
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - REDEEMABLE PREFERRED STOCK
In connection with the class action lawsuit settlement in March 1995,
300,000 shares designated as Class S Preferred Stock, $10.00 per share par
value, were issued February 8, 1996. The Class S Preferred Stock is redeemable
in February 2003, has an 11% annual cumulative dividend payable in February
2003, and is convertible into SMC common stock at $7.62 per share until
February 1998 and $10.00 per share thereafter, subject to adjustment under a
formula intended to protect against dilution.
SMC may voluntarily redeem the Class S Preferred Stock prior to February
2003 at par value plus accumulated and unpaid dividends. As of June 30, 1996,
SMC has repurchased and retired 69,721 shares of Class S Preferred Stock on the
open market at a cost of $442 primarily paid through borrowings under the
Credit Agreement. These repurchases resulted in an extraordinary gain on early
redemption of redeemable preferred stock of $166 and $267 for the three and six
month periods ended June 30, 1996, respectively.
NOTE 5 - NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1996 1995
<S> <C> <C>
Fair value of securities available for sale $231,441 $232,144
Amortized cost of securities available for sale 236,520 225,695
Gross unrealized gain (loss) on securities (5,079) 6,449
available for sale
Adjustments for:
Deferred policy acquisition costs 1,860 (2,380)
Present value of future profits 184 (174)
Deferred federal income tax recoverable 1,020 (1,311)
(liability)
Minority interest 2 (2)
Net $(2,013) $2,582
unrealized gain (loss) on securities available for sale
</TABLE>
NOTE 6 - INCOME TAXES
The effective consolidated federal income tax expense (credit) rate for
SMC and subsidiaries (the "Company") was (11)% and (75)% for the three and six
months ended June 30, 1996, compared to 24% and 10% for the three and six
months ended June 30, 1995. The large credit for the six months ended June 30,
1996 is primarily due to tax benefits of $1,420 related to the sale of First
International Life Insurance Company ("First International") (SEE NOTE 7).
Also, the effective rates in 1995 are less than the statutory rates primarily
because the amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International is not
subject to United States income tax. The Company also has received the
benefits of a special deduction available to small life insurance companies and
the utilization of operating loss carryforwards in 1995. The benefits of the
special deduction available to small life insurance companies will no longer be
available when consolidated assets exceed $500,000.
NOTE 7 - DISPOSAL OF SUBSIDIARIES
On March 18, 1996, Standard Life Insurance Company of Indiana ("Standard
Life"), a wholly-owned subsidiary of SMC, completed the sale of a duplicate
charter associated with its wholly-owned subsidiary, First International, to
Guardian Insurance and Annuity Co., Inc. ("GIAC"), a subsidiary of The Guardian
Life Insurance Company of America, New York, New York. Standard Life received
sale proceeds of $10,393, including $1,500 for the charter and licenses
associated with First International. Standard Life realized a net pretax gain
of $1,042 and a tax benefit of $1,420 on this sale or $2,462 ($.45 per share)
for the six months ended June 30, 1996. In addition, First International,
Standard Life and GIAC have entered into a series of agreements that include
provisions for Standard Life to continue to administer First International
policies in force at the date of sale and for Standard Life to continue to
receive the profit stream from a majority of First International's in force
business at the date of sale.
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In an unrelated matter, the Company decided in February 1996 to terminate
the reinsurance agreement between Standard Reinsurance of North America Ltd.
("Standard Reinsurance") and Salamandra Joint-Stock Insurance Company in
Ukraine ("Salamandra"), and not to renew the Barbados license of Standard
Reinsurance due to an insignificant amount of reinsurance premium volume. This
resulted in the termination of Standard Reinsurance operations and the write-
off of SMC's investment in Standard Reinsurance and certain intangible assets
of Standard Reinsurance amounting to $156 for the six months ended June 30,
1996.
The combined effect of the gain on sale of First International and
related contracts, and the Standard Reinsurance write-offs, was an increase in
revenues of $886 and a tax benefit of $1,420, for net income effect of
approximately $2,306 or $.42 per share for the six months ended June 30, 1996.
NOTE 8 - PENDING ACQUISITION
On July 18, 1996, Standard Life signed a definitive stock purchase
agreement to acquire Shelby Life Insurance Company ("Shelby Life") from Delta
Life and Annuity Company ("DLAC"), a life insurance company located in Memphis,
Tennessee. Under terms of the agreement, SMC will purchase Shelby Life for
approximately $14,250, plus acquisition costs, including $13,000 in cash and
250,000 shares of SMC common stock. Financing for the transaction will be
provided by senior debt of $10,000 and the balance in subordinated convertible
debt.
For statutory purposes, Shelby had $104,283 in total assets and capital
and surplus of $10,621 at June 30, 1996, and revenues of $7,174 and net income
of $723 for the six months ended June 30, 1996.
The Shelby Life acquisition, which is scheduled to close in the fourth
quarter of 1996, is subject to certain conditions, including the final approval
by all regulatory authorities. No assurances can be given that this
transaction will be consummated.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion highlights the material factors affecting the
results of operations and the significant changes in balance sheet items of the
Company on a consolidated basis for the periods listed as well as the Company's
liquidable and capital resources. This analysis should be read in conjunction
with the consolidated financial statements and notes thereto included in this
document, as well as the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
OPERATING INCOME. The loss from operations (before net realized
investment gains, gain on disposal of subsidiaries and reduction in accruals of
certain legal expenses) was $(187,000) for the second quarter of 1996, or
$(.04) per share, compared to a loss of $(279,000) for the second quarter of
1995, or $(.05) per share. The change resulted from international operations
producing income from operations of $104,000 compared to a loss from
international operations of $(374,000) for the second quarter of 1996 and 1995,
respectively. The international operating gains resulted primarily from
increased management fees on an increasing separate account base due to
portfolio sales in 1996 and 1995, coupled with a decrease in marketing costs in
1996 when compared to the second quarter of 1995. The income (loss) from
operations in the United States decreased to a loss of $(291,000) in 1996
compared to income of $95,000 in 1995. The decline was attributable to an
increase in interest expense from borrowings to repurchase Common and Class S
Preferred Stock and additional costs to convert the operations and expand the
marketing effort in Dixie National Life.
PREMIUM INCOME. Premium income is composed of premiums, including
renewal premiums, received on ordinary life insurance policies. The Company's
new product sales are composed primarily of annuity products. Under GAAP,
deposits from interest-sensitive annuities and other financial products are not
recorded as revenues. GAAP premium income for the second quarter of 1996 was
$5,630,000, an increase of 495% or $4,686,000 from $946,000 for the second
quarter of 1995. This increase is mainly attributable to recapture of premiums
previously ceded of $4,234,000 due to the termination and recapture of a
reinsurance agreement with National Mutual Life Insurance Company ("National
Mutual"), and also to the inclusion of Dixie National Life in the results of
operations for periods after October 2, 1995. Dixie National Life's premium
income of $472,000 in 1996, along with an increase in Standard Life's premium
income of $263,000 compared to 1995, more than offsets the decline in premiums
from the cession of a portion of First International's life insurance business
and the regular policy lapses, surrenders and expiries in the Company's closed
blocks of business.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $14,808,000
compared to $3,738,000 for the second quarter of 1996 and 1995, respectively.
The increase in net premium received is partially due to an increase in gross
domestic premium deposits. Gross domestic premium deposits received from
interest-sensitive annuities and financial products were $17,511,000 for the
three months ended June 30, 1996 compared to $9,501,000 for the three months
ended June 30, 1995. The increase is partially due to an aggressive marketing
campaign implemented by Standard Life with increased crediting interest rates
effective April 15, 1996. Also contributing to the increase in premiums was
the continued development of the Company's distribution system. Since the
Company's operating income is primarily a function of its investment spreads,
persistency of annuity in force business, mortality experience, and operating
expenses, a change in premium deposits in a single period does not directly
cause operating income to change, although continued increases or decreases in
premiums may affect the growth rate of total assets on which investment spreads
are earned.
The Company also decreased the quota-share portion of business ceded
pursuant to a reinsurance agreement, under which 70% of a portion of Standard
Life's annuity business pursuant to the terms of the agreement produced after
December 31, 1994 was ceded, to 50% at September 1, 1995, which was further
decreased to 25% effective April 1, 1996. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium by $2,702,000 in the second
quarter of 1996 compared to $5,763,000 in 1995.
<PAGE>
NET INVESTMENT INCOME. Net investment income increased $231,000 or 5% to
$4,731,000 for the second quarter of 1996, from $4,500,000 for the comparable
period of 1995. The increase resulted primarily from an increase in the
average annualized yield of the Company's investment portfolio to 7.44% from
7.26% for the second quarter of 1996 and 1995, respectively.
NET REALIZED INVESTMENT GAINS. Net realized investment gains decreased
$61,000 or 22% to $218,000 from $279,000 for the second quarter of 1996 and
1995, respectively. Net realized investment gains fluctuate from period to
period and arise when securities are sold in response to changes in the
investment environment which provide opportunities to maximize return on the
investment portfolio without adversely affecting the quality and overall yield
of the investment portfolio. No significant writedowns on investments were
recorded in 1995 or 1996. The pretax net unrealized gain (loss) on the
Company's securities available for sale was $(5,079,000) at June 30, 1996
compared to $6,449,000 at December 31, 1995, reflecting the general rise in
interest rates during the quarter which generally caused the fair value of
fixed maturity securities to decrease. In the absence of decreases in interest
rates the Company may be unable to realize gains on its investment portfolio at
the levels of prior years or could recognize losses from sales of securities
prior to maturity. The change in market value of the Company's fixed maturity
securities is not expected to have a significant effect on results of
operations because the Company has the present intent and practice to hold most
of its available-for-sale fixed maturity securities to maturity and the
Company's asset/liability management activity is designed to monitor and adjust
for the effects of changes in market interest rates.
POLICY CHARGES. Policy charges, which represent the amounts assessed
against policyholder account balances for the cost of insurance, policy
administration and surrenders, increased $185,000 or 37% to $690,000 for the
second quarter of 1996 compared to $505,000 for the second quarter of 1995.
The increase in policy charges resulted from an increase in policy surrender
charges on flexible premium deferred annuities ("FPDAs") and the inclusion of
Dixie National Life in operating results for periods after October 2, 1995,
which offset the absence of policy charges from the Company's closed blocks of
universal life business which were sold to GIAC through a reinsurance contract
effective January 1, 1996.
AMORTIZATION OF EXCESS OF NET ASSETS ACQUIRED OVER ACQUISITION COST.
Amortization of excess of net assets acquired over acquisition cost ("negative
goodwill") is recorded to amortize into earnings the negative goodwill recorded
in connection with the acquisition of Standard Management International in
1993. The negative goodwill is being amortized on a straight-line basis over
five years. Amortization of negative goodwill was $347,000 for each of the
second quarters of 1996 and 1995.
MANAGEMENT FEES AND SIMILAR INCOME FROM SEPARATE ACCOUNTS. Management
fees and similar income is recorded from investment management fee income
recorded by Standard Management International on its separate account assets
and investment contracts. Management fees and similar income from separate
accounts increased $230,000 or 104% to $452,000 for the second quarter of 1996
from $222,000 for the second quarter of 1995. This increase is due primarily
to an increase in the value of assets held in separate accounts from
$94,301,000 at December 31, 1994 to $125,432,000 at June 30, 1996 and to higher
service fees being levied on certain transactions. Such income fluctuates in
relationship to total separate account assets and the return earned on such
assets.
OTHER INCOME. Other income primarily includes administration fee income,
reserve adjustments and experience rating refunds in connection with the
agreements with GIAC and override commissions received from unaffiliated
companies by Standard Marketing Corporation ("Standard Marketing"), a wholly-
owned subsidiary which is a wholesale distributor of life insurance and annuity
products. Other income increased $486,000 or 438% to $597,000 for the second
quarter of 1996 compared to $111,000 for the comparable 1995 period. The
increase resulted primarily from the administration agreements with GIAC in
1996 and increased commissions received by Standard Marketing from the sale of
unaffiliated products.
BENEFITS AND CLAIMS. Benefits and claims include life insurance and
payout annuity benefits paid and changes in policy reserves. Benefits and
claims increased $5,446,000 or 573% to $6,396,000 for the second quarter of
1996 from $950,000 for the second quarter of 1995. The increase in benefits
and claims resulted primarily from an increase in reserves of $4,234,000
related to the termination and recapture of a reinsurance agreement with
National Mutual and the inclusion of Dixie National Life's benefits and claims
in the results of operations in 1996. The significant increase is also due to
higher life insurance benefit claims of $225,000 due to adverse claims
experience. Throughout the Company's history, it has experienced both periods
of higher and lower benefit claims. Such volatility is not uncommon in the
life insurance industry and, over extended periods of time, periods of higher
claims experience tend to be offset by periods of lower claims experience.
INTEREST CREDITED ON INTEREST-SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest sensitive annuities and other
financial products was $2,358,000 for the second quarter of 1996, a decrease of
$206,000 or 8% from $2,564,000 for the comparable prior year period. The
decrease resulted primarily from the Company's continued ability to enhance
investment spreads due to its decrease of credited interest rates on annuities
and other financial products as well as a reclassification to benefits and
claims in the second quarter of 1996. This more than offsets the growth in
account values inforce for FPDAs. At June 30, 1996, the weighted average
interest credited rate for Standard Life's annuities and other financial
product liabilities was 5.26% compared to 5.45% at June 30, 1995. Crediting
rates offered on new business can be changed at any time in response to
competition and market interest rates.
SALARIES AND WAGES. Salaries and wages were $1,255,000 for the second
quarter of 1996, an increase of $90,000 or 8% from $1,165,000 for the
comparable prior year period. This fluctuation was caused primarily by an
increase in the number and average wages of employees in the United States.
These increases offset savings from the gradual decreases in staff in
international operations.
AMORTIZATION. Amortization expense primarily includes charges to
operations for the amortization of deferred policy acquisition costs, the
present value of future profits and the excess of cost over net assets
acquired. Amortization expense increased $147,000 or 26% to $712,000 for the
second quarter of 1996 from $565,000 for the second quarter of 1995. The
increase in current year amortization expense resulted primarily from increased
amortization of deferred acquisition costs as gross profits from business sold
in recent years began to emerge, increased surrenders and their corresponding
impact on the amortization of deferred acquisition costs and from the
amortization of present value of future profits for the acquisition of Dixie
National Life. These items more than offset reduced amortization of excess of
cost over net assets acquired and present value of future profits due to the
sale of First International.
OTHER OPERATING EXPENSES. Other operating expenses increased $176,000 or
11% to $1,795,000 for the second quarter of 1996 from $1,619,000 for the second
quarter of 1995. The increase in other operating expenses resulted primarily
from the expenses of Dixie National Life included in the results for the second
quarter of 1996, professional fees incurred and losses on currency exchange
related to revaluation differences by Standard Management International and
increased marketing efforts by Standard Marketing.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $118,000 or 328% to $154,000 in 1996 from $36,000 in 1995. The
increase in interest expense and financing costs during 1996 resulted from the
borrowings on the Credit Agreement related to the repurchase of Common and
Class S Preferred Stock. The borrowings under the Credit Agreement occurred
after June 30, 1995.
FEDERAL INCOME TAXES. Federal income tax expense was $57,000 for the
second quarter of 1996, compared to $77,000 for the second quarter of 1995.
The effective rates in 1995 are less than the statutory rates primarily because
the amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International is not
subject to United States income tax. The Company also has received the
benefits of a special deduction available to small life insurance companies and
the utilization of operating loss carryforwards in 1995. The benefits of the
special deduction available to small life insurance companies will no longer be
available when consolidated assets exceed $500,000,000.
CLASS ACTION LITIGATION AND SETTLEMENT COSTS. Class action litigation
and settlement costs were recorded to reflect the estimated costs of litigation
and settlement of the shareholder class action lawsuit, based on the terms of
the settlement agreement and assumptions as to the future estimated legal and
other costs to settle the lawsuit, which was settled in March 1995, and to
register the Class S Preferred Stock which was distributed to the class
participants in February 1996. There were no class action litigation and
settlement expenses in the quarters ended June 30, 1996 and 1995. However,
with the signing of the Settlement Agreement with the 22 persons who previously
excluded themselves from the class and the reevaluation of the future estimated
legal and other costs to settle the lawsuit, SMC recorded a reduction of
$314,000 in the second quarter of 1995 in the estimated future costs to settle
the lawsuit and register the Class S Preferred Stock.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF REDEEMABLE PREFERRED STOCK.
Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount the Company is able to repurchase the Class S
Preferred Stock below its book value plus accumulated and unpaid dividends.
The Company will continue to repurchase these shares as long as holders of the
Class S Preferred Stock are willing to sell at a substantial discount to book
value. The extraordinary gain was $166,000 for the three months ended June 30,
1996 compared to no gain for the prior comparable period.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
OPERATING INCOME (LOSS). The income (loss) from operations (before net
realized investment gains, gain on disposal of subsidiaries and reduction in
accruals of certain legal expenses) was $27,000 in 1996, compared to $(29,000)
for 1995. The change resulted from international operations producing income
from operations of $335,000 compared to a loss of $(323,000) for the second
quarter of 1996 and 1995, respectively. The international operating gains
resulted primarily from increased management fees on an increasing separate
account base due to portfolio sales in 1995 and 1996, and increased value of
assets under management, coupled with a decrease in marketing costs in 1996
when compared to the second quarter of 1995. The income (loss) from operations
in the United States decreased to a loss of $(308,000) in 1996 compared to
income of $294,000 in 1995. The decline was attributable to an increase in
interest expense from borrowings to repurchase Common and Class S Preferred
Stock and additional costs to convert the operations and expand the marketing
effort in Dixie National Life.
PREMIUM INCOME. GAAP premium income for the six months ended June 30,
1996 was $7,129,000, an increase of 205% or $4,789,000 from $2,340,000 for the
six months ended June 30, 1995. This increase is mainly attributable to
recapture of premiums ceded of $4,234,000 due to the termination and recapture
of the reinsurance agreement with National Mutual and the inclusion of Dixie
National Life in the results of operations for periods after October 2, 1995.
Dixie National Life's premium income of $878,000 for the six months ended June
30, 1996, along with an increase in Standard Life's premium income of $297,000
compared to 1995, more than offsets the decline in premiums from the cession of
a portion of First International's life insurance business and the regular
policy lapses, surrenders and expiries in the Company's closed blocks of
business.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $18,796,000
compared to $7,017,000 for the six months ended June 30, 1996 and 1995,
respectively. The increase in premium deposits is partially due to an increase
in gross domestic premium deposits. Gross domestic premium deposits received
from interest-sensitive annuities and financial products were $23,799,000 for
the six months ended June 30, 1996 compared to $18,232,000 for the six months
ended June 30, 1995. The increase is partially due to an aggressive marketing
campaign implemented by Standard Life with increased crediting interest rates
effective April 15, 1996. Also contributing to the increase in premiums was
the continued development of the Company's distribution system.
As previously mentioned, the Company also decreased the quota-share
portion of business ceded pursuant to a reinsurance agreement from 70% to 50%
at September 1, 1995, which was further decreased to 25% effective April 1,
1996. Premium deposits ceded pursuant to this reinsurance agreement reduced
net premium by $5,003,000 in the six months ended June 30, 1996 compared to
$11,215,000 in 1995.
NET INVESTMENT INCOME. Net investment income increased $212,000 or 2% to
$9,391,000 for the six months ended June 30, 1996 from $9,179,000 for the
comparable period of 1995. The increase primarily resulted from an increase in
total invested assets of approximately 5% from 1995 to 1996, offset by a
decline in average yield to 7.19% from 7.42% for the six months ended June 30,
1996 and 1995, respectively. The continued growth in the Company's total
invested assets reflects increased sales of FPDAs and the inclusion of Dixie
National Life in the results of operations effective October 2, 1995.
NET REALIZED INVESTMENT GAINS. Net realized investment gains increased
$122,000 or 37% to $456,000 from $334,000 for the six months ended June 30,
1996 and 1995, respectively. Net realized investment gains fluctuate from
period to period and arise when securities are sold in response to changes in
the investment environment which provide opportunities to maximize return on
the investment portfolio without adversely affecting the quality and overall
yield of the investment portfolio.
GAIN ON DISPOSAL OF SUBSIDIARIES. On March 18, 1996, the Company
completed the sale of a duplicate charter associated with First International
to GIAC. The Company received sale proceeds of $10,393,000, including
$1,500,000 for the charter and licenses associated with First International. In
addition, First International, Standard Life and GIAC have entered into a
series of agreements that include provisions for Standard Life to retain the
economic interest in certain First International policies and administer First
International policies in force at the date of such sale.
<PAGE>
In an unrelated matter, the Company decided in February 1996 to terminate
the reinsurance agreement between Standard Reinsurance and Salamandra, and not
to renew the Barbados license of Standard Reinsurance. This resulted in a
first quarter 1996 write-off of SMC's investment in Standard Reinsurance and
certain intangible assets of Standard Reinsurance amounting to $156,000.
The combined effect of the pre-tax gain on the sale of First
International and related contracts, and the Standard Reinsurance write-offs,
was $886,000 pre-tax in the first quarter of 1996.
POLICY CHARGES. Policy charges increased $110,000 or 10% to $1,214,000
for the six months ended June 30, 1996 compared to $1,104,000 for the six
months ended June 30, 1995. The increase in policy charges resulted from an
increase in policy surrender charges on FPDAs and the inclusion of Dixie
National Life in operating results for periods after October 2, 1995 which
offset the absence of policy charges from the Company's closed blocks of
universal life business which were sold to GIAC through a reinsurance contract
effective January 1, 1996.
MANAGEMENT FEES AND SIMILAR INCOME FROM SEPARATE ACCOUNTS. Management
fees and similar income from separate accounts increased $348,000 or 71% to
$836,000 for the six months ended June 30, 1996 from $488,000 for the six
months ended June 30, 1995. Such income fluctuates in relationship to total
separate account assets and the return earned on such assets.
OTHER INCOME. Other income increased $766,000 or 514% to $915,000 for
the six months ended June 30, 1996 compared to $149,000 for the comparable 1995
period. The increase resulted primarily from the administration fee income,
reserve adjustments and experience rating refunds in connection with the
agreements with GIAC and increased commissions received by Standard Marketing
from the sale of unaffiliated products.
BENEFITS AND CLAIMS. Benefits and claims increased $4,462,000 or 162% to
$7,223,000 for the six months ended June 30, 1996 from $2,761,000 for the six
months ended June 30, 1995. The increase resulted primarily from an increase
in reserves of $4,234,000 related to the termination and recapture of a
reinsurance agreement with National Mutual and the inclusion of Dixie National
Life's benefits and claims in the results of operations in 1996. The
significant increase is also due to higher life insurance benefit claims of
$1,006 due to adverse claims experience. Throughout the Company's history, it
has experienced both periods of higher and lower benefit claims. Such
volatility is not uncommon in the life insurance industry and, over extended
periods of time, periods of higher claims experience tend to be offset by
periods of lower claims experience.
INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest sensitive annuities and other
financial products was $5,004,000 for the six months ended June 30, 1996, a
decrease of 2% from $5,127,000 for the comparable prior year period. The
decrease resulted primarily from the Company's continued ability to enhance
investment spreads due to its decrease of credited interest rates on annuities
and other financial products. This more than offsets the increases in the
growth in policy reserves for FPDAs. At June 30, 1996, the weighted average
interest credited rate for Standard Life's annuities and other financial
product liabilities was 5.26% compared to 5.45% at June 30, 1995.
SALARIES AND WAGES. Salaries and wages were $2,463,000 for the six
months ended June 30, 1996, an increase of $258,000 or 12% from $2,205,000 for
the comparable prior year period. This fluctuation was caused primarily by an
increase in the number and average wages of employees in the United States and
an increase in incentive compensation expense for the six months ended June 30,
1996 based on operating income for the six months ended June 30, 1996. These
increases offset savings from the gradual decreases in staff in international
operations.
AMORTIZATION. Amortization expense increased $238,000 or 26% to
$1,159,000 for the six months ended June 30, 1996 from $921,000 for the six
months ended June 30, 1995. The increase in current year amortization expense
resulted primarily from increased amortization of deferred acquisition costs as
gross profits from business sold in recent years began to emerge, increased
surrenders and their corresponding impact on the amortization of deferred
acquisition costs, and from the amortization of present value of future profits
for the acquisition of Dixie National Life. These items more than offset
reduced amortization of excess of cost over net assets acquired and present
value of future profits due to the sale of First International.
OTHER OPERATING EXPENSES. Other operating expenses increased $970,000 or
33% to $3,910,000 for the six months ended June 30, 1996 from $2,940,000 for
the six months ended June 30, 1995. The increase in other operating expenses
resulted primarily from the expenses of Dixie National Life included in the
results for the six months ended June 30, 1996 and the increased expenses
related to potential acquisitions.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $224,000 or 423% to $277,000 for the six months ended June 30,
1996 from $53,000 for the six months ended June 30, 1995. The increase in
interest expense and financing costs during 1996 resulted primarily from the
borrowings on the Credit Agreement. The borrowings under the Credit Agreement
occurred after June 30, 1995.
CLASS ACTION LITIGATION AND SETTLEMENT COSTS. Class action litigation
and settlement costs were recorded to reflect the estimated costs of litigation
and settlement of the shareholder class action lawsuit, based on the terms of
the settlement agreement and assumptions as to the future estimated legal and
other costs to settle the lawsuit, which was settled in March 1995, and to
register the Class S Preferred Stock which was distributed to the class
participants in February 1996. There were no class action litigation and
settlement expenses in the six months ended June 30, 1996 and 1995. However,
with the signing of the Settlement Agreement with the 22 persons who previously
excluded themselves from the class and the reevaluation of the future estimated
legal and other costs to settle the lawsuit, SMC recorded a reduction of
$314,000 in the second quarter of 1995 in the estimated future costs to settle
the lawsuit and register the Class S Preferred Stock.
FEDERAL INCOME TAXES. Federal income tax expense (credit) was
$(1,118,000) for the six months ended June 30, 1996, compared to $61,000 for
the six months ended June 30, 1995. The large credit in 1996 is primarily due
to tax benefits of $1,420,000 related to the sale of First International.
Also, the effective rates in 1995 are less than the statutory rates primarily
because the amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International is not
subject to United States income tax. The Company also has received the
benefits of a special deduction available to small life insurance companies and
the utilization of operating loss carryforwards in 1995. The benefits of the
special deduction available to small life insurance companies will no longer be
available when consolidated assets exceed $500,000,000.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF REDEEMABLE PREFERRED STOCK.
Extraordinary gains are recorded on the early redemption of the Class S
Preferred Stock for the amount the Company is able to repurchase the Class S
Preferred Stock below its book value plus accumulated and unpaid dividends.
The Company will continue to repurchase these shares as long as holders of the
Class S Preferred Stock are willing to sell at a substantial discount to book
value. The extraordinary gain was $267,000 for the six months ended June 30,
1996 compared to no gain for the prior comparable period.
LIQUIDITY AND CAPITAL RESOURCES
SMC is an insurance holding company. The liquidity requirements of SMC
are met primarily from management fees, equipment rental income and payments
for other charges and dividends received from SMC's subsidiaries as well as SMC
working capital. These are SMC's primary source of funds to pay operating
expenses and meet debt service obligations. The payment of dividends and
management and other fees by Standard Life to SMC is subject to restrictions
under the insurance laws of Indiana, Standard Life's jurisdiction of domicile.
These internal sources of liquidity have been supplemented in the past by
external sources such as lines of credit and revolving credit agreements and
long-term debt and equity financing in the capital markets.
The Company reported on a consolidated GAAP basis net cash provided
(used) by operations of $1,634,000 and $5,325,000 for the six months ended June
30, 1996 and 1995, respectively. Although deposits received on the Company's
interest-sensitive annuities and other financial products are not included in
cash flow from operations under GAAP, such funds are available for use by the
Company. Cash provided (used) by operations plus net deposits received, less
net account balances returned to policyholders on interest sensitive annuities
and other financial products, resulted in positive cash flow of $11,027,000 and
$3,391,000 for the six months ended June 30, 1996 and 1995, respectively. Cash
generated on a consolidated basis is available to SMC only to the extent that
it is generated at SMC level or is available to SMC through dividends,
interest, management fees or other payments from subsidiaries.
In April 1993, SMC instituted a program to repurchase its Common Stock
from time to time. The purpose of the stock repurchase program is to enhance
shareholder value. The Company has repurchased 974,453 shares of its Common
Stock for $4,725,000 as of June 30, 1996. The repurchases in 1996 have been
paid through additional borrowings under the Credit Agreement. At June 30,
1996, the Company is authorized to purchase an additional 525,896 shares under
this program.
<PAGE>
In February 1996, SMC instituted a program to repurchase from time to
time up to 300,000 shares of its Class S Preferred Stock in the open market or
privately negotiated transactions. As of July 31, 1996, SMC has repurchased
and retired 142,646 shares of its Class S Preferred Stock for $954,000.
On May 1, 1996, the Board of Directors declared a stock dividend of 5% on
shares of its common stock for shareholders of record on May 17, 1996. The
stock dividend was distributed on June 21, 1996, with shareholders receiving
shares of common stock equivalent to 5% of common shares owned as of May 17,
1996 and cash equivalent for fractional shares. The number of shares issued
pursuant to this action was 272,926, plus cash in lieu of fractional shares.
At July 31, 1996, SMC had "parent company only" cash and short-term
investments of $1,167,000. These funds are available to the Company for
general corporate purposes including repayment of debt outstanding and
additional capital infusions into Standard Life. SMC's "parent company only"
operating expenses (not including class action litigation and settlement costs
and interest expense) were $1,604,000 and $1,372,000 for the six months ended
June 30, 1996 and 1995, respectively.
Pursuant to the management services agreement with SMC, Standard Life
paid SMC a monthly fee of $150,000 during 1996 and 1995 for certain management
services related to the production of business, investment of assets and
evaluation of acquisitions. The agreement was approved by the Indiana
Department of Insurance with the stipulation that Dixie National Life would pay
an annual fee of at least $1,500,000 to Standard Life during 1996. A
management service agreement between Standard Life and Dixie National Life,
which currently provides for a management fee of $154,000 per month to be paid
by Dixie National Life to Standard Life, was approved by the Mississippi
Department of Insurance. Both of these agreements provide that they may be
modified or terminated by the department of insurance in the event of financial
hardship of Standard Life or Dixie National Life.
Pursuant to the management services agreement with SMC, Premier Life
(Luxembourg) paid SMC a management fee of $25,000 per quarter during 1996 and
1995 for certain management and administrative services. The agreement
provides that it may be modified or terminated by either SMC or Premier Life
(Luxembourg).
At April 1, 1995, SMC sold its property and equipment to a
leasing/financing company for $1,396,000 and subsequently entered into a
capital lease obligation whereby SMC pays a monthly rental amount of $45,000.
SMC charges a monthly equipment rental fee to its subsidiaries of $64,000.
The Credit Agreement provides for SMC to borrow up to $6,000,000 in the
form of a five-year reducing revolving loan arrangement, which may be extended
to seven years at the discretion of the bank. SMC has agreed to pay a non-use
fee of .50% per annum on the unused portion of the commitment. In connection
with the Credit Agreement, SMC issued warrants to the bank to purchase 30,000
shares of SMC Common Stock. Borrowings under this Credit Agreement may be used
for contributions to surplus of insurance subsidiaries, acquisition financing,
and repurchases of Class S Preferred and Common Stock of SMC. The debt is
secured by a Pledge Agreement of all of the issued and outstanding shares of
common stock of Standard Life and Standard Marketing. Interest on the
borrowings under the Credit Agreement is determined, at the option of SMC, to
be: (I) a fluctuating rate of interest to the corporate base rate announced by
the bank from time to time plus 1% per annum, or (ii) a rate at LIBOR plus
3.25%. Given the Company's current level of borrowings, no principal
repayments will be required until November 1997. With the bank's consent,
principal payments may be deferred until November 1998 or 1999. Indebtedness
incurred under the Credit Agreement is subject to certain restrictions and
covenants including, among other things, certain minimum financial ratios,
minimum statutory surplus requirements for the insurance subsidiaries, minimum
consolidated equity requirements for the Company and certain investment and
indebtedness limitations. As of June 30, 1996, the Company was in compliance
with all restrictions and covenants in the Credit Agreement. At July 31, 1996,
SMC had borrowed $5,600,000 under this Credit Agreement at interest rates
ranging from 8.3125% to 8.7969%.
Assuming the continuation of current debt level ($5,600,000) and the
current interest rates (weighted average rate of 8.625%) annual debt service in
1996 would be approximately $460,000 in interest expense on the Credit
Agreement. In addition, SMC will also pay $539,000 in rental payments relating
to a capital lease obligation in 1996.
Dividends from Standard Life to SMC are limited by laws applicable to
insurance companies. As an Indiana domiciled insurance company, Standard Life
may pay a dividend or distribution from its surplus profits, without the prior
approval of the Indiana Commissioner of Insurance, if the dividend or
distribution, together with all other dividends and distributions paid within
the preceding twelve months, does not exceed the greater of (I) net gain from
operations or (ii) 10% of surplus, in each case as shown in its preceding
annual statutory financial statements. For the year ended December 31, 1995,
Standard Life reported statutory net gain from operations of $124,000 and
statutory surplus of $10,186,000. During 1996, Standard Life can pay dividends
of $1,019,000 without regulatory approval; Standard Life must notify the
Indiana regulatory authorities of their intent to pay dividends at least thirty
days prior to payment. Regulatory approval will be required for additional
dividend payments in excess of this amount by Standard Life during 1996. On
June 20, 1996, Standard Life paid an ordinary dividend on $1,000,000 to SMC
which was not disapproved by the Indiana Department of Insurance.
SMC anticipates the available cash from its existing working capital,
plus anticipated 1996 dividends, management fees and rental income, will be
more than adequate to meet its anticipated 1996 "parent company only" cash
requirements for 1996.
SMC has a note receivable of $2,858,000 from an affiliate and a note
payable of $2,858,000 to a different affiliate. This note receivable and note
payable are eliminated in the consolidated financial statements.
In July 1996, SMC announced that Standard Life signed an agreement to
purchase Shelby from DLAC for approximately $14,250,000, plus acquisition
costs, including $13,000,000 in cash and 250,000 shares of SMC Common Stock.
Financing for the transaction will be provided by senior debt of $10,000,000
and the balance in subordinated convertible debt. The Company anticipates its
current Credit Agreement will be combined with the new senior debt in a new
credit agreement, the terms of which are currently being negotiated.
U.S. INSURANCE OPERATIONS. The principal liquidity requirements of
Standard Life are its contractual obligations to policyholders, dividend, rent
and management fee payments to SMC and other operating expenses. The primary
source of funding for these obligations has been cash flow from premium income,
net investment income, investment sales and maturities and sales of FPDAs.
These sources of liquidity for Standard Life significantly exceed scheduled
uses. Liquidity is also affected by unscheduled benefit payments including
death benefits and policy withdrawals and surrenders. The amount of
withdrawals and surrenders is affected by a variety of factors such as renewal
interest crediting rates, interest rates for competing products, general
economic conditions, Standard Life's A.M. Best ratings (currently rated "B")
and events in the industry which affect policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions
which allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, in light of such activity.
Changes in interest rates may affect the incidence of policy surrenders
and other withdrawals. In addition to the potential impact on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect earnings if the Company were required to sell investments at
reduced values in order to meet liquidity demands. The Company manages the
asset and liability portfolios in order to minimize the adverse earnings impact
of changing market interest rates. The Company seeks assets which have
duration characteristics similar to the liabilities which they support. The
Company also prepares cash flow projections and performs cash flow tests under
various market interest rate scenarios to assist in evaluating liquidity needs
and adequacy. Standard Life currently expects available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the
National Association of Insurance Commissioners ("NAIC"), as modified by the
Indiana Department of Insurance, or the state in which the insurance
subsidiaries do business. Statutory accounting rules are different from GAAP
and are intended to reflect a more conservative perspective. The Company's
long-term growth goals contemplate continued growth in its insurance
businesses. To achieve these growth goals, Standard Life will need to increase
statutory surplus. Additional statutory surplus may be secured through various
sources such as internally generated statutory earnings, equity sales or
infusions by the Company with funds generated through debt or equity offerings.
With respect to new business, statutory accounting practices require that: (I)
acquisition costs and (ii) reserves for future guaranteed principal payments
and interest in excess of statutory rates, be expensed in the year the new
business is written. These items cause a statutory loss ("surplus strain")
from many insurance products in the year they are issued. The Company designs
its products to minimize such first-year losses, but certain products continue
to cause a statutory loss in the year written. For each product, the Company
controls the amount of net new premiums written in order to manage the effect
of such statutory surplus strain.
In March 1996, Standard Life sold its subsidiary, First International,
and realized an increase in statutory capital and surplus of approximately
$4,951,000 from the statutory gain on the sale and related reinsurance
transactions.
Commencing January 1, 1995, Standard Life began to reinsure a portion of
its annuity business. This reinsurance agreement has allowed SMC to write
volumes of business that it would not otherwise have been able to write due to
regulatory restrictions based on its ratio of surplus to liabilities as
determined by regulatory authorities in the State of Florida. By reinsuring a
portion of the annuity business, the liability growth is slowed, thereby
avoiding the erosion of surplus that occurs in periods of increasing sales. If
SMC's ratio of surplus to liabilities falls below 4%, the State of Florida
could prohibit SMC from writing new business in Florida. Standard Life's
largest annuity reinsurer at June 30, 1996, Winterthur Life Re Insurance
Company ("Winterthur"), is rated "A" ("Excellent") by A.M. Best. From January
1, 1995 to August 31, 1995 approximately 70% of certain of Standard Life's
annuity business produced was ceded. Standard Life decreased the quota-share
portion of business ceded to 50% at September 1, 1995 and further reduced it to
25% effective April 1, 1996 to reflect the reduced need for additional capital
and increase current earnings potential. Winterthur limits dividends and other
transfers by Standard Life to SMC or affiliated companies in certain
circumstances.
State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio (the "Ratio") of the enterprise's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. Each of the Company's insurance subsidiaries has
a Ratio that is at least 300% of the minimum RBC requirements; accordingly, the
subsidiaries meet the RBC requirements.
Management believes that operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 1996. As of June 30, 1996,
Standard Life had statutory capital and surplus for regulatory purposes of
$15,638,000 compared to $12,877,000 at December 31, 1995. As the life
insurance and annuity business produced by Standard Life increases, Standard
Life expects to continue to satisfy statutory capital and surplus requirements
through statutory profits, through the continued reinsurance of a portion of
its new business, and through additional capital contributions by the Company.
During 1996, SMC has not made any capital contributions to Standard Life. Net
cash flow from operations on a statutory basis of Standard Life, after payment
of benefits and operating expenses, was $19,139,000 and $4,263,000 for the six
months ended June 30, 1996 and year ended December 31, 1995, respectively. If
the need arises for cash which is not readily available, additional liquidity
could be obtained from the sale of invested assets.
INTERNATIONAL OPERATIONS. The balance sheet of the Company at June 30,
1996, includes a $3,469,000 credit representing the excess of net assets
acquired over acquisition cost which will be amortized into future earnings on
the purchase of Standard Management International. This amortization is a non-
cash credit to the Company statement of operations.
Standard Management International may pay dividends from accumulated
earnings without regulatory approval. Premier Life (Bermuda) did not pay
dividends in 1995 and 1994. Standard Management International and Premier Life
(Luxembourg) were not permitted to pay dividends in 1995 and 1994 due to
accumulated losses.
Due to the nature of unit-linked products issued by Standard Management
International, which represent over 95% of the Standard Management
International portfolio, the investment risk rests with the policyholder.
Investment risk for Standard Management International exists where Standard
Management International makes investment decisions with respect to the
remaining traditional business and for the assets backing certain actuarial and
regulatory reserves. The investments underlying these liabilities mostly
represent fixed maturity securities. These fixed maturity securities are
normally only bought and/or disposed of on the advice of independent consulting
actuaries who perform an annual exercise comparing anticipated cash flows on
the insurance portfolio with the cashflows from the fixed maturity securities.
Any resulting material mis-matches are then covered by buying and/or selling
the securities as appropriate.
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry
has experienced an increasing number of mergers, acquisitions, consolidations
and sales of certain business lines. These consolidations have been driven by
a need to reduce costs of distribution and overhead and maintain business in
force. Additionally, increased competition, regulatory capital requirements
and technology costs have also contributed to the level of consolidation in the
industry. These forces are expected to continue as is the level of industry
consolidation. The Company has been, and continues to be, a buyer in this
marketplace.
FOREIGN CURRENCY RISK. Standard Management International policyholders
invest in assets denominated in a wide range of currencies. Policyholders
effectively bear the currency risk, if any, as these investments are matched by
policyholder separate account liabilities. Therefore, their investment and
currency risk is limited to premiums they have paid. Policyholders are not
permitted to invest directly into options, futures and derivatives. Standard
Management International could be exposed to currency fluctuations if
currencies within the conventional investment portfolio or certain actuarial
reserves are mismatched. The assets and liabilities of this portfolio and the
reserves are continually matched by the company and at regular intervals by the
independent actuary. In addition, Premier Life (Luxembourg)'s shareholder's
equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not
hedge it's translation risk, but this is currently being reviewed to protect
SMC against currency fluctuations. At June 30, 1996, there is an unrealized
gain from foreign currency translation adjustment of $937,000.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in the Company's
financial statements as of June 30, 1996 are certain assets that are valued for
financial statement purposes primarily on the basis of assumptions established
by the Company's management. These assets include deferred acquisition costs,
present value of future profits, costs in excess of net assets acquired and
organization and deferred debt issuance costs. The total value of these assets
reflected in the June 30, 1996 consolidated balance sheet aggregated
$34,029,000, or 7% of its assets. The Company has established procedures to
periodically review the assumptions utilized to value these assets and
determine the need to make any adjustments in such values in the Company's
consolidated financial statements. The Company has determined that the
assumptions utilized in the initial valuation of these assets are consistent
with the current operations of the Company as of June 30, 1996. In February
1996, the Company decided to terminate the operations of Standard Reinsurance,
which resulted in the write-off of SMC's investment in Standard Reinsurance and
certain intangible assets in the second quarter of 1996 amounting to $156,000.
REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory
accounting principles (SAP) may vary between states and between companies. The
NAIC is in the process of codifying SAP to promote standardization of methods
utilized throughout the industry. Completion of this project might result in
changes in statutory accounting practices for the Company; however, it is not
expected that such changes would materially impact the Company's statutory
capital requirements.
ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements with
employees and encourages, but does not require, compensation cost to be
measured based on the fair value of the equity instruments awarded. Companies
are permitted, however, to continue to apply Accounting Principles Board (APB)
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply APB
Opinion No. 25 to its stock-based compensation awards to employees and
directors and will disclose the required pro forma effect on net income and
earnings per share in its consolidated financial statements for the year ended
December 31, 1996.
SAFE HARBOR PROVISIONS. Forward-looking statements in this Quarterly
Report on Form 10-Q are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. There are certain important
factors that could cause results to differ materially from those anticipated by
some of the statements made above. Investors are cautioned that all forward-
looking statements involve risks and uncertainty. In addition to the factors
discussed above, among the other factors that could cause actual results to
differ materially are the following: economic environment, interest rate
changes, product development, regulatory changes, the results of financing
efforts, acquisitions completed or attempted, the Company's accounting
policies, and competition. Additional information concerning those and other
factors is contained in the Company's Securities and Exchange Commission
filings, including but not limited to the Annual Report on Form 10-K, copies of
which are available from the Company without charge.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 18, 1996,
the following individuals were elected to the Board of Directors:
SHARES FOR SHARES WITHHELD
Robert A. Borns 3,356,947 362,340
Raymond J. Ohlson 3,270,603 448,684
Ramesh H. Bhat 3,092,264 627,023
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
SHARES FOR SHARES AGAINST SHARES ABSTAINING
Ratify the appointment of Ernst
and Young LLP as principal
independent auditors for the
year ending December 31, 1996. 3,326,403 372,359 20,525
A total of 3,719,287 shares were present in person or by proxy at the Annual
Meeting of Stockholders.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON
FORM 8-K.
(a) EXHIBITS
EXHIBIT 11 Statement regarding computation of per share earnings.
EXHIBIT 27 Financial Data Schedule, which is submitted
electronically pursuant to Regulation S-K to the
Securities and Exchange Commission for information
only and not filed.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: August 29, 1997
STANDARD MANAGEMENT CORPORATION
(Registrant)
By:
/s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President
and
Chief Executive Officer
By:
/s/ GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
STANDARD MANAGEMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
<S> <C> <C> <C> <C>
1996 1995{ (1)} 1996 1995{ (1)}
PRIMARY
Weighted average common shares outstanding 4,534,080 5,276,428 4,640,688 5,281,983
5% common stock dividend 226,576 - 225,377 -
Common equivalent shares related to:
Stock warrants at average market price 109,282 77,812 80,275 38,769
Stock options at average market price 17,533 5,883 10,058 2,685
Net issuable shares for modified treasury stock method
(after assumed buyback of 20% of outstanding stock
options and warrants) - - 522,810 -
WEIGHTED AVERAGE PRIMARY SHARES OUTSTANDING 4,887,471 5,360,123 5,479,208 5,323,437
Income before extraordinary gain on early redemption of
redeemable preferred stock and preferred stock
dividend as reported $(62) $248 $2,603 $534
Reduction in interest expense and increase in short-term
investment income for modified treasury stock method - - 131 -
(62) 248 2,734 534
Extraordinary gain on early redemption of redeemable
preferred stock 166 - 267 -
Net income (as adjusted) 104 248 3,001 534
Preferred stock dividends as reported (66) - (112) -
Preferred stock dividends reduction for modified stock - - 46 -
method
Earnings available to common shareholders (as adjusted) $38 $248 $2,935 $534
Earnings Per Share:
Income before extraordinary gain on early redemption
of
redeemable preferred stock and preferred stock $(.01) $.05 $.50 $.10
dividends
Extraordinary gain on early redemption of redeemable
preferred stock .03 - .05 -
NET INCOME .02 .05 .55 .10
Preferred stock dividend (.01) - (.01) -
Earnings available to common shareholders $.01 $.05 $.54 $.10
</TABLE>
(1)Share amounts have been retroactively adjusted for the effect of the 5%
stock dividend distributed on June 21, 1996, to shareholders of record on
May 17, 1996.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statements of income filed as
part of the Quarterly Report on Form 10-Q for the quarterly period Ended June
30, 1996 and is qualified in its entirety by reference to such Quarterly Report
on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 231,377
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 64
<MORTGAGE> 3,049
<REAL-ESTATE> 550
<TOTAL-INVEST> 252,573
<CASH> 3,876
<RECOVER-REINSURE> 64,714
<DEFERRED-ACQUISITION> 16,225
<TOTAL-ASSETS> 492,857
<POLICY-LOSSES> 311,763
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,438
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,682
2,403
0
<COMMON> 40,758
<OTHER-SE> (4,577)
<TOTAL-LIABILITY-AND-EQUITY> 492,857
7,129
<INVESTMENT-INCOME> 9,391
<INVESTMENT-GAINS> 456
<OTHER-INCOME> 4,545
<BENEFITS> 12,227
<UNDERWRITING-AMORTIZATION> 1,159
<UNDERWRITING-OTHER> 6,650
<INCOME-PRETAX> 1,485
<INCOME-TAX> (1,118)
<INCOME-CONTINUING> 2,603
<DISCONTINUED> 0
<EXTRAORDINARY> 267
<CHANGES> 0
<NET-INCOME> 2,870
<EPS-PRIMARY> .55
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
