UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] 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 October 31, 1997, the Registrant had 4,870,240 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PAGE
NUMBER
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheet --
September 30, 1997 (Unaudited) and December 31, 1996 (Audited) 3
Consolidated Statement of Operations --
For the Three Months and Nine Months Ended September 30, 1997
and 1996 (Unaudited) 4
Consolidated Statement of Shareholders' Equity --
For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) 5
Consolidated Statement of Cash Flows --
For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 20
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1997 1996
(UNAUDITED) (AUDITED)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $363,605 in 1997
and $349,151 in 1996) $368,658 $347,310
Equity securities, at fair value (cost: $50 in 1997 and $58 in 1996) 52 62
Mortgage loans, at unpaid principal balances 397 3,035
Policy loans, at unpaid principal balances 9,708 9,903
Real estate, at depreciated cost 2,334 546
Other invested assets 810 865
Short-term investments, at cost, which approximates fair value 13,483 8,417
Total investments 395,442 370,138
Cash...... 3,164 5,113
Accrued investment income 6,333 6,198
Amounts due and recoverable from reinsurers 68,594 68,811
Deferred policy acquisition costs 19,781 18,078
Present value of future profits, less accumulated amortization of $5,322 in 1997
and $3,520 in 1996 22,242 23,806
Excess of acquisition cost over net assets acquired,
less accumulated amortization of $397 in 1997 and $314 in 1996 2,508 2,260
Other assets 5,758 5,463
Assets held in separate accounts 145,574 128,546
Total assets $669,396 $628,413
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial products $350,503 $333,633
Traditional life insurance 87,245 87,106
Total future policy benefits 437,748 420,739
Policy claims and other policyholders' benefits and funds 4,677 4,585
442,425 425,324
Accounts payable and accrued expenses 5,439 6,189
Obligations under capital lease 270 637
Notes payable 26,024 20,060
Deferred federal income taxes 5,347 3,206
Excess of net assets acquired over acquisition cost,
less accumulated amortization of $4,880 in 1997 and $3,839 in 1996 1,734 2,775
Liabilities related to separate accounts 145,574 128,546
Total liabilities 626,813 586,737
Class S Cumulative Convertible Redeemable Preferred Stock, par value $10 per share:
Authorized 300,000 shares; issued and outstanding 159,889 shares in 1996,
redemption value -- 1,757
of $10.00 per share plus accumulated and unpaid dividends
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and outstanding -- --
Common Stock and additional paid-in capital, no par value:
Authorized 20,000,000 shares; issued 4,870,240 shares 40,646 40,481
Treasury stock, at cost, 882,259 shares in 1997 and 728,229 shares in 1996 (4,604) (3,528)
(deduction)
Unrealized gain (loss) on securities available for sale 2,072 (746)
Foreign currency translation adjustment (370) 691
Retained earnings 4,839 3,021
Total shareholders' equity 42,583 39,919
Total liabilities, redeemable securities and shareholders' equity $669,396 $628,413
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
<S> <C> <C> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
Revenues:
Premium income $1,715 $1,289 $5,277 $8,418
Net investment income 7,580 5,037 21,926 15,007
Net realized investment gains 81 222 287 677
Gain on disposal of subsidiaries -- -- -- 886
Policy charges 1,328 617 4,110 1,832
Amortization of excess of net assets acquired
over 347 347 1,041 1,041
acquisition cost
Fees from separate accounts 417 257 1,255 1,093
Other income 119 200 1,014 536
Total revenue 11,587 7,969 34,910 29,490
Benefits and expenses:
Benefits and claims 1,577 1,434 5,945 8,657
Interest credited on interest-sensitive
annuities and other 4,461 2,641 12,627 7,645
financial products
Salaries and wages 1,344 1,215 4,249 3,678
Amortization 967 564 2,544 1,723
Other operating expenses 1,797 1,263 5,127 5,173
Interest expense and financing costs 646 153 1,724 430
Total benefits and expenses 10,792 7,270 32,216 27,306
Income before federal income taxes, extraordinary
gain on early
redemption of redeemable preferred stock and 795 699 2,694 2,184
preferred stock dividends
Federal income tax expense (credit) 204 228 779 (890)
Income before extraordinary gain on early
redemption of 591 471 1,915 3,074
redeemable preferred stock and preferred stock
dividends
Extraordinary gain on early redemption of
redeemable -- 233 -- 500
preferred stock, net of $ -- federal income tax
NET INCOME 591 704 1,915 3,574
Preferred stock dividends 15 51 97 163
Earnings available to common shareholders $576 $653 $1,818 $3,411
Earnings per share:
Income before extraordinary gain on early
redemption of $ .11 $ .10 $ .36 $ .61
redeemable preferred stock and preferred
stock dividends
Extraordinary gain on early redemption of
redeemable -- .04 -- .09
preferred stock
NET INCOME .11 .14 .36 .70
Preferred stock divid .01 .01 .02 .02
Earnings available to common shareholders $ .10 $ .13 $ .34 $ .68
Weighted average number of shares outstanding:
Common shares 4,882,467 4,774,840 4,973,580 4,835,657
Common equivalent shares 547,603 165,242 360,914 463,842
5,430,070 4,940,082 5,334,494 5,299,499
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C> <C> <C>
AMOUNTS SHARES
1997 1996 1997 1996
Common Stock and additional paid-in capital:
Balance, beginning of period $40,481 $39,808 5,752,499 5,459,573
Issuance of common stock -- 100 -- 20,000
5% common stock dividend -- 850 -- 272,926
Issuance of common stock warrants 165 239 -- --
Balance, end of period 40,646 40,997 5,752,499 5,752,499
Treasury stock (at cost):
Balance, beginning of period (3,528) (2,621) (728,229) (502,025)
Treasury stock acquired (1,079) (2,126) -- (431,026)
5% common stock dividend -- -- (154,903) (46,402)
Reissuance of treasury stock in
connection with 4 6 873 1,224
exercise of stock options
Balance, end of period (4,604) (4,741) (882,259) (978,229)
Unrealized gain (loss) on securities:
Balance, beginning of period (746) 2,582
Change in unrealized gain (loss) on
securities 2,818 (4,474)
available for sale, net
Balance, end of period 2,072 (1,892)
Foreign currency translation adjustments:
Balance, beginning of period 691 1,159
Translation adjustments for the (1,061) (442)
period
Balance, end of period (370) 717
Retained earnings:
Balance, beginning of period 3,021 (686)
Net income 1,915 3,574
5% common stock dividend, plus cash
in lieu of -- (850)
fractional shares
Preferred stock dividend (97) (1)
Loss on reissuance of treasury stock -- (163)
Balance, end of period 4,839 1,874
Total shareholders' equity and common shares
outstanding $42,583 $36,955 4,870,240 4,774,270
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
<S> <C> <C>
September 30,
1997 1996
OPERATING ACTIVITIES
Net income $1,915 $3,574
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 1,039 837
Policy acquisition costs deferred (5,323) (4,519)
Deferred federal income taxes 695 (471)
Depreciation and amortization 960 308
Future policy benefits and reinsurance recoverable 6,858 5,995
Policy claims and other policyholders' benefits and funds 132 (228)
Net realized investment gains (287) (677)
Accrued investment income 135 (244)
Extraordinary gain on early redemption of redeemable preferred stock -- (500)
Other (1,477) (1,318)
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,626 2,757
FINANCING ACTIVITIES
Borrowings 5,628 2,600
Repayments on long term debt and capital lease obligation (402) (364)
Premiums received on interest-sensitive annuities and other financial
products 38,355 32,153
credited to policyholder account balances, net of premiums ceded
Return of policyholder account balances on interest-sensitive annuities
and other (27,986) (12,993)
financial products, net of premiums ceded
Redemption of redeemable preferred stock (1,855) (941)
Reissuance of treasury stock in connection with exercise of stock options 4 --
Proceeds from common and treasury stock sales 165 106
Purchase of Common Stock for treasury (1,079) (2,126)
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,830 18,435
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (158,353) (136,972)
Sales 123,113 94,247
Maturities 23,632 6,381
Short-term investments, net (5,066) 2,647
Other investments, net (2,681) (68)
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 (19,405) (22,537)
Net increase (decrease) in cash (1,949) (1,351)
Cash at beginning of period 5,113 5,762
Cash at end of period $3,164 $4,411
</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.
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. Certain amounts in the 1996 Consolidated
Financial Statements and Notes have been reclassified to conform with the 1997
presentation.
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 profit, goodwill, future
policy benefits and deferred federal income taxes. Such estimates and
assumptions 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
nine months ended September 30, 1997 include the assets and liabilities and
results of operations of Shelby Life Insurance Company ("Shelby Life") which
was acquired and merged into Standard Life Insurance Company of Indiana
("Standard Life"), a wholly-owned subsidiary of Standard Management Corporation
("Standard Management"), the parent company, effective November 1, 1996.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Annual Report on Form 10-K/A No. 2 of
Standard Management for the year ended December 31, 1996.
NOTE 2 -- COMMON STOCK
Standard Management declared a 5% stock dividend on shares of Standard
Management Common Stock ("SMC Common Stock") for shareholders of record on May
17, 1996 which was distributed on June 21, 1996. All applicable number of
shares and per share amounts included in the consolidated financial statements
and notes have been retroactively adjusted to reflect this stock dividend for
all periods presented.
NOTE 3 -- NOTE PAYABLE
In connection with the acquisition of Shelby Life, Standard Management
borrowed $4,000 from an insurance company pursuant to a subordinated
convertible debt agreement which was due in December 2003 and required interest
payments in cash at 12% per annum, or, if Standard Management chose, in
non-cash additional subordinated convertible debt notes at 14% per annum until
December 31, 2000. At June 30, 1997, this subordinated convertible debt
agreement was amended at the principal amount of $4,372 which is due July 2004
unless previously converted, and requires interest payments in cash on January
1 and July 1 of each year at 10% per annum. At June 30, 1997, Standard
Management borrowed an additional $5,628 from an insurance company pursuant to
another subordinated convertible debt agreement (collectively, the "Notes")
which is due July 2004 unless previously converted, and requires interest
payments in cash on January 1 and July 1 of each year at 10% per annum.
Proceeds from the additional borrowings were used for contributions to surplus
of insurance subsidiaries of $2,400, redemption of Class S Cumulative
Convertible Redeemable Preferred Stock ("Class S Preferred Stock") of
approximately $1,840 (SEE NOTE 4), and the balance for other general corporate
purposes. The Notes are convertible into SMC Common Stock at the rate of
$5.747 per share.
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Notes may be prepaid in whole or in part at the option of Standard
Management commencing on July 1, 2000 at redemption prices equal to 105% of the
principal amount (plus accrued interest) and declining to 102% of the principal
amount plus accrued interest. The Notes may be prepaid prior to July 1, 2000
under certain limited circumstances. The Notes are subject to certain
restrictions and covenants including, among other things, certain minimum
financial ratios, minimum consolidated equity requirements for SMC, positive
net income, minimum statutory surplus requirements for the Company's insurance
subsidiaries and certain limitations on acquisitions, additional indebtedness,
investments, mergers, consolidations and sales of assets.
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.
Standard Management may voluntarily redeem the Class S Preferred Stock
prior to February 2003 at redemption value of $10.00 per share plus accumulated
and unpaid dividends. In February 1996, Standard Management 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 private negotiated transactions. Through
July 31, 1997, Standard Management had repurchased and retired 141,761 shares
of Class S Preferred Stock on the open market at a cost of $964. These
repurchases resulted in an extraordinary gain on early redemption of redeemable
preferred stock of $233 and $500 for the three and nine month periods ended
September 30, 1996. Effective as of August 1, 1997, Standard Management
redeemed all of the issued and outstanding Class S Preferred Stock at
redemption value of $10.00 per share plus accumulated and unpaid dividends.
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>
SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1997 1996
Fair value of securities available for sale $368,710 $347,372
Amortized cost of securities available for sale 363,655 349,209
Gross 5,055 (1,837)
unrealized gain (loss) on securities available for sale
Adjustments for:
Deferred policy acquisition costs (1,789) 696
Present value of future profits (123) 20
Deferred federal income tax recoverable (liability) (1,071) 375
Net $2,072 $(746)
unrealized gain (loss) on securities available for sale
</TABLE>
NOTE 6 -- INCOME TAXES
The effective consolidated federal income tax expense (credit) rate for the
Company was 26% and 29% for the three and nine months ended September 30, 1997,
compared to 33% and (41)% for the three and nine months ended September 30,
1996. The effective rates in 1997 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 S.A.
("Standard Management International") is not subject to U.S. income tax. The
large credit for the nine months ended September 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).
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 7 -- DISPOSAL OF SUBSIDIARIES
On March 18, 1996, Standard Life 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 Group,
New York, New York. Standard Life received 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 $2,462 ($.46 per share) for the nine months ended September 30,
1996. In addition, First International, Standard Life and GIAC have entered
into a series of other 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 the
majority of First International's in force business at the date of sale.
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 the Company's investment in Standard Reinsurance and certain
intangible assets of Standard Reinsurance amounting to $156 ($.03 per share)
for the nine months ended September 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 $.44 per share for the nine months ended September 30, 1996.
NOTE 8 -- SAVERS LIFE ACQUISITION
The Company entered into an Agreement and Plan of Merger dated as of
December 19, 1996, as amended to date (the "Merger Agreement"), with Savers
Life Insurance Company ("Savers Life"). The closing of the transactions
contemplated by the Merger Agreement was subject to normal conditions,
including approval by (i) the Company's stockholders of the issuance ("Share
Issuance") of shares of the Company's Common Stock pursuant to the merger
contemplated by the Merger Agreement and upon payment of the Performance
Premium (as defined in the Merger Agreement), (ii) Savers Life stockholders of
the Merger Agreement and (iii) applicable regulatory authorities. The
Company's stockholders approved the Share Issuance at the Company's Annual
Meeting of Stockholders held on October 22, 1997. By action of the Board of
Directors of Savers Life, the Special Meeting of Stockholders of Savers Life
called for October 22, 1997, at which the Savers Life stockholders were to
consider approval of the Merger Agreement, was adjourned to an unspecified date
before action was taken on the proposal to approve the Merger Agreement. The
Merger Agreement provided that it terminated if the merger was not consummated
by November 5, 1997. The Company and Savers Life have engaged in discussions
regarding the possibility of reinstating the Merger Agreement, including the
possibility of a restructured agreement.
NOTE 9 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 128 is required to be adopted on December 31, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate prior periods. SFAS No. 128 will
eliminate the presentation of primary earnings per share and replace it with
basic earnings per share. Basic earnings per share differs from primary
earnings per share because common stock equivalents are not considered in
computing basic earnings per share. Fully diluted earnings per share will be
replaced with diluted earnings per share. Diluted earnings per share is
similar to fully diluted earnings per share, except in determining the number
of dilutive shares outstanding for options and warrants, the proceeds that
would be received upon the conversion of all dilutive options and warrants are
assumed to be used to repurchase the Company's common shares at the average
market price of such stock during the period. For fully diluted earnings per
share, the higher of the average market price or ending market price is used.
The impact is expected to result in an increase in primary earnings per share
for the quarter ended September 30, 1997 of $.02 per share and the nine months
ended September 30, 1997 and 1996 of $.03 and $.06 per share, respectively.
There will be no change in the primary earnings per share for the quarter ended
September 30, 1996. The impact of SFAS No. 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for all
changes in a company's equity during a period except those resulting from
investments by owners and distributions to owners. SFAS No. 130 is effective
for financial statements issued for fiscal years beginning after December 15,
1997 and will be adopted by the Company in the first quarter of 1998. Because
the statement is merely a change in presentation, the Company does not expect
the adoption of this statement to have any impact on the amount of net income,
earnings per share or total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. Currently, the Company considers
its life insurance operations to be its only material operating segment. The
Company is in the process of defining additional business segments and
developing allocation methods to assess their performance. Once the process is
completed, additional disclosures will be provided in accordance with SFAS No.
131.
NOTE 10 -- RESTATEMENT
The Company has restated the previously issued September 30, 1996
consolidated financial statements for recognition of administration fee income.
Effective May 31, 1996, Standard Life terminated by recapture a reinsurance
agreement with National Mutual Life Insurance Company ("National Mutual"). In
connection with this transaction, the Company recorded the collection of
administration fees of $375 from National Mutual for services provided in prior
years as a reduction to present value of future profits. Previously the
administration fees were recorded as revenues. The following summarizes the
net effect of the restatement:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
Income before federal income taxes,
extraordinary gain
on early redemption of redeemable $699 $699 $2,559 $2,184
preferred stock
and preferred stock dividends
Net income 704 704 3,821 3,574
Net income per share .14 .14 .74 .70
</TABLE>
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
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
discussion 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, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OPERATING INCOME. The income from operations
(before net realized investment gains) was $537,000 for the third quarter of
1997, compared to $342,000 for the comparable period in 1996. The increase
resulted primarily from international operations producing income from
operations of $364,000 for the third quarter of 1997 compared to $105,000 for
the third quarter of 1996. The international operating gains resulted
primarily from increased fees from separate accounts and decreased operating
expenses, primarily due to the strengthening of the U.S. dollar.
PREMIUM INCOME. Premium income is composed
of premiums, including renewal premiums, received on ordinary life insurance
policies. SMC'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 third
quarter of 1997 was $1,715,000, an increase of $426,000 or 33% from $1,289,000
for the third quarter of 1996. This increase is attributable to the inclusion
of Shelby Life in the results of operations for periods after November 1, 1996.
SMC recorded net premium income of $568,000 in the third quarter of 1997 for
the Shelby Life block which more than offsets the decline in premiums from the
regular policy lapses, surrenders and expiries in SMC's closed blocks of
business.
Net premium deposits received from the sales
of interest-sensitive annuities and other financial products (which are not
recorded as revenues) were $13,229,000 compared to $13,358,000 for the third
quarter of 1997 and 1996, respectively. The decrease in premium deposits is
partially due to a decrease in gross domestic premium deposits. Gross domestic
premium deposits received from interest-sensitive annuities and financial
products were $15,308,000 for the third quarter of 1997 compared to $15,982,000
for the third quarter of 1996. Since SMC'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 annuity premium
deposits in a single period does not directly cause operating income to change,
although continued increases or decreases in annuity premiums may affect the
growth rate of total assets on which investment spreads are earned.
NET INVESTMENT INCOME. Net investment income
increased $2,543,000 or 50% to $7,580,000 for the third quarter of 1997 from
$5,037,000 for the comparable period of 1996. The increase primarily resulted
from an increase in the weighted average annualized yield of SMC's investment
portfolio (exclusive of realized and unrealized gains and losses) to 7.83% from
7.57% for the third quarter of 1997 and 1996, respectively, and the increase in
total invested assets (amortized cost) of approximately 41% from December 31,
1995 to September 30, 1997, most of which (approximately $100,000,000) occurred
in the fourth quarter of 1996 due to the acquisition of Shelby Life. As of
September 30, 1997, yields available on new investments were declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $141,000 or 64% to $81,000 from $222,000 for the
third quarter of 1997 and 1996, 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. The pretax net
unrealized gain (loss) on SMC's securities available for sale increased
$6,892,000 to $5,055,000 at September 30, 1997 from a gross unrealized loss of
$(1,837,000) at December 31, 1996. In the absence of decreases in interest
rates, SMC 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 SMC's fixed maturity securities is
not expected to have a significant effect on results of operations because SMC
has the present intent and practice to hold most of its available-for-sale
fixed maturity securities to maturity and SMC'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 $711,000 or
115% to $1,328,000 for the third quarter of 1997 compared to $617,000 for the
third quarter of 1996. The increase in policy charges resulted primarily from
an increase in policy charges for Standard Life's universal life insurance
products of $489,000 due to the inclusion of Shelby Life in the results of
operations for periods after November 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 third quarters of 1997 and 1996.
FEES FROM SEPARATE ACCOUNTS. Fees from
separate accounts consist of the investment management fees earned by Standard
Management International on its separate account assets and investment
contracts. Management fees and similar income from separate accounts increased
$160,000 or 62% to $417,000 for the third quarter of 1997 from $257,000 for the
third quarter of 1996. The increase is due primarily to an increase in the
value of assets held in separate accounts from $122,705,000 at December 31,
1995 to $145,574,000 at September 30, 1997. Such income fluctuates in
relationship to total separate account assets and the return earned on such
assets.
OTHER INCOME. Other income decreased $81,000
or 41% to $119,000 for the third quarter of 1997 compared to $200,000 for the
comparable 1996 period. The decrease resulted primarily from the reduction in
commission income received by Standard Marketing, a wholesale distributor of
life insurance and annuity products, from the sale of unaffiliated insurance
products.
BENEFIT AND CLAIMS. Benefits and claims
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims increased $143,000 or 10% to $1,577,000 for the
third quarter of 1997 from $1,434,000 for the third quarter of 1996. The
increase in benefits and claims results from the inclusion of Shelby Life
(approximately $335,000 in the third quarter of 1997) in the results of
operations for periods after November 1, 1996. Throughout SMC'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 $4,461,000 for
the third quarter of 1997, an increase of $1,820,000 or 69% from $2,641,000 for
the comparable prior year period. The increase resulted primarily from the
inclusion of interest credited of $939,000 in the third quarter of 1997 from
Shelby Life products and the increases in annuity policy reserves from sales.
At September 30, 1997, the weighted average interest credited rate for Standard
Life's currently marketed annuities and other financial product liabilities was
5.81% compared to 5.40% at September 30, 1996.
SALARIES AND WAGES. Salaries and wages were
$1,344,000 for the third quarter of 1997, an increase of $129,000 or 11% from
$1,215,000 for the comparable prior year period. This increase was caused
primarily by an increase in the number of employees in 1997 and an increase in
incentive compensation expense in the third quarter of 1997 of $39,000 based on
operating income for the third quarter of 1997.
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 $403,000 or 71% to
$967,000 for the third quarter of 1997 from $564,000 for the third quarter of
1996. The increase in current year amortization expense resulted primarily
from increased amortization of deferred policy acquisition costs as gross
profits from business sold in recent years began to emerge, increased
surrenders and their corresponding increase in the amortization of deferred
policy acquisition costs, and from the amortization of present value of future
profits of $125,000 in the third quarter of 1997 for the acquisition of Shelby
Life.
OTHER OPERATING EXPENSES. Other operating
expenses increased $534,000 or 42% to $1,797,000 for the third quarter of 1997
from $1,263,000 for the third quarter of 1996. The increase in other operating
expenses resulted primarily from the growth in the Company's inforce business,
primarily through the acquisition of Shelby Life effective November 1, 1996 and
increased expenditures for marketing of the life insurance business.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $493,000 or 322% to $646,000 in
the third quarter of 1997 from $153,000 in the third quarter of 1996. The
increase in interest expense and financing costs during 1997 resulted primarily
from increased borrowing of $10,100,000 on an Amended and Restated Revolving
Line of Credit Agreement with a bank ("Amended Credit Agreement") and
borrowings of $4,000,000 from an insurance company in connection with the
acquisition of Shelby Life and additional borrowings of $5,600,000 in June
1997.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF
REDEEMABLE PREFERRED STOCK. Extraordinary gains were recorded on the early
redemption of the Class S Preferred Stock for the amount by which SMC was able
to repurchase the Class S Preferred Stock below its book value plus accrued and
unpaid dividends. SMC recorded no extraordinary gain for the third quarter of
1997 compared to $233,000 for the third quarter of 1996. Effective August 1,
1997, SMC redeemed all of its issued and outstanding Class S Preferred Stock at
redemption value of $10.00 per share plus accumulated and unpaid dividends.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OPERATING INCOME. The income from operations
(before net realized investment gains and gain on disposal of subsidiaries) was
$1,726,000 in the first nine months of 1997, compared to $369,000 for the
comparable period in 1996. The change resulted primarily, from operations in
the United States producing income from operations of $539,000 compared to a
loss of $71,000 for the first nine months of 1997 and 1996, respectively. The
increase is primarily due to an increase in interest spreads on an increasing
asset base. The income from international operations also increased to
$1,187,000 for the first nine months of 1997 compared to $440,000 for the first
nine months of 1996. The international operating gains resulted primarily from
increased fees from separate accounts and decreased operating expenses,
primarily due to the strengthening of the U.S. dollar.
PREMIUM INCOME. GAAP premium income for the
first nine months of 1997 was $5,277,000, a decrease of $3,141,000 or 37% from
$8,418,000 for the first nine months of 1996. This decrease is attributable to
the recapture of premiums ceded of $4,234,000 due to the termination and
recapture of the reinsurance agreement with National Mutual in the second
quarter of 1996, which offsets increases in premium income for the inclusion of
Shelby Life in the results of operations for periods after November 1, 1996.
SMC recorded net premium income of $1,328,000 in the first nine months of 1997
for the Shelby Life block which more than offsets the decline in premiums from
the regular policy lapses, surrenders and expiries in SMC's closed blocks of
business.
Net premium deposits received from the sales
of interest-sensitive annuities and other financial products (which are not
recorded as revenues) were $38,355,000 compared to $32,153,000 for the first
nine months of 1997 and 1996, 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 $45,141,000 for the nine months ended September 30,
1997 compared to $39,781,000 for the nine months ended September 30, 1996. The
increase in gross premium deposits is the result of an aggressive marketing
campaign implemented by Standard Life with the introduction of attractive new
annuity products and the effects of increasing first year crediting rates
approximately 1% commencing during the third quarter of 1996. Also
contributing to the increase in premiums is the introduction of new products,
the competitiveness of SMC's products, the continued development of SMC's
distribution system through marketing support from Standard Marketing and an
increase in the agency base achieved through the recruitment of larger managing
general agencies and expanding geographical concentration into the Mid-South
and California.
SMC 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
deposits by $6,786,000 in the first nine months of 1997 compared to $7,628,000
in the first nine months of 1996.
NET INVESTMENT INCOME. Net investment income
increased $6,919,000 or 46% to $21,926,000 for the first nine months of 1997
from $15,007,000 for the comparable period of 1996. The increase primarily
resulted from an increase in the weighted average annualized yield of SMC's
investment portfolio (exclusive of realized and unrealized gains and losses) to
7.66% from 7.28% for the first nine months of 1997 and 1996, respectively, and
the increase in total invested assets (amortized cost) of approximately 41%
from December 31, 1995 to September 30, 1997, most of which (approximately
$100,000,000) occurred in the fourth quarter of 1996 due to the acquisition of
Shelby Life.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $390,000 or 58% to $287,000 from $677,000 for the
first nine months of 1997 and 1996, 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, SMC completed the sale of a duplicate charter associated with
First International to GIAC. SMC 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.
In an unrelated matter, SMC 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 and $2,306,000 after-tax in the
first quarter of 1996.
POLICY CHARGES. Policy charges increased
$2,278,000 or 124% to $4,110,000 for the nine months ended September 30, 1997
compared to $1,832,000 for the nine months ended September 30, 1996. The
increase in policy charges resulted from an increase in policy charges for
Standard Life's universal life insurance products of $1,473,000 due to the
inclusion of Shelby Life in the results of operations for periods after
November 1, 1996 and an increase in policy surrender charges on FPDAs of
$447,000. The increase in annuity policy withdrawals and surrender charges on
flexible premium deferred annuities generally corresponds to the aging and
growth of SMC's annuity business in force.
FEES FROM SEPARATE ACCOUNTS. Fees from
separate accounts increased $162,000 or 15% to $1,255,000 for the first nine
months of 1997 from $1,093,000 for the first nine months of 1996. The increase
is due primarily to an increase in the value of assets held in separate
accounts from $122,705,000 at December 31, 1995 to $145,574,000 at September
30, 1997. Such income fluctuates in relationship to total separate account
assets and the return earned on such assets.
BENEFIT AND CLAIMS. Benefits and claims
decreased $2,712,000 or 31% to $5,945,000 for the first nine months of 1997
from $8,657,000 for the first nine months of 1996. The decrease in benefits
and claims resulted from an increase in change in policy reserves of $4,234,000
related to the termination and recapture of a reinsurance agreement with
National Mutual in the third quarter of 1996. This decrease offset the
increase in benefits and claims from the inclusion of Shelby Life
(approximately $1,132,000 in the first nine months of 1997) in the results of
operations for periods after November 1, 1996. Throughout SMC'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 $12,627,000 for
the first nine months of 1997, an increase of $4,982,000 or 65% from $7,645,000
for the comparable prior year period. The increase resulted primarily from the
inclusion of interest credited of $2,846,000 in the first nine months of 1997
from Shelby Life products, increases in interest credited rates on new annuity
sales and the increases in the growth in policy reserves for annuities from
sales. At September 30, 1997, the weighted average interest credited rate for
Standard Life's currently marketed annuities and other financial product
liabilities was 5.61% compared to 5.40% at September 30, 1996.
SALARIES AND WAGES. Salaries and wages were
$4,249,000 for the first nine months of 1997, an increase of $571,000 or 16%
from $3,678,000 for the comparable prior year period. This increase was caused
primarily by an increase in the number of employees in 1997 and an increase in
incentive compensation expense in the first nine months of 1997 of $216,000
based on operating income for the nine months ended September 30, 1997.
AMORTIZATION. Amortization expense increased
$821,000 or 48% to $2,544,000 for the first nine months of 1997 from $1,723,000
for the first nine months of 1996. The increase in current year amortization
expense resulted primarily from the amortization of present value of future
profits of $537,000 in the first nine months of 1997 for the acquisition of
Shelby Life.
OTHER OPERATING EXPENSES. Other operating
expenses decreased $46,000 or 1% to $5,127,000 for the first nine months of
1997 from $5,173,000 for the first nine months of 1996. The decrease in other
operating expenses resulted primarily from eliminating in 1997 the additional
cost to convert the operations and expand the marketing effort in Dixie
National Life incurred in the first nine months of 1996 and a reduction in
international operating expenses due to the strengthening of the U.S. dollar.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $1,294,000 or 301% to $1,724,000
in the nine months ended September 30, 1997 from $430,000 in the nine months
ended September 30, 1996. The increase in interest expense and financing costs
during 1997 resulted primarily from increased borrowing of $10,100,000 on the
Amended Credit Agreement and borrowings of $4,000,000 from an insurance company
in connection with the acquisition of Shelby Life and additional borrowings of
$5,600,000 in June 1997.
FEDERAL INCOME TAXES. Federal income tax
expense (credit) was $779,000 for the first nine months of 1997, compared to
$(890,000) for the first nine months of 1996. The large credit in 1996 is
primarily due to tax benefits of $1,420,000 related to the sale of First
International.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF
REDEEMABLE PREFERRED STOCK. Extraordinary gains were recorded on the early
redemption of the Class S Preferred Stock for the amount by which SMC was able
to repurchase the Class S Preferred Stock below its book value plus accrued and
unpaid dividends. SMC recorded no extraordinary gain for the first nine months
of 1997 compared to $500,000 for the nine months ended September 30, 1996.
Effective August 1, 1997, SMC redeemed all of its issued and outstanding
Class S Preferred Stock at redemption value of $10.00 per share plus
accumulated and unpaid dividends.
LIQUIDITY AND CAPITAL RESOURCES
Standard Management is an insurance holding
company. The liquidity requirements of Standard Management are met primarily
from management fees, equipment rental fees and payments for other charges and
dividends and interest on Surplus Debentures received from Standard
Management's subsidiaries as well as Standard Management's working capital.
These are Standard Management's primary source of funds to pay operating
expenses and meet debt service obligations. The payment of dividends and
interest on Surplus Debentures and management and other fees by Standard Life
to Standard Management 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.
SMC reported on a consolidated GAAP basis net
cash provided by operations of $1,726,000 and $6,331,000 for the years ended
December 31, 1996 and 1995, respectively. Although deposits received on SMC'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 SMC.
Cash provided 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 $26,717,000 and
$6,003,000 for the years ended December 31, 1996 and 1995, respectively. Cash
generated on a consolidated basis is available to Standard Management only to
the extent that it is generated at Standard Management level or is available to
Standard Management through dividends, interest, management fees or other
payments from subsidiaries.
In April 1993, Standard Management instituted
a program to repurchase SMC Common Stock from time to time. The purpose of the
stock repurchase program is to enhance shareholder value. Standard Management
had repurchased 1,134,356 shares of SMC Common Stock for $5,826,000 as of
October 31, 1997. Of these repurchases 419,026 shares were paid for through
additional borrowing under the Amended Credit Agreement, 39,016 shares from the
proceeds of the Notes and the remainder were paid from working capital. At
October 31, 1997, Standard Management was authorized to purchase an additional
365,644 shares under this program.
Between February 1996 and July 1997 Standard
Management repurchased 141,761 shares of Class S Preferred Stock at an
aggregate price of $964,000 primarily through additional borrowings under the
Amended Credit Agreement. On August 1, 1997, Standard Management redeemed all
of its issued and outstanding shares of Class S Preferred Stock for an
aggregate redemption price of $1,840,000, redemption value of $10.00 per share
plus accumulated and unpaid dividends. Such redemption was financed from the
proceeds of the Notes.
At October 31, 1997, Standard Management had
"parent company only" cash and short-term investments of $1,261,000. These
funds are available to Standard Management for general corporate purposes.
Standard Management's "parent company only" operating expenses (not including
class action litigation and settlement costs and interest expense) were
$3,470,000 and $2,793,000 for the years ended December 31, 1996 and 1995,
respectively.
Pursuant to the management services agreement
with Standard Management, Standard Life paid Standard Management 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 management service agreement between Standard Management and Standard Life
for 1997 has been renegotiated to increase the monthly fee to $166,667 (annual
fee of $2,000,000). This amended management service agreement has been
approved by the Commissioner of the Indiana Department of Insurance. Pursuant
to the management service agreement with Standard Life, Dixie National Life
paid fees of $1,524,000 for the year ended December 31, 1996. The Mississippi
Department of Insurance has approved a decrease of the monthly payment to
$83,333 (annual fee of $1,000,000) from Dixie National Life to Standard Life in
1997. Both of these agreements provide that they may be modified or terminated
by the Indiana and Mississippi departments of insurance in the event of
financial hardship of Standard Life or Dixie National Life.
Pursuant to the management services agreement
with Standard Management, Premier Life (Luxembourg), a wholly-owned subsidiary
of Standard Management International, paid Standard Management 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 Standard Management or Premier Life (Luxembourg).
Standard Management does not plan to modify this agreement in 1997.
At April 1, 1995, Standard Management sold
its property and equipment to an unaffiliated leasing/financing company for
$1,396,000 and subsequently entered into a capital lease obligation whereby
Standard Management pays a monthly rental amount of $45,000. Standard
Management charges a monthly equipment rental fee to its subsidiaries for this
equipment and additional equipment purchased after April 1, 1995. The amount
of the rental income received from Standard Management's subsidiaries was
$854,000 and $853,000 for the nine months ended September 30, 1997 and year
ended December 31, 1996, respectively.
On November 8, 1996, Standard Life acquired
through merger Shelby Life from DLAC for approximately $14,650,000, including
$13,000,000 in cash, 250,000 shares of restricted SMC Common Stock (valued at
$1,250,000) and $400,000 of acquisition costs. Financing for the Shelby Life
transaction was provided by senior debt of $10,000,000 under the Amended Credit
Agreement and $4,000,000 in subordinated convertible debt described below.
The Amended Credit Agreement permits Standard
Management to borrow up to $16,000,000 in the form of a seven-year reducing
revolving loan arrangement. Standard Management has agreed to pay a non-use
fee of .50% per annum on the unused portion of the commitment. In connection
with the original and Amended Credit Agreement, Standard Management issued
warrants to the bank to purchase 61,500 shares of SMC Common Stock. Borrowing
under the Amended Credit Agreement may be used for contributions to surplus of
insurance subsidiaries, acquisition financing, and repurchases of Class S
Preferred and SMC Common Stock. 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 borrowing under the Amended Credit
Agreement is determined, at the option of Standard Management, to be: (i) a
fluctuating rate of interest based on the corporate base rate announced by the
bank from time to time plus one percent per annum, or (ii) a rate at LIBOR plus
3.25%. Annual principal repayments of $2,667,000 begin in November 1998 and
conclude in November 2003. Indebtedness incurred under the Amended 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 Standard Management and certain investment and indebtedness
limitations. At September 30, 1997, Standard Management was in compliance with
all restrictions and covenants in the Amended Credit Agreement. At September
30, 1997, Standard Management had borrowed $16,000,000 under the Amended Credit
Agreement at a weighted average interest rate of 9.178%. SMC has received a
commitment to increase the Amended Credit Agreement to $20,000,000 to finance
the acquisition of Savers Life.
In connection with the acquisition of Shelby
Life, SMC borrowed $4,000,000 from an insurance company pursuant to a
subordinated convertible debt agreement which was due in December 2003 and
required interest payments in cash at 12% per annum, or, if SMC chose, in
non-cash additional subordinated convertible debt notes at 14% per annum until
December 31, 2000. At September 30, 1997, this subordinated convertible debt
agreement was amended at the principal amount of $4,372,000 which is due July
2004 unless previously converted, and requires interest payments in cash on
January 1 and July 1 of each year at 10% per annum. At June 30, 1997, Standard
Management borrowed an additional $5,628,000 from an insurance company pursuant
to another subordinated convertible debt agreement (collectively, the "Notes")
which is due July 2004 unless previously converted, and requires interest
payments in cash on January 1 and July 1 of each year at 10% per annum.
Proceeds from the additional borrowings were used for contributions to surplus
of insurance subsidiaries of $2,400,000, redemption of Class S Preferred Stock
of approximately $1,840,000 and the balance for other general corporate
purposes. The Notes are convertible into SMC Common Stock at the rate of
$5.747 per share. The Notes may be prepaid in whole or in part at the option
of Standard Management commencing on July 1, 2000 at redemption prices equal to
105% of the principal amount (plus accrued interest) and declining to 101% of
the principal amount (plus accrued interest). The Notes may be prepaid prior
to July 1, 2000 under certain limited circumstances. The subordinated
convertible debt agreements contain terms and financial covenants substantially
similar to those in the Amended Credit Agreement.
Assuming an increase in the current level of
debt under the Amended Credit Agreement to $20,000,000 and current interest
rates at September 30, 1997 (weighted average rate of 9.178%) Standard
Management annual debt service would be approximately $2,800,000 in interest
paid. In addition, Standard Management has 1997 obligations under a capital
lease of $539,000.
From the funds borrowed by Standard
Management pursuant to the Amended Credit Agreement and the subordinated
convertible debt agreements, $13,000,000 was loaned to Standard Life pursuant
to a Surplus Debenture which requires Standard Life to make quarterly interest
payments to Standard Management at a variable corporate base rate plus 2% per
annum, and annual principal payments of $1,000,000 per year beginning in 2007
and concluding in 2019. The interest and principal payments are subject to
quarterly approval by the Indiana Department of Insurance, depending upon
satisfaction of certain financial tests relating to levels of Standard Life's
capital and surplus and general approval of the Commissioner of the Indiana
Department of Insurance. Standard Management currently anticipates these
quarterly approvals will be granted. Assuming the approvals are granted and
the September 30, 1997 interest rate of 10.50% continues in 1997, Standard
Management will receive interest income of $1,357,000 from its Surplus
Debenture receivable for 1997.
Dividends from Standard Life to Standard
Management 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
Commissioner of the Indiana Department 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. Also, regulatory approval is required
when dividends to be paid exceed unassigned statutory surplus. For the year
ended December 31, 1996, Standard Life reported statutory net gain from
operations of $1,427,000, statutory surplus of $22,970,000 and unassigned
surplus of $1,140,000. Standard Life paid a dividend of $1,000,000 on May 1,
1997. Standard Life anticipates paying additional dividends of approximately
$600,000 in the remainder of 1997 and the approval of the Commissioner of the
Indiana Department of Insurance will be required.
Standard Management anticipates the available
cash from its existing working capital, plus anticipated 1997 dividends,
management fees, rental income and interest payments on its Surplus Debenture
receivable will be more than adequate to meet its anticipated "parent company
only" cash requirements for 1997.
Standard Management 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.
U.S. INSURANCE OPERATIONS. The principal
liquidity requirements of Standard Life are its contractual obligations to
policyholders, dividend, rent, management fee and Surplus Debenture payments to
Standard Management 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 that affect policyholders' confidence.
The policies and annuities issued by Standard
Life contain provisions that 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 effect on liquidity, unanticipated withdrawals in a changing interest
rate environment could adversely affect earnings if SMC were required to sell
investments at reduced values to meet liquidity demands. SMC manages the asset
and liability portfolios in order to minimize the adverse earnings effect of
changing market interest rates. SMC seeks assets that have duration
characteristics similar to the liabilities that they support. SMC also
prepares cash flow projections and performs cash flow tests under various
market interest rate scenarios to assist in evaluating liquidity needs and
adequacy. SMC's U.S. insurance subsidiaries currently expect 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 NAIC, as modified by the Indiana Department of
Insurance, or the states in which the insurance subsidiaries do business.
Statutory accounting rules are different from GAAP and are intended to reflect
a more conservative perspective. With respect to new business, statutory
accounting practices require that: (I) acquisition costs (primarily commissions
and policy issue 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 reduction in statutory surplus
("surplus strain") in the year written for many insurance products. SMC
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, SMC
controls the amount of net new premiums written to manage the effect of such
surplus strain. SMC's long-term growth goals contemplate continued growth in
its insurance businesses. To achieve these growth goals, SMC's U.S. insurance
subsidiaries will need to increase statutory surplus. Additional statutory
surplus may be secured through various sources such as internally generated
statutory earnings, equity sales, infusions by Standard Management with funds
generated through debt or equity offerings or mergers with other life insurance
companies. If additional capital is not available from one or more of these
sources, SMC believes that it could reduce surplus strain through the use of
reinsurance or through reduced writing of new business.
Standard Life produced statutory net income
of $1,114,000 and $3,291,000 for the nine months ended September 30, 1997 and
the year ended December 31, 1996, respectively. As a result, Standard
Management did not make cash capital contributions to Standard Life during 1996
to maintain adequate levels of statutory capital and surplus. However,
Standard Management contributed $2,400,000 to Standard Life in the second
quarter of 1997 to facilitate growth in new premiums written. 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 September 30, 1997,
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. This reduction was possible since the
surplus strain experienced by Standard Life was not as great as originally
anticipated as a result of lower than expected sales in 1995 and the increase
in surplus resulting from the sale of First International. In addition,
Standard Life's ability to retain business was further increased by the capital
contribution of $2,400,000 in the second quarter of 1997. Winterthur limits
dividends and other transfers by Standard Life to Standard Management or
affiliated companies in certain circumstances.
Management believes that operational cash
flow of Standard Life will be sufficient to meet its anticipated needs for
1997. As of September 30, 1997, Standard Life had statutory capital and
surplus for regulatory purposes of $25,923,000 compared to $22,970,000 at
December 31, 1996. The increase is primarily due to the capital contribution
of $2,400,000 from Standard Management in the second quarter of 1997 and an
increase in admitted goodwill under statutory accounting practices for its
investment in Dixie National Life. As the life insurance and annuity business
produced by Standard Life and Dixie National 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 Standard
Management. During 1996, Standard Management did not make any capital
contributions to Standard Life, other than the SMC Common Stock associated with
the Shelby merger. Net cash flow from operations on a statutory basis of
Standard Life, after payment of benefits and operating expenses, was
$17,921,422 and $4,263,011 for the years ended December 31, 1996 and
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.
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 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 "RBC 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 SMC's insurance subsidiaries has an RBC
Ratio that is at least 400% of the minimum RBC requirements; accordingly, the
subsidiaries meet the RBC requirements.
Standard Life's acquisition of Shelby Life,
and merger of Shelby Life into Standard Life, effective November 1, 1996 is
anticipated to have a positive effect on Standard Life's liquidity and cash
flows. Shelby Life ceased writing new business effective November 1, 1996,
thus reducing the surplus strain normally associated with the issuance of new
policies. The anticipated profits from Shelby Life's book of business are
expected to exceed the related interest expense connected with the $13,000,000
of Surplus Debentures issued by Standard Life in connection with the
acquisition of Shelby Life. The statutory net income of Shelby Life was
$1,660,855 for the year ended December 31, 1995 and $851,472 for the ten months
ended October 31, 1996.
INTERNATIONAL OPERATIONS. The consolidated
balance sheet of SMC at September 30, 1997, includes a $1,734,000 credit
representing the negative goodwill on the purchase of Standard Management
International which will be amortized into future earnings. This amortization
is a non-cash credit to SMC statements of operations.
Standard Management International dividends
are limited to its accumulated earnings without regulatory approval. Standard
Management International and Premier Life (Luxembourg) were not permitted to
pay dividends in 1996 and 1995 due to accumulated losses. Premier Life
(Bermuda) did not pay dividends in 1996 and 1995. SMC does not anticipate any
dividends from these companies in 1997.
Due to the nature of unit-linked products
issued by Standard Management International, which represent over 91% 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 short-term investments and fixed maturity
securities. These short-term investments and fixed maturity securities are
normally bought and/or disposed of only on the advice of independent consulting
actuaries who perform an annual analysis comparing anticipated cash flows on
the insurance portfolio with the cash flows from the fixed maturity securities.
Any resulting material mismatches are then covered by adjusting the securities
in the investment portfolio as appropriate.
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
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.
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) shareholders' equity is denominated in Luxembourg
francs. Premier Life (Luxembourg) does not hedge its translation risk because
its shareholders' equity will remain in Luxembourg francs for the foreseeable
future and no significant realized foreign exchange gains or losses are
anticipated.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS.
Included in SMC's financial statements as of September 30, 1997 are certain
assets that are valued for financial statement purposes primarily on the basis
of assumptions established by SMC'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 September 30, 1997 consolidated balance
sheet aggregated $42,948,000 or 6% of SMC's assets. SMC 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 SMC's
consolidated financial statements. SMC has determined that the assumptions
utilized in the initial valuation of these assets are consistent with the
operations of SMC as of September 30, 1997.
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 SMC's insurance subsidiaries; however, it is not expected that
such changes would materially affect SMC's insurance subsidiaries' statutory
capital requirements.
FINANCIAL SERVICES DEREGULATION. The United
States Congress is currently considering a number of legislative proposals
intended to reduce or eliminate restrictions on affiliations among financial
services organizations. Proposals are extant which would allow banks to own or
affiliate with insurers and securities firms. An increased presence of banks
in the life insurance and annuity businesses may increase competition in these
markets. The Company cannot predict the impact of these proposals on the
earnings of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS. In
February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128
is required to be adopted on December 31, 1997. At that time, SMC will be
required to change the method currently used to compute earnings per share and
to restate prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and stock warrants
will be excluded. The impact is expected to result in an increase in primary
earnings per share for the first nine months ended September 30, 1997 and 1996
of $.03 and $.06 per share, respectively. The impact of SFAS No. 128 on the
calculation of fully diluted earnings per share for these periods is not
expected to be material.
PROPOSED ACQUISITION OF SAVERS LIFE. The
Company entered into a Merger Agreement dated as of December 19, 1996, as
amended to date with Savers Life. The closing of the transactions
contemplated by the Merger Agreement was subject to normal conditions,
including approval by (i) the Company's stockholders of the issuance ("Share
Issuance") of shares of the Company's Common Stock pursuant to the merger
contemplated by the Merger Agreement and upon payment of the Performance Premium
(as defined in the Merger Agreement), (ii) Savers Life stockholders of the
Merger Agreement and (iii) applicable regulatory authorities. The
Company's stockholders approved the Share Issuance at the Company's Annual
Meeting of Stockholders held on October 22, 1997. By action of the Board
of Directors of Savers Life, the Special Meeting of Stockholders of Savers
Life called for October 22, 1997, at which the Savers Life stockholders were to
consider approval of the Merger Agreement, was adjourned to an unspecified date
before action was taken on the proposal to approve the Merger Agreement. The
Merger Agreement provided that it terminated if the merger was not consummated
by November 5, 1997. The Company and Savers Life have engaged in discussions
regarding the possibility of reinstating the Merger Agreement, including the
possibility of a restructured agreement. If the Company and Savers Life do
not reinstate the agreement or enter into a restructured agreement, the
Company's net income in 1997 is expected to be impacted due to costs
associated with the Merger Agreement, including an estimated $550,000 to
$700,000 in legal and accounting fees, printing and mailing costs and filings
fees.
SAFE HARBOR PROVISIONS. Forward-looking
statements in this 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 immediately above, among the other factors that could
cause actual results to differ materially are the following: economic
environment, interest rate changes generally and credited rates on new
business, sales volume, product development, regulatory changes, the results of
financing efforts, SMC's accounting policies, competition, the reinsurance
agreement with GIAC and the acquisition of Shelby Life.
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SMC is involved in various legal proceedings in the normal course of business.
In most cases, such proceedings involve claims under insurance policies or
other contracts of SMC. The outcomes of these legal proceedings are not
expected to have a material adverse effect on the consolidated financial
position, liquidity, or future results of operations of SMC based on SMC's
current understanding of the relevant facts and law.
As reported previously in the Form 10-Q/A for the quarterly period ended June
30, 1997, SMC is a party to Quinn v. SMC, an action filed on June 19, 1997 in
the Superior Court of Marion County Indiana. SMC disputes Mr. Quinn's claims.
SMC filed its Answer and Counterclaim against Mr. Quinn on September 11, 1997.
Mr. Quinn is a former officer and director of SMC. The ultimate outcome of
the action cannot presently be determined. Accordingly, no provision for any
liability that may result has been made in the financial statements.
Management believes that the conclusion of such litigation will not have a
material adverse effect on SMC's consolidated financial condition.
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 10.14 Promissory Note from Ronald D. Hunter to SMC in the
amount of $775,500 executed October 28, 1997.
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 (the "Commission") for information only and
not filed.
(b) REPORTS ON FORM 8-K
A report on Form 8-K dated January 24, 1997,
as amended by the Company's reports on Form 8-K/A filed February 19, 1997,
April 10, 1997, May 20, 1997 and August 29, 1997, was filed with the Commission
to report under Item 7, the financial statements of Shelby Life for the two
years ended December 31, 1995 and the pro forma condensed consolidated
financial statements as of September 30, 1996.
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
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: November 14, 1997
STANDARD MANAGEMENT CORPORATION
(Registrant)
By: RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President
(Chief Accounting Officer)
<PAGE>
STANDARD MANAGEMENT CORPORATION
___________________
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 NINE MONTHS ENDED
<S> <C> <C> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 (1)
Weighted average common shares outstanding 4,882,467 4,774,840 4,973,580 4,685,406
5 percent common stock dividend -- -- -- 150,251
Common equivalent shares related to:
Stock warrants at average market price 274,503 135,381 209,845 98,643
Stock options at average market price 273,100 29,861 151,069 16,659
Net issuable shares for modified treasury
stock
method (after assumed buyback of 20% of -- -- -- 348,540
outstanding stock options and warrants)
WEIGHTED AVERAGE PRIMARY SHARES OUTSTANDING 5,430,070 4,940,082 5,334,494 5,299,499
Income before extraordinary gain on early
redemption of
redeemable preferred stock and preferred $591 $471 $1,915 $3,074
stock dividends
as reported
Reduction in interest expense and increase in
short-term -- -- -- 131
investment income for modified treasury stock
method............................................
591 471 1,915 3,205
Extraordinary gain on early redemption of
redeemable -- 233 -- 500
preferred stock
NET INCOME (AS ADJUSTED) 591 704 1,915 3,705
Preferred stock dividends as reported (15) (51) (97) (163)
Preferred stock dividends reduction for modified
treasury -- -- -- 46
stock method
Earnings available to common shareholders (as $576 $653 $1,818 $3,588
adjusted).........................................
Earnings Per Share:
Income before extraordinary gain on early
redemption
of redeemable preferred stock and $ .11 $ .10 $ .36 $ .61
preferred stock
dividends
Extraordinary gain on early redemption of
redeemable -- .04 -- .09
preferred stock
NET INCOME .11 .14 .36 .70
Preferred stock dividends (.01) (.01) (.02) (.02)
Earnings available to common shareholders $ .10 $ .13 $ .34 $ .68
</TABLE>
(1) Share amounts have been retroactively adjusted for the
effect of the 5 percent 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 operations
filed as part of the Quarterly Report on Form 10-Q for the Quarterly Period
Ended September 30, 1997 and is qualified in its entirety by reference to such
Quarterly Report on Form 10-Q.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 368,658
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 52
<MORTGAGE> 397
<REAL-ESTATE> 2,334
<TOTAL-INVEST> 395,442
<CASH> 3,164
<RECOVER-REINSURE> 68,594
<DEFERRED-ACQUISITION> 19,781
<TOTAL-ASSETS> 669,396
<POLICY-LOSSES> 437,748
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,677
<NOTES-PAYABLE> 26,024
0
0
<COMMON> 40,646
<OTHER-SE> 1,937
<TOTAL-LIABILITY-AND-EQUITY> 669,396
5,277
<INVESTMENT-INCOME> 21,926
<INVESTMENT-GAINS> 287
<OTHER-INCOME> 7,420
<BENEFITS> 5,945
<UNDERWRITING-AMORTIZATION> 2,544
<UNDERWRITING-OTHER> 9,376
<INCOME-PRETAX> 2,694
<INCOME-TAX> 779
<INCOME-CONTINUING> 1,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,915
<EPS-PRIMARY> .34
<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>
PROMISSORY NOTE
$775,500
Within ten (10) days of my voluntary termination or resignation as
Chairman and Chief Executive Officer of Standard Management Corporation, for
value received, the undersigned (jointly and severally) promise(s) to pay to
the order of Standard Management Corporation the sum of Seven Hundred Seventy-
Five Thousand Five Hundred Dollars ($775,500), at 9100 Keystone Crossing,
Indianapolis, Indiana 46240 or at such other place as the holder hereof may
direct in writing, with interest thereon at the rate of zero per centum (0%)
per annum from the date of this instrument until maturity, and six per centum
(6%) per annum after maturity until paid, with attorneys' fees and costs of
collection, and without relief from valuation and appraisement laws.
The maker(s) and indorser(s) jointly and severally waive demand,
presentment, protest, notice of protest and notice of nonpayment or dishonor of
this note, and each of them consents to extensions of the time of payment of
this note.
No delay or omission on the part of the holder hereof in the exercise of
any right or remedy shall operate as a waiver thereof, and no single or partial
exercise by the holder hereof of any right or remedy shall preclude other or
further exercise thereof or of any other right or remedy.
Signed and delivered at Indianapolis, Indiana this 28th day of October,
1997
Signature: RONALD D. HUNTER
Printed: Ronald D. Hunter
Address: 3570 Sedgemoor Circle
Carmel, Indiana 46032
<PAGE>
ADDENDUM TO PROMISSORY NOTE
OF RONALD D. HUNTER
DATED OCTOBER 28, 1997 IN THE SUM OF $775,500
In the event of a termination of the employment of Ronald D. Hunter with
Standard Management Corporation following a change-in-control of Standard
Management Corporation, as such term is defined in the Second Amended and
Restated Employment Contract dated April 3, 1995 by and between Ronald D.
Hunter and Standard Management Corporation, the Promissory Note in the sum of
$775,500 dated October 28, 1997 shall be deemed forgiven in full. In the event
of such termination, Standard Management Corporation shall pay to Ronald D.
Hunter a sum of cash equal to any tax liability, federal and state, owed by
Ronald D. Hunter with respect to note forgiveness, within thirty (30) days of
such termination of employment.
STANDARD MANAGEMENT CORPORATION
By: STEPHEN M. COONS
Stephen M. Coons
Executive Vice President & Secretary
