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, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana No. 35-1773567
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9100 Keystone Crossing, Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Registrant's telephone number, including area code)
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 November 2, 1998, the Registrant had 7,909,309 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PAGE
NUMBER
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30,1998(Unaudited) and December 31,1997(Audited) 3
Consolidated Statements of Income --
For the Three and Nine Months Ended September 30,1998 and 1997(Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Nine Months Ended September 30,1998 and 1997(Unaudited) 5
Consolidated Statements of Cash Flows --
For the Nine Months Ended September 30,1998 and 1997(Unaudited) 6
Notes to Consolidated Financial Statements(Unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 12 - 21
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1998 1997
(UNAUDITED) (AUDITED)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $423,356 in
1998 and $367,372 in 1997) $431,147 $372,576
Equity securities, at fair value(cost: $1,547 in 1998 and $55 in 1997) 1,338 52
Mortgage loans on real estate 8,528 375
Policy loans 8,875 9,495
Real estate 3,815 2,163
Other invested assets 895 779
Short-term investments 19,569 13,342
Total investments 474,167 398,782
Cash 13,058 4,165
Accrued investment income 6,832 6,512
Amounts due and recoverable from reinsurers 64,377 61,596
Deferred policy acquisition costs 27,298 21,435
Present value of future profits 23,117 20,537
Excess of acquisition cost over net assets acquired 4,614 2,445
Federal income tax recoverable 166 1,854
Other assets 3,635 3,602
Assets held in separate accounts 182,308 148,064
Total assets $799,572 $668,992
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $511,140 $439,390
Accounts payable and accrued expenses 5,929 6,208
Obligations under capital lease -- 141
Notes payable 27,000 26,000
Deferred federal income taxes 6,848 4,488
Excess of net assets acquired over acquisition cost 347 1,388
Liabilities related to separate accounts 182,308 148,064
Total liabilities 733,572 625,679
Series A Convertible Redeemable Preferred Stock, par value $100 per share;
Authorized 130,000; 37,300 issued and outstanding in 1998. . . . . . . . . . . 3,730 --
. . . . . . . . . . . . . . . . . .
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 870,000 shares; none issued and outstanding -- --
Common Stock, no par value:
Authorized 20,000,000 shares; issued 8,105,860 in 1998 and 5,752,499 in 55,938 40,646
1997
Treasury stock, at cost, 884,389 shares in 1998 and 876,009 shares in 1997 (4,792) (4,572)
(deduction)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale 3,151 2,171
Foreign currency translation adjustment (620) (473)
Retained earnings 8,593 5,541
Total shareholders' equity 62,270 43,313
Total liabilities and shareholders' equity $799,572 $668,992
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(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,
1998 1997 1998 1997
Revenues:
Premium income - life $1,759 $1,715 $5,667 $5,277
Premium income - health -- -- 5,992 --
Net investment income 8,071 7,580 23,920 21,926
Net realized investment gains 43 81 73 287
Policy charges 1,906 1,328 5,058 4,110
Amortization of excess of net assets acquired
over 347 347 1,041 1,041
acquisition cost
Fees from separate accounts 994 417 2,147 1,255
Other income 1,263 119 2,698 1,014
Total revenue 14,383 11,587 46,596 34,910
Benefits and expenses:
Benefits and claims - life 2,817 1,577 6,763 5,945
Benefits and claims - health -- -- 4,821 --
.
Interest credited on interest-sensitive
annuities and other 4,247 4,461 13,112 12,627
financial products
Salaries and wages 1,888 1,344 5,028 4,249
Amortization 1,322 967 3,546 2,544
Other operating expenses 1,939 1,797 5,633 5,127
Commission expense - health. -- -- 784 --
Interest expense and financing costs 772 646 2,201 1,724
Total benefits and expenses 12,985 10,792 41,888 32,216
Income before federal income taxes and preferred
stock dividends 1,398 795 4,708 2,694
Federal income tax expense 260 204 1,529 779
Net income 1,138 591 3,179 1,915
Preferred stock dividends (71) (15) (71) (97)
Earnings available to common shareholders $1,067 $576 $3,108 $1,818
Earnings per share:
Net income $ $ $ $
0.16 0.12 0.48 0.39
Preferred stock dividends (.01) -- (.01) (.02)
Earnings available to common shareholders $ $ $ $
0.15 0.12 0.47 0.37
Earnings per share - assuming dilution:
Net income $ $ $ $
0.15 0.11 0.44 0.36
Preferred stock dividends (.01) (.01) (.01) (.02)
Earnings available to common shareholders $ $ $ $
0.14 0.10 0.43 0.34
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Comprehensive Retained
Total Stock Stock Income Earnings
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $39,919 $40,481 $(3,528) $(55) $3,021
Comprehensive income, net of tax:
Net income 1,915 1,915
Other comprehensive income:
Change in unrealized gain (loss) on
securities 2,818 2,818
available for sale, net
Change in foreign currency (1,061) (1,061)
translation adjustment
Other comprehensive income 1,757
Comprehensive income 3,672
Issuance of Common Stock Warrants 165 165
Treasury stock acquired (1,076) (1,076)
Preferred stock dividends (97) (97)
Balance at September 30, 1997 $42,583 $40,646 $(4,604) $1,702 $4,839
Balance at January 1, 1998 $43,313 $40,646 $(4,572) $1,698 $5,541
Comprehensive income, net of tax:
Net income 3,179 3,179
Other comprehensive income:
Change in unrealized gain (loss) on
securities 980 980
available for sale, net
Change in foreign currency (147) (147)
translation adjustment
Other comprehensive income 833
Comprehensive income 4,012
Issuance of Common Stock for Savers Life 15,024 15,024
acquisition
Issuance of Common Stock warrants 30 30
Issuance of Common Stock in connection with
exercise of stock warrants 233 234 (1)
Treasury stock acquired (274) (274)
Conversion of preferred stock into Common 4 4
Stock
Reissuance of treasury stock in connection
with (1) 54 (55)
exercise of stock options
Preferred stock dividends (71) (71)
Balance at September 30, 1998 $62,270 $55,938 $(4,792) $2,531 $8,593
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
<S> <C> <C>
September 30,
1998 1997
OPERATING ACTIVITIES
Net income $3,179 $1,915
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 2,014 1,039
Policy acquisition costs deferred (8,684) (5,323)
Deferred federal income taxes 1,529 695
Depreciation and amortization 883 960
Insurance policy liabilities (7,442) 6,990
Net realized investment gains (73) (287)
Accrued investment income (105) 114
Amounts due to Savers Life from brokers for security sales at 6,519 --
acquisition date
Other 2,880 (1,477)
Net cash provided by operating activities 700 4,626
FINANCING ACTIVITIES
Borrowings, net of debt issuance costs of $86 in 1998 and $-- in 1997 3,914 5,628
Repayments on long term debt and obligations under capital lease (3,153) (402)
Premiums received on interest-sensitive annuities and other financial
products 53,846 38,355
credited to policyholder account balances, net of premiums ceded
Return of policyholder account balances on interest-sensitive annuities
and other (36,009) (27,986)
financial products, net of premiums ceded . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of convertible preferred stock, net of issuance costs of $120 . 3,610 --
. . . . . . . . . . . . . . . . . . .
Redemption of redeemable preferred stock . . . . . . . . . . . . . . . . -- (1,855)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Reissuance of treasury stock in connection with exercise of stock options 233 4
and warrants . . . . . . .
Proceeds from Common and Treasury Stock sales . . . . . . . . . . . . . . -- 165
. . . . . . . . . . . . . . . . . . . . . .
Purchase of Common Stock for treasury (272) (1,079)
Net cash provided by financing activities 22,169 12,830
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (190,140) (158,353)
Sales 128,978 123,113
Maturities, calls and redemptions 15,289 23,632
Short-term investments, net 36,516 (5,116)
Other investments, net (2,450) (2,681)
Purchase of Savers Life Insurance Company, less cash acquired of $518 (2,169) --
Net cash used by investing activities (13,976) (19,405)
Net increase (decrease) in cash 8,893 (1,949)
Cash at beginning of period 4,165 5,113
Cash at end of period $13,058 $3,164
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 1997 Consolidated
Financial Statements and Notes have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on previously reported
shareholders' equity or net income during the periods involved.
The nature of the insurance business of Standard Management Corporation
("SMC") and its consolidated subsidiaries (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
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
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, 1997.
NOTE 2 -- ACQUISITIONS
On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers
Life"), with Savers Life surviving as a wholly-owned subsidiary of SMC. Each
of the 1,779,908 shares of Savers Life Common Stock outstanding was converted
into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life
Common Stock could elect to receive the $1.50 per share portion of the merger
consideration in the form of additional shares of SMC Common Stock. SMC issued
approximately 2.2 million shares with a value of approximately $14,937,000 and
paid $2,119,000 in cash (excluding acquisition costs) to acquire Savers Life.
SMC increased the Amended and Restated Revolving Line of Credit Agreement with
a bank (the "Amended Credit Agreement") to an amount of $20,000,000 to finance
the acquisition of Savers Life.
Savers Life underwrites, markets and distributes annuities, life
insurance, and Medicare supplement health insurance through a sales force
consisting of approximately 4,000 independent brokers and is licensed to sell
products in North Carolina, South Carolina, Virginia and Florida. Savers Life
had total assets of $72,186,000 at December 31, 1997 and revenues of
$43,047,000 for the year ended December 31, 1997.
The acquisition of Savers Life was accounted for using the purchase
method of accounting and the consolidated financial statements include the
results of Savers Life from the date of acquisition. Under purchase
accounting, SMC allocated the total purchase price of Savers Life to the assets
and liabilities acquired, based on a preliminary determination of their values
and recorded the excess of total purchase price over net assets acquired as
goodwill. SMC may adjust this allocation when a final determination of fair
values is made. Any adjustment is not expected to be material.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2 -- ACQUISITIONS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Savers Life acquisition described above (in thousands):
Assets acquired:
Fixed maturity securities $ 7,061
Equity securities 2,840
Mortgage loans on real estate 6,273
Real estate 1,750
Policy loans 9
Short term investments 42,745
Cash 518
Present value of future profits 7,400
Other assets 7,378
Total assets acquired 75,974
Liabilities assumed:
Policy reserves 57,889
Deferred federal income taxes 516
Other liabilities 1,061
Total liabilities assumed 59,466
Net assets acquired 16,508
Excess of acquisition cost over net assets
acquired 2,049
Total purchase price $ 18,557
The following are supplemental unaudited pro forma consolidated results of
operations of the Company as if the acquisition of Savers Life and the transfer
of the major medical product line from Savers Life to World Insurance Company
("World") through a reinsurance agreement whereby World assumed, through
coinsurance effective July 1, 1997, 100% of the product line, had occurred at
January 1, 1997 presented at the same purchase price, based on estimates and
assumptions considered appropriate (in thousands, except per share amounts).
Nine Months Ended
SEPTEMBER 30,
1998 1997
Revenues $55,453 $61,696
Net income 3,513 2,501
Earnings per share 0.40 0.35
Earnings per share,
assuming dilution 0.38 0.33
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable and do not reflect any benefit from savings
which might be achieved from combined operations. The unaudited pro forma
results do not necessarily represent results which would have occurred if the
acquisition of Savers Life and the transfer of the major medical product line
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3 -- NOTES PAYABLE
Notes payable of the Company were as follows (in thousands):
<TABLE>
<CAPTION>
Interest September 30, December 31,
Rate 1998 1997
<S> <C> <C> <C>
Borrowings under revolving credit 8.86%{ (1)} $17,000 $16,000
agreements
Senior subordinated convertible notes 10.00% 10,000 10,000
due 2004
$27,000 $26,000
</TABLE>
(1) Current weighted average rate at September 30, 1998.
In March 1998, SMC had borrowed an additional $4,000,000 under revolving
credit agreements to purchase Savers Life. In July 1998, SMC repaid
$3,000,000 on the $20,000,000 Amended Revolving Line of Credit Agreement from
the gross proceeds received in connection with the issuance of 37,300 shares of
the Series A Preferred Stock (See Note 6).
NOTE 4 -- NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain on
securities available for sale" in shareholders' equity are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
1998 1997
Fair value of securities available for sale $432,485 $372,628
Amortized cost of securities available for sale 424,903 367,427
Gross unrealized gain on securities available for 7,582 5,201
sale
Adjustments for:
Deferred policy acquisition costs (1,658) (1,727)
Present value of future profits (1,084) (209)
Deferred federal income tax liability (1,689) (1,094)
Net unrealized gain on securities available for sale $3,151 $2,171
</TABLE>
NOTE 5 -- EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." All earnings per
share amounts for all periods presented have been restated to conform to the
SFAS No. 128 requirements. SFAS No. 128 eliminates the presentation of primary
earnings per share and replaces 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 are 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 was used.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 5 -- EARNINGS PER SHARE (CONTINUED)
A reconciliation of the numerator and denominator of the earnings per share
computation is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
<S> <C> <C>
September 30,
1998 1997
Numerator:
Net income $3,179 $1,915
Preferred stock dividends (71) (97)
Numerator for basic earnings per share -
Income available to common shareholders 3,108 1,818
Effect of dilutive securities:
Preferred stock dividends 71 97
Interest on subordinated convertible debt 750 --
Numerator for diluted earnings per share -
Income available to common shareholders after assumed $3,929 $1,915
conversions
Denominator:
Denominator for basic earnings per share - weighted -average 6,599,428 4,973,580
shares
Effect of dilutive securities:
Stock options 288,833 151,069
Stock warrants 236,608 209,845
Convertible preferred stock -- --
Subordinated convertible debt 1,740,038 --
Dilutive 2,265,479 360,914
potential common shares
Denominator for diluted earnings per share - adjusted
weighted -average 8,864,907 5,334,494
shares and assumed conversions
</TABLE>
The senior subordinated convertible notes were not included in the 1997
computation of diluted earnings per share because the effect would be
antidilutive.
NOTE 6 -- REDEEMABLE PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 130,000
shares of preferred stock designated as Series A Convertible Redeemable
Preferred Stock, $100 par value per share. The Series A Preferred Stock is
redeemable on July 1, 2005, has a 7 3/4 % annual dividend payable on a
quarterly basis, and is convertible into 11.7647 shares of SMC common stock for
each Series A Preferred Stock share (convertible into SMC common stock based on
a conversion price of $8.50 for each SMC common stock share). Prior to July 1,
1999, SMC may voluntarily redeem the Series A Preferred Stock under certain
limited circumstances. After July 1, 1999, SMC may voluntarily redeem the
Series A Preferred Stock at a redemption price of 105% of the stated value
reducing to stated value beginning July 1, 2003 and thereafter. During July,
1998, SMC issued 37,300 shares of the Series A Preferred Stock receiving
gross proceeds of $3,730,000. SMC, during July, 1998, used $3,000,000 of
these proceeds to pay down its $20,000,000 Amended Revolving Line of
Credit Agreement. During October 1998, SMC issued an additional 28,000
shares of the Series A Preferred Stock,receiving gross proceeds of
$2,800,000, of which 26,000 shares were purchased by SMC's officers and
directors. SMC used the proceeds to help fund the acquisition of
Midwestern National Life Insurance Company of Ohio ("Midwestern National
Life"). (See Note 8 - Completed Acquisition)
NOTE 7 -- DISPOSAL OF MEDICARE SUPPLEMENT BUSINESS
Effective July 1, 1998 the Savers Life Medicare supplement business,
which represented substantially all of the Company's health business was sold
to Oxford Life Insurance Company ("Oxford Life") and a quota share reinsurance
agreement was entered into between Savers Life and Oxford Life. In connection
with the sale of the Medicare supplement business, Savers Life received an
initial statutory ceding allowance of $4,200,000 which was offset by a reserve
reduction of $1,642,470 and write off of present value of future profits of
$2,557,530 for GAAP. Under the terms of the reinsurance agreement, Savers Life
will administer the Medicare supplement business through July 1, 1999 and will
receive administration fee income as a result of this transaction. The
consummation of this transaction resulted in the Company exiting from Medicare
supplement business it acquired with the Savers Life acquisition.
NOTE 8 -- COMPLETED ACQUISITION
On October 30, 1998, SMC acquired Midwestern National Life Insurance
Company of Ohio ("Midwestern National Life") as a wholly-owned subsidiary of
SMC. SMC issued 696,453 shares of its common stock valued at $6.625,
increased its bank debt by $6,000,000 on restructured terms and paid
$2,886,000 in cash (excluding acquisition costs) for an aggregate purchase
price of $13,500,000 to acquire Midwestern National Life. SMC borrowed an
additional $6,000,000 by increasing the Amended and Restated Revolving Line
of Credit Agreement with a bank from $20,000,000 to $26,000,000 and drawing
down $6,000,000 for the Midwestern National Life closing. SMC plans to merge
Midwestern National Life into Standard Life effective December 31, 1998
with Standard Life being the surviving entity. Midwestern National Life
reported total assets of $133,384,000 and $125,028,000 at December 31,
1997 and September 30, 1998, respectively and reported total revenues of
$11,759,000 and $6,558,000 and a net loss of $240,000 and $2,088,000 for the
ten months ended December 31, 1997 and the nine months ended September 30,
1998, respectively.
NOTE 9 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of SFAS No. 130 had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
securities available for sale and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 supercedes 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. SFAS No. 131 is effective for financial statements
issued for fiscal years beginning after December 15, 1997 and will be adopted
by the Company in 1998. 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which is required to be adopted in years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter
after its issuance. The Company adopted the Statement effective July 1, 1998.
At September 30, 1998 recording derivatives at fair value resulted in a
writedown of $193,664.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 liquidity 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, 1997.
RESULTS OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OPERATING INCOME. The income from operations
(before net realized investment gains) was $1,095,000 for the third quarter of
1998, an increase of $558,000 or 104%, compared to $537,000 for the comparable
period in 1997. The increase resulted primarily from increased operating
earnings from domestic operations of $503,000 compared to $173,000 for the
third quarter of 1998 and 1997, respectively. The increased domestic operating
gains resulted primarily from increased spread revenues and from favorable
mortality experience during the third quarter of 1998 and the inclusion of
Savers Life in the Company's operating results from March 12, 1998, the
acquisition date of Savers Life.
PREMIUM INCOME. Premium income-life 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-
life for the third quarter of 1998 was $1,759,000 an increase of $44,000 or 3%
from $1,715,000 for the third quarter of 1997. SMC recorded net premium
income-life of $328,593 in the third quarter of 1998 for the Savers Life
acquisition which more than offsets the decline in premiums from the regular
policy lapses, surrenders, and expiries in SMC's closed blocks of business.
Net domestic premium deposits received from
the sales of interest-sensitive annuities and other financial products (which
are not recorded as revenues) were $23,764,000 compared to $11,267,000 for the
third quarter of 1998 and 1997, respectively. Gross domestic premium deposits
received from interest-sensitive annuities and financial products were
$25,372,000 for the third quarter of 1998 compared to $13,347,000 for the third
quarter of 1997. Annuity sales increased in 1998 due to the introduction of
new competitive products and an increase in the agency base achieved through
the recruitment of high volume agents and larger managing general agencies and
continued expansion of geographical concentration into such areas as
California. 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 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 $491,000 or 6% to $8,071,000 for the third quarter of 1998 from
$7,580,000 for the comparable period of 1997. The increase primarily resulted
from an increase in total invested assets (amortized cost) from December 31,
1996 to September 30, 1998, of $94,397,000 or 25%. This increase included
$67,800,000 from the Savers Life acquisition. The weighted average annualized
yield of the Company's investment portfolio (exclusive of realized and
unrealized gains and losses) was 7.51% for the third quarter of 1998 compared
to 7.83% for the third quarter 1997. As of September 30, 1998, yields
available on new investments were declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $38,000 or 47% to $43,000 from $81,000 for the third
quarter of 1998 and 1997, 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 on the Company's securities available for sale was $7,582,000
at September 30, 1998. 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, the Company's
asset/liability management activity is designed to monitor and adjust for the
effects of changes in market interest rates, and the Company's focus is to
manage its net spread revenue.
POLICY CHARGES. Policy charges, which
represent the amounts assessed against policyholder account balances for the
cost of insurance, policy administration and surrenders, increased $578,000 or
44% to $1,906,000 for the third quarter of 1998 compared to $1,328,000 for the
third quarter of 1997. The increase in policy charges resulted primarily from
an increase in policy surrender charges on certain deferred annuity products in
1998 when compared to 1997 and from the inclusion of Savers Life in the results
of operations from March 12, 1998, the acquisition date of Savers Life.
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
$577,000 or 138% to $994,000 for the third quarter of 1998 from $417,000 for
the third quarter of 1997. The increase is due primarily to an increase in the
value of assets held in separate accounts from $148,064,000 at December 31,
1997 to $182,308,000 at September 30, 1998. Net deposits from sales of unit-
linked products by Standard Management International were $8,780,000 and
$3,675,000 for the third quarter of 1998 and 1997, respectively. Such income
fluctuates in relationship to total separate account assets and the return
earned on such assets.
OTHER INCOME. Other income, which represents
primarily fee income from products marketed by Savers Life, increased
$1,144,000 or 961% to $1,263,000 for the third quarter of 1998 compared to
$119,000 for the comparable 1997 period. The increase primarily resulted from
the inclusion of Savers Life in the Company's operating results from March 12,
1998, the acquisition date of Savers Life.
BENEFIT AND CLAIMS. Benefits and claims-life
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims-life increased $1,240,000 or 79% to $2,817,000
for the third quarter of 1998 from $1,577,000 for the third quarter of 1997.
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. The
increase primarily resulted from the inclusion of Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
INTEREST CREDITED ON INTEREST-SENSITIVE
ANNUITIES AND OTHER FINANCIAL PRODUCTS. Interest credited on
interest-sensitive annuities and other financial products was $4,247,000 for
the third quarter of 1998, a decrease of $214,000 or 5% from $4,461,000 for the
comparable prior year period. At September 30, 1998, the weighted average
interest credited rate for Standard Life's currently marketed annuities and
other financial product liabilities was 5.38% compared to 5.81% at September
30, 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 $355,000 or 37% to
$1,322,000 for the third quarter of 1998 from $967,000 for the third quarter of
1997. 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, and increased
surrenders and a corresponding increase in the amortization of deferred policy
acquisition costs. The increase in amortization expense also includes $121,000
of such expense for the third quarter of 1998 from including Savers Life in the
Company's operating results from March 12, 1998, the acquisition date of Savers
Life.
OTHER OPERATING EXPENSES. Other operating
expenses increased $142,000 or 8% to $1,939,000 for the third quarter of 1998
from $1,797,000 for the third quarter of 1997. The increase in other operating
expenses resulted primarily from including Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $126,000 or 20% to $772,000 for
the third quarter of 1998 from $646,000 for the third quarter of 1997. The
increase in interest expense and financing costs during 1998 resulted from
additional borrowings of $5,600,000 in June 1997 and $4,000,000 in March 1998.
In July 1998, $3,000,000 of borrowings were repaid which partially offset the
increase in interest expense in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OPERATING INCOME. The income from operations
(before net realized investment gains) was $3,106,000 in the first nine months
of 1998, an increase of $1,380,000 or 80%, compared to $1,726,000 for the
comparable period in 1997. The increase resulted primarily from increased
operating earnings from domestic operations of $1,026,000 to $1,565,000 for the
first nine months of 1998 compared to $539,000 for the first nine months of
1997. The increased domestic operating gains resulted primarily from increased
spread revenues and from favorable mortality experience during the first nine
months of 1998 and the inclusion of Savers Life in the Company's operating
results from March 12, 1998, the acquisition date of Savers Life.
PREMIUM INCOME. Premium income-life 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-
life for the first nine months of 1998 was $5,667,000, an increase of $390,000
or 7% from $5,277,000 for the first nine months of 1997. Premium income-health
of $5,992,000 for the first nine months of 1998 is premiums received on
Medicare supplement insurance obtained as part of the Savers Life acquisition.
This premium income is included in the Company's operating results from March
12, 1998, the acquisition date of Savers Life through July 1, 1998, the
effective date the Medicare supplement business was sold to Oxford Life.
Net domestic premium deposits received from
the sales of interest-sensitive annuities and other financial products (which
are not recorded as revenues) were $53,846,000 compared to $37,622,000 for the
first nine months of 1998 and 1997, respectively. Gross domestic premium
deposits received from interest-sensitive annuities and financial products were
$60,106,000 for the nine months ended September 30, 1998 compared to
$44,408,000 for the nine months ended September 30, 1997. Annuity sales
increased in 1998 due to the introduction of new competitive products and an
increase in the agency base achieved through the recruitment of high volume
agents and larger managing general agencies and continued expansion of
geographical concentration into such areas as California. 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 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 $1,994,000 or 9% to $23,920,000 for the first nine months of 1998
from $21,926,000 for the comparable period of 1997. The increase primarily
resulted from an increase in total invested assets (amortized cost) from
December 31, 1996 to September 30, 1998 of $94,397,000 or 25%. This increase
included $67,800,000 from the Savers Life acquisition. The weighted average
annualized yield of the Company's investment portfolio (exclusive of realized
and unrealized gains and losses) was 7.54% for the first nine months of 1998
and 7.66% for the comparable period of 1997. As of September 30, 1998,
yields available on new investments were declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $214,000 or 75% to $73,000 from $287,000 for the
first nine months of 1998 and 1997, 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 on the Company's securities available for sale was $7,582,000
at September 30, 1998. 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, the Company's
asset/liability management activity is designed to monitor and adjust for the
effects of changes in market interest rates and the Company's focus is to
manage its net spread revenue.
POLICY CHARGES. Policy charges, which
represent the amounts assessed against policyholder account balances for the
cost of insurance, policy administration and surrenders, increased $948,000 or
23% to $5,058,000 for the nine months ended September 30, 1998 compared to
$4,110,000 for the nine months ended September 30, 1997. The increase in
policy charges resulted from an increase in policy surrender charges on certain
deferred annuity products in 1998 when compared to 1997 and from the inclusion
of Savers Life in the Company's results of operations from March 12, 1998, the
acquisition date of Savers Life.
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
$892,000 or 71% to $2,147,000 for the first nine months of 1998 from $1,255,000
for the first nine months of 1997. The increase is due primarily to an
increase in the value of assets held in separate accounts from $148,064,000 at
December 31, 1997 to $182,308,000 at September 30, 1998. Net deposits from
sales of unit-linked products by Standard Management International were
$28,845,000 and $10,752,000 for the nine months ended September 30, 1998 and
1997, respectively. Such income fluctuates in relationship to total separate
account assets and the return earned on such assets.
OTHER INCOME. Other income, which
represents primarily fee income from products marketed by Savers Life, increased
$1,684,000 or 166% to $2,698,000 for the first nine months of 1998 compared to
$1,014,000 for the comparable 1997 period. The increase primarily resulted
from the inclusion of Savers Life in the Company's operating results from March
12, 1998, the acquisition date of Savers Life.
BENEFIT AND CLAIMS. Benefits and claims-life
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims-life increased $818,000 or 14% to $6,763,000 for
the first nine months of 1998 from $5,945,000 for the first nine months of
1997. The increase in benefits and claims-life resulted from benefits and
claims incurred primarily from the inclusion of Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life and
an increase in benefit and claims expense from international operations.
Benefits and claims-health of $4,821,000 for the nine months ended September
30, 1998 are benefits and claims incurred on Medicare supplement insurance
obtained as part of the Savers Life acquisition. These benefits and claims-
health are included in the Company's operating results from March 12, 1998, the
acquisition date of Savers Life through July 1, 1998, the effective date of the
sale of the Medicare supplement business to Oxford Life. 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 $13,112,000 for the first nine months of 1998, an
increase of $485,000 or 4% from $12,627,000 for the comparable prior year
period. The increase resulted from the inclusion of Savers Life interest
credited in the Company's operating results from March 12, 1998 the acquisition
date of Savers Life. At September 30, 1998, the weighted average interest
credited rate for Standard Life's currently marketed annuities and other
financial product liabilities was 5.38% compared to 5.81% at September 30,
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 $1,002,000 or 39% to
$3,546,000 for the first nine months of 1998 from $2,544,000 for the first nine
months of 1997. 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, and increased
surrenders and a corresponding increase in the amortization of deferred policy
acquisition costs. The current year increase in amortization expense also
includes $316,000 of such expense from including Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
OTHER OPERATING EXPENSES. Other operating
expenses increased $506,000 or 10% to $5,633,000 for the first nine months of
1998 from $5,127,000 for the first nine months of 1997. The increase in other
operating expenses resulted primarily from including Savers Life operating
expenses in the Company's operating results from March 12, 1998, the
acquisition date of Savers Life.
COMMISSION EXPENSE - HEALTH. Commission
expense - health of $784,000 for the nine months ended September 30, 1998 is
commission expense on Medicare supplement insurance obtained as part of the
Savers Life acquisition. This commission expense is included in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life
through July 1, 1998, the effective date of the sale of the Medicare supplement
business to Oxford Life.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $477,000 or 28% to $2,201,000 in
the nine months ended September 30, 1998 from $1,724,000 in the nine months
ended September 30, 1997. The increase in interest expense and financing costs
during 1998 resulted from additional borrowings of $5,600,000 in June 1997 and
$4,000,000 in March 1998. In July 1998, $3,000,000 of borrowings were repaid
which partially offset the increase in interest expense in the third quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
SMC is an international financial services
holding company. The liquidity requirements of SMC are met primarily from
management fees, equipment rental fees and payments for other charges and
dividends and interest on Surplus Debentures received from SMC's subsidiaries
as well as SMC's working capital. These are SMC'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 Insurance Company of Indiana ("Standard Life") to SMC is subject
to restrictions under the insurance laws of Indiana, Standard Life's
jurisdiction of domicile. Dixie National Life Insurance Company ("Dixie
National Life") is a subsidiary of Standard Life. Accordingly, any dividends
paid by Dixie National Life to Standard Life may be paid to SMC only if
Standard Life is entitled to pay dividends to SMC. The payment of dividends
and management fees by Savers Life to SMC is subject to restrictions under the
insurance laws of North Carolina, Savers 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 by operations of $7,764,000 and $1,726,000 for the
years ended December 31, 1997 and 1996, 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 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 $19,649,000 and $26,717,000 for the years ended December 31, 1997
and 1996, 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 Common Stock from time to time. The purpose of the stock repurchase
program is to enhance shareholder value. SMC had repurchased 1,174,558 shares
of Common Stock for $6,120,000 as of October 31, 1998. At October 31, 1998,
SMC was authorized to purchase an additional 325,442 shares under this program.
At October 31, 1998, SMC had "parent company
only" cash and short-term investments of $182,000. During July, 1998, SMC
received gross proceeds of $3,730,000 from the sale of 37,300 shares of Series
A Convertible Redeemable Preferred Stock. SMC, during July, 1998, used
$3,000,000 of these proceeds to pay down its $20,000,000 Amended Revolving
Line of Credit Agreement. SMC's "parent company only" operating expenses
(not including interest expense) were $3,420,000 and $3,470,000 for the
years ended December 31, 1997 and 1996, respectively.
Pursuant to the management services agreement
with SMC, Standard Life paid SMC a monthly fee of $167,000 (annual fee of
$2,000,000) during 1997 and the first nine months of 1998 for certain
management services related to the production of business, investment of assets
and evaluation of acquisitions. Pursuant to the management services agreement
with Standard Life, Dixie National Life paid monthly payments of $83,000
(annual fee of $1,000,000) to Standard Life in 1997 and in the first nine
months of 1998 Dixie National Life paid monthly payments of $100,000 (annual
fee of $1,200,000). 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.
A management services agreement between SMC
and Savers Life was approved by the North Carolina Department of Insurance on
March 11, 1998. The management services agreement calls for the payment of
$83,000 per month by Savers Life to SMC for financial and regulatory reporting,
investment of assets and the production of business. SMC had agreed to receive
no fee, nor shall Savers Life have an obligation to pay such fee, unless the
capital and surplus of Savers Life is greater than $7,000,000 after the
acquisition of Savers Life. In addition, as a condition of the acquisition of
Savers Life, SMC entered into an agreement with the North Carolina Department
of Insurance to maintain statutory capital and surplus of Savers Life of at
least $6,000,000. The amount of capital and surplus of Savers Life at
September 30, 1998 was $9,767,000. As a result, in September 1998, Savers Life
paid SMC management fees of $500,000 for April 1998 through September 1998, and
will pay a monthly management fee of $83,000 beginning October 1, 1998.
Pursuant to the management services agreement
with SMC, Premier Life (Luxembourg), a wholly-owned subsidiary of Standard
Management International, paid SMC a management fee of $25,000 per quarter
during 1997 and the first nine months of 1998 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 an unaffiliated 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. During the second quarter of 1998, the lease was
terminated and the property and equipment was repurchased for $116,000. SMC
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 SMC's subsidiaries was $787,000 and $1,145,000 for
the nine months ended September 30, 1998 and year ended December 31, 1997,
respectively.
The Amended Credit Agreement permits SMC to
borrow up to $20,000,000 in the form of a seven-year reducing revolving loan
arrangement. SMC 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, SMC issued warrants to the bank to purchase 73,500 shares of
Common Stock. Borrowing under the Amended Credit Agreement may be used for
contributions to surplus of insurance subsidiaries, acquisition financing, and
repurchases of 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 SMC, to be: (i) a fluctuating rate of
interest based on 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%. Annual principal
repayments of $3,333,000 begin in March 2000 and conclude in March 2005.
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 SMC and certain
investment and indebtedness limitations. At September 30, 1998, SMC was in
compliance with all restrictions and covenants in the Amended Credit Agreement.
At September 30, 1998, SMC had borrowed $17,000,000 under the Amended Credit
Agreement at a weighted average interest rate of 8.86%.
In connection with the acquisition of Shelby
Life, the Company borrowed $4,000,000 from an insurance company pursuant to a
subordinated convertible debt agreement which was due in December 2003. At
September 30, 1997, this subordinated convertible debt agreement was amended to
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 September 30, 1997, the Company 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 at any time at the option of the note holder into
Common Stock at the rate of $5.747 per share. The Notes may be prepaid in
whole or in part at the option of the Company commencing on July 1, 2000 at
redemption prices equal to 102% 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 at a redemption price equal to 101%
of the principal amount (plus accrued interest) under certain limited
circumstances. The subordinated convertible debt agreements contain terms and
financial covenants substantially similar to those in the Amended Credit
Agreement.
Assuming the current level of debt under the
Amended Credit Agreement and current interest rates at September 30, 1998
(weighted average rate of 8.86%) SMC annual debt service in 1998 would be
approximately $1,506,000 in interest paid.
From the funds borrowed by SMC pursuant to
the Amended Credit Agreement and the subordinated convertible debt agreements,
$13,000,000 was loaned to Standard Life pursuant to an Unsecured Surplus
Debenture Agreement (the "Surplus Debenture") which requires Standard Life to
make quarterly interest payments to SMC at a variable corporate base rate
(8.25% at September 30, 1998) 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. SMC currently
anticipates these quarterly approvals will be granted. Assuming the approvals
are granted and the September 30, 1998 interest rate of 10.25% continues in
1998, SMC will receive interest income of $1,365,000 from the Surplus Debenture
during 1998.
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 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, 1997, Standard
Life reported statutory net gain from operations before realized capital gains
of $2,374,000 and statutory surplus of $25,923,000, which includes unassigned
surplus of $1,693,000. Standard Life paid dividends of $1,600,000 in 1997.
During 1998, Standard Life can pay dividends of approximately $2,500,000
without regulatory approval.
As a North Carolina domiciled insurance
company, Savers Life may pay a dividend or distribution from its capital and
surplus, without the prior approval of the North Carolina 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
lesser of (I) net gain from operations or (ii) 10% of capital and surplus, in
each case as shown in its preceding annual statutory financial statements.
Savers Life was not allowed to pay a dividend in 1996 or 1997 without prior
North Carolina Department of Insurance approval due to its statutory net losses
in 1995 and 1996. Savers Life will not be permitted to pay dividends in 1998
without such approval.
SMC anticipates the available cash from its
existing working capital, plus anticipated 1998 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 1998.
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.
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
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 annuity products. 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 Company, Inc. ("A.M. Best") rating (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 the Company were required
to sell investments at reduced values to meet liquidity demands. The Company
manages the asset and liability portfolios in order to minimize the adverse
earnings effect of changing market interest rates. The Company seeks assets
that have duration characteristics similar to the liabilities that 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. The Company'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 National Association of Insurance Commissioners
("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. 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 new net premiums written to manage the effect
of such surplus strain. The Company's long-term growth goals contemplate
continued growth in its insurance businesses. To achieve these growth goals,
the Company'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 the
Company 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, the Company believes that it could reduce surplus
strain through the use of reinsurance or through reduced writing of new
business.
Commencing January 1, 1995, Standard Life
began to reinsure a portion of its annuity business. This reinsurance
agreement has allowed the Company 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 the Company's ratio of surplus to
liabilities falls below 4%, the State of Florida could prohibit the Company
from writing new business in Florida. Standard Life's largest annuity
reinsurer at September 30, 1998, 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, 25%
effective April 1, 1996 and further reduced it to 0% on October 1, 1998, to
reflect the reduced need for additional capital and increase current earnings
potential. 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.
Management believes that operational cash
flow of Standard Life will be sufficient to meet its anticipated needs for
1998. As of September 30, 1998, Standard Life had statutory capital and
surplus for regulatory purposes of $26,889,000 compared to $25,923,000 at
December 31, 1997. Standard Life produced statutory net gain from operations
of $1,041,000 and $2,374,000 for the nine months ended September 30, 1998 and
the year ended December 31, 1997, respectively. SMC contributed $2,400,000 to
Standard Life in the second quarter of 1997 to facilitate growth in new
premiums written. 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 and through additional capital contributions by SMC.
Net cash flow from operations on a statutory basis of Standard Life, after
payment of benefits and operating expenses, was $19,588,000 and $17,921,000 for
the years ended December 31, 1997 and December 31, 1996, 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 ("RBC") 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. The RBC Ratio for Standard Life and Dixie
National Life were in excess of 400% of the minimum RBC requirements and Savers
Life was in excess of 300%; 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.
SMC's acquisition of Savers Life at March 12,
1998 is anticipated to have a positive effect on SMC's liquidity and cash
flows. SMC anticipates that existing working capital, unused proceeds from
borrowings under the Amended Credit Agreement and management fees by Savers
Life will be adequate to cover debt service on the additional borrowings under
the Amended Credit Agreement through 1998.
INTERNATIONAL OPERATIONS. The consolidated
balance sheet of the Company at September 30, 1998, includes a $347,000 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 the Company 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 1997 due to accumulated losses. Premier Life (Bermuda) did
not pay dividends in 1997. SMC does not anticipate any dividends from these
companies in 1998.
Due to the nature of unit-linked products
issued by Standard Management International, which represent over 90% of
Standard Management International portfolio's assets, 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.
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
Standard Management International 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 the Company's financial statements as of September 30, 1998 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 September 30, 1998
consolidated balance sheet aggregated $55,437,000 or 7% of the Company's
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 operations of the Company as
of September 30, 1998.
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's insurance subsidiaries; however, it is not expected
that such changes would materially affect the Company'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.
SAFE HARBOR PROVISIONS. All statements,
trend analyses, and other information contained in this Quarterly Report on
Form 10-Q or any document incorporated by reference herein relative to markets
for the Company's products and trends in the Company's operations or financial
results, as well as other statements including words such as "anticipate,"
"believe," "plan,""estimate,""expect,""intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results
to be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: (1) general economic
conditions and other factors, including prevailing interest rate levels, stock
market performance and health care inflation, which may affect the ability of
the Company to sell its products, the market value of the Company's investments
and the lapse rate and profitability of the Company's policies; (2) the
Company's ability to achieve anticipated levels of operational efficiencies at
recently acquired companies, as well as through other cost-saving initiatives;
(3) customer response to new products, distribution channels and marketing
initiatives; (4) mortality, morbidity, usage of health care services and other
factors which may affect the profitability of the Company's insurance products;
(5) changes in the Federal income tax laws and regulation which may affect the
relative tax advantages of some of the Company's products; (6) increasing
competition in the sale of the Company's products; (7) regulatory changes or
actions, including those relating to regulation of financial services affecting
(among other things) bank sales and underwriting of insurance products,
regulation of the sale, underwriting and pricing of insurance products, and
health care regulation affecting the Company's supplemental health insurance
products; (8) the availability and terms of future acquisitions; and (9) the
risk factors or uncertainties listed from time to time in any document
incorporated by reference herein.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.39 Quota Share Reinsurance Agreement between Savers
Life and the Oxford Life Insurance Company dated
September 24, 1998 and effective July 1, 1998.
10.40 Addendum No.5 to Reinsurance Agreement between
Standard Life Insurance Company of Indiana and
Winterthur Life Re Insurance Company dated
August 20,1998 and effective October 1, 1998.
10.41 Employment Agreement between Robert B. Neal and
Standard Management Corporation dated October 2,
1998 and effective October 2, 1998.
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 October 13, 1998, was filed with the
Commission to report under Item 5 the signing of the Third Amendment to
the Stock Purchase Agreement dated as of October 8, 1998 to
purchase Midwestern National Life Insurance Company of Ohio.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
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 12, 1998
STANDARD MANAGEMENT CORPORATION
(Registrant)
By:/s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By:/s/ GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000853971
<NAME> EXHIBIT 27
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 431,147
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,338
<MORTGAGE> 8,528
<REAL-ESTATE> 3,815
<TOTAL-INVEST> 474,167
<CASH> 13,058
<RECOVER-REINSURE> 64,377
<DEFERRED-ACQUISITION> 50,415<F1>
<TOTAL-ASSETS> 799,572
<POLICY-LOSSES> 503,917
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,315
<POLICY-HOLDER-FUNDS> 4,908
<NOTES-PAYABLE> 27,000
3,730
0
<COMMON> 51,146
<OTHER-SE> 11,124<F2>
<TOTAL-LIABILITY-AND-EQUITY> 799,572
1,759
<INVESTMENT-INCOME> 8,071
<INVESTMENT-GAINS> 43
<OTHER-INCOME> 3,247<F3>
<BENEFITS> 7,064<F4>
<UNDERWRITING-AMORTIZATION> 1,322
<UNDERWRITING-OTHER> 3,829
<INCOME-PRETAX> 1,398
<INCOME-TAX> 260
<INCOME-CONTINUING> 1,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,138<F5>
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $23,117 of present value of future profits.
<F2>Includes retained earnings of $8,593 and other comprehensive income of
$2,531.
<F3>Includes policy charges of $1,906, and amortization of negative goodwill of
$347, and fees from separate accounts of $994.
<F4>Includes benefits and claims of $2,817 and interest credited on
interest-sensitive annuities and other financial products of $4,247.
<F5>Net income and EPS calculations do not include preferred stock dividends of
$71 and $0.01, respectively.
</FN>
</TABLE>
REINSURANCE
AGREEMENT
Between
SAVERS LIFE INSURANCE COMPANY
and
OXFORD LIFE INSURANCE COMPANY
<PAGE>
REINSURANCE AGREEMENT
between
SAVERS LIFE INSURANCE COMPANY
of
WINSTON-SALEM, NORTH CAROLINA
hereinafter referred to as "SAVERS," and
OXFORD LIFE INSURANCE COMPANY
of
Phoenix, Arizona,
hereinafter referred to as "OXFORD"
A. REINSURANCE COVERAGE
1.The Medicare Supplement policies (referred to herein as the "Policies") in
force as of the Effective Date and when issued by SAVERS on the forms listed in
Schedule I shall be automatically reinsured with OXFORD, as of the Effective
Date, subject to the provisions of this Agreement.
2.The reinsurance shall cover the quota share of the Policies as specified in
Schedule II. All benefits provided by the Policies shall be reinsured
hereunder in the portion specified in Schedule II.
3.The liability of OXFORD shall begin simultaneously with that of SAVERS but in
no event prior to the Effective Date of this Agreement. Reinsurance with
respect to any Policy shall not be in force and binding unless the insurance
issued directly by SAVERS is in force and unless the issuance and delivery of
such insurance constituted the doing of business in a state of the United
States of America (including the District of Columbia) in which SAVERS was
properly licensed and authorized to do business. SAVERS shall give
notification of such reinsurance to OXFORD simultaneously with the monthly
periodic report prescribed in Schedule III.
4.The liability of OXFORD under this Agreement shall follow the same fortunes
of SAVERS under the Policies, but in no event will its liabilities exceed its
portion of the benefits payable under the Policies.
5.The reinsurance under this Agreement with respect to any Policy shall be
maintained in force without reduction so long as the liability of SAVERS under
such Policy reinsured hereunder remains in force without reduction, unless
reinsurance is terminated or reduced as provided herein.
B. POLICY ADMINISTRATION
SAVERS will be responsible for administration of the Policies renewed hereunder
and for all accounting for such Policies until the Date of Administrative
Transfer. OXFORD will begin administration of the Policies reinsured hereunder
and for the accounting for such Policies as of the Date of the Administrative
Transfer.
OXFORD and SAVERS will work together to establish a Date of Administrative
Transfer. In no event will this date be before January 1, 1999 or after
December 31, 1999.
2.POLICYHOLDER SERVICES
(a)SAVERS will be responsible for providing customary general services to
individuals under the Policies. The services provided will include the
following:
1.responding to inquiries with respect to the scope and amounts of coverage
provided under the Policies;
2.supplying claimants, Policyholders, agents and insured individuals with
appropriate instructions and forms for reporting claims and submitting relevant
information;
3.subject to timely notice by OXFORD to SAVERS, issuing timely notices with
respect to any changes in the coverage provided under the Policies, including
any endorsements thereto, and any changes in the amounts payable toward
premiums with respect to the coverage under the Policies;
4.processing and recording changes in the Policy and endorsements thereto,
including any necessary reissue thereof. Such changes may include, but are not
limited to, changes of ownership, beneficiary, options under the Policy and
endorsements, changes in address and changes in other data related to the
Policyholder and persons insured under the Policy and endorsements;
5.issuing timely notices of termination to the Policyholder;
6.providing instructions for completing forms in compliance with administrative
procedures.
(b)SAVERS will use forms and supplies, authorized by OXFORD, in the performance
of these Policyholder services.
(c)SAVERS will maintain, at its own expense, an accurate information system for
use in the administration of the Policies and in the production and supplying
of reports and data to OXFORD sufficient for OXFORD to complete all regulatory
statements.
(d)SAVERS will utilize the same conservation efforts for the Policies as used
by OXFORD for similar OXFORD policies, as such are adopted from time to time,
including conservation calls to agents and Policyholders. OXFORD will provide
financial information that can be used by SAVERS for conservation efforts.
(e)Perform such other Policyholder services as may be agreed upon in advance by
the parties to this Agreement in writing.
<PAGE>
3.CLAIM ADMINISTRATION SERVICES
(a)SAVERS will perform the following services and functions in connection with
the administration of claims under the Policies:
(1)review and pay by SAVERS check all claims for a benefits up to $10,000 per
Policy, which SAVERS' review determines to be qualified for payment; but if
such review determines that any such claim is not qualified for payment, then
further review such claim jointly with OXFORD and secure OXFORD's approval
prior to any compromise or denial of such claim;
(2)review jointly with OXFORD any claim over $10,000, and secure OXFORD's
approval prior to the approval, compromise or denial of such claim;
(3)communicate with claimants with respect to the submission, approval and
payment, compromise or denial of claims made under the Policies and
endorsements administered under this Agreement;
(4)maintain full and complete claim records to the same extent as maintained by
SAVERS for its own claims;
(5)refer to OXFORD any legal process or communications from attorneys or
governmental agencies with respect to contested disposition of any claims. If
any such legal process or communications name SAVERS, SAVERS shall be entitled
to represent its own interests at its own costs;
(6)in the performance of these claims administration functions, SAVERS will
follow the Policy provisions and any rules, procedures, guidelines, and
instructions acceptable to OXFORD and agreed to by SAVERS and any other written
instructions issued by OXFORD and agreed to by SAVERS from time to time.
(b)SAVERS will use forms, checks and supplies reasonably acceptable to and
approved in advance by OXFORD, in the performance of these claims
administration functions.
(c)SAVERS agrees to maintain and preserve full and complete records necessary
for the processing of claims and claim payments in a manner satisfactory to
OXFORD and SAVERS, and all such records shall be and remain the property of
OXFORD.
(d)SAVERS will be responsible for providing providers with Internal Revenue
Service forms 1099.
4.SAVERS will be responsible for all Administrative Expenses, including non-
Policy expenses.
OXFORD is not responsible for:
(a)Usual investigative or administrative expenses, except as specified on
Schedule V attached hereto;
(b)Expenses incurred in connection with a dispute or contest arising out of or
in connection with conflicting claims of entitlement to Policy proceeds or
benefits which SAVERS admits are payable;
(c)Expenses, fees, settlements or judgments arising out of or in connection
with claims against SAVERS for punitive or exemplary damages;
(d)Expenses, fees, settlements or judgments arising out of or in connection
with claims made against SAVERS and based on alleged or actual bad faith,
failure to exercise good faith or tortuous conduct; and
(e)Claims, liabilities or penalties arising out of or related to the sales,
marketing or distribution of the Policies by SAVERS or its producers.
5.UNUSUAL EXPENSES
Any other expenses that in the customs and practices of the Medicare Supplement
insurance business are defined or treated as "unusual expenses", that have not
specifically been addressed in this Agreement, shall not be the liability of,
nor in any way be participated in by OXFORD.
C. PAYMENTS BY SAVERS
1.INITIAL CONSIDERATION
The Initial Consideration to be paid to OXFORD by SAVERS on the Settlement Date
is set forth in Schedule V, with interest at an annual effective rate of six
per cent (6%) compounded daily from the Effective Date to the Settlement Date
of this Agreement.
2.REINSURANCE PREMIUMS
SAVERS shall pay OXFORD reinsurance premiums, equal to OXFORD'S quota share, of
the gross collected contributions or premiums including premium loads and
policy fees, if any, SAVERS receives on or after the Effective Date on the
Policies reinsured hereunder.
D. PAYMENTS BY OXFORD
1.INITIAL CEDING ALLOWANCE
SAVERS shall receive on the Settlement Date:
(a)the proceeds of the Escrow Account dated August 14, 1998;
(b)80% of the Initial Ceding Allowance, with interest at an annual effective
rate of six per cent (6%) compounded daily from the Effective Date to the
Settlement Date of this Agreement.
OXFORD shall deposit 10% of the Initial Ceding Allowance, with interest at an
annual effective rate of six per cent (6%) compounded daily from the Effective
Date to the Settlement Date of this Agreement, into a Reserve Adequacy Escrow
Account.
Reserve Adequacy Escrow Account - Based on January 31, 1999 data, the Initial
Consideration will be adjusted to reflect the Revised Initial Consideration, an
estimate of what the Initial Consideration should have been as of June 30,
1998, pursuant to Schedule VIII attached hereto. The calculation of the
Revised Initial Consideration shall be presented by OXFORD to SAVERS by
February 19, 1999. Any excess of the Revised Initial Consideration over the
original Initial Consideration will be paid to OXFORD with a pro rata share of
interest from the Reserve Adequacy Escrow Account. The remainder of the
Reserve Adequacy Account will be disbursed to SAVERS by February 26, 1999.
<PAGE>
2.BENEFITS
OXFORD shall pay SAVERS, OXFORD'S quota share of the benefits paid by SAVERS,
without deduction for reserves.
3.POLICY EXPENSE ALLOWANCES
OXFORD shall pay SAVERS the Monthly Reinsurance Allowances as defined in
Schedule V on OXFORD'S quota share of the Policies reinsured hereunder.
Neither party hereto shall be liable to the other for taxes, assessments or any
expenses, except as specified in Schedule V, resulting from reinsurance
hereunder.
E. SETTLEMENT OF REINSURANCE
1.AMOUNTS DUE SAVERS OR OXFORD
Except as otherwise specifically provided herein, all amounts due to be paid to
OXFORD or SAVERS shall be determined on a net basis as of the last day of the
calendar month to which such amount is attributable. All amounts shall be due
and accrued as of such date, but in no case prior to the Settlement Date. The
payment of such amounts shall be submitted in accordance with the provisions of
Schedule III. All settlements of account between OXFORD and SAVERS shall be
made in cash or its equivalent.
2.PAYMENT DATES
(a)Not later than fifteen (15) days after the end of each calendar month,
SAVERS shall submit a Monthly Periodic Report substantially in accord with
Schedule III. Any amounts indicated in the Periodic Report as due OXFORD shall
accompany such report.
(b)Not later than fifteen (15) days after the receipt of the Monthly Periodic
Report, any amounts indicated in the Periodic Report as due SAVERS shall be
paid by OXFORD.
(c)Not later than twenty (20) days after the end of each calendar year, SAVERS
shall submit to OXFORD an Annual Report substantially in accord with Schedule
IV.
(d)As specified in Schedule VI, interest shall be paid on amounts not paid when
due.
3.SECTION 1.848-2(G)(8) ELECTION
The parties elect to have this Agreement treated in accordance with Section
1.848-2(g)(8) of the Income Tax Regulations issued under Section 848 of the
Internal Revenue Code of 1986. Specific details of this election are set forth
in Schedule VII.
4.OFFSET
Any debts or credits, matured or unmatured, liquidated or unliquidated,
regardless of when they arose or when incurred, in favor of or against SAVERS
or OXFORD with respect to this Agreement, and any other agreement or with
respect to any other claim of one party against the other are deemed mutual
debts or credits, as the case may be, and shall be set off, and only the
balance shall be allowed or paid.
F. TRUST AGREEMENT
OXFORD shall enter into the Trust Agreement with SAVERS. OXFORD agrees to
deposit and maintain assets, in trust, the market value of which shall at all
times be greater than or equal to the Trust Assets. The term "Trust Assets" is
defined as the amount of statutory liabilities, reserves, and claim reserves on
Policies reinsured.
OXFORD shall be entitled, pursuant to the Trust Agreement, to withdraw assets
from the trust provided that the market value of the assets which remain in
trust is greater than or equal to the Trust Assets. Assets shall be deposited
from time to time as needed to cover increases in the amount of Trust Assets.
The Trust Agreement shall be effective as of the Settlement Date of this
Agreement and shall continue in full force and effect for so long as any
liability of SAVERS remains under the policies and business reinsured pursuant
to this Agreement or until OXFORD exercises its right of assumption. Assets
deposited and maintained in trust pursuant to the Trust Agreement shall at all
times meet all applicable regulatory requirements. OXFORD shall provide a
listing within 30 days after the end of each calendar quarter showing the
market value of all assets held under the Trust Agreement.
Upon written notice of OXFORD, SAVERS may withdraw the assets held under the
Trust Agreement in an Event of Default. An Event of Default shall be deemed to
have occurred if:
OXFORD files a voluntary petition of bankruptcy or makes an assignment for the
benefit of creditors, or if OXFORD is declared insolvent or is placed in
rehabilitation, liquidation, or supervision by the Director of Insurance of the
insurance department of its state of domicile;
(b)OXFORD fails to maintain assets under the Trust Agreement as set forth in
Section F.1 hereof, and such shortfall of assets remains uncured for a period
of fifteen (15) days following notice of such shortfall by SAVERS to OXFORD;
(c)OXFORD fails to satisfy the minimum capital and surplus and other
requirements necessary for SAVERS to receive a full statutory statement offset
from its state of domicile on the business reinsured hereunder, and such
failure has not been remedied after a period of fifteen (15) days following
notice of such failure by SAVERS to OXFORD.
In the event assets held by OXFORD under the Trust Agreement are withdrawn by
SAVERS as provided above, SAVERS shall hold such assets and shall establish and
maintain a liability for such funds held pursuant to this Agreement until such
time as the Event of Default which gave rise to such withdrawal is cured by
OXFORD. Such assets shall be held for safe keeping by SAVERS on behalf of
OXFORD with respect to such assets provided that such investment directions are
consistent with this Agreement. The requirements set forth in Sections F.1 and
F.2 shall continue to apply during any such period.
<PAGE>
G. RIGHT OF ASSUMPTION
OXFORD has the sole right to exercise an assumption of the Policies reinsured
hereunder and SAVERS cannot sell, assign or reinsure the Policies reinsured
herein, at any time without OXFORD's written permission. OXFORD will undertake
its best efforts to complete its assumption of the Policies on or prior to
December 31, 1999 and shall comply with all applicable statutes and regulations
pertaining to assumption of policies in the effected jurisdictions.
H. ERRORS
If either SAVERS or OXFORD shall fail to perform an obligation under this
Agreement and such failure shall be the result of an error on the part of
SAVERS or OXFORD, such error shall be corrected by restoring both SAVERS and
OXFORD to the positions they would have occupied had no such error occurred.
An "error" is a clerical mistake made inadvertently and excludes errors of
judgment and all other forms of error.
I. POLICY CHANGES
1.If SAVERS proposes to make a change in the terms or conditions of a Policy
reinsured hereunder, and such change is likely to affect the risk reinsured
hereunder in respect of such Policy, SAVERS shall notify OXFORD of such
proposed changes.
2.For purposes of this Agreement, any change made to a Policy reinsured
hereunder which has not been approved by OXFORD shall be deemed to be the
issuance of a new policy form by SAVERS and is not reinsured under this
Agreement unless both parties agree it should be included in the Agreement.
OXFORD shall inform SAVERS whether OXFORD will include such new policy form
under this Agreement or will terminate or modify the reinsurance hereunder in
respect of such policy.
SAVERS will not unreasonably withhold implementation of policy changes
requested by OXFORD.
<PAGE>
J. REDUCTIONS
1.If a portion of the insurance issued by SAVERS on a Policy reinsured
hereunder is terminated, reinsurance on that Policy hereunder shall be reduced
proportionally.
2.If SAVERS should contest or compromise any claim or proceeding and the amount
of net liability thereby be reduced, or if at any time SAVERS should recover
monies from any third party in connection with or arising out of any claim
SAVERS by OXFORD, OXFORD's reinsurance liability shall be reduced or OXFORD
shall share in the recovery, as the case may be, in the proportion that the net
liability of OXFORD bore to the total net liability existing as of the
occurrence of the claim. As used in this section, "recovery" shall include,
but not be limited to settlements, judgments, awards and insurance payments of
any kind.
K. AUDIT OF RECORDS AND PROCEDURES
Upon a reasonable request, OXFORD and SAVERS each shall have the right to
audit, during normal business hours and at the office of the other, all records
and procedures relating to reinsurance under this Agreement. The expenses of
any such audit shall be borne by the party initiating the audit.
L. ARBITRATION
It is the intention of SAVERS and OXFORD that customs and practices of the
insurance and reinsurance industry shall be given full effect in the operation
and interpretation of this Agreement. The parties shall act in all things with
the highest good faith. If SAVERS and OXFORD cannot mutually resolve a dispute
which arises out of or relates to this Agreement, the dispute shall be decided
by arbitration. The arbitrators are empowered to decide all questions or
issues and shall be free to reach their decision from the standpoint of equity
and customary practices of the insurance and reinsurance industry rather than
from that of the strict law. The decision of the arbitrators shall be binding
and final.
To initiate arbitration, either SAVERS or OXFORD shall notify the other party
in writing of its desire to arbitrate, stating the nature of its dispute and
the remedy sought. The party to which the notice is sent shall respond to the
notification in writing within ten (10) days of its receipt.
The arbitration hearing shall be before a panel of three arbitrators, each of
whom must be a present officer of an insurance or reinsurance company. An
arbitrator may not be a present or former officer, attorney, or consultant of
SAVERS or OXFORD or either's affiliates.
SAVERS and OXFORD shall each name five (5) candidates to serve as an
arbitrator. SAVERS and OXFORD shall each choose one candidate from the other
party's list, and these two candidates shall serve as the first two
arbitrators. If one or more candidates so chosen shall decline to serve as an
arbitrator, the party which named such candidate shall add an additional
candidate to its list, and the other party shall again choose one candidate
from the list. This process shall continue until two arbitrators have been
chosen and have accepted. SAVERS and OXFORD shall each present their initial
lists of five (5) candidates by written notification to the other party within
twenty-five (25) days of the date of the mailing of the notification initiating
the arbitration. Any subsequent additions to the list which are required shall
be presented within ten (10) days of the date the naming party receives notice
that a candidate that has been chosen declines to serve.
The two arbitrators shall then select the third arbitrator from the eight (8)
candidates remaining on the lists of SAVERS and OXFORD within fourteen (14)
days of the acceptance of their position as arbitrators. If the two
arbitrators cannot agree on the choice of the third, then this choice shall be
referred back to SAVERS and OXFORD. SAVERS and OXFORD shall take turns
striking the name of one of the remaining candidates from the initial eight (8)
candidates until only one candidate remains. If the candidate so chosen shall
decline to serve as the third arbitrator, the candidate whose name was stricken
last shall be nominated as the third arbitrator. This process shall continue
until a candidate has been chosen and has accepted. This candidate shall serve
as the third arbitrator. The first turn at striking the name of a candidate
shall belong to the party that is responding to the other party's initiation of
the arbitration. Once chosen, the arbitrators are empowered to decide all
substantive and procedural issues by a majority of votes.
It is agreed that each of the three arbitrators should be impartial regarding
the dispute and should resolve the dispute on the basis described herein.
Therefore, at no time will either SAVERS or OXFORD contact or otherwise
communicate with any person who is to be or has been designated as a candidate
to serve as an arbitrator concerning the dispute, except upon the basis of
jointly drafted communications provided by both SAVERS and OXFORD to inform
those candidates actually chosen as arbitrators of the nature and the facts of
the dispute. Likewise, any written or oral arguments provided to the
arbitrators concerning the dispute shall be coordinated with the other party
and shall be provided simultaneously to the other party or shall take place in
the presence of the other party. Further, at no time shall any arbitrator be
informed that the arbitrator has been named or chosen by one party or the
other.
The arbitration hearing shall be held on the date fixed by the arbitrators in
Phoenix, Arizona. In no event shall this date be later than six (6) months
after the appointment of the third arbitrator. As soon as possible, the
arbitrators shall establish prearbitration procedures as warranted by the facts
and issues of the particular case. In establishing such procedures the
arbitrators shall make provision for reasonable prehearing examinations of
officers, employees or agents of the parties and for the production of relevant
documentation.
At least ten (10) days prior to the arbitration hearing, each party shall
provide the other party and the arbitrators with a detailed statement of the
facts and arguments it will present at the arbitration hearing. The
arbitrators may consider any relevant evidence, they shall give the evidence
such weight as they deem it entitled to after consideration of any objections
raised concerning it. The party initiating the arbitration shall have the
burden of proving its case by a preponderance of the evidence. Each party
shall be entitled to call any officers, employees or agents of the other party
and such other party shall do everything reasonable to ensure the attendance
and cooperation of any such witnesses. Each party may examine any witness who
testifies at the arbitration hearing. Within twenty (20) days after the end of
the arbitration hearing, the arbitrators shall issue a written decision that
sets forth their findings and any award to be paid as a result of the
arbitration, except that the arbitrators may not award punitive or exemplary
damages. In their decision, the arbitrators shall also apportion the costs of
arbitration, which shall include, but not be limited to, their own fees and
expenses.
M. INSOLVENCY
1.The portion of any risk or obligation assumed by OXFORD, when such portion is
ascertained, shall be payable on demand of SAVERS at the same time as SAVERS
shall pay its net retained portion of such risk or obligation, with reasonable
provision for verification before payment, and the reinsurance shall be payable
by OXFORD, on the basis of the liability of SAVERS under the Policies reinsured
hereunder without diminution because of the insolvency of SAVERS. In the event
of insolvency and the appointment of a conservator, liquidator or statutory
successor of SAVERS, such portion shall be payable to such conservator,
liquidator or statutory successor immediately upon demand, with reasonable
provision for verification, on the basis of claims allowed against SAVERS by
any court of competent jurisdiction or by any conservator, liquidator or
statutory successor of SAVERS having authority to allow such claims, without
diminution because of such insolvency or because such conservator, liquidator
or statutory successor has failed to pay all or a portion of any claims.
2.SAVERS' conservator, liquidator, or statutory successor shall give OXFORD
written notice of the pendency of a claim against SAVERS indicating the Policy
reinsured, within a reasonable time after such claim is filed. OXFORD may
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which OXFORD may deem available to SAVERS,
or its conservator, liquidator or statutory successor.
3.Any expense incurred by OXFORD pursuant to paragraph 2, above, shall be
payable subject to court approval out of the estate of SAVERS as part of the
expense of conservation or liquidation to the extent of OXFORD'S quota share of
the benefit which may accrue to SAVERS in conservation or liquidation, solely
as a result of the defense undertaken by OXFORD. Where two or more reinsurers
are participating in the same claim and a majority in interest elect to
interpose defense to such claim, the expense shall be apportioned in accordance
with the terms of this Agreement as though such expense had been incurred by
SAVERS.
4.It is expressly agreed that nothing in this Agreement does, or is intended
to, make or require OXFORD to drop down or in any way have any responsibility
for the obligations of SAVERS on the Policies in the event of insolvency of
SAVERS.
N. PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between SAVERS and
OXFORD. The acceptance of reinsurance hereunder shall not create any right or
legal relation whatever between OXFORD and the insured or the beneficiary under
any Policy reinsured hereunder, and SAVERS shall be and remain solely liable to
such insured or beneficiary under any such Policy.
O. ASSIGNMENT
None of the rights and obligations under this Agreement may be assigned by
either SAVERS or OXFORD except as indicated in Section G. Notwithstanding any
provision of this Agreement, SAVERS may merge into its affiliate, Standard Life
Insurance Company of Indiana, ("Standard Life") and Standard Life shall assume
the rights and obligations under this Agreement.
P. EFFECTIVE DATE
The Effective Date of this Agreement is 12:01 A.M. July 1, 1998.
<PAGE>
Q. DURATION OF AGREEMENT
1.Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2.This Agreement shall automatically terminate at the end of any calendar month
if all Policies reinsured hereunder have terminated and the amount of reinsured
reserves on the Policies reinsured hereunder is zero dollars ($0).
3.SAVERS shall have the right to terminate this Agreement and recapture all
reinsurance hereunder in the event OXFORD becomes subject to any insolvency or
similar proceeding. In the event SAVERS exercises this right to terminate and
recapture reinsurance, SAVERS shall reimburse OXFORD for any unamortized excess
first-year expense allowances (i.e. commissions, fees, etc). For purposes of
this Agreement first year expense allowances will be amortized at a rate of
1/180 per month.
4.The termination of this Agreement, or of the reinsurance in effect under this
Agreement, shall not extend to or affect any of the rights or obligations of
SAVERS and OXFORD applicable to any period prior to the effective date of such
termination. In the event that, subsequent to the termination of this
Agreement, an adjustment is made necessary with respect to any accounting
hereunder, a supplementary accounting shall take place. Any amount owed to
either party by reason of such supplementary accounting shall be paid promptly
upon the completion thereof.
R. AGREEMENT
This Agreement and all schedules attached hereto are the entire agreement
between SAVERS and OXFORD with respect to the Policies reinsured hereunder; it
supersedes any prior oral or written agreements with respect to the Policies
reinsured hereunder, and there are no understandings between SAVERS and OXFORD
with respect to the Policies reinsured hereunder other than as expressed in
this Agreement. Any change or modification to this Agreement and any schedule
attached hereto shall be null and void unless made by amendment to the
Agreement signed by both SAVERS and OXFORD.
S. REPRESENTATION AND WARRANTIES OF SAVERS
1.SAVERS is an insurance corporation presently organized, existing and in good
standing under the laws of the State of North Carolina, and currently holds a
valid, unrevoked Certificate of Authority from that state and each and every
state in which it is currently conducting sales of insurance Policies.
2.Each Policy, Policy amendment, rider, endorsement and form relating to the
Policies reinsured hereunder, has been properly approved by the appropriate
regulatory authorities, and those which have been issued to Policyholders have
been validly issued in compliance with all applicable laws and regulations.
3.SAVERS agrees to refrain, and to cause its employees and affiliates (as
identified in the organization charts of the annual statement of SAVERS as
filed in its state of domicile) and its affiliates' employees to refrain, from
utilizing information regarding the Policies reinsured hereunder for the
purposes of causing or attempting to cause any Policyholder to replace any
Policy with any other policy of insurance of SAVERS or any affiliate of SAVERS
or any other company which provides substantially similar benefits to the
Policies, unless specifically agreed to in writing by OXFORD. SAVERS agrees to
use all reasonable efforts to conserve, maintain and assure the persistency of
the business reinsured and agrees to refrain from taking any action which might
tend to have a materially adverse effect on the persistency of the business
reinsured hereunder, without the prior written consent of OXFORD. SAVERS
agrees not to engage in a replacement program that includes the Policies
hereunder.
<PAGE>
4.SAVERS will assign the marketing agreements and the solicitation rights to
the policyholders to OXFORD. SAVERS agrees to work with and assist OXFORD in
securing a continuation of the marketing of new Medicare Supplement business
including continuation of the conservation program of the in force business, by
referral of leads to Celtic until the OXFORD Medicare Supplement product is
available, and thereafter to OXFORD.
SAVERS and its affiliates agree not to write Medicare Supplement business
except for the Policies covered in this Agreement for a period of five years
from the Settlement Date in the states of North Carolina, South Carolina,
Virginia and Florida.
5.Neither the making nor consummation of this Agreement will violate any
provision of SAVERS' Articles of Incorporation, Bylaws, any agreement to which
it is a party, or any law or order of any county, state or other regulatory
authority which it is subject.
6.The execution, delivery and performance of this Agreement has been duly
authorized by the Executive Committee, its Board of Directors, State of North
Carolina or the individual or group whose approval is required for SAVERS to be
authorized to enter into this Agreement.
7.SAVERS warrants that it is not aware of any dispute or claims arising out of
or related to the sales, marketing or distribution of the Policies in this
state or any similar Policies in other states insured by SAVERS. The warranty
includes regulatory claims or investigations.
8.SAVERS warrants that all of its agents, employees and producers who are
involved in the sales, marketing or distribution of the Policies have acquired
all necessary licenses and authorizations.
<PAGE>
T. REPRESENTATION AND WARRANTIES OF OXFORD
1.OXFORD is a corporation presently organized, existing and in good standing
under the laws of the State of Arizona, and currently holds a valid, unrevoked
Certificate of Authority from that state and each and every state in which it
is currently conducting sales of insurance Policies.
2.Neither the making nor consummation of this Agreement will violate any
provision of OXFORD'S Articles of Incorporation, Bylaws, any agreement to which
it is a party, or any law or order of any county, state or other regulatory
authority which it is subject.
3.The execution, delivery and performance of this Agreement has been duly
authorized by the Executive Committee of its Board of Directors or by its Board
of Directors.
U. MISCELLANEOUS
1.This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, and the counterparts shall constitute but one and
the same instrument, which shall be sufficiently evidenced by any one
counterpart.
2.The headings of the Sections have been inserted for convenience of reference
only, and shall not be deemed to constitute a part of this Agreement.
3.This Agreement shall be construed and enforced, and any dispute relating to
or arising out of this Agreement, will be subject to the laws of the State of
Arizona, without regard to conflict of law principles.
<PAGE>
4.Unless otherwise provided in or pursuant to this Agreement, all notices and
other communications hereunder shall be in writing, telex or telecopy, or if
oral, shall be promptly confirmed in writing, and shall be hand-delivered,
telexed, or telecopied to the following addresses:
If to OXFORD:Oxford Life Insurance Company
Attn: President
2721 North Central Avenue
Phoenix, Arizona 85004
Phone: (602) 263-6666
FAX: (602) 277-5901
If to SAVERS:Savers Life Insurance Company
c/o Standard Management Corporation
Attn: President
9100 Keystone Crossing, Suite 600
Indianapolis, IN 46240
Phone:(317) 574-6200
FAX:(317) 574-6227
Each party may from time to time designate a different address for notices,
directions, requests, demands, acknowledgments and other communications by
giving written notice of such change to the other parties.
<PAGE>
V. EXECUTION
IN WITNESS WHEREOF the said
SAVERS LIFE INSURANCE COMPANY
of
Winston-Salem, North Carolina
and the said
OXFORD LIFE INSURANCE COMPANY
of
Phoenix, Arizona
have by their respective officers executed this agreement in duplicate on the
date shown below.
SAVERS LIFE INSURANCE COMPANY
Signed at: Indianapolis, Indiana
By: /s/ Edward T. Stahl By: /s/ Raymond J. Ohlson
Title: Executive Vice President Title: President
Date: 9/23/98 Date: 9/23/98
OXFORD LIFE INSURANCE COMPANY
Signed at Phoenix, Arizona
By: /s/ Larry Goodyear By: /s/ Mark Haydukovich
Title: Senior Vice President Title: President
Date: 9/24/98 Date: 9/24/98
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE
All policies issued on the Policy forms listed below on or after the Effective
Date of the Agreement are subject to reinsurance as set forth in the Agreement.
POLICY FORM NUMBER
MS1-8505
MS2-8505
MS1-9001
MS2-9001
MS-9201-A
MS-9201-B
MS-9201-C
MS-9201-D
MS-9201-E
MS-9201-F
MS-9201-G
<PAGE>
SCHEDULE II
AMOUNT OF REINSURANCE
The amount of reinsurance under this Agreement shall be OXFORD'S quota share
percentage shown below of the liability of SAVERS on all Policies in the forms
listed in Schedule I. All benefits provided by such Policies shall be
reinsured.
Quota Share % = 100%
<PAGE>
SCHEDULE III
MONTHLY PERIODIC REPORT
A.Due OXFORD (1)+(2):
(1)Premiums Collected (multiplied by the quota share percentage)
(2)Increase in Remittances and Items Not Allocated (multiplied by the quota
share percentage)
B.Due SAVERS (1)+(2)+(3):
(1)Allowances and Expense Reimbursements (Per Schedule V)
(a)Monthly Administration Expense Allowance
(b)Premium Tax Reimbursement
(c)Commission Incurred Reimbursement
(2)Benefits Ceded (multiplied by the quota share percentage)
(3)Decrease in Remittances and Items Not Allocated (multiplied by the quota
share percentage)
C.Informational Reports
(1)Reserve Report (STAT, TAX, GAAP)
(2)Required Interest Computed on Tax Basis Reserves
(3)Persistency Report
(4)Loss Reports
(5)Information Which May Be Necessary for OXFORD to Monitor the Experience of
the Policies reinsured hereunder
<PAGE>
SCHEDULE IV
ANNUAL REPORT
The annual report shall provide the following information:
(a)Exhibits 1, 9 and 11 and Schedules H & O from the NAIC-prescribed Annual
Statement
(b)"Analysis of Increase in Reserves" from the NAIC-prescribed annual statement
An actuarial opinion that the reported reserves on the Policies reinsured
hereunder equal or exceed those required by the valuation law as interpreted by
the State of North Carolina
Computer files of liability data sufficient to enable OXFORD to perform cash
flow testing on the Policies reinsured hereunder
Information which may be necessary for OXFORD to monitor the experience of the
Policies reinsured hereunder
(f)Medicare Supplement Insurance Experience Exhibit
(g)Any other reports as required by the NAIC or other regulatory authorities
<PAGE>
SCHEDULE V
INITIAL CONSIDERATION, ALLOWANCES AND EXPENSE REIMBURSEMENTS
INITIAL CONSIDERATION
The term "Initial Consideration" shall be defined as the statutory liabilities,
reserves and claim reserves as required to be reported to the state of domicile
of SAVERS on the same basis as computed as of the Effective Date and reported
under Exhibits 1, 9 and 11 of the annual statutory statement, as computed at
the end of each calendar quarter for the Policies using amounts as of June 30,
1998.
<TABLE>
Advance Premium 416,029
<S> <C>
Unearned Premium 3,703,020
Additional Contract Reserves 848,350
Claim Reserves 0
In Course of Settlement 0
Incurred But Not Reported 5,950,000
Less Due Premiums 206,206
TOTAL 10,711,193
</TABLE>
INITIAL CEDING ALLOWANCE - $4.2 million
MONTHLY REINSURANCE ALLOWANCES
The following allowances, subject to the quota share percentage described in
Schedule II, shall be:
(1)A monthly administrative expense allowance equal to 7% times the collected
premium from the Effective Date to the Date of Administrative Transfer.
(2)Premium taxes incurred on premiums written after the Effective Date on the
Policies reinsured.
(3)Commission incurred on premiums written after the Effective Date on the
Policies reinsured.
<PAGE>
SCHEDULE VI
INTEREST RATE ON LATE PAYMENTS
Interest on delayed payments will be computed according to the following
formula:
The annual effective rate, compounded daily assuming a 360 day year, equal to
90% of the prime interest rate established by Bank of America, or its
successor, on the last day of the calendar month for which settlement is being
made.
<PAGE>
SCHEDULE VII
SECTION 1.848-2(G)(8) ELECTION
SAVERS and OXFORD agree to the following pursuant to Section 1.848-2(g)(8) of
the Income Tax Regulations issued under Section 848 of the Internal Revenue
Code of 1986 (hereinafter "Section 1.848-2(g)(8).")
1.As used below, the term "party" will refer to SAVERS or OXFORD as
appropriate.
2.As used below, the phrases "net positive consideration", "capitalize
specified Policy acquisition expenses", "general deduction limitation", and
"net consideration" shall have the meaning used in Section 1.848-2(g)(8).
3.The party with net positive consideration for this Agreement for any taxable
year beginning with the taxable year prescribed in paragraph 5 below will
capitalize specified Policy acquisition expenses with respect to this Agreement
without regard to the general deductions limitation.
4.The parties agree to exchange information pertaining to the amount of net
consideration under this Agreement to ensure consistency. This will be
accomplished as follows:
(a)SAVERS shall submit to OXFORD by the thirty-first (31st) day of March in
each year its calculation of the net consideration for the preceding calendar
year. Such calculation will be accompanied by a statement signed by an officer
of SAVERS stating that SAVERS will report such net consideration in its tax
return for the preceding calendar year.
(b)SAVERS shall submit to OXFORD by the thirtieth (30th) day of June in each
year its calculation of the net consideration for the preceding fiscal year
ended March thirty-first (31st) Such calculation will be accompanied by a
statement signed by an officer of SAVERS stating that SAVERS will report such
net consideration in its tax return.
(c)OXFORD may contest such calculation by providing an alternative calculation
to SAVERS in writing within thirty (30) days of OXFORD'S receipt of SAVERS'S
calculation If OXFORD does not so notify SAVERS, OXFORD will report the net
consideration as determined by SAVERS in OXFORD'S tax return.
(d)If OXFORD contests SAVERS' calculation of the net consideration, the parties
will act in good faith to reach an agreement as to the current amount within
thirty (30) days of the date OXFORD submits its alternative calculation. If
SAVERS and OXFORD reach agreement on an amount of net consideration, each party
shall report such amount in their respective tax returns for the preceding
calendar year or fiscal year, as appropriate.
5.This election shall be effective for 1998 and all subsequent taxable years
for which the Reinsurance Agreement remains in effect.
<PAGE>
SCHEDULE VIII
METHODOLOGY OF REVISED INITIAL CONSIDERATION
1.ADDITIONAL CONTRACT RESERVES
Reserves are calculated using the claims costs from the original product
filing. A new set of factors is created for each issue year thereafter using a
7% inflation adjustment.
Two years full preliminary term is used.
Net premiums equal 65% of gross premiums.
The Additional Contract Reserve is the excess, if any, of the active life
reserve plus the net unearned premium reserve over the gross unearned premium
reserve.
CLAIM RESERVE, ICOS & IBNR
The claims paid through January 31, 1999 for Policies reinsured with incurred
dates prior to the Effective Date, plus the claims liability for Policies
reinsured based on data available as of January 31, 1999 for claims incurred
prior to the Effective Date.
ADVANCE, UNEARNED AND PREMIUM DUE
These amounts are calculated in accordance with NAIC statutory
requirements.
<PAGE>
TABLE OF CONTENTS
PAGE
REINSURANCE COVERAGE 1
POLICY ADMINISTRATION 2
PAYMENTS BY SAVERS 5
PAYMENTS BY OXFORD 6
SETTLEMENT OF REINSURANCE 7
TRUST AGREEMENT 8
RIGHT OF ASSIGNMENT 10
ERRORS 10
POLICY CHANGES 10
REDUCTIONS 11
AUDIT OF RECORDS AND PROCEDURES 11
ARBITRATION 11
INSOLVENCY 14
PARTIES TO AGREEMENT 15
ASSIGNMENT 15
EFFECTIVE DATE 15
DURATION OF AGREEMENT 16
AGREEMENT 16
REPRESENTATION AND WARRANTIES OF SAVERS 17
REPRESENTATION AND WARRANTIES OF OXFORD 19
MISCELLANEOUS 19
EXECUTION 21
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE 22
SCHEDULE II
AMOUNT OF REINSURANCE 23
SCHEDULE III
MONTHLY PERIODIC REPORT 24
SCHEDULE IV
ANNUAL REPORT 25
<PAGE>
SCHEDULE V
INITIAL CONSIDERATION, ALLOWANCES
AND EXPENSE REIMBURSEMENTS 26
SCHEDULE VI
INTEREST RATE ON LATE PAYMENTS 27
SCHEDULE VII
SECTION 1.848-2(g)(8) ELECTION 28
SCHEDULE VIII
METHODOLOGY OF REVISED INITIAL CONSIDERATION 30
ADDENDUM NO. 5
to
REINSURANCE AGREEMENT, Ref. # STLWL0100
between
STANDARD LIFE INSURANCE COMPANY OF INDIANA
Indianapolis, Indiana
and
WINTERTHUR LIFE RE INSURANCE COMPANY
Dallas, Texas
Both parties hereby mutually agree that the above referenced Agreement shall be
amended as follows:
1. The Agreement shall be terminated for new business produced on or after
October 1, 1998.
Coverage for business reinsured under the Agreement prior to October 1,
1998 shall remain in
full force and effect until expiration or cancellation of such business,
whichever first occurs.
2. Schedule II - Coinsurance Percentages, of the Agreement shall be replaced
by the attached
Schedule II.
This Addendum does not alter, amend or modify the Agreement other than as set
forth in this Addendum,
and it is subject otherwise to all the terms and conditions of the Agreement
together with all the Addenda
and supplements thereto.
IN WITNESS WHEREOF, the parties have executed this Addendum in duplicate on the
dates and places
set forth below:
STANDARD LIFE INSURANCE COMPANY WINTERTHUR LIFE RE INSURANCE
OF INDIANA COMPANY
Indianapolis, Indiana Dallas, Texas
Date: 8-20-98 Date: 7-20-98
By: /s/ Gerald R. Hochgesang By: /s/ John Brill
Title: Senior Vice President Title: Senior Vice President
Witness:/s/ Carla James Witness:/s/ James Allen
____________________________________________________________________________
STLWL0100-Add 5 10/01/98 Page 1 07/20/98
SCHEDULE II
A. COINSURANCE PERCENTAGES
CALENDAR PERIOD OF ISSUE JURISDICTION QUOTA SHARE REINSURED
January 1, 1995 - August 31, 1995 All 70%
September 1, 1995 - March 31, 1996 All 50%
April 1, 1996 - September 30, 1998 All 25%
October 1, 1998 and later All 0%
_______________________________________________________________________________
STLWL0100 - Add 5 10/01/98 Page 2 07/20/98
EMPLOYMENT CONTRACT
THIS CONTRACT OF EMPLOYMENT (hereinafter "Contract") is made in
Indianapolis, Indiana, to be dated October 2, 1998, by and between STANDARD
MANAGEMENT CORPORATION ( hereinafter "Company"), an Indiana corporation and
ROBERT B. NEAL (hereinafter "Executive") and terminates and releases the
Company and Executive from the prior Employment Contract dated and
effective October 2, 1995.
RECITALS
A. Executive is expected to continue pursuing new acquisition
targets to add to the profitability, growth and financial
strength of the Company.
B. The Company considers the continued services of the Executive to
be in the best interest of the Company and its shareholders and
desires to assure the continued services of the Executive on
behalf of the Company.
C. Executive is willing to remain in the employ of the Company under
the terms and conditions hereof.
NOW THEREFORE, in consideration of the mutual agreements contained
herein, the parties to this Contract hereby agree as follows:
AGREEMENT
1. EMPLOYMENT. The Employment Contract dated and effective
October 2, 1995 is terminated effective October 2, 1998. The
Company hereby agrees to employ Executive as Vice Chairman of
Dixie National Life Insurance Company, a controlled subsidiary of
Company. Executive accepts such employment and agrees to be
subject to the general supervision, orders, advice and direction
of the Chairman of the Board of the Company in a manner
consistent with the Articles of Incorporation and By-Laws of
Company.
2. TERMS OF EMPLOYMENT AND COMPENSATION. Executive's term of
employment (the "Employment Term") hereunder shall start on the
date first written above and continue until such employment
terminates pursuant to Section 8 hereof. In consideration for
providing services hereunder Executive shall be compensated
through the salary and bonus provisions of Section 3.
3. SALARY AND BONUS. Executive's salary shall be $100,000 per
year. In addition to salary, the Executive will be paid a 1%
annual bonus based on the gross purchase price of an acquisition
target (the "Acquisition Target"). The gross purchase price is
defined as the total consideration paid in any combination of
cash, notes, stock or other property for an Acquisition Target.
The bonus will be adjusted by deducting the salary and expenses
paid during the contract year to the Executive. The bonus will
be paid only on completed transactions introduced by the
Executive to the Company. Each new Acquisition Target must be
acknowledged in writing by the Company as qualifying for a bonus
and will qualify for a bonus if the transaction is completed
within two (2) years from the date of acknowledgment of the
Acquisition Target.
4. SALARY GUARANTEE. All salaries payable to the Executive under
the Agreement will be guaranteed (the "Guaranteed Payments") as
of the effective date of the Agreement for the full Employment
Term of the Agreement except for terminations for violations
found in Section 8 (b)(c) or (d) hereof.
(a) All Guaranteed Payments described in this Section and
payable to the Executive shall be payable to the Estate of
Robert B. Neal in the event of death of the Executive.
After the initial Employment Term of Guaranteed Payments,
any additional one year extensions made pursuant to the
terms of Section 8(a) will be guaranteed once the notice
period for the extension of termination period found in
Section 8(a) has passed.
(b) In the event of any mental disability which renders the
Executive unable to fulfill his duties pursuant to Section 1
of this Agreement, all Guaranteed Payments shall be made to
Robert B. Neal's spouse, his attorney in fact, his personal
representative, his guardian, or any other such person
legally specifically listed, to whomever is legally
authorized to receive monetary payments due and owing to
Robert B. Neal.
5. FRINGE BENEFITS. Continuing immediately and throughout the
Employment Term, Executive shall be entitled to participate in
the Company's corporate, medical and disability insurance plans.
Executive shall be entitled to all other fringe benefits
generally provided for salaried employees of the Company as
provided under such fringe benefit programs, including, without
limitation, four weeks vacation per year.
1. AUTOMOBILE ALLOWANCE. During the Employment Term, Executive
shall be entitled to an automobile allowance of $500.00 per
month.
2. REIMBURSEMENT FOR EXPENSES. The Company shall, during the
Employment Term, reimburse Executive for all reasonable travel,
business entertainment and other business expenses incurred by
Executive in rendering services under this Contract. Such
reimbursement shall be subject to compliance with the applicable
policies and procedures established by the Company.
3. TERMINATION. The Employment Term shall terminate on the first
to occur of the following events:
(a) the first anniversary of the date on which the Employment
Term commenced; provided, however, that after such first
anniversary, the Employment Term shall be extended each year
thereafter for an additional one year period unless either
party gives the other written notice at least ninety (90)
days before such anniversary date of its intention not to
renew the Contract.
(b) termination by the Company for cause, upon written notice
(specifying the particulars) to Executive from the Company's
Board of Directors which cause shall be limited to:
(i) an act or acts which in the judgment of the Board of
Directors, constitute the failure or refusal by
Executive to comply with the material orders, advice,
directions, policies, standards and regulations of the
Company and its Board of Directors, as promulgated from
time to time, or with the provisions of this Contract;
(ii) an act or acts which, in the judgment of the Board of
Directors, constitute fraud or dishonesty by Executive
or which, in the judgment of the Board of Directors,
result in or tend to result in gain to or personal
enrichment of Executive at the Company's expense;
(iii)any felony conviction of Executive or material tort
which is detrimental to the Company; or
(iv) the continuous absence of Executive from his employment
without reasonable cause or explanation for a period of
30 days or more;
(c) the death of Executive;
(d) the 90{th} day after notice from the Company to Executive
that Executive is considered to be permanently disabled due
to his inability to perform his duties or fulfill his
responsibilities hereunder, which inability existed for a
period of 90 days or more before such notice; or
(e) the 10{th} day after Executive gives written notice to the
Company terminating his employment by the Company.
Upon termination of Executive's employment pursuant to Section 8(b) or
Section 8(e) hereof, Executive (or his estate) shall receive (i) any unpaid
salary payments with respect to periods prior to the date of termination,
and (ii) any termination, disability or death benefits to which he is
entitled up until such termination under any employee benefit plan of the
Company which is in effect at the time of the termination of his
employment.
4. TRAVEL. Executive shall not be required to move from Jackson,
Mississippi, as a condition of his continued employment of the
Company.
5. TECHNICAL INFORMATION. Executive agrees that during the
Employment Term and for a period of one year thereafter, he will
assign to the Company or its nominees all of his right, title and
interest in and to all "Technical Information" (as hereinafter
defined) which he makes, develops or conceives, either alone or
in conjunction with others; he will disclose promptly to the
Company all such Technical Information; and he will cooperate
with the Company in its efforts to protect its or any of its
affiliates' or subsidiaries' rights of ownership in such
Technical Information. For purposes of this Contract, "Technical
Information" shall mean and include, but not be limited to, all
software, processes, devices, trademarks, trade names,
copyrights, marketing plans, improvements, and ideas relating to
the business of the Company, or any of its affiliates or
subsidiaries, and all goodwill associated with any such item.
6. COVENANT AGAINST DISCLOSURE OF TECHNICAL AND CONFIDENTIAL
INFORMATION. Executive agrees that while he is employed by the
Company and thereafter he shall not, directly or indirectly,
disclose or use to the detriment of the Company, of any of its
affiliates or subsidiaries, or for the benefit of any other
person, corporation or other entity, any confidential information
or trade secret (including, but not limited to, the identity and
needs of any customer of the Company, or any of its affiliates or
subsidiaries, the method and techniques of any of the business of
the Company, or any of its affiliates or subsidiaries, the
marketing, sales, costs and pricing plans and objectives of the
Company, or any of its affiliates or subsidiaries, the problems,
developments, research records, and Technical Information) of the
Company, or any of its affiliates or subsidiaries. Furthermore,
Executive shall deliver promptly to the Company upon termination
of his employment, or at any time the Company may so request, all
memoranda, notes, records, reports, manuals, software, models,
designs, and other documents and computer records (and all copies
thereof) relating to the business of the Company, and all of its
affiliates and subsidiaries, and all property associated
therewith, which he may then possess or have under his control.
This Contract supplements and does not supersede Executive's
obligations under statute or the common law to protect the
Company's trade secrets and confidential information.
7. REMEDY. Executive acknowledges that the restrictions
contained in Sections 10 and 11 of this Contract are reasonable
and that the legal remedies for breach of the covenants which are
contained Sections 10 and 11 of this Contract may be inadequate
and, therefore, agrees that, in the event of any actual or
threatened breach of any such covenant, in addition to any other
right or remedy which the Company may have, the Company may: (a)
seek specific enforcement of any such covenant through injunction
or other equitable relief, and (b) recover from Executive an
amount equal to (i) all sums paid by the Company to him after
commencement of the breach, plus (ii) all costs and expenses
(including attorneys' fees) incurred by the Company in
enforcement of the covenant, plus (iii) all other damages to
which the Company may be legally entitled.
8. ENTIRE AGREEMENT. This Contract contains the entire agreement
of the parties relating to the employment of Executive by the
Company, superseding any and all prior such agreements, and
cannot be amended, modified, or supplemented in any respect
except by subsequent written agreement entered into by the
parties.
9. BENEFIT. Executive acknowledges that the services to be
rendered to him are unique and personal; accordingly, Executive
may not assign any of his rights or delegate any of his duties or
obligations under this Contract. The rights and obligations of
the Company under this Contract shall inure to the benefit of,
and be binding upon, the legal representatives, successors and
assigns of the Company.
10. NO WAIVER. No failure on the part of either party at any time
to require the performance by the other party of any term of this
Contract shall be taken or held to be a waiver of such term or in
any way affect such party's right to enforce such term, and no
waiver on the part of either party of any term of this Contract
shall be taken or held to be a waiver of any other term hereof or
the breach thereof.
11. SEVERABILITY. The provisions of Section 10 through 12 hereof
are severable, and the invalidity or unenforceability of any
particular provision of Sections 10 through 12 shall not affect
or limit the enforceability of the other provisions. If any
provision in Sections 10 through 12 hereof is held unenforceable
for any reason, including the time period, geographic area, or
scope of activity covered, then such provision shall be enforced
to whatever extent is reasonable and enforceable.
12. GOVERNING LAW. This Contract shall be governed and construed
in accordance with the law of the State of Indiana (other than
the provision relating to choice of law). The Contract may be
brought in any state or federal court of record in Indianapolis,
Indiana and the parties hereto waive any right to question the
jurisdiction of such court over their person or the property of
such venue.
13. CAPTIONS. The captions in this Contract are for convenience
and identification purposes only, and not an integral part of
this Contract, and are not to be considered in the interpretation
of any part hereof.
14. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if in
writing and personally delivered to the party to whom notice
should be given or if sent by registered or certified mail,
postage prepaid, addressed to the addresses set forth below, or
to such other addresses as shall be furnished in writing by
either party to the other:
To Executive:
Robert B. Neal
5465 Saratoga Drive
Jackson, Mississippi 39225
To the Company:
Dixie National Life Insurance Company
9100 Keystone Crossing
Indianapolis, Indiana 46240
Attn: Ronald D. Hunter
With a copy to:
Stephen M. Coons, Esq.
9100 Keystone Crossing
Indianapolis, Indiana 46240
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Contract to be
executed on its behalf by its duly authorized officer and Executive has
hereunto set his hand as of the date and year first above written.
STANDARD MANAGEMENT CORPORATION
By: /s/ Ronald D. Hunter
Ronald D. Hunter
Chairman, President & CEO
Attest:
By: /s/ Stephen M. Coons
Stephen M. Coons, Esq.
Secretary
EXECUTIVE:
/s/ Robert B. Neal
Robert B. Neal
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