UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 35-1773567
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
9100 Keystone Crossing, Indianapolis, Indiana 46240 (317) 574-6200
(Address of principal executive offices) (Telephone)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 13,
1998 as reported on The Nasdaq Stock Market, was approximately $41.5 million.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 13, 1998, Registrant had outstanding 7,094,417 shares of Common
Stock.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
PART I
AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE CLEARLY REQUIRES, "SMC", OR
THE "COMPANY" REFERS TO STANDARD MANAGEMENT CORPORATION AND ITS CONSOLIDATED
SUBSIDIARIES AND "STANDARD MANAGEMENT" REFERS TO STANDARD MANAGEMENT
CORPORATION ON AN UNCONSOLIDATED BASIS. ALL FINANCIAL INFORMATION CONTAINED
HEREIN IS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP") UNLESS OTHERWISE SPECIFIED.
ITEM 1. BUSINESS OF SMC
INTRODUCTION
SMC is an international financial services holding company which directly
and through its subsidiaries acquires and manages in force life insurance and
annuity business and issues and distributes life insurance and annuity
products. SMC offers unit-linked assurance products through its international
subsidiaries. SMC's active subsidiaries at December 31, 1997 include:
(i) Standard Life Insurance Company of Indiana ("Standard Life") and its
subsidiary, Dixie National Life Insurance Company ("Dixie National Life"),
(ii) Standard Management International S.A. ("Standard Management
International") and its subsidiaries, Premier Life (Luxembourg) S.A. ("Premier
Life (Luxembourg)") and Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)")
and (iii) Standard Marketing Corporation ("Standard Marketing").
Standard Life, SMC's principal insurance subsidiary, was organized in
1934 as an Indiana-domiciled life insurer. It is licensed to write new business
or service existing business in the District of Columbia and all states except
New York and New Jersey. Standard Life offers flexible premium deferred
annuities ("FPDAs") and whole and universal life insurance. Standard Life also
generates cash flow and income from closed blocks of in force life insurance
and annuities. At December 31, 1997, Standard Life's statutory assets were
$367,121,000 and the aggregate of its statutory capital and surplus, asset
valuation reserve ("AVR") and interest maintenance reserve ("IMR") (its
"adjusted statutory capital") was $37,634,000. The ratio of Standard Life's
adjusted statutory capital to its total statutory assets was 10.3% at December
31, 1997. Standard Life has a rating of "B+" ("Very Good, Secure") by A.M. Best
Company, Inc. ("A.M. Best"), a rating agency.
Standard Management International is a holding company organized under
Luxembourg law with its registered office in Luxembourg. At December 31, 1997,
Standard Management International and its subsidiaries had $160,516,000 in
assets with policies in force in over 80 countries. The majority of its
business is unit-linked assurance products with a range of policyholder
directed investment choices coupled with a small death benefit, sold through
its subsidiaries: Premier Life (Luxembourg) and Premier Life (Bermuda). At
December 31, 1997, Premier Life (Luxembourg) had statutory capital and surplus
of $7,288,000 and its minimum capital and surplus was $2,915,000 and Premier
Life (Bermuda) had statutory capital and surplus of $1,350,000 and its minimum
capital and surplus was $250,000.
Standard Life owns 99.4% of Dixie National Life. At December 31, 1997,
Dixie National Life's statutory assets were $35,240,000, the adjusted statutory
capital was $3,865,000 and the ratio of its adjusted statutory capital to its
statutory assets was 11.0%. Dixie National Life has a rating of B ("Adequate")
by A.M. Best. Dixie National Life markets a variety of life insurance products
throughout the Mid-South offering primarily "burial expense" policies.
Standard Marketing is a wholesale distributor of life insurance and
annuity products. Through its network of managing general agents and
independent agents, Standard Marketing distributes life insurance and annuity
products for Standard Life, Dixie National Life and Savers Life Insurance
Company and for a select group of unaffiliated insurance companies. Standard
Marketing earns override commission income from the sale of these products.
On November 8, 1996, Standard Life acquired through merger Shelby Life
Insurance Company ("Shelby Life") from Delta Life and Annuity Corporation
("DLAC"), a life insurance company located in Memphis, Tennessee (the "Shelby
Merger"). The purchase price was approximately $14,650,000, including
$13,000,000 in cash, 250,000 shares of restricted Common Stock (valued at
$1,250,000) and acquisition costs of $400,000. Financing for the Shelby Merger
was provided by senior debt of $10,000,000 and $4,000,000 in subordinated
convertible debt. SMC's intent at the time it purchased Shelby Life was to
cease writing new business as the new business premium volume did not justify
the costs of marketing support, and to continue to earn profits from the
existing business. Consistent with that intent, Shelby Life ceased writing new
business effective November 1, 1996, thus eliminating marketing and sales costs
and thereby reducing statutory surplus strain. Statutory accounting practices
require that acquisition costs associated with new business (primarily
commissions and policy issue costs) be fully expensed in the year the new
business is written. Surplus strain is created when acquisition costs incurred
in connection with new business reduces statutory surplus. Many states impose
minimum levels of surplus as a condition to writing new business. See "Business
of SMC--Regulation."
<PAGE>
The acquisition of Shelby Life was accounted for using the purchase
method of accounting and SMC's consolidated financial statements include the
results of Shelby Life from November 1, 1996, the effective date of
acquisition. Under purchase accounting, Standard Life allocated the total
purchase price of Shelby Life to the assets and liabilities acquired, based on
a determination of their fair values and recorded the excess of acquisition
cost over net assets acquired as goodwill, which will be amortized on a
straight-line basis over 20 years.
On March 18, 1996, Standard Life completed the sale of a duplicate
charter associated with First International Life Insurance Company ("First
International") to The Guardian Insurance and Annuity Company, Inc. ("GIAC"), a
subsidiary of The Guardian Group, New York, NY. Standard Life received proceeds
of approximately $10,393,000, including $1,500,000 for the charter and licenses
associated with First International. Standard Life realized a net pretax gain
of $1,042,000 and a tax benefit of $1,420,000 on this sale, or $2,462,000. In
addition, First International, Standard Life and GIAC have entered into a
series of agreements that include provisions for Standard Life to administer
First International policies in force at the date of sale, and for Standard
Life to continue to receive the profit stream from certain First International
policies in force at the date of such sale. See "Business of SMC--Reinsurance."
SMC decided in February 1996 to terminate the reinsurance agreement
between Standard Reinsurance of North America Ltd. ("Standard Reinsurance") and
Salamandra Joint-Stock Insurance Company in Ukraine ("Salamandra"), and not to
renew the Barbados license of Standard Reinsurance due to an insignificant
amount of reinsurance premium volume (less than $100,000). This resulted in
the termination of Standard Reinsurance operations and the write-off of SMC's
investment in Standard Reinsurance and certain intangible assets of Standard
Reinsurance amounting to $156,000.
The combined effect of the gain on sale of First International and
related contracts, and the Standard Reinsurance write-offs, was a gain on
disposal of subsidiaries of $886,000 and a tax benefit of $1,420,000, for net
income effect of $2,305,836 for the year ended December 31, 1996.
In June 1988, Standard Life ceded a block of business to National Mutual
Life Insurance Company ("National Mutual"). Effective May 31, 1996, Standard
Life terminated by recapture the reinsurance agreement with National Mutual. As
a result of this recapture, Standard Life received assets of $4,826,000 and
liabilities of $4,826,000, primarily ordinary life policies. In connection with
this transaction, Standard Life agreed to pay National Mutual a recapture fee
of $1,200,000, and Standard Life collected administration fees of $375,000
related to services provided in prior years that had not been recorded
previously due to the uncertainty as to its collection. The net proceeds of
$825,000 were recorded as the present value of the future profits on this block
of business, which is being amortized in proportion to the emergence of profits
over 20 years. This premium income and corresponding increase in reserves of
$4,234,000, recorded in connection with the recapture of the reinsurance
agreement with National Mutual will not recur in the future.
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 $14.9 million
and paid $2.1 million 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. See "Liquidity and
Capital Resources".
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.
ACQUISITION STRATEGY
A principal component of SMC's strategy is to grow through the
acquisition of life insurance companies and blocks of in force life insurance
and annuities. SMC regularly investigates acquisition opportunities in the life
insurance industry that complement or are otherwise strategically consistent
with its existing business. Any decision to acquire a block of business or an
insurance company will depend on a favorable evaluation of various factors. SMC
believes that availability of blocks of business in the marketplace will
continue in response to ongoing industry consolidation and risk-based capital
requirements as well as other regulatory and rating agency concerns. In
addition, SMC plans to market annuity and life insurance products directly as
it has done in the past. SMC currently has no plans or commitments to acquire
any specific insurance business or other material assets besides Savers Life.
No assurance can be given that SMC will be successful in consummating any
future acquisition.
SMC has the information systems and administrative capabilities necessary
to add additional blocks of business without a proportional increase in
operating expenses. In addition, SMC has developed management techniques for
reducing or eliminating the expenses of the companies it acquires through the
consolidation of their operations with those of SMC, and for increasing
investment yields. Such techniques include reduction or elimination of
overhead, including the acquired company's management, staff and home office,
elimination of marketing expenses and, where appropriate, the substitution of
Standard Marketing's network for the acquired company's current distribution
system, and the conversion of the acquired company's data processing operations
to SMC's system.
SMC may effect its acquisitions through the purchase or exchange of
shares, if the acquisition candidate is an insurance company, or an assumption
reinsurance transaction, if the proposed acquisition concerns a block of
business. SMC's acquisitions may be subject to certain regulatory approvals,
policyholder consents and stockholder approval, when applicable.
MARKETING
DOMESTIC MARKETING. Standard Marketing was organized as a wholesale
distribution system to provide a lower cost alternative to the traditional
captive agency force. Standard Marketing has established a network of
approximately 20,000 independent general agents, including Savers Life. These
agents distribute a full line of life insurance and annuity products issued by
Standard Life, Dixie National Life and Savers Life and a select group of
unaffiliated insurance carriers that Standard Marketing represents. As part of
its normal recruiting, Standard Marketing selectively recruits new agents from
those formerly associated with companies acquired by SMC.
Crediting rates, commissions, the perceived quality of the issuer,
product features and services are generally the principal factors influencing
an agent's willingness and ability to sell particular life and annuity
products. SMC believes that both agents and policy owners value the service
provided by SMC. Standard Marketing assists its agents in submitting and
processing policy applications and helps ensure that issuing insurers pay
commissions on a timely basis. Standard Life issues an annuity and pays the
Standard Marketing agent's commission within 24 hours subsequent to receipt of
policyholder's deposit. Standard Marketing also assists its agents with
licensing applications and provides other administrative support. Standard
Marketing provides marketing support for its agents, including sales seminars
and other continuing education programs, point of sale materials, illustrated
proposal services, toll-free access for sales inquiries and access to senior
executives. In addition, Standard Marketing can introduce agents to lead
services who will provide such services at discounted rates that Standard
Marketing has negotiated.
Standard Marketing agents offer a full portfolio of life insurance,
annuity and health products that Standard Marketing has selected on the basis
of their competitive position and likely consumer acceptance. Such portfolio
includes FPDAs, whole and universal life insurance and critical illness
products issued by Standard Life and Dixie National Life, for which Standard
Marketing is the exclusive distributor, and life insurance products issued by
selected unaffiliated insurers. Standard Marketing receives, directly from the
insurance companies it serves, primarily affiliated insurance companies,
override commissions on sales by its agents, which are in addition to the
commissions paid to Standard Marketing's independent agents. The availability
of override commissions provides an economic incentive to Standard Marketing to
recruit agents who produce business. Standard Marketing's relationships with
these companies are non-exclusive and are terminable by either party upon 30
days notice. Standard Marketing regularly evaluates the products its agents
offer to determine whether products or insurers should be added to, or deleted
from, the Standard Marketing portfolio. SMC does not insure any of the
policies and contracts Standard Marketing's agents sell for unaffiliated
insurers.
Each general agent operates his own agency and is responsible for all
expenses of the agency. The general agents are compensated directly by the
issuing insurance companies, which perform all policy issuance, underwriting
and accounting functions. SMC is not dependent on any one agent or agency for
any substantial amount of its business. No single agent accounted for more
than 4% of Standard Life's annual sales in 1997, and the top twenty individual
agents accounted for approximately 37% of Standard Life's volume in 1997. At
December 31, 1997, approximately 25% of Standard Marketing's independent agents
were located in Indiana, Florida, Ohio, Georgia, California and Illinois, with
the balance distributed across the country. SMC is attempting to increase the
number and geographic diversity of its agents. In 1997, SMC began writing
significant amounts of business in Colorado and the Mid-South due to Standard
Marketing's expansion efforts.
SMC does not have exclusive agency agreements with its agents and
management believes most of these agents sell products similar to those sold by
SMC for other insurance companies. This could result in a sales decline if
SMC's products were to become relatively less competitive. Standard Life's 1997
FPDA sales increased partially due to an aggressive marketing campaign targeted
to high volume sales agents and marketing companies. Also contributing to the
increase in premiums was the continued development of Standard Life's
distribution system through marketing support from Standard Marketing along
with an aggressive program aimed at retention of key producers and expanding
geographical concentration into the Mid-South and California.
SAVERS LIFE MARKETING. Savers Life initially sold only annuity products
through its affiliations with a network of North Carolina-based Savings and
Loan institutions. In the late 1980s, the Savings and Loan industry
experienced financial crises which led to a large number of mergers in that
industry. Savers Life's distribution network among the Savings and Loan
institutions was threatened by this merger boom, so Savers Life expanded its
marketing efforts, gradually building up a network of independent brokers,
while still continuing to market through certain North Carolina and South
Carolina Savings and Loan institutions. Savers Life currently has approximately
4,000 active brokers. Savers Life is not dependent on any one broker or
agency for any substantial amount of its business. Savers Life employs three
Regional Managers, who are responsible for personally initiating and
maintaining direct communications with every broker appointed by Savers
Life. The Regional Managers are responsible for the recruitment and
training of all new brokers. Each broker operates independently
of Savers Life and is responsible for all of his or her expenses.
INTERNATIONAL MARKETING. The subsidiaries of Standard Management
International, Premier Life (Luxembourg) and Premier Life (Bermuda), produced
aggregate new premium deposits of approximately $22,000,000, $17,000,000 and
$32,000,000 during 1997, 1996 and 1995, respectively. The increase in 1997 is
due to renewed marketing efforts in certain European countries, particularly in
Sweden and Belgium. The decrease in 1996 is primarily due to an internal
reorganization of its operational facility as well as a renewed focus on target
markets which succeeded in 1997. The countries within the European Union
have been the main contributor to these sales. Although SMC expects this to be
the case in the future, it plans to increase marketing efforts in other parts
of the world as well.
Although Standard Management International anticipates as part of its
long term plan to grow significantly through internal sales, acquisitions of
other European insurance companies may be considered. It has designed and
launched new single and regular premium products in recent years. It is also in
discussions with a number of companies to form alliances to produce tailored
products for their markets. It is currently the intention that Premier Life
(Luxembourg) will write business within the European Union and Premier Life
(Bermuda) will write international business elsewhere in the world. The market
for Standard Management International's products is considered to be medium to
high net worth individuals who typically have in excess of $75,000 to invest in
a single premium policy and medium to high earners who have in excess of $3,000
per annum to invest in a regular premium savings product. The above individuals
would come from a combination of expatriates, residents of European Union
countries and from other targeted areas. The expatriate and European insurance
markets are well established and highly competitive with a large number of
domestic and international groups operating in, or going into, the same markets
as Standard Management International.
Standard Management International's products are distributed via
independent agents who have established connections with these targeted
individuals. Standard Management International is striving to develop into an
entrepreneurial intermediary oriented organization committed to building long
term relationships with high quality distributors, thereby creating a niche
position. Standard Management International places the same emphasis as SMC's
U.S. insurance companies on a high level of service to intermediaries and
policyholders while striving to achieve low overhead costs.
PRODUCTS
SMC primarily markets FPDAs, whole life and universal and
interest-sensitive life insurance policies and unit-linked policies. The
following table sets forth the amounts and percentages of net premiums received
by SMC from currently marketed products for the years ended December 31, 1997,
1996 and 1995, respectively (in thousands). Because GAAP generally excludes
annuity and unit-linked products deposits, and premiums from universal and
interest-sensitive life insurance from premium income, and thus does not fully
reflect SMC's cash flow from new business, the premium information contained in
the following table is reported using statutory accounting principles which
includes deposits on annuities and unit-linked policies, and premiums from
universal and interest-sensitive life insurance.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
Amount % Amount % Amount %
Currently marketed products:
FPDAs $41,066 55.5 $37,322 58.7 $12,417 25.8
Universal and 5,836 7.9 5,384 8.5 2,044 4.2
interest-sensitive life
Single premium immediate 2,704 3.7 1,423 2.2 1,257 2.6
annuities
Whole life 2,349 3.2 2,546 4.0 668 1.4
Unit-linked products 21,954 29.7 16,902 26.6 31,793 66.0
$73,909 100.0 63,577 100.0 48,179 100.0
</TABLE>
FPDA sales increased in 1997 primarily due to the introduction of new
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. FPDA sales
increased in 1996 partially due to Standard Life decreasing the quota-share
portion of business ceded pursuant to a reinsurance agreement, under which 70%
of a portion of Standard Life's annuity business pursuant to the terms of the
agreement produced after December 31, 1994 was ceded, to 50% at September 1,
1995, which was further decreased to 25% effective April 1, 1996. This
reduction was possible since the surplus strain experienced by Standard Life
was not as great as originally anticipated as a result of lower than expected
sales in 1995 and the additional surplus resulting from the sale of First
International. Premium deposits ceded pursuant to this reinsurance agreement
reduced net premium by $8,707,000, $8,907,000 and $20,090,000 for 1997, 1996
and 1995, respectively.
The increase in universal and interest-sensitive life products in 1996 is
primarily due to the increase in interest-sensitive life products issued by
Dixie National Life, which is included in results after October 2, 1995, the
effective date of the acquisition.
The increase in deposits from unit linked products in 1997 is primarily
due to the renewed marketing efforts in certain European countries,
particularly in Sweden and Belgium.
The following table shows certain information for SMC as of the dates set
forth below (in thousands):
<TABLE>
<CAPTION>
At December 31,
<S> <C> <C> <C> <C>
1997 1996 1995
Number of annuity contracts in force 14,013 13,221{ (3)} 8,637
Interest-sensitive annuity and other
financial $350,607 $333,633{ (3)} $212,500
product reserves, net of reinsurance
ceded
Number of life policies in force 68,571 76,219{ (4)} 63,038
Life insurance in force, net of reinsurance $ 1,178,171{ (1)} $ 1,367,675{ (4)} $826,296
ceded
Number of separate contracts
(primarily unit-linked products) 2,329 2,484 2,951
Total liabilities related to separate
accounts $ 148,064 $128,546 $122,705
(primarily unit-linked products) {(2)}
</TABLE>
(1) The decrease in life insurance in force is due to the termination and
recapture of a reinsurance agreement effective January 1, 1997. See
"Business of SMC -- Reinsurance".
(2) The liabilities related to separate accounts increased in 1997 due to
increased new premium deposits and higher investment returns earned by
the policyholder on the separate accounts due to improved fund
performance.
(3) The number of annuity contracts in force and interest-sensitive annuity
and other financial product reserves increased in 1996 primarily due to
the increase in FPDA sales in 1996 and the Shelby merger.
(4) The number of life policies and insurance in force increased in 1996, as
a result of the Shelby merger. Shelby Life had 16,603 life policies and
$617,688,000 insurance in force as of November 1, 1996.
CURRENTLY MARKETED PRODUCTS
The individual annuity business is a growing segment of the savings and
retirement industry, which increased in sales from $1 billion in 1970 to more
than $54 billion in 1990. The individual annuity market, which is one of SMC's
primary target, comprises 42% of those sales. As the 76 million baby boomers
born from 1946 through 1964 grow older, demand for insurance products is
expected to grow. SMC believes that those seeking adequate retirement incomes
will depend less and less on Social Security and their employers' retirement
programs and more and more upon their own financial resources. Annuities
currently enjoy an advantage over certain other saving mechanisms because the
annuity buyer receives a tax-deferred accrual of interest on his investment
during the accumulation period.
Standard Life, Dixie National Life and Standard Management International
all currently issue new policies. Standard Life emphasizes the issuance of
FPDAs. Dixie National Life primarily sells "burial expense" life insurance
policies. Standard Management International markets unit-linked products. Over
31% of all net premiums and deposits collected in 1997 by SMC from its
currently marketed products, arise from the sale of unit-linked products by
Standard Management International. The balance is represented by the sales of
whole life and universal and interest-sensitive life insurance products by
Standard Life and Dixie National Life and Standard Life's FPDAs. The portfolio
of products is continuously reviewed by management, and product features and
terms are adjusted in response to market conditions in an effort to remain
competitive.
Standard Management International's products are sold primarily in
Western Europe. SMC's gross sales percentages by U.S. geographical region are
summarized as follows:
STATE 1997 1996 1995
Indiana 21% 18% 24%
California 11 11 3
Ohio 10 16 22
Florida 10 14 11
Texas 4 4 2
Louisiana 4 2 2
Virginia 4 2 --
Colorado 4 1 --
Michigan 2 6 4
All other states {(1)} 30 26 32
Total 100% 100% 100%
(1) No other state had gross sales greater than 4%.
STANDARD LIFE PRODUCTS
FLEXIBLE PREMIUM DEFERRED ANNUITIES. FPDAs provide for an initial
deposit by an annuitant and optional additional deposits, the time and amount
of which are at the discretion of the annuitant. Standard Life credits the
account of the annuitant with earnings at interest rates that are revised
periodically by Standard Life until the maturity date. This accumulated value
is tax deferred. Revisions to interest rates on FPDAs are restricted by an
initial crediting rate guaranteed for a specific period of time and a minimum
crediting rate guaranteed for the term of the FPDA. At maturity, the annuitant
can elect a lump sum cash payment of the accumulated value or one of the
various payout options available. Standard Life's FPDAs also provide for
penalty-free partial withdrawals of up to 10% annually of the accumulation
value after the annuitant has held the FPDA for more than 12 months. In
addition, the annuitant may surrender the FPDA at any time before the maturity
date and receive the accumulated value, less any surrender charge then in
effect for that contract. To protect holders of FPDAs from a sharp reduction in
the credited interest rate after a FPDA is issued, Standard Life permits the
FPDA holder of certain annuities to surrender the annuity during a specified
period without incurring a surrender charge if the renewal crediting rate is
below a stated level. This stated level of interest is referred to as the
"bail-out rate" and is typically below the original crediting rate, but above
the minimum guaranteed crediting rate.
As of January 1, 1998, the crediting rates available on Standard Life's
currently marketed FPDAs ranged from 6.8% to 12%, with new issues having an
interest rate with a one year guarantee period. After the initial period, the
crediting rate may be changed periodically, subject to minimum guaranteed rates
from 3% to 4%. As of January 1, 1998, interest crediting rates after the
initial guarantee period ranged from 5% to 6.6%. The surrender charge is
initially 13% or 15% of the contract value depending on the product and
decreases over the applicable penalty period of nine, ten or thirteen years. As
of January 1, 1998, the bail out rate for Standard Life's FPDAs was 4.5%; most
currently marketed products carry a bail out rate for only the first two years
after issue. As of December 31, 1997, Standard Life had 8,855 currently
marketed FPDA contracts in force.
WHOLE LIFE INSURANCE. Standard Life offers two types of
non-participating whole life policies: one in face amounts up to $10,000 (which
is only issued upon conversion of other policies) and the other in face amounts
up to $50,000. Whole life insurance products involve fixed premium payments
made over time, with the stated death benefit paid in full upon the death of
the insured. The whole life policy combines the death benefit with a forced
savings plan. Premiums remain level over the life of the policy, with the
policyholder prefunding during the early years of coverage when risk of death
is low. Over time, whole life policies begin to accrue a cash value which can
be made available to the policyholder net of taxes and withdrawal penalties. As
of December 31, 1997, Standard Life had 551 currently marketed whole life
policies in force.
SINGLE PREMIUM IMMEDIATE ANNUITIES. Standard Life offers a single
premium immediate annuity ("SPIA"), whereby an annuitant purchases an immediate
annuity with a one-time premium deposit at the time of issuance. Standard Life
begins a payout stream shortly after the time of issuance consisting of
principal value plus accumulated interest credited to such annuity. This
product credits interest based on an investment portfolio earned rate
assumption. As of December 31, 1997, Standard Life had 691 SPIA contracts in
force.
UNIVERSAL LIFE. SPULs provide for an initial deposit (flexible premium
universal life ("FPUL") for periodic deposits), credit interest to account
values and charge the account values for mortality and administrative costs. As
of January 1, 1998, the current interest rate on new sales of SPULs was 6.75%
with a guaranteed interest rate of 3.4%. As of December 31, 1997, Standard Life
had 88 and 286 SPUL and FPUL policies in force, respectively.
CRITICAL ILLNESS. During 1997, Standard Life introduced a new critical
illness product which is being offered in the United States for the first time.
A critical illness policy pays a 100% lump sum cash payment when the insured
survives 30 days or more after diagnosis of cancer, stroke, or heart attack.
In addition, the insurer would pay 25% of the benefit amount on heart bypass
surgery, Alzheimer's, deafness, or blindness. Although not intended to replace
existing insurance, this product gives policyholders access to sums of money to
help them through difficult situations. Included in the policy is a return of
premium benefit, which would return all paid premiums (without interest) if the
insured dies after 10 years, assuming the policy is still in force. This 14
year-old product has been extremely successful in South Africa, Australia, the
United Kingdom, and Japan. In 1993, $15.5 billion of face amount insurance in
critical illness policies was sold in the United Kingdom alone. In Japan,
500,000 policies were sold within the first 10 months of its inception, with
over $6 million in total sales to date.
DIXIE NATIONAL LIFE PRODUCTS
Life insurance policies sold by Dixie National Life in the final expense,
or burial, market include fixed premium interest sensitive policies that
provide for increasing death benefits, as well as traditional whole life
policies. These policies are designed to cover expenses such as funeral, last
illness, monument and cemetery lot. The policies provide for a death benefit,
generally not in excess of $10,000, and a level premium payment. The products
include a cash value which may be borrowed by the policyholder. Dixie National
Life's policies sold in other markets include interest sensitive and
traditional whole life policies and forms of term policies. The interest
sensitive whole life policies have a guaranteed interest rate of 5.50% on
products marketed as of January 1, 1998. The interest sensitive and whole life
policies include cash values which may be borrowed by the policyholder. Dixie
National Life issues policies on both a participating and non-participating
basis. As of December 31, 1997, Dixie National Life had 734 and 24,185
individual annuities and life policies in force, respectively.
STANDARD MANAGEMENT INTERNATIONAL PRODUCTS
UNIT-LINKED POLICIES. Standard Management International currently writes
unit-linked life products, which are similar to U.S. produced variable life
products. Separate account assets and liabilities are maintained primarily for
the exclusive benefits of universal life contracts and investment contracts of
which the majority represents unit-linked business where benefits on surrender
and maturity are not guaranteed. They generally represent funds held in
accounts to meet specific investment objectives of policyholders who bear the
investment risk. Investment income and investment gains and losses within the
separate accounts accrue directly to such policyholders. The fees received by
Standard Management International for administrative and contract holder
maintenance services performed for these separate accounts are included in
SMC's statement of operations.
In the past, Standard Management International also wrote investment
contracts and universal life policies and to a lesser extent, traditional life
policies. The investment contracts are mainly short-term single premium
endowments or temporary annuities under which fixed benefits are paid to the
policyholder. The terms of these contracts are such that SMC has relatively
small morbidity or mortality risk. The universal life contracts are mainly
regular premium and single premium endowment. The benefits payable to the
policyholders are directly linked to the investment performance of the
underlying assets.
CLOSED BLOCKS
SMC also generates cash flow and income from its closed blocks of in
force life insurance and annuities. Closed blocks are blocks of in force life
insurance and annuities that are not currently being marketed by SMC. The
closed block designation is for internal purposes only, it does not have any
legal or regulatory significance and there are no restrictions on the assets or
future profits of closed blocks. The premiums received on the closed blocks
were primarily from the ordinary and universal life business. This decline in
premium income is expected as a result of policy lapses, surrenders and
expiries from closed blocks of business.
ANNUITIES. SMC's closed blocks of deferred annuities consist primarily
of FPDAs and a small amount of single premium deferred annuities ("SPDAs")
which, unlike FPDAs, do not provide for additional deposits. As of January 1,
1998, these deferred annuities had crediting rates ranging from 5% to 5.5% and
guaranteed minimum crediting rates ranging from 3% to 5.5%. The crediting rate
may be changed periodically. The contract owner is permitted to withdraw all or
part of the accumulation value. SMC's closed blocks of annuities include payout
annuities. Payout annuities consist of those annuities the benefits of which
are being paid out over a specified time period. Payout annuities cannot be
terminated by surrender or withdrawal. SMC's crediting rates on payout
annuities range from 5.5% to 6.5% and cannot be changed. At December 31, 1997,
SMC had 3,688 annuity contracts in force for closed blocks.
ORDINARY LIFE. The ordinary life policies included in SMC's closed
blocks are composed primarily of fixed premium, cash value whole life products.
In addition, they include annually renewable term policies as well as five, ten
and fifteen year level premium term policies. At December 31, 1997, SMC had
35,937 ordinary life policies in force for closed blocks.
UNIVERSAL LIFE. Certain closed blocks include universal life business.
For this business, SMC credits deposits and interest to account values and
charges the account values for mortality and administrative costs. At December
31, 1997, SMC had 6,368 universal life policies in force for the Shelby Life
closed block of business.
REINSURANCE. In connection with financial reinsurance, Dixie National
Life terminated a reinsurance agreement with Crown Life Insurance Company and
received recaptured premium income of $18,186,000 and entered into a financial
reinsurance agreement with Cologne Life Reinsurance Company and ceded
$13,091,000 of premium income in 1996.
The policies subject to the recapture of the reinsurance agreement with
National Mutual were primarily ordinary life policies. See "Business of SMC --
Reinsurance."
SAVERS LIFE PRODUCTS
Savers Life issues and markets Medicare supplement health policies, term
and whole life policies, single premium deferred annuities and SPIAs.
MEDICARE SUPPLEMENT INSURANCE. Medicare supplement insurance is designed
to help Medicare recipients with the portion of their medical expenses that
Medicare does not cover. This product is regulated by the federal government.
Each insurance company's products are identical in benefits covered. Medicare
supplement plans are identified by the letters A through J. Savers Life sells
plans A through G. Each plan has different benefits to the insured as well as
different premium levels. Medicare supplement plans are available to anyone
who is eligible for Medicare Part B and within the ages of 65 and 85 at date of
issue. At the time a person initially becomes eligible for Medicare Part B
("open enrollment period"), Savers Life must offer a Medicare supplement policy
to that person regardless of potential health problems of the person. If a
person requests insurance coverage after the open enrollment period, Savers
Life is allowed to underwrite the policy and determine insurability based on
the health of the individual. Savers Life has a combination of products in its
in-force block of Medicare supplement business, including pre-standardization
plans and standardized plans A through G. Premiums on all of these policies can
be increased only with regulatory approval in the states in which the policies
were written. With the exception of South Carolina, premium rate increases can
occur no more frequently than annually. South Carolina allows premium rate
increases semiannually after the first policy anniversary.
In addition to sales of its own products, Savers Life markets products of
other companies, and for this effort, receives fee income.
KEYPORT ANNUITIES. Savers Life sells annuities on behalf of Keyport Life
Insurance Company ("Keyport"), a Rhode Island-based seller of annuities,
through its broker network. Savers Life sells Keyport fixed annuity products
that, due to their relatively high rate of interest, are very popular with
Savers Life's customer base. Savers Life remits the premiums collected to
Keyport and is compensated through commission agreements.
QUALCHOICE OF NORTH CAROLINA PRODUCT. Savers Life entered into a
two-year marketing and administrative contract with QualChoice of North
Carolina ("QualChoice") in 1996 whereby Savers Life is the distribution system
for the small group product offered by QualChoice. QualChoice is an HMO in a
twenty-county area in the northwestern part of North Carolina offering HMO
insurance coverage to both large and small groups. Small group coverage is
defined as any group of employees from one to fifty. Savers Life is
compensated for this effort with a marketing fee, administrative fee and
commission reimbursement for its brokers.
PRODUCT PROFITABILITY
The profitability of the life insurance and annuity products depend to a
significant degree on the maintenance of profit margins between investment
results from invested assets and interest credited on insurance and annuity
products. During 1997, such margins continued to be positive as a result of the
increase in investment portfolio yields, which offsets the effects of sales of
FPDAs in 1997 with higher and more competitive interest rates.
The long-term profitability of insurance products depends on the accuracy
of the actuarial assumptions that underlie the pricing of such products.
Actuarial calculations for such insurance products, and the ultimate
profitability of such products, are based on four major factors:
(i) persistency, (ii) mortality (iii) return on cash invested by the insurer
during the life of the policy and (iv) expenses of acquiring and administering
the policies.
The average expected remaining life of Standard Life's ordinary life
business in force at December 31, 1997 was 9.0 years. This calculation was
determined based upon SMC's actuarial models and assumptions as to expected
persistency and mortality. Persistency is the extent to which insurance
policies sold are maintained by the insured. The persistency of life insurance
and annuity products is a critical element of their profitability. However, a
surrender charge often applies in the early contract years and declines to zero
over time.
Policyholders sometimes do not pay premiums, thus causing their policies
to lapse. For the years 1997, 1996 and 1995 Standard Life experienced total
policy lapses of 6.5%, 6.3% and 5.1% of total policies in force at December 31
of each year, respectively. The American Council of Life Insurance 1997 Fact
Book reported industry life insurance voluntary termination rates in 1996 of
17.7% for policies in force less than two years, 5.1% for policies in force for
two years or more and 6.8% for all policies in force.
<PAGE>
OPERATIONS
SMC emphasizes a high level of service to agents and policyholders and
strives to achieve low overhead costs. SMC's principal administrative
departments are its financial, policyholder services and management information
services ("MIS") departments. The financial department provides accounting,
budgeting, tax, investment, financial reporting and actuarial services and
establishes cost control systems for SMC. The policyholder services department
reviews policy applications, issues and administers policies and authorizes
disbursements related to claims and surrenders. The MIS department oversees and
administers SMC's information processing systems.
SMC's administrative departments in the United States use a common
integrated system that permits SMC to function more efficiently, control costs
and maintain low overhead. SMC's MIS system serviced approximately 150,000
active and inactive policies at December 31, 1997. SMC is continually improving
its MIS systems to provide for continued growth from acquisitions and sales.
SMC's 1998 capital budget for systems improvements is $150,000. Also, SMC
anticipates minimal expenditure to be required in the update of the MIS system
for the year 2000.
Standard Management International's administrative and MIS departments in
Luxembourg are an autonomous unit from the systems in the United States. SMC is
in the process of improving the MIS systems of Standard Management
International and integrating them with the U.S. systems.
INVESTMENTS
Investment activities are an integral part of SMC's business; investment
income of SMC's insurance subsidiaries is an important part of its total
revenues. Profitability is significantly affected by spreads between rates
credited on insurance liabilities and interest yield on invested assets.
Substantially all credited rates on FPDAs may be changed at least annually. For
the year ended December 31, 1997, the weighted average interest rate credited
on SMC's interest-sensitive liability portfolio, excluding liabilities related
to separate accounts, was approximately 5.58% per annum, and the weighted
average net yield of SMC's investment portfolio for the year ended December 31,
1997 was 7.68% for an average interest spread of 210 basis points at December
31, 1997, compared to 205 basis points at December 31, 1996. The consistency in
the average interest spread is primarily attributable to the increase in
investment portfolio yields, which offsets the effects of sales of FPDAs in
1997 with higher and more competitive interest rates. Increases or decreases in
interest rates could increase or decrease the average interest rate spread
between investment yields and interest rates credited on insurance liabilities,
which in turn could have a beneficial or adverse effect on the future
profitability of SMC. Sales of fixed maturity securities that result in
investment gains may also tend to decrease future average interest rate
spreads. State insurance laws and regulations prescribe the types of permitted
investments and limit their concentration in certain classes of investments.
The following table shows SMC's pre-tax investment performance for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Average invested assets{ (1)} $384,145 $285,186 $253,055
Net investment income 29,516 20,871 18,517
Weighted average annual yield{ (2)} 7.68% 7.32% 7.32%
Net realized investment gains $396 $1,302 $688
</TABLE>
(1) Average invested assets are computed by dividing the total of the
amortized cost of invested assets at the beginning of the period plus the
individual quarter-end balances by the number of quarterly periods plus
one. The increase in average invested assets in 1997 is primarily due to
the acquisition of Shelby Life effective November 1, 1997.
(2) The weighted average annual yield on SMC's investment portfolio for each
period is computed by dividing net investment income (exclusive of
realized and unrealized gains and losses) by average invested assets for
such period.
<PAGE>
The following table shows the amortized cost, gross unrealized gain
(loss) and estimated fair value of SMC's investment securities all of which are
available for sale (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Gain Unrealized Fair
Cost (Loss) Value
Fixed maturity securities:
United States Treasury
securities and
obligations of United $27,613 $174 $(90) $27,697
States government agencies
Obligations of states and
political 3,790 204 (26) 3,968
subdivisions
Foreign government securities 30,558 497 (3,296) 27,759
Utilities 26,606 534 (109) 27,031
Corporate bonds 223,958 8,140 (1,609) 230,489
Mortgage-backed securities 51,266 657 (60) 51,863
Redeemable preferred stock 3,581 188 (60) 3,769
Total fixed maturity 367,372 10,394 (5,190) 372,576
securities
Equity securities 55 -- (3) 52
Total $367,427 $10,394 $(5,193) $372,628
December 31, 1996
Gross Gross
Amortized Unrealized Gain Unrealized Fair
Cost (Loss) Value
Fixed maturity securities:
United States Treasury
securities and
obligations of United $20,753 $51 $(420) $20,384
States government agencies
Obligations of states and
political 3,588 106 -- 3,694
subdivisions
Foreign government securities 10,042 51 (166) 9,927
Utilities 31,000 295 (675) 30,620
Corporate bonds 210,977 3,086 (3,539) 210,524
Mortgage-backed securities 72,264 247 (919) 71,592
Redeemable preferred stock 527 42 -- 569
Total fixed maturity 349,151 3,878 (5,719) 347,310
securities
Equity securities 58 4 -- 62
Total $349,209 $3,882 $(5,719) $347,372
</TABLE>
The fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or by discounting expected future cash flows using a current market
rate applicable to the coupon rate, credit and maturity of the investments.
SMC balances the duration of its invested assets with the expected
duration of benefit payments arising from insurance liabilities. The "duration"
of a security is the time-weighted present value of the security's cash flows
and is used to measure a security's price sensitivity to changes in market
interest rates. At December 31, 1997, the adjusted modified duration of fixed
maturities and short-term investments for its U.S. insurance subsidiaries was
5.6 years compared to 5.5 years at December 31, 1996.
<PAGE>
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1997 by contractual maturity are shown below (in thousands).
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their lives.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $4,560 $4,551
Due after one year through five years 31,597 32,048
Due after five years through ten years 141,805 140,972
Due after ten years 134,561 139,373
Subtotal 312,523 316,944
Redeemable preferred stock 3,581 3,769
Mortgage-backed securities 51,266 51,863
Total fixed maturity securities $367,370 $372,576
</TABLE>
SMC's investment strategy is guided by strategic objectives established
by the Investment Committee of the Board of Directors of Standard Life. SMC's
major investment objectives are: (i) to ensure adequate safety of investments
and to protect and enhance capital; (ii) to maximize after-tax return on
investments; (iii) to match the anticipated duration of investments with the
anticipated duration of policy liabilities; and (iv) to provide sufficient
liquidity to meet cash requirements with minimum sacrifice of investment yield.
Consistent with its strategy, SMC invests primarily in securities of the U.S.
government and its agencies, investment grade utility and corporate debt
securities and collateralized mortgage obligations ("CMOs"). From time to time
when opportunities arise, however, below investment grade securities may be
purchased. Protection against default risk is a primary consideration. SMC has
determined it will not invest more than 7% of its bond portfolio in below
investment grade securities.
The following table sets forth the quality of SMC's fixed maturity
securities as of December 31, 1997, classified in accordance with the ratings
assigned by the National Association of Insurance Commissioners ("NAIC"):
Percent of Fixed
NAIC RATING (1) MATURITY SECURITIES
1 48%
2 47
Investment Grade 95
3-4 4
5-6 1
Below Investment Grade 5
Total fixed maturity securities 100%
(1) The NAIC assigns securities quality ratings and uniform book values
called "NAIC Designations," which are used by insurers when preparing
their annual statements. The NAIC assigns ratings to publicly traded as
well as privately-placed securities. The ratings assigned by the NAIC
range from Class 1 to Class 6, with a rating in Class 1 being of the
highest quality.
SMC engages Conseco Capital Management Inc. ("CCM"), a wholly owned
subsidiary of Conseco, Inc., to manage SMC's invested assets (other than
mortgage loans, policy loans, real estate and other invested assets), subject
to the direction of SMC's Investment Committee. A quarterly fee equal to .035%
of the total market value of the assets under management as of the end of each
quarter is paid to CCM for its investment advisory services.
Approximately 14% of SMC's fixed maturity securities at December 31, 1997
is comprised of mortgage-backed securities. Investments in mortgage-backed
securities include CMOs and mortgage-backed pass-through securities.
Approximately 96% of the book value of the mortgage-backed securities in SMC's
portfolio is backed by an agency of the U.S. government (although generally not
by the full faith and credit of the U.S. government) as to the full amount of
both principal and interest. Approximately 9% of the book value of
mortgage-backed securities in SMC's portfolio is backed by the full faith and
credit of the U.S. government as to the full amount of both principal and
interest. SMC closely monitors the market value of all investments within its
mortgage-backed portfolio.
<PAGE>
The following table summarizes SMC's mortgage-backed securities at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Estimated Avg.
% of % of Avg. Life Term
Amortized Fixed Fair Fixed of to Final
Cost Maturities Value Maturities Investment Maturity
<S> <C> <C> <C> <C> <C> <C>
(In Years) (In Years)
Agency CMOs:
Planned and target amortization $23,034 6.3% $23,142 6.2% 7.1 24.4
classes
Sequential and support classes 2,150 .6 2,116 .6 4.6 26.4
Total 25,184 6.9 25,258 6.8 6.8 26.4
Non-agency CMOs:
Sequential classes 1,591 .4 1,636 .4 2.8 20.6
Total CMOs 26,775 7.3 26,894 7.2 6.8 24.4
Agency mortgage-backed pass-through
securities 24,491 6.7 24,969 6.7 4.6 15.9
Total mortgage- $51,266 14.0% $51,863 13.9% 6.4 19.5
backed securities
</TABLE>
The market values for SMC's mortgage-backed securities were determined
from broker-dealer market makers, internally developed methods and nationally
recognized statistical rating organizations.
Certain mortgage-backed securities are subject to significant prepayment
risk, since, in periods of declining interest rates, mortgages may be repaid
more rapidly than scheduled as individuals refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investment
which cannot be reinvested at an interest rate comparable to the rate on the
prepaying mortgages. SMC has addressed this risk of prepayment risk by
investing 45% of its mortgage-backed investment portfolio in planned and target
amortization classes. These investments are designed to amortize in a more
predictable manner by shifting the primary risk of prepayment of the underlying
collateral to investors in other tranches ("support classes"). Mortgage-backed
pass-through securities, "sequential" and support class CMOs, which comprised
approximately 55% of the book value of SMC's mortgage-backed securities at
December 31, 1997, are more sensitive to this prepayment risk.
SEPARATE ACCOUNTS
Separate account assets and liabilities are maintained primarily for
universal life contracts of which the majority represents unit-linked business
where benefits on surrender and maturity are not guaranteed. They generally
represent funds held in accounts to meet specific investment objectives of
policyholders who bear the investment risk. Investment income and investment
gains and losses accrue directly to such policyholders.
UNDERWRITING
Premiums charged on insurance products are based in part on assumptions
about the incidence and timing of insurance claims. SMC has adopted and follows
underwriting procedures for both its whole life and universal life insurance
policies. To implement these procedures, SMC employs a professional
underwriting staff. All underwriting decisions are made in SMC's home office.
To the extent that an applicant does not meet SMC's underwriting standards for
issuance of a policy at the standard risk classifications, SMC may rate or
decline the application. Underwriting with respect to FPDAs is minimal. No
underwriting procedures are applied to Standard Life's $10,000 conversion
policy or Standard Management International's unit-linked business.
Traditional underwriting procedures are not applied to policies acquired
in blocks. In these cases, SMC reviews the mortality experience for recent
years and compares actual experience to that assumed in the actuarial
projections for the acquired policies.
RESERVES
In accordance with applicable insurance laws, SMC's insurance
subsidiaries have established and carry as liabilities in their statutory
financial statements actuarially determined reserves to satisfy their
respective annuity contract and life insurance policy obligations. Reserves,
together with premiums to be received on outstanding policies and interest
thereon at certain assumed rates, are calculated to be sufficient to satisfy
policy and contract obligations. The actuarial factors used in determining such
reserves are based on statutorily prescribed mortality tables and interest
rates.
<PAGE>
The reserves recorded in the consolidated financial statements included
elsewhere herein are calculated based on GAAP and differ from those specified
by the laws of the various states and recorded in the statutory financial
statements of SMC's insurance subsidiaries. These differences arise from the
use of different mortality tables and interest rate assumptions, the
introduction of lapse assumptions into the reserve calculation and the use of
the net level premium reserve method on all insurance business. See Note 1 of
the Notes to the Consolidated Financial Statements for certain additional
information regarding reserve assumptions under GAAP.
To determine policy benefit reserves for its life insurance and annuity
products, SMC performs periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
calculating the reserves. Differences are reflected currently in earnings for
each period. SMC historically has not experienced significant adverse
deviations from its assumptions.
REINSURANCE
Consistent with the general practice of the life insurance industry, SMC
has reinsured portions of the coverage provided by its insurance products with
other insurance companies under agreements of indemnity reinsurance. The
policy risk retention limit on the life of any one individual does not exceed
$150,000.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured, but it is the practice of insurers for
statutory accounting purposes (subject to certain limitations of state
insurance statutes) to account for risks which have been reinsured with other
approved companies, to the extent of the reinsurance, as though they are not
risks for which the original insurer is liable. However, under Statement of
Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" these amounts
are added back to policy reserves and recorded as amounts due from reinsurers.
Reinsurance ceded on life insurance policies to unaffiliated companies by
SMC in 1997, 1996 and 1995 represented 51.9%, 57.6% and 68.8%, respectively, of
gross combined individual life insurance in force at the end of such years.
Reinsurance assumed in the normal course from unaffiliated companies by SMC in
1997, 1996 and 1995 represented .02%, .02% and .03%, respectively, of net
combined individual life insurance in force excluding reinsurance from GIAC
described below. SMC cedes reinsurance to numerous reinsurers. At December 31,
1997, approximately $398,456,000 of the face value of life policies and
reinsurance recoverable of $2,648,000 had been ceded to The Lincoln National
Life Insurance Company ("Lincoln National"), $188,524,000 of the face value of
life policies and reinsurance recoverable of $1,021,000 ceded to Swiss Re Life
and Health ("Swiss Re") and $169,869,000 of the face value of life policies and
reinsurance recoverable of $1,179,000 had been ceded to Security Life of Denver
Insurance Company ("Security Life"). Lincoln National is the lead reinsurer
with a total of 31.3% of total reinsurance ceded with Swiss Re and Security
Life each accounting for 14.9% and 13.3%, respectively, of total reinsurance
ceded by SMC's life insurance subsidiaries at December 31, 1997. The amount of
life insurance business ceded to any other reinsurer is not material. Of SMC's
total life insurance in force at December 31, 1997 that is reinsured, 100.0% is
ceded to insurers rated "A" or better by A.M. Best. SMC historically has not
experienced any material losses in collection of reinsurance receivables.
Commencing January 1, 1995, SMC began to reinsure a portion of its
annuity business. The primary purposes of the reinsurance agreement were to
limit the net loss arising from large risks, maintain SMC's exposure to loss
within capital resources, and provide additional capacity for future growth.
Furthermore, these reinsurance agreements have allowed SMC to write volumes of
business that it would not otherwise have been able to write due to
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 can occur in periods of increasing sales. If SMC's ratio of
surplus to liabilities falls below 4%, the State of Florida could prohibit SMC
from writing new business in Florida. SMC's largest annuity reinsurer at
December 31, 1997, Winterthur Life Re Insurance Company ("Winterthur"),
represented $32,194,000, or 52.3% of total reinsurance recoverable, $8,707,000
of premium deposits ceded in 1997 and 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. SMC decreased the
quota-share portion of business ceded to 50% at September 1, 1995 and further
reduced it to 25% effective April 1, 1996. This reduction was possible since
the surplus strain experienced by Standard Life was not as great as originally
anticipated as a result of lower than expected sales in 1995 and the increase
in surplus resulting from the sale of First International. Winterthur limits
dividends and other transfers by Standard Life to SMC or affiliated companies
if adjusted surplus is less than 5.5% of admitted assets, $20,192,000 at
December 31, 1997.
On March 18, 1996, Standard Life completed the sale of First
International to GIAC. Standard Life received sale proceeds of approximately
$10,393,000 including $1,500,000 for the charter and licenses associated with
First International. Standard Life realized a net pretax gain of $1,042,000 and
a tax benefit of $1,420,000 on the sale. First International, Standard Life and
GIAC have entered into a series of reinsurance and other agreements that
include provisions for Standard Life to administer First International policies
in force at the date of sale, and for Standard Life to continue to receive the
profit stream from certain First International policies in force effective
January 1, 1996.
All the in force business of First International effective January 1,
1996 was ceded to GIAC through a coinsurance indemnity reinsurance agreement.
Under the terms of the agreement, approximately $18,841,000 of First
International's reserves and assets of $18,841,000 were ceded to GIAC as of
January 1, 1996. The assets transferred included cash of $17,046,000, policy
loans of $1,371,000, and net due and deferred premiums of $424,000. The in
force business related to this automatic coinsurance indemnity reinsurance
agreement is comprised of the following two blocks: ("Block I") -- ordinary
life policies (issued in New York and New Jersey), universal life, immediate
and deferred annuities (issued in New York, New Jersey and Vermont),
supplemental contracts and group waivers, and ("Block II") -- ordinary life
policies (not issued in New York and New Jersey) issued prior to 1989, and term
life policies (issued in New York, New Jersey and Vermont) issued after 1988.
Effective January 1, 1996, GIAC entered into a modified coinsurance
indemnity reinsurance agreement with Standard Life with respect to Blocks I and
II. Pursuant to this agreement, Standard Life administers the policies in both
Block I and Block II. Under the terms of the agreement, Standard Life assumed
approximately $18,841,000 of reserves for Block I and Block II from GIAC as of
January 1, 1996. During 1996, Standard Life incurred and paid experience rating
refunds to GIAC on Block I for profits earned in excess of specified amounts.
These refunds were calculated and paid on a quarterly basis. As a result, the
economic risks and benefits associated with Block I remained with GIAC.
Effective January 1, 1997, GIAC and Standard Life executed Amendment I to the
modified coinsurance indemnity reinsurance agreement. Under the terms of
Amendment I, GIAC and Standard Life agreed to terminate effective January 1,
1997 the modified coinsurance indemnity reinsurance agreement with regard to
Block I, and Block I reverted completely to GIAC. In accordance with the
provisions of SFAS 60, SFAS 97, and SFAS 113 for a reinsurance assuming
enterprise, in accordance with deposit accounting, Standard Life has not
recorded revenue or expense during 1996 for the Block I reinsurance. A ceding
commission of $1,100,000 received by First International in connection with the
sale was deferred by First International in accordance with FAS 113. When First
International was sold, the amount was paid to SMC by GIAC as part of First
International's statutory capital and surplus. There is no experience rating
refund on Block II and, accordingly, the economic risks and benefits associated
with Block II remain with Standard Life. Under the terms of the reinsurance
agreement, Standard Life is permitted to appoint an investment advisor subject
to approval from GIAC for the Block II assets. Standard Life has appointed
Gibraltar Investments as such investment advisor for Block II assets.
Investment advisory fees are paid from the Block II assets and reduce Block II
profits. The Block II contract was determined to be a risk transfer assumption
reinsurance contract by Standard Life in accordance with SFAS 113.
As part of the acquisition of First International by SMC in 1992,
Standard Life entered into an indemnity reinsurance agreement with First
International effective July 1, 1992. This business was subsequently assumed by
Standard Life effective January 1, 1993. At the date of the sale of First
International to GIAC, Standard Life ceded this block of business with policy
reserves of $12,514,000 and related assets to GIAC. Consideration of $700,000
paid in connection with the purchase agreement represented additional sales
proceeds. All risks and rewards related to the $700,000 have occurred and have
therefore been recognized. This block of business ("Block III") consisted of
term life policies (not issued in New York, New Jersey or Vermont) issued after
1988 and immediate and deferred annuities (not issued in New York, New Jersey
and Vermont) and lottery annuities. Standard Life will continue to receive
profits from Block III through experience rating refunds from GIAC on
Block III. These experience rating refund calculations are prepared and paid on
a quarterly basis for profits in excess of specified amounts. The experience
rating refund payments will continue so long as any of the underlying policies
remain in force. Under the terms of the reinsurance agreement, Standard Life is
permitted to appoint an investment advisor subject to approval from GIAC for
the Block III assets. Standard Life has appointed Gibraltar Investments as such
investment advisor for Block III assets. Investment advisory fees are paid from
the Block III assets and reduce the experience rating refunds. For GAAP
accounting purposes, Standard Life concluded that this contract did not involve
the transfer of risk to GIAC in accordance with SFAS 113.
SMC decided in February 1996 to terminate the reinsurance agreement
between Standard Reinsurance and Salamandra, and to not renew the Barbados
license of Standard Reinsurance. This resulted in the termination of Standard
Reinsurance's operations and the write-off of SMC's investment in Standard
Reinsurance and certain intangible assets of Standard Reinsurance amounting to
$156,000.
Standard Life terminated by recapture in May 1996 the reinsurance
agreement with National Mutual. Standard Life received assets of $4,826,000 and
liabilities of $4,826,000, primarily ordinary life policies. In connection with
this transaction, Standard Life agreed to pay National Mutual a recapture fee
of $1,200,000, and Standard Life collected administration fees of $375,000
related to services provided in prior years that had not been recorded
previously due to the uncertainty as to its collection. The net proceeds of
$825,000 were recorded as the present value of the future profits on this block
of business, which is being amortized in proportion to the emergence of profits
over 20 years. The premium income, and corresponding increase in reserves, of
$4,234,000, recorded in connection with the recapture of the reinsurance
agreement with National Mutual will not recur in the future.
In order to write an increasing amount of new business while continuing
to meet the statutory requirements of the states in which it conducts its
insurance operations, it has been necessary for Dixie National Life to utilize
various forms of surplus relief. The principal source of surplus relief has
been financial reinsurance agreements, which for GAAP purposes are treated as
financing arrangements, but for statutory accounting purposes provide reserve
credits that, in equal amount, increase statutory surplus. Dixie National Life
has a financial reinsurance agreement that entitles it to a credit to its
statutory reserves of $1,250,000 at December 31, 1997, with the amount of the
credit decreasing each quarter by the amount of profit generated to Dixie
National Life by the underlying block of business.
COMPETITION
The life insurance industry is highly competitive and consists of a large
number of both stock and mutual insurance companies, many of which have
substantially greater financial resources, broader and more diversified product
lines and larger staffs than those possessed by SMC. There are approximately
2,000 life insurance companies in the United States which may offer insurance
products similar to those marketed by SMC. Competition within the life
insurance industry occurs on the basis of, among other things, product features
such as price and interest rates, perceived financial stability of the insurer,
policyholder service, name recognition and ratings assigned by insurance rating
organizations. Additionally, when SMC bids on companies it wishes to acquire,
it typically is in competition with other entities.
SMC must also compete with other insurers to attract and retain the
allegiance of agents. SMC believes it has been successful in attracting and
retaining agents because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy issuance
and responsive policyholder service. Because most annuity business written by
life companies is through agents, management believes that competition centers
more on the strength of the agent relationship rather than on the identity of
the insurer.
Competition also is encountered from the expanding number of banks,
securities brokerage firms and other financial intermediaries which are
marketing insurance products and which offer competing products such as savings
accounts and securities. In the case of banks, these insurance products are
sold for non-affiliate insurance companies in return for a sales fee. A change
in legislation may increase interest on the part of banks to begin selling
annuities or to expand their existing efforts to sell annuities. The decision
could result in a partial shift in the distribution of annuities from insurance
agents to national banks, which, in turn, could result in a decrease in sales
for SMC, or it could result in an increase in the number of annuities sold
because of distribution through national banks (or securities firms), which
could result in new distribution opportunities for SMC. SMC has not been
involved in distribution of annuities through national banks but anticipates
expansion into financial institutions with the acquisition of Savers Life.
The unit-linked life insurance market in Europe is highly competitive and
consists of many companies domiciled in the United Kingdom and its offshore
centers, as well as many companies in Luxembourg and Ireland which sell
products similar to those of Standard Management International. Standard
Management International is able to develop its share of a competitive market
by developing strong relationships with high-quality independent intermediaries
and by continual innovation in the design of niche market products.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the ratings of an insurer as
one factor in determining which insurer's annuity to market or purchase.
Standard Life and Dixie National Life have a rating of "B+" and "B",
respectively by A.M. Best. Savers Life is not rated by A.M. Best. A rating of
"B+" is assigned by A.M. Best to companies which, in their opinion, have
achieved very good overall performance when compared to the standards
established by A.M. Best, and have a good ability to meet their obligations to
policyholders over a long period of time. A rating of "B" is assigned by A.M.
Best to companies which, in their opinion, have achieved good overall
performance when compared to the standards established by A.M. Best. According
to A.M. Best, these companies generally have an adequate ability to meet their
obligations to policyholders, but their financial strength is vulnerable to
unfavorable changes in underwriting or economic conditions. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage and liquidity as well as the company's book of
business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its reserves and the
experience and competence of its management. A.M. Best's ratings are based upon
factors relevant to policyholders, agents, insurance brokers and intermediaries
and are not directed to the protection of investors. Generally, rating agencies
base their ratings on information furnished to them by the issuer and on
investigations, studies and assumptions by the rating agencies. There is no
assurance that any particular rating will continue for any given period of time
or that it will not be changed or withdrawn entirely if, in the judgment of the
rating agency, circumstances so warrant. Although a higher rating by A.M. Best
or another insurance rating organization could have a favorable effect on
Standard Life and Dixie National Life's business, management believes that
Standard Life and Dixie National Life are able to compete on the basis of their
competitive crediting rates, asset quality, strong relations with their
independent agents and the quality of service to their policyholders.
FEDERAL INCOME TAXATION
The life insurance and annuity products marketed and issued by Standard
Life and Dixie National Life generally provide the policyholder with an income
tax advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Life insurance benefits
which accrue prior to the death of the policyholder and annuity benefits are
generally not taxable until paid and life insurance death benefits are
generally exempt from income tax. The tax advantage for life insurance and
annuity products is provided in the Internal Revenue Code ("IRC"), and is
generally followed in all states and other United States taxing jurisdictions.
Accordingly, it is subject to change by Congress and the legislatures of the
respective taxing jurisdictions.
SMC, Standard Marketing and other U.S. non-insurance subsidiaries file a
consolidated return for federal income tax purposes. Standard Life and Dixie
National Life, as life insurance companies, filed separate federal income tax
returns for 1996 and prior years. For 1997 and subsequent years, Standard Life
and Dixie National Life are eligible to file a life/life consolidated return.
As of December 31, 1997, SMC, Standard Marketing and other U.S. non-insurance
subsidiaries had consolidated net operating loss carryforwards of approximately
$9,320,000 for tax return purposes which expire from 2005 to 2012.
At December 31, 1997, the Standard Life consolidated return had tax
return net operating loss carryforwards of approximately $4,100,000, which
expire in 2010 and 2012. These carryforwards will be available to reduce the
taxable income of the Standard Life consolidated return. The change in
ownership of Savers Life will not result in additional limitations on the use
of the loss carryforwards available to Standard Life.
Standard Management International is a Luxembourg holding company which
is currently exempt from Luxembourg income tax. Premier Life (Bermuda) is
exempt from income tax until March 2016 pursuant to a decree from the Minister
of Finance. Premier Life (Luxembourg) is subject to Luxembourg income taxation
(statutory corporate rate of 39.39%) and a capital tax of approximately 1% of
its net equity. At December 31, 1997, Premier Life (Luxembourg) had accumulated
corporate income tax loss carryforwards of approximately $3,960,000, all of
which may be carried forward indefinitely. To the extent that such income is
taxable under U.S. law, such income will be included in SMC's consolidated
return.
INFLATION
The primary direct effect on SMC of inflation is the increase in
operating expenses. A large portion of SMC's operating expenses consists of
salaries which are subject to wage increases at least partly affected by the
rate of inflation. SMC attempts to minimize the impact of inflation on
operating expenses through programs to improve productivity.
The rate of inflation also has an indirect effect on SMC. To the extent
that the government's economic policy to control the level of inflation results
in changes in interest rates, SMC's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also
have an effect on interest spreads, as investment earnings are reinvested.
FOREIGN OPERATIONS AND CURRENCY RISK
SMC's foreign operations represent the Standard Management International
group which consists of a Luxembourg holding company and two life insurance
subsidiaries: Premier Life (Luxembourg) and Premier Life (Bermuda). Standard
Management International policyholders invest in assets denominated in a broad
range of currencies. Policyholders effectively bear the currency risk, if any,
as these investments are matched by policyholder separate account liabilities.
Therefore, their investment and currency risk is limited to premiums they have
paid. Policyholders are not permitted to invest directly into options, futures
and derivatives.
Standard Management International could be exposed to currency
fluctuations if currencies within the conventional investment portfolio or
certain actuarial reserves are mismatched. The assets and liabilities of this
portfolio and the reserves are continually matched by the company and at
regular intervals by the independent actuary. In addition, Premier Life
(Luxembourg)'s stockholder's equity is denominated in Luxembourg francs.
Premier Life (Luxembourg) does not hedge it's translation risk because its
stockholder's equity will remain in Luxembourg francs for the foreseeable
future and no significant realized foreign exchange gains or losses are
anticipated. At December 31, 1997, there is an unrealized loss from foreign
currency translation adjustment of $473,000.
Due to the nature of unit-linked products issued by Standard Management
International, which represent over 94% of the Standard Management
International portfolio, the investment risk rests with the policyholder.
Investment risk for Standard Management International exists where Standard
Management International makes investment decisions with respect to the
remaining traditional business and for the assets backing certain actuarial and
regulatory reserves. The investments underlying these liabilities mostly
represent short term investments and fixed maturity securities. These
short-term investments and fixed maturity securities are normally bought and/or
disposed of only on the advice of independent consulting actuaries who perform
an annual exercise comparing anticipated cash flows on the insurance portfolio
with the cash flows from the fixed maturity securities. Any resulting material
foreign currency mismatches are then covered by buying and/or selling the
securities as appropriate.
REGULATORY FACTORS
SMC's insurance subsidiaries are subject to regulation by the insurance
regulatory authorities in the jurisdictions in which they are domiciled and the
insurance regulatory bodies in the other jurisdictions in which they are
licensed to sell insurance. The purpose of such regulation is primarily to
ensure the financial stability of insurance companies and to provide safeguards
for policyholders rather than to protect the interest of stockholders. The
insurance laws of various jurisdictions establish regulatory agencies with
broad administrative powers relating to the licensing of insurers and their
agents, the regulation of trade practices, management agreements, the types of
permitted investments and maximum concentration, deposits of securities, the
form and content of financial statements, rates charged by insurance companies,
sales literature and insurance policies, accounting practices and the
maintenance of specified reserves, capital and surplus. Each of SMC's insurance
subsidiaries is required to file detailed periodic financial reports with
supervisory agencies in certain of the jurisdictions in which it does business.
Most states have enacted legislation regulating insurance holding
companies. The insurance holding company laws and regulations vary by state,
but generally require an insurance holding company and its insurance company
subsidiaries licensed to do business in the state to register and file certain
reports with the regulatory authorities, including information concerning
capital structure, ownership, financial condition, certain intercompany
transactions and general business operations. State holding company laws also
require prior notice or regulatory agency approval of certain material
intercompany transfers of assets within the holding company structure.
As a holding company, Standard Management's ability to pay operating
expenses and meet debt service obligations if any, depends on the receipt of
sufficient funds, primarily through management fees, rental income, dividends
and interest payments on its Surplus Debentures from its subsidiaries. Subject
to the restrictions described below, Standard Management may receive dividends
from its direct subsidiaries, Standard Life, Standard Management International
and Standard Marketing. Dixie National Life is a subsidiary of Standard Life.
Accordingly, any dividends paid by Dixie National Life to Standard Life may be
paid to Standard Management only if Standard Life is entitled to pay dividends
to Standard Management.
Under Indiana insurance law, Standard Life may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including Standard Management,
unless Standard Life has notified the Indiana Department of Insurance of its
intention to enter into such transactions and the Indiana Department of
Insurance has not disapproved of them within the period specified by Indiana
law. Among other things, such transactions are subject to the requirement that
their terms be fair and reasonable and that the charges or fees for services
performed be reasonable.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $166,667 (annual fee of
$2,000,000) during 1997 for certain management services related to the
production of business, investment of assets and evaluation of acquisitions.
Pursuant to the management service agreements with Standard Life, Dixie
National Life paid monthly payments of $83,333 (annual fee of $1,000,000) to
Standard Life in 1997. Both of these agreements provide that they may be
modified or terminated by the Indiana and Mississippi departments of insurance
in the event of financial hardship of Standard Life or Dixie National Life.
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 $83,333 per month
by Savers Life to SMC for financial and regulatory reporting, investment of
assets and the production of business. SMC has agreed to receive no fee, nor
shall Savers Life have an obligation to pay, unless the capital and surplus
of Savers Life is $7,000,000 after the acquisition of Savers Life. The
amount of capital and surplus of Savers Life at December 31, 1997 was
$7,134,000.
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.
Dividends from Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Commissioner of the Indiana Department of
Insurance, if the dividend or distribution, together with all other dividends
and distributions paid within the preceding twelve months, does not exceed the
greater of (i) net gain from operations or (ii) 10% of surplus, in each case as
shown in its preceding annual statutory financial statements. Also, regulatory
approval is required when dividends to be paid exceed unassigned surplus. For
the year ended December 31, 1997, Standard Life reported statutory net gain
from operations before net realized capital losses of $2,374,000 and statutory
surplus of $25,923,000 which includes unassigned surplus of $1,693,000.
During 1998, Standard Life can pay dividends of approximately $2,500,000
without regulatory approval.
The Indiana insurance laws and regulations require that the statutory
surplus of Standard Life following any dividend or distribution be reasonable
in relation to its outstanding liabilities and adequate to its financial needs.
The Indiana Department of Insurance may bring an action to enjoin or rescind
the payment of a dividend or distribution by Standard Life that would cause its
statutory surplus to be unreasonable or inadequate under this standard.
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 and 1996 due to accumulated losses. Premier Life (Bermuda) did not pay
dividends in 1997 and 1996. SMC does not anticipate any dividends from these
companies in 1998. Pursuant to the management services agreement with Standard
Management, Premier Life (Luxembourg) paid Standard Management a management fee
of $100,000 per year during 1997 and 1996 for certain management and
administrative services. The agreement provides that it may be modified or
terminated by either Standard Management or Premier Life (Luxembourg).
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.
Most states, including Indiana, require administrative approval of the
acquisition of 10% or more of the outstanding shares of an insurance company
incorporated in the state or the acquisition of 10% or more of the outstanding
shares of an insurance holding company whose insurance subsidiary is
incorporated in the state. The request for approval must be accompanied by
detailed information concerning the acquiring parties and the plan of
acquisition. The acquisition of 10% of such shares is generally deemed to be
the acquisition of "control" for the purpose of the holding company statutes.
However, in many states the insurance authorities may find that "control" in
fact does or does not exist in circumstances in which a person owns or controls
either a lesser or a greater amount of securities.
In some instances many state regulatory authorities require deposits of
assets for the protection of policyholders either in those states or for all
policyholders. At December 31, 1997, securities representing approximately 4%
of the book value of SMC's U.S. insurance subsidiaries' invested assets were on
deposit with various state treasurers or custodians. Such deposits must consist
of securities that comply with the standards that the particular state has
established. Assets of Standard Management International of $4,441,000 at
December 31, 1997 were held by a custodian bank approved by the Luxembourg
regulatory authorities to comply with local insurance laws.
In recent years, the NAIC and state insurance regulators have reexamined
existing laws and regulations and their application to insurance companies.
This reexamination has focused on insurance company investment and solvency
issues, risk-based capital guidelines, assumption reinsurance, interpretations
of existing laws, the development of new laws, the interpretation of
nonstatutory guidelines, the standardization of statutory accounting rules and
the circumstances under which dividends may be paid. The NAIC has encouraged
states to adopt model NAIC laws on specific topics such as holding company
regulations and the definition of extraordinary dividends. It is not possible
to predict the future impact of changing state regulation on the operations of
SMC.
The NAIC, as well as Indiana, Mississippi and North Carolina, has adopted
RBC requirements for U.S. life/health insurance companies to evaluate the
adequacy of statutory capital and surplus in relation to investment and
insurance risks such as asset quality, mortality and morbidity, asset and
liability matching, benefit and loss reserve adequacy, and other business
factors. The RBC formula is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. The RBC
guidelines are intended to be a regulatory tool only, and are not intended as a
means to rank insurers generally. In addition, the formula defines minimum
capital standards that supplement the previously existing system of low fixed
minimum capital and surplus requirements on a state-by-state basis. Regulatory
compliance is determined by a 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 specific corrective
action. If a company's RBC ratio is in the Company Action Level range defined
as an RBC ratio of 1.5-2, the company must submit a plan to improve its RBC
ratio. The Regulatory Action Level range defined as an RBC ratio of 1-1.5
provides that regulators will order corrective actions. At the Authorized
Control Level range defined as an RBC ratio of 0.7-1, regulators are authorized
to take control of the company. Finally, at the Mandatory Control Level defined
as ratios below 0.7, regulators must take over the company. The RBC ratios of
Standard Life and Dixie National Life are all in excess of 4 at December 31,
1997. The RBC ratio of Savers Life is in excess of 3 at December 31, 1997.
However, should the insurance subsidiaries' RBC position decline in the future,
the insurance subsidiaries' continued ability to pay dividends and the degree
of regulatory supervision or control to which they are subjected could be
affected.
<PAGE>
The NAIC calculates twelve financial ratios based on statutory financial
statements ("IRIS ratios") to assist state regulators in monitoring the
financial condition of insurance companies. A "usual range" of results for each
ratio is used as a benchmark for analysis, and a company's variation from this
range may be either favorable or unfavorable. State insurance departments may
make inquiries of SMC when at least four IRIS ratios are outside the usual
range. These inquiries could lead to restrictions on the amount of business
that may be written in an individual state. The following table presents the
IRIS ratios as determined by the NAIC for SMC's insurance subsidiaries which
varied from the "usual range" for 1997.
Reported
COMPANY RATIO NAME USUAL RANGE VALUE
Standard Life..........Change in Product Mix........... . - to 5.0 ... 7.4
Dixie National Life....Net Change in Capital and Surplus.. -10 to 50 .......-11
.........Gross Change in Capital and Surplus -10 to 50 ...... -11
.........Adequacy of Investment Income...... 125 to 900.......121
.........Surplus Relief..................... -10 to 10 ........28
.........Change in Premium.................. -10 to 50 .......-82
Savers Life............Net Income to Total Income.......... .- to 0 .........0
...............Change in Premium.................. -10 to 50 .......-23
...............Change in Reserving Ratio.......... -20 to 20 .......-79
Explanation of Ratios:
CHANGE IN PRODUCT MIX. This ratio represents the average change in the
percentage of total premium from each product line during the year. The
unusual ratio is due to the sale of First International and related reinsurance
agreements in 1996.
CHANGE IN CAPITAL AND SURPLUS. This ratio, calculated on a gross and net
basis, are a measure of improvement or deterioration in the company's financial
position during the year. The negative value for Dixie National Life is
primarily due to continuation of reserve strengthening recorded by direct
charges to surplus of approximately $600,000 in 1997.
ADEQUACY OF INVESTMENT INCOME. This ratio indicates whether an insurer's
investment income is adequate to meet the interest requirements of its
reserves. The ratio may indicate that Dixie National Life's net investment
yield is not "adequate" to meet its interest required on reserves.
SURPLUS RELIEF. The positive ratio for Dixie National Life results from a
financial reinsurance agreement at December 31, 1997. See "Business of SMC --
Reinsurance."
CHANGE IN PREMIUM. This ratio represents the percentage change in premium
from prior to current years. The negative values for Dixie National Life in
1997 relate to the surplus relief reinsurance agreement transaction in 1996
increasing premium income in 1996. The negative value for Savers Life is due to
the sale of the major medical business effective July 1, 1997.
NET INCOME TO TOTAL INCOME. This ratio is a measure of a company's
profitability. The unusual value for Savers Life was primarily due to the
statutory loss from operations recorded in 1997.
CHANGE IN RESERVING RATIO. The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. The negative value for Savers Life was due to the
reserve strengthening within the life product line in the prior year. The
majority of the life reserves consist of whole life policies which have higher
reserve requirements than term policies.
SMC attempts to manage its assets and liabilities so that income and
principal payments received from investments are adequate to meet the cash flow
requirements of its policyholder liabilities. The cash flows of SMC's
liabilities are affected by actual maturities, surrender experience and
credited interest rates. SMC periodically performs cash flow studies under
various interest rate scenarios to evaluate the adequacy of expected cash flows
from its assets to meet the expected cash requirements of its liabilities. SMC
utilizes these studies to determine if it is necessary to lengthen or shorten
the average life and duration of its investment portfolio. Because of the
significant uncertainties involved in the estimation of asset and liability
cash flows, there can be no assurance that SMC will be able to effectively
manage the relationship between its asset and liability cash flows.
In December 1995, the NAIC passed a model law for disclosure in life
insurance policy illustrations which became effective on January 1, 1997. This
law did not have a significant effect on SMC. New rules adopted by the NAIC are
effective only to the extent adopted by the states in which SMC operates, and
it is not possible to predict the future impact of changing state and federal
regulation on the operations of SMC.
The statutory filings of SMC's insurance subsidiaries require
classifications of investments and the establishment of an AVR, an account
designed to stabilize a company's statutory surplus against fluctuations in the
market value of stocks and bonds, according to regulations prescribed by the
NAIC. The AVR account consists of two main components: a "default component" to
provide for future credit-related losses on fixed income investments and an
"equity component" to provide for losses on all types of equity investments,
including real estate. The NAIC requires an additional reserve, called the IMR,
which consists of the portion of realized capital gains and losses from the
sale of fixed income securities attributable to changes in interest rates. The
IMR is required to be amortized against earnings on a basis reflecting the
remaining period to maturity of the fixed income securities sold. These
regulations affect the ability of SMC's insurance subsidiaries to reflect
future investment gains and losses in current period statutory earnings and
surplus.
The amounts related to AVR and IMR for the insurance subsidiaries at
December 31, 1997 are summarized as follows (in thousands):
Maximum
AVR AVR IMR
Standard Life...........$3,236 $3,856 $8,474
Dixie National Life........214 317 149
The annual addition to the AVR for 1997 is 20% of the maximum reserve
over the accumulated balance. If the calculated reserve with current year
additions exceeds the maximum reserve amount, the reserve is reduced to the
maximum amount. For the year ended December 31, 1997, SMC's U.S. subsidiaries
each made the required contribution to the AVR.
Most jurisdictions require insurance companies to participate in guaranty
funds designed to cover claims against insolvent insurers. Insurers authorized
to transact business in these jurisdictions are generally subject to
assessments based on annual direct premiums written in that jurisdiction to pay
such claims, if any. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's financial strength and, in
certain instances, may be offset against future state premium taxes. The
incurrence and amount of such assessments have increased in recent years and
may increase further in future years. The likelihood and amount of all future
assessments cannot be reasonably estimated and are beyond the control of SMC.
As part of their routine regulatory oversight process, approximately once
every three to five years state insurance departments conduct periodic detailed
examinations ("Examinations") of the books, records and accounts of insurance
companies domiciled in their states. Standard Life underwent an Examination
during 1996 for the five-year period ended December 31, 1995. The final report
on such examination has been issued by the Indiana Department of Insurance and
did not raise any significant issues.
Although the federal government generally does not directly regulate the
insurance industry, federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the current condition
of the insurance industry (encompassing both life and health and property and
casualty insurance) in the United States in order to decide whether some form
of federal role in the regulation of insurance companies would be appropriate.
Congress is currently conducting a variety of hearings relating in general to
insurers. It is not possible to predict the outcome of any such congressional
activity nor the potential effects thereof on SMC.
Congressional initiatives have been introduced which are directed at
repeal of the McCarran-Ferguson Act (which exempts the "business of insurance"
from most federal laws to the extent it is subject to state regulation), and
judicial decisions have been issued which narrow the definition of "business of
insurance" for McCarran-Ferguson Act purposes. Current and proposed federal
measures may also significantly affect the insurance industry including removal
of barriers preventing banks from engaging in the insurance business.
EMPLOYEES
As of March 13, 1998, SMC had 139 employees: Standard Life had 58
employees, Savers Life had 47 employees, Standard Management International had
16 employees (9 of whom are covered by a collective bargaining agreement),
Standard Marketing had 10 employees, and Standard Management had 8 employees.
SMC believes that its future success will depend, in part, on its ability to
continue to attract and retain highly-skilled technical, marketing, support and
management personnel. Management believes that it has excellent relations with
its employees.
ITEM 2. PROPERTIES
SMC leases approximately 31,000 square feet in an office building located
at 9100 Keystone Crossing, Indianapolis, Indiana, under the terms of a lease
which expires on June 1, 2001. SMC entered into a lease on March 31, 1997, for
approximately 16,000 square feet in a warehouse located at 2525 North
Shadeland, Indianapolis, Indiana, under the terms of a lease which expires on
September 30, 1999.
Standard Management International entered into a lease on November 17,
1997 for approximately 4,500 square feet in an office building located at 13A,
rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg, under the terms
of a lease which expires on November 16, 2003.
Dixie National Life leases approximately 1,000 square feet in an office
complex located at 855 South Pear Orchard Road, Suite 305, Ridgeland,
Mississippi, under the terms of a lease which expires on December 31, 1998.
Savers Life owns its Home Office building containing approximately 27,000
square feet at 8064 North Point Boulevard, Winston-Salem, North Carolina.
Savers Life occupies the top floor of its two story building and leases most of
the first floor.
ITEM 3. LEGAL PROCEEDINGS
John J. Quinn resigned as an officer and director of SMC effective as of
April 15, 1997. On June 19, 1997, Mr. Quinn commenced an action in the
Superior Court of Marion County, Indiana, against SMC claiming that his
employment agreement contained a provision to the effect that, following a
termination of his employment with SMC under certain circumstances, Mr. Quinn
would be entitled to receive a lump sum payment equal to the amount determined
by multiplying the number of shares of SMC Common Stock subject to unexercised
stock options previously granted by SMC to Mr. Quinn on the date of
termination, whether or not such options were then exercisable, by the highest
per share fair market value of the SMC Common Stock on any day during the
six-month period ending on the date of termination. Upon payment of such
amount, such unexercised stock options would be deemed to have been surrendered
and canceled. Mr. Quinn further claims that his employment agreement contained
an additional provision that he would be entitled to receive a lump sum payment
equal to two years of annual salary, following termination of employment.
Mr. Quinn has asserted to SMC that he is entitled to a lump sum termination
payment of $1,654,000, and liquidated damages not exceeding $3,308,000, by
virtue of his voluntarily leaving SMC's employment.
SMC disputes Mr. Quinn's claims. SMC filed its Answer and Counterclaim
against Mr. Quinn on September 11, 1997. SMC's investigation since the action
was filed revealed a basis for the termination of Mr. Quinn's employment for
cause relative to after-acquired evidence. On October 14, 1997, the Board of
Directors of SMC terminated Mr. Quinn for cause effective as of March 15, 1997.
Such termination will also be argued by SMC as a complete defense to all claims
asserted by Mr. Quinn. The ultimate outcome of the action cannot presently be
determined. Accordingly, no provision for any liability that may result has
been made in the consolidated financial statements. Management believes that
the conclusion of such litigation will not have a material adverse effect on
SMC's consolidated financial condition.
In addition, SMC is involved in various legal proceedings in the normal
course of business. In most cases, such proceedings involve claims under
insurance policies or other contracts of SMC. The outcomes of these legal
proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity, or future results of operations of
SMC based on SMC's current understanding of the relevant facts and law.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Stockholders held on October 22, 1997,
the following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Shares For Shares Withheld
<S> <C> <C>
Stephen M. Coons 4,154,740 343,709
Martial R. Knieser 4,154,845 343,604
Paul ("Pete") B. Pheffer 4,158,515 339,934
</TABLE>
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
<TABLE>
<CAPTION>
Shares Shares
Shares For Against Abstaining
<S> <C> <C> <C> <C> <C>
Approve the issuance of SMC Common Stock in
connection with the acquisition by SMC of
Savers Life Insurance Company 2,990,817 107,128 11,329
Approve an amendment to SMC's Amended and
Restated 1992 Stock Option Plan to increase
the number of shares of SMC Common Stock
available for issuance pursuant thereto
from 1,500,000 to 2,500,000 and to allow
the Board of Directors of SMC to vary, from
year to year, the number of shares subject 2,303,213 739,488 65,733
to options granted to Outside Directors
Ratify the appointment of Ernst and Young
LLP as principal independent auditors for
the year ending December 31, 1997. 4,473,009 17,155 8,285
</TABLE>
A total of 4,498,449 shares were present in person or by proxy at the
Annual Meeting of Stockholders.
EXECUTIVE OFFICERS
The following table sets forth information concerning each of SMC's
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <S>
Ronald D. Hunter 46 Chairman of the Board, Chief Executive Officer and President
Stephen M. Coons 56 Executive Vice President, General Counsel and Secretary
Raymond J. Ohlson 47 Executive Vice President and Chief Marketing Officer
Paul B. Pheffer 46 Executive Vice President, Chief Financial Officer and Treasurer
Edward T. Stahl 51 Executive Vice President and Director of Corporate Development
</TABLE>
RONALD D. HUNTER Mr. Hunter has been the Chairman of the Board, Chief
Executive Officer and President of SMC since its formation in June 1989 and the
Chairman of the Board and Chief Executive Officer of Standard Life since
December 1987. Previously, Mr. Hunter held several management and sales
positions in the life insurance industry with a number of companies including
Conseco, Inc. (1981-1986), Aetna Life & Casualty Company (1978-1981), United
Home Life Insurance Company (1975-1977) and Prudential Life Insurance Company
(1972-1975).
STEPHEN M. COONS Mr. Coons has been a director of SMC since August 1989.
Mr. Coons has been General Counsel and Executive Vice President of SMC since
March 1993 and has been Secretary of SMC since March 1994. He was of counsel to
the law firm of Coons, Maddox & Koeller from March 1993 to December 31, 1996.
Prior to March 1993, Mr. Coons was a partner with the law firm of Coons &
Saint. He has been practicing law for 27 years. Mr. Coons served as Indiana
Securities Commissioner from 1978 to 1983.
RAYMOND J. OHLSON Mr. Ohlson has served as Executive Vice President and
director of SMC since December 1993. He has served as President and director of
Standard Marketing since August 1991. Since June 1993, Mr. Ohlson has served as
President of Standard Life. Mr. Ohlson entered the life insurance business in
1971. While still in college, Mr. Ohlson qualified for the Million Dollar Round
Table and is now a life member. He earned his CLU designation in 1980.
Mr. Ohlson owned and operated Ohlson & Associates, an independent insurance
marketing organization, from 1984 to April 1, 1994, when the assets of Ohlson &
Associates were acquired by Standard Marketing.
PAUL ("PETE") B. PHEFFER Mr. Pheffer has been Executive Vice President,
Chief Financial Officer and Treasurer of SMC since May 1, 1997 and director of
SMC since June 27, 1997. Prior to joining SMC, Mr. Pheffer was Senior Vice
President -- Chief Financial Officer and Treasurer of Jackson National Life
Insurance Company from 1994 to 1996 and prior to that was Senior Vice
President -- Chief Financial Officer at Kemper Life Insurance Companies from
1992 to 1994. Mr. Pheffer, a CPA, received his MBA from the University of
Chicago in 1988.
EDWARD T. STAHL Mr. Stahl has been an Executive Vice President of SMC
since its formation, has been a director of SMC from July 1989 (except for the
period from January 12, 1990 to May 21, 1990) and has served as Director of
Corporate Development since June 1993. Mr. Stahl was Secretary of SMC from June
1989 to March 1994. Mr. Stahl was President and Chief Operations Officer of
Standard Life from May 1988 to June 1993. He has been a director of Standard
Life since December 1987, and Executive Vice President and Secretary since June
1993. Mr. Stahl has served in various capacities in the insurance industry
since 1966. He earned his FLMI designation in 1981, and is a member of several
insurance associations.
<PAGE>
PART II
ITEM 5. MARKET FOR SMC COMMON STOCK AND RELATED STOCKHOLDER MATTERS
SMC Common Stock trades on Nasdaq under the symbol "SMAN." The following
table sets forth, for the periods indicated, the range of the high and low
sales prices of SMC Common Stock as reported by Nasdaq (after adjustment for
the May 17, 1996 5% stock dividend). SMC has never paid dividends on its Common
Stock. At the close of business on March 13, 1998 there were approximately
3,133 holders of record of the outstanding shares of SMC Common Stock. Although
SMC Common Stock is traded on Nasdaq, no assurance can be given as to the
future price of or the markets for SMC Common Stock.
SMC
COMMON STOCK
HIGH LOW
1996
Quarter ended March 31, 1996 $4.524 $3.571
Quarter ended June 30, 1996 5.250 3.690
Quarter ended September 30, 1996 5.500 4.000
Quarter ended December 31, 1996 5.375 4.000
1997
Quarter ended March 31, 1997 6.250 4.875
Quarter ended June 30, 1997 6.000 4.625
Quarter ended September 30, 1997 7.875 5.688
Quarter ended December 31, 1997 8.375 6.500
<PAGE>
ITEM 6. SMC SELECTED HISTORICAL FINANCIAL DATA (A)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected historical financial data of SMC set forth below at and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 were derived from
audited consolidated financial statements of SMC. The selected historical
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the SMC
Consolidated Financial Statements and related notes thereto, each included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
STATEMENT OF OPERATIONS DATA:
Premium income $7,100 $10,468 (e) $5,504 $4,565 $5,511
Investment Activity:
Net investment income 29,516 20,871 18,517 16,057 12,171
Net realized investment gains 396 1,302 688 558 6,980
Total revenues 46,869 40,307 30,238 26,518 26,542
Interest expense and financing 2,381 805 118 47 519
costs
Total benefits and expenses 43,607 36,772 (e) 28,682 30,032 22,099
Income (loss) before income taxes,
extraordinary gain (charge) and
cumulative effect of change in 3,262 3,535 1,556 (3,514) 4,443 (i)
accounting principle
Income (loss) before extraordinary
gain
(charge) and cumulative effect 2,645 4,265 (f) 1,313 (3,436) 2,984 (i)
of change in accounting
principle
Net income (loss) 2,645 4,767 (g) 1,313 (3,436) 2,132
Operating income (loss) (b) 2,384 1,174 461 293 (1,936)
PER SHARE DATA: (C)
Income (loss) per share before
extraordinary
gain (charge) and cumulative
effect of change in accounting $.54 $.88 (f) $.25 $(.62) $.80 (i)
principle
Net income (loss) .54 (g) .98 (g) .25 (.62) .57
Net income (loss), assuming
dilution .48 .91 .25 (.61) .53
Operating income (loss) (b) .48 .24 .09 .05 (.52)
Operating income (loss), assuming
dilution (b) .43 .21 .09 .05 (.48)
Weighted average common shares
outstanding, assuming dilution 5,591,217 5,549,057 5,345,937 5,663,187 4,013,893
Book value per common share $8.88 $7.95 $7.73 $4.27 $7.82
Book value per common share
excluding
unrealized gain (loss) on $ 8.44 (h) $ 8.09 (h) $ 7.23 (h) $6.81 (h) $7.82
securities available for sale
Common shares outstanding 4,876,490 5,024,270 5,205,425 5,291,455 4,954,676
BALANCE SHEET DATA (at year end):
Invested assets $398,782 $370,138 $280,597 $224,926 $199,413
Assets held in separate accounts 148,064 128,546 122,705 94,301 107,173
Total assets 668,992 628,413 479,598 373,524 354,431
Long-term debt, notes payable and
capital 26,141 20,697 4,191 695 --
lease obligations
Class S Preferred Stock -- 1,757 -- -- --
Shareholders' equity 43,313 39,919 40,242 22,610 36,914
Shareholders' equity, excluding
unrealized gain 41,142 40,665 37,660 36,021 36,918
(loss) on securities available
for sale
Ratio of debt to total 38% 36% 9% 3% --
capitalization (d)
</TABLE>
<PAGE>
NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a)Comparison of consolidated financial information is significantly affected
by the acquisitions of Standard Management International effective
December 31, 1993, Dixie National Life on October 2, 1995 and Shelby Life
effective November 1, 1996 and disposal of First International effective
March 1, 1996. Refer to the notes to the consolidated financial statements
included in SMC's Audited Consolidated Financial Statements, included
elsewhere herein, for a description of business combinations.
(b)Operating income represents income before extraordinary gains (charge),
excluding net realized investment gains (less income taxes relating to such
gains), gain on disposal of subsidiary and class action litigation and
settlements.
(c)All applicable shares and per share amounts have been adjusted to reflect
the adoption of Statement of Financial Accounting Standards ("SFAS") No.
128, "Earning Per Share" on December 31, 1997. Refer to the notes to the
consolidated financial statements included in SMC's Audited Consolidated
Financial Statements, included elsewhere herein, for a description of
earnings per share.
(d)Total capitalization is the sum of SMC's debt (long term debt, notes
payable, capital lease obligations and redeemable preferred stock) and
shareholders' equity.
(e)Includes recapture of premiums ceded and an increase in benefits due to an
increase in reserves of $4,234 due to the termination and recapture of a
reinsurance agreement with National Mutual Life Insurance Company. See
"Business of SMC -- Reinsurance."
(f)Does not reflect extraordinary gain of $502 ($.10 per share) on early
redemption of Class S Preferred Stock for 1996.
(g)Does not reflect preferred stock dividends of $97 ($.01 per share) and $208
($.04 per share) for 1997 and 1996, respectively, on Class S Preferred
Stock.
(h)Excludes the effect of reporting securities available for sale at fair value
and recording the unrealized gain or loss on such securities as a component
of shareholders' equity, net of tax and other adjustments, which SMC began
to do in 1994. Such adjustments are in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities", as
described in the notes to the consolidated financial statements included in
SMC's Consolidated Financial Statements, included elsewhere herein.
(i)Before deduction of extraordinary charge of $1,301 ($.32 per share) on early
extinguishment of long-term debt and cumulative effect of change in
accounting principle of $449 ($.11 per share) from applying the new method
of accounting for income taxes.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion highlights the principal factors affecting the
results of operations and the significant changes in balance sheet items of SMC
on a consolidated basis for the periods listed as well as SMC's liquidity and
capital resources. This discussion should be read in conjunction with the SMC
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.
INTRODUCTION
SMC acquired Standard Management International on December 15, 1993, Dixie
National Life on October 2, 1995, Shelby Life on November 8, 1996 and Savers
Life on March 12, 1998. These acquisitions are accounted for using the purchase
method of accounting (effective December 31, 1993 for the Standard Management
International acquisition, October 2, 1995 for the Dixie National Life
acquisition, November 1, 1996 for the Shelby Life acquisition, and March 1,
1998 for the Savers Life acquisition). Therefore, these subsidiaries are
included in the SMC Consolidated Financial Statements commencing with their
respective acquisition effective dates. SMC disposed of First International on
March 18, 1996 (effective March 1, 1996) and terminated the operations of
Standard Reinsurance on March 1, 1996.
PRODUCT PROFITABILITY. Margins on life insurance and annuity products are
affected by interest rate fluctuations. Rising interest rates would result in a
decline in the market value of assets. However, as there are positive cash
flows from renewal premiums, investment income and maturities of existing
assets, the need for early disposition of investment assets to meet operating
cash flow requirements would be unlikely. Rising interest rates would also
result in available cash flows from maturities being invested at higher
interest rates, which would help support a gradual increase in new business and
renewal interest rates on interest-sensitive products. A sharp, sudden rise in
the interest rate environment without a concurrent increase in crediting rates
could result in higher surrenders, particularly for annuities. The effect of
surrenders would be to reduce earnings over the long term. Earnings in the
period of the surrender could increase or decrease depending on whether
surrender charges were applicable and whether such changes differed from the
write-off of related deferred acquisition costs or present value of future
profits.
When interest rates fall, SMC generally attempts to adjust the credited
interest rates subject to competitive pressures. Although SMC believes that
such strategies will continue to permit it to achieve a positive spread, a
significant decline in the yield on SMC's investments could adversely affect
the results of operations and financial condition of SMC.
PURCHASED INSURANCE BUSINESS. In accordance with industry practice, when
SMC purchases additional insurance businesses it assigns a portion of the
purchase price, called the present value of future profits, to the right to
receive future cash flows arising from existing insurance policies. This asset
is recorded when the business is purchased at the value of projected future
cash flows on existing policies, less a discount to present value. As future
cash flows emerge, they are treated as a recovery of this asset. Therefore, if
cash flows emerging from the purchased or recaptured business during a period
exactly equal the projections, they are offset by that period's amortization of
the cost of the policies purchased. In that event, the only income statement
effect from the purchased business is the realization of the discount that was
initially deducted from the asset to reflect its present value. Changes in the
future annual amortization of this asset are not expected to have a significant
effect on the results of operations, because the amount of amortization is
expected to be equal to the profits emerging from the purchased policies, net
of interest on the unrecovered present value of future profits balance. This
asset is amortized over the expected life of the related policies purchased.
Present value of future profits is increased for the estimated effect of
realizing unrealized investment losses and decreased for the estimated effect
of realizing unrealized investment gains.
In selecting the interest rate to calculate the discounted present value of
the projected future profits, SMC used the risk rate of return it needs to earn
in order to invest in the business being acquired or recaptured.
In determining this required rate of return, SMC considers the following
factors:
<circle>The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows (as
described above).
<circle>Our cost of the capital required to fund the acquisition or
recapture.
<circle>The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
<circle>The acquired company's compatibility with other SMC activities that
may favorably affect future cash flows.
<circle>The complexity of the acquired company or recaptured business.
<circle>Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire or recapture similar blocks of business.
The discount rate used to determine the present value of the projected
future profits is used to determine the subsequent amortization of the cost of
the purchased policies for acquisitions prior to November 19, 1992. For
acquisitions subsequent to November 19, 1992, the discount rate used to
amortize the unamortized balance of the present value of future profits is the
crediting rate of the underlying policies.
The discount rate selected may affect subsequent earnings in those instances
where the purchase price of the policies exceeds the value of net assets
acquired (including the value of future profits discounted at the selected
interest rate). Selection of a lower (or higher) discount rate will increase
(or decrease) the portion of the purchase price assigned to the present value
of future cash flows and will result in an offsetting decrease (or increase) in
the amount of the purchase price assigned to goodwill. The effect on subsequent
earnings caused by this variation in purchase price allocation will depend on
the characteristics of the policies purchased. For products where the profits
emerge at relatively constant levels over an extended period of time (for
example, most of SMC's immediate and deferred annuities), use of a lower rate
may result in an increase in reported earnings in the early years after an
acquisition followed by a decrease in earnings in later years. For products
where profits emerge over a shorter period of time or in amounts that decrease
over the life of the product (for example, ordinary and term life products),
selection of a lower rate will generally result in a decrease in reported
earnings in the early years after an acquisition followed by an increase in
reported earnings in later years. For SMC, the majority of the cost of policies
purchased relates to ordinary life products and the balance to deferred annuity
products.
The activity related to the present value of future profits of the business
acquired or recaptured is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $23,806 $ 15,246 $ 8,299
Amounts related to acquisitions and disposals (1,374) 9,615 7,901
Net amortization during the year (1,666) (1,249) (780)
Adjustments relating to net unrealized (gain)
losses on securities available for sale (229) 194 (174)
Balance, end of year........................... $20,537 $ 23,806 $15,246
</TABLE>
The percentage of future expected net amortization of the beginning balance
of the present value of future profits before the effect of net unrealized
gains and losses, based on the present value of future profits at December 31,
1997 and current assumptions as to future events on all policies in force, will
be between 6% and 8% in each of the years 1998 through 2002.
The discount rate used to calculate the present value of future profits for
business acquired prior to November 19, 1992, reflected in SMC's December 31,
1997 consolidated balance sheet ranged from 7.5% to 18%. SMC used a 15%
discount rate to calculate the present value of future profits on the business
of the Dixie National Life acquisition, which is being amortized over 30 years
as the majority of the present value of future profits related primarily to the
ordinary life business. SMC used a 15% discount rate to calculate the present
value of future profits on the business of the Shelby Life acquisition, which
is being amortized over 20 years based on the mix of annuity and life business
in Shelby Life.
PRODUCED INSURANCE BUSINESS. Insurance products generate two types of
profit streams: (i) from the excess of investment income earned over that
credited to the policyholder and (ii) from the excess of premiums received over
costs incurred for policy issuance, administration and mortality. Costs
incurred in issuing new policies are deferred and recorded as deferred
acquisition costs ("DAC"), which are amortized using present value techniques
so that profits are realized in proportion to premium revenue for certain
products and estimated gross profits for certain other products. Profits from
all of these elements are recognized over the lives of the policies; no profits
are recorded at the time the policies are issued.
<PAGE>
Amortization of DAC was $1,456,000, $1,221,000 and $1,142,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. The increase in current
year amortization expense resulted primarily from increased amortization of DAC
as gross profits from business sold in recent years began to emerge. DAC of
$18,309,000 at December 31, 1996 and additions to policy acquisition costs of
$7,005,000 for business produced during the year ended December 31, 1997 are
generally being amortized over the expected lives of the policies, a period of
approximately 20 years, in a constant relationship to the present value of
estimated future gross profits. Interest is being accreted at 7% during year
one and 5% thereafter, the projected crediting rate on the policies. DAC is
increased for the estimated effect of realizing unrealized investment losses
and decreased for the estimated effect of realizing unrealized investment
gains. The offset to these amounts is recorded directly to shareholders'
equity, net of taxes. Future expected amortization of DAC for the next five
years before the effect of net realized and unrealized gains and losses, based
on DAC at December 31, 1997 and current assumptions, is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
Gross amortization $2,945 $2,976 $3,068 $2,858 $2,597
Interest accreted 1,079 906 736 604 483
Net amortization $1,866 $2,070 $2,332 $2,254 $2,114
</TABLE>
The amounts included in the foregoing table do not include any
amortization of DAC resulting from the sale of new products after December 31,
1997. Any changes in future annual amortization of this asset are not expected
to have a significant effect on results of operations because the amount of
amortization is expected to be proportionate to the profits from the produced
policies, net of interest on DAC.
VARIANCES BETWEEN ACTUAL AND EXPECTED PROFITS. Actual experience on
purchased and produced insurance may vary from projections due to differences
in renewal premiums collected, investment spreads, mortality costs, surrender
benefits, persistency, administrative costs and other factors. Variances from
original projections, whether positive or negative, are included in net income
as they occur. To the extent that these variances indicate that future
experience will differ from the estimated profits reflected in the
capitalization and amortization of the cost of policies purchased or the cost
of policies produced, current and future amortization rates may be adjusted.
ACCOUNTING FOR ANNUITIES AND UNIVERSAL AND INTEREST-SENSITIVE LIFE
PRODUCTS. The Company primarily accounts for its annuity and universal and
interest-sensitive life policy deposits in accordance with Statement of
Financial Accounting Standards No. 97 ("SFAS No. 97"). "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses on the Sale of Investments". Under SFAS No. 97, a
benefit reserve is established at the time of policy issuance in an amount
equal to the deposits received. Thereafter, the benefit reserve is adjusted for
any additional deposits, interest credited and partial or complete withdrawals.
Revenues for annuities and universal and interest-sensitive life policies,
other than certain non-interest sensitive annuities, consist of policy charges
for surrenders and partial withdrawals, mortality and administration, and
investment income earned. Such revenues do not include the annuity and
universal and interest-sensitive life policy deposits. Expenses related to
these products include interest credited to policyowner account balances,
operating costs for policy administration, amortization of DAC and mortality
costs in excess of account balances.
Costs relating to the acquisition of new business, primarily commissions
paid to agents, which vary with and are directly related to the production of
new business, are deferred to the extent that such costs are recoverable from
future profit margins. At the time of issuance, the acquisition expenses,
approximately 13% of initial annuity premium deposits and 50% of premiums from
universal and interest-sensitive life products for SMC, are capitalized as DAC.
In accordance with SFAS No. 97, DAC with interest is amortized over the lives
of the policies in a constant relationship to the present value of estimated
future gross profits.
UNIT-LINKED PRODUCT ACCOUNTING. Separate account assets and liabilities
are maintained primarily for contracts of which the majority represents
unit-linked products where benefits on surrender and maturity are not
guaranteed. They generally represent funds held in accounts to meet specific
investment objectives of policyholders who bear the investment risk. Investment
income and investment gains and losses accrue directly to such policyholders.
SMC earns income from the investment management fee it charges on such
unit-linked contracts, which range from .8% to 1.2% of the value of the
underlying separate accounts.
<PAGE>
DISCUSSION OF CHANGES IN THE CONSOLIDATED STATEMENT OF OPERATIONS FROM YEAR
ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
OPERATING INCOME. The income from operations (before net realized
investment gains and gain on disposal of subsidiaries) was $2,384,000 in 1997,
or $.48 per share, compared to $1,174,000 for 1996, or $.24 per share. The
increase resulted primarily from operations in the United States producing
income from operations of $664,000 for 1997 compared to a loss of $44,000 for
1996. The increase is primarily due to an increase in interest spreads on an
increasing asset base. The income from international operations also increased
to $1,720,000 for 1997 compared to $1,218,000 for 1996. The international
operating income resulted primarily from increased fees from an increase in
value of assets under separate accounts and deceased operating expenses,
primarily due to the strengthening of the U.S. dollar.
PREMIUM INCOME. GAAP premium income for 1997 was $7,100,000, a decrease
of $3,368,000 or 32% from 10,468,000 for 1996. This decrease is attributable to
the recapture of premiums ceded of $4,234,000 in 1996 due to the termination
and recapture of a reinsurance agreement with National Mutual which offset the
increase in premium income for the inclusion of Shelby Life in the results of
operations for periods after November 1, 1996. The Shelby Life block of
business recorded net premium income of $1,685,000 in 1997.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $49,362,000
compared to $42,347,000 for 1997 and 1996, respectively. The increase in
premium deposits is partially due to an increase in gross domestic premium
deposits. Gross domestic premium deposits received from interest-sensitive
annuities and financial products were $58,069,000 for 1997 compared to
$51,254,000 for 1996. The increase in gross domestic premium is the result of
an aggressive marketing campaign targeted to high volume marketing companies.
Also contributing to the increase in premiums is the continued development of
SMC's distribution system through marketing support from Standard Marketing, an
aggressive program aimed at retaining key producers, and an increase in the
agency base achieved by expanding geographical concentration into the Mid-South
and California. Since SMC's operating income is primarily a function of its
investment spreads, persistency of annuity in force business mortality
experience and operating expenses, a change in premium deposits in a single
period does not directly cause operating income to change, although continued
increases or decreases in premiums may affect the growth rate of total assets
on which investment spreads are earned.
NET INVESTMENT INCOME. Net investment income increased $8,645,000 or 41%
to $29,516,000 for 1997 from $20,871,000 for 1996. The increase resulted from
an increase in total invested assets (amortized cost) of approximately 42% from
December 31, 1995 to December 31, 1997, most of which occurred in the fourth
quarter of 1996 due to the acquisition of Shelby Life, and an increase in the
weighted average net yield of SMC's investment portfolio (exclusive of realized
and unrealized gains) to 7.68% from 7.32% for 1997 and 1996, respectively. The
continued growth in SMC's total invested assets reflects increased sales of
FPDAs and the inclusion of the invested assets of Shelby Life of approximately
$100,000,000 in the consolidated balance sheet effective November 1, 1996.
NET REALIZED INVESTMENT GAINS. Net realized investment gains decreased
$906,000 or 70% to $396,000 from $1,302,000 for 1997 and 1996, respectively.
Net realized investment gains fluctuate from period to period and arise when
securities are sold in response to changes in the investment environment which
provide opportunities to maximize return on the investment portfolio without
adversely affecting the quality and overall yield of the investment portfolio.
The pretax net unrealized gain on the Company's fixed maturity portfolio
was $5,201,000 at December 31, 1997, compared to a pretax net unrealized (loss)
of $(1,837,000) at December 31, 1996. In the absence of continued 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 Company's future earnings could be adversely
affected to the extent it is unable to realize gains on its investment
portfolio.
GAIN ON DISPOSAL OF SUBSIDIARIES. On March 18, 1996, SMC completed the
sale of a duplicate charter associated with First International to GIAC. SMC
received sale proceeds of $10,393,000, including $1,500,000 for the charter and
licenses associated with First International. Standard Life realized a net
pre-tax gain of $1,042,000 on this sale. In addition, First International,
Standard Life and GIAC have entered into a series of agreements that include
provisions for Standard Life to retain the economic interest in certain First
International policies and administer First International policies in force at
the date of such sale.
In an unrelated matter, SMC decided in February 1996 to terminate the
reinsurance agreement between Standard Reinsurance and Salamandra, and not to
renew the Barbados license of Standard Reinsurance. This resulted in a 1996
write-off of SMC's investment in Standard Reinsurance and certain intangible
assets of Standard Reinsurance amounting to $156,000.
The combined effect of the pre-tax gain on the sale of First
International and related contracts, and the Standard Reinsurance write-offs,
was $886,000 pre-tax and $2,306,000 after tax in 1996.
POLICY CHARGES. Policy charges, which represent the amounts assessed
against policyholder account balances for the cost of insurance, policy
administration and surrenders, increased $2,961,000 or 116% to $5,512,000 for
1997 compared to $2,551,000 for 1996. The increase in policy charges resulted
from an increase in policy charges for Standard Life's universal life insurance
products of $1,790,000 due to the inclusion of Shelby Life in the results of
operations for periods after November 1, 1996, and an increase in policy
surrender charges on FPDAs of $693,000. The increase in annuity policy
withdrawals and surrender charges on flexible premium deferred annuities
generally corresponds to the aging and growth of SMC's annuity business in
force.
FEES FROM SEPARATE ACCOUNTS. Fees from separate accounts increased
$215,000 or 14% to $1,779,000 for 1997 from $1,564,000 for 1996. This increase
is due primarily to an increase in the value of assets held in separate
accounts from $122,705,000 at December 31, 1995 to $148,064,000 at December 31,
1997. Net deposits from sales of unit-linked products by Standard Management
International were $21,954,000 and $16,902,000 for 1997 and 1996, respectively.
Such income fluctuates in relationship to total separate account assets and the
return earned on such assets.
BENEFITS AND CLAIMS. Benefits and claims decreased $821,000 or 8% to
$9,098,000 for 1997 from $9,919,000 for 1996. The decrease in benefits and
claims in 1997 resulted primarily from an increase in change in policy reserves
of $4,234,000 in 1996 related to the termination and recapture of the
reinsurance agreement with National Mutual. This decrease offset the increase
in benefits and claims from adverse mortality experience and the inclusion of
Shelby Life (approximately $1,152,000 in 1997) in the results of operations for
periods after November 1, 1996. Throughout SMC's history, it has experienced
both periods of higher and lower benefits and 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 $16,281,000 for 1997, an increase of $5,189,000 or 47%
from $11,092,000 for 1996. The increase resulted from the inclusion of interest
credited of $3,740,000 from Shelby Life products, increases in interest
credited rates on new annuity sales and the increases in the growth in policy
reserves for FPDAs from sales. At December 31, 1997, the weighted average
interest credited rate for Standard Life's currently marketed annuities and
other financial product liabilities was 5.58% compared to 5.27% at December 31,
1996.
SALARIES AND WAGES. Salaries and wages were $5,608,000 for 1997, an
increase of $555,000 or 11% from $5,053,000 for 1996. This increase was caused
primarily by an increase in the average wages per employee in 1997 and an
increase in the number of employees from 84 at January 1, 1996 to 92 at
December 31, 1997.
AMORTIZATION. Amortization expense increased $656,000 or 25% to
$3,248,000 for 1997 from $2,592,000 for 1996. The increase in current year
amortization expense resulted primarily from the amortization of present value
of future profits of $555,000 in 1997 for the acquisition of Shelby Life.
OTHER OPERATING EXPENSES. Other operating expenses decreased $320,000 or
4% to $6,991,000 for 1997 from $7,311,000 for 1996. The decrease in other
operating expenses resulted primarily from eliminating in 1997 the additional
cost to convert the operations and expand the marketing effort in Dixie
National Life incurred in 1996 and a reduction in international operating
expenses due to the strengthening of the U.S. dollar.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $1,576,000 or 196% to $2,381,000 for 1997 from $805,000 for
1996. The increase in interest expense and financing costs during 1997 resulted
primarily from increased borrowing of $10,100,000 in November 1996 on the
Amended Credit Agreement and borrowings of $4,000,000 from an unaffiliated
insurance company in connection with the acquisition of Shelby Life and
additional borrowings of $5,600,000 in connection with funding capital
contributions to an insurance subsidiary and redemption of Class S Preferred
Stock in 1997.
FEDERAL INCOME TAXES. Federal income tax expense (credit) was $617,000
for 1997, compared to $(730,000) for 1996. The large credit in 1996 is
primarily due to tax benefits of $1,420,000 related to the sale of First
International.
EXTRAORDINARY GAIN ON EARLY REDEMPTION OF REDEEMABLE PREFERRED STOCK.
Extraordinary gains were recorded on the early redemption of the Class S
Preferred Stock for the amounts by which the repurchase price for the Class S
Preferred Stock was below its book value plus accrued and unpaid dividends.
SMC recorded no extraordinary gain for 1997 compared to a $502,000 gain for
1996. Effective August 1, 1997, SMC redeemed all of its issued and outstanding
Class S Preferred Stock at redemption value of $10.00 per share plus
accumulated and unpaid dividends.
<PAGE>
DISCUSSION OF CHANGES IN THE CONSOLIDATED STATEMENT OF OPERATIONS FROM
YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
OPERATING INCOME. The income from operations (before net realized
investment gains and gain on disposal of subsidiaries), was $1,174,000 in 1996,
or $.24 per share, compared to $461,000 for 1995, or $.09 per share. The change
resulted primarily from international operations producing income from
operations of $1,218,000 compared a loss of to $(22,000) for 1996 and 1995,
respectively. The international operating gains resulted primarily from
increased management fees on an increasing separate account base due to
portfolio sales in 1996 and 1995, and increased value of assets under
management, coupled with a decrease in marketing costs in 1996 when compared to
1995. The income (loss) from operations in the United States decreased to
$(44,000) in 1996 compared to $483,000 in 1995. The decline was attributable to
an increase in interest expense from borrowings to repurchase Common Stock,
Class S Preferred Stock and the purchase of Shelby Life and additional costs to
convert the operations and expand the marketing effort in Dixie National Life.
PREMIUM INCOME. GAAP premium income for the 1996 was $10,468,000, an
increase of $4,964,000 or 90% from $5,504,000 for 1995. This increase is mainly
attributable to recapture of premiums ceded of $4,234,000 due to the
termination and recapture of a reinsurance agreement with National Mutual and
the inclusion of Dixie National Life and Shelby Life in the results of
operations for periods after October 2, 1995 and November 1, 1996,
respectively. These amounts offset the decline in premiums from the cession of
a portion of First International's life insurance business and the regular
policy lapses, surrenders and expiries in SMC's closed blocks of business.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $42,347,000
compared to $17,524,000 for 1996 and 1995, respectively. The increase in
premium deposits is partially due to an increase in gross domestic premium
deposits. Gross domestic premium deposits received from interest-sensitive
annuities and financial products were $51,254,000 for 1996 compared to
$37,614,000 for 1995. The increase is the result of an aggressive marketing
campaign implemented by Standard Life with increased crediting interest rates.
First year interest crediting rates were increased approximately 1% on certain
FPDAs sold after April 1, 1995. Also contributing to the increase in premiums
is the continued development of SMC's distribution system through marketing
support from Standard Marketing and an increase in the agency base achieved
through the recruitment of larger managing general agencies and expanding
geographical concentration into the Mid-South and California.
SMC also decreased the quota-share portion of business ceded pursuant to
a reinsurance agreement from 70% to 50% at September 1, 1995, which was further
decreased to 25% effective April 1, 1995. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium deposits by $8,907,000 in 1996
compared to $20,090,000 in 1995.
NET INVESTMENT INCOME. Net investment income increased $2,354,000 or 13%
to $20,871,000 for 1996 from $18,517,000 for 1995. The increase primarily
resulted from an increase in total invested assets (amortized cost) of
approximately 32% from 1995 to 1996, most of which occurred in the fourth
quarter due to the acquisition of Shelby Life. The weighted average net yield
on SMC's invested assets was 7.32% for both 1996 and 1995. The continued growth
in SMC's total invested assets reflects increased sales of FPDAs and the
inclusion of the invested assets of Dixie National Life of approximately
$26,400,000 and Shelby Life of approximately $100,000,000 in the consolidated
balance sheet effective October 2, 1995 and November 1, 1996, respectively,
which was offset by the invested assets ceded in the GIAC reinsurance
transaction of approximately $18,000,000.
NET REALIZED INVESTMENT GAINS. Net realized investment gains increased
$614,000 or 89% to $1,302,000 from $688,000 for 1996 and 1995, respectively.
The increase primarily resulted from active portfolio management by SMC. 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.
POLICY CHARGES. Policy charges increased $84,000 or 3% to $2,551,000 for
1996 compared to $2,467,000 for 1995. The increase in policy charges resulted
from an increase in policy surrender charges on FPDAs of $254,000 and the
inclusion of Dixie National Life and Shelby Life in operating results for
periods after October 2, 1995 and November 1, 1996, respectively, for an
increase of $1,359,000 which offset a decrease of $1,502,000 for the absence of
policy charges from SMC's closed blocks of universal life business which were
sold to GIAC through a reinsurance contract effective January 1, 1995.
FEES FROM SEPARATE ACCOUNTS. Fees from separate accounts increased
$270,000 or 21% to $1,564,000 for 1996 from $1,294,000 for 1995. This increase
is due primarily to an increase in the value of assets held in separate
accounts from $94,301,000 at December 31, 1994 to $128,546,000 at December 31,
1996 and to higher service fees being levied on certain transactions. Net
deposits from sales of unit-linked products by Standard Management
International were $16,902,000 and $31,793,000 for 1996 and 1995, respectively.
Such income fluctuates in relationship to total separate account assets and the
return earned on such assets.
OTHER INCOME. Other income increased $897,000 or 236% to $1,277,000 for
1996 compared to $380,000 for 1995. The increase resulted primarily from
administration fees of $316,000 and the reserve and experience refund
adjustments in connection with the agreements with GIAC and increased
commissions received by Standard Marketing from the sale of unaffiliated
products.
BENEFITS AND CLAIMS. Benefits and claims increased $4,128,000 or 71% to
$9,919,000 for 1996 from $5,791,000 for 1995. The increase resulted primarily
from an increase in reserves of $4,234,000 related to the termination and
recapture of a reinsurance agreement with National Mutual. Throughout SMC's
history, it has experienced both periods of higher and lower benefit claims.
Such volatility is not uncommon in the life insurance industry and, over
extended periods of time, periods of higher claims experience tend to be offset
by periods of lower claims experience.
INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest sensitive annuities and other
financial products was $11,092,000 for 1996, an increase of $1,083,000 or 11%
from $10,009,000 for 1995. The increase resulted primarily from SMC's increase
of credited interest rates on new annuity sales and the increases in the growth
in policy reserves for FPDAs from sales and the inclusion of Shelby Life in the
operations results effective November 1, 1996. At December 31, 1996, the
weighted average interest credited rate for Standard Life's annuities and other
financial product liabilities was 5.27% compared to 5.35% at December 31, 1995.
SALARIES AND WAGES. Salaries and wages were $5,053,000 for 1996, an
increase of $352,000 or 7% from $4,701,000 for 1995. This increase was caused
primarily by an increase in incentive compensation expense of $315,000.
AMORTIZATION. Amortization expense increased $548,000 or 27% to
$2,592,000 for 1996 from $2,044,000 for 1995. The increase in current year
amortization expense resulted primarily from increased amortization of deferred
acquisition costs as gross profits from business sold in recent years began to
emerge and increased surrenders and their corresponding increase in the
amortization of deferred acquisition costs, and from an increase of $602,000
for the amortization of present value of future profits for the acquisitions of
Dixie National Life, Shelby Life and National Mutual. These items more than
offset reduced amortization of excess of cost over net assets acquired of
$46,000 and present value of future profits of $120,000 due to the sale of
First International.
OTHER OPERATING EXPENSES. Other operating expenses increased $1,292,000
or 21% to $7,311,000 for 1996 from $6,019,000 for 1995. The increase in other
operating expenses resulted primarily from the expenses of Dixie National Life
and Shelby Life included in the results for the periods after October 2, 1995
and November 1, 1996, respectively and the increased expenses related to
potential acquisitions and advisory fees.
INTEREST EXPENSE AND FINANCING COSTS. Interest expense and financing
costs increased $687,000 or 582% to $805,000 for 1996 from $118,000 for 1995.
The increase in interest expense and financing costs during 1996 resulted
primarily from the borrowing on the Amended Credit Agreement. The borrowing
under the Amended Credit Agreement and the original credit agreement primarily
occurred after December 31, 1995 in connection with the acquisition of Shelby
Life and the repurchase of Common Stock and Class S Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Standard Management is a financial services holding company. The
liquidity requirements of Standard Management are met primarily from management
fees, equipment rental fees and payments for other charges and dividends and
interest on Surplus Debentures received from Standard Management's subsidiaries
as well as Standard Management's working capital. These are Standard
Management's primary source of funds to pay operating expenses and meet debt
service obligations. The payment of dividends and interest on Surplus
Debentures and management and other fees by Standard Life to Standard
Management is subject to restrictions under the insurance laws of Indiana,
Standard Life's jurisdiction of domicile. These internal sources of liquidity
have been supplemented in the past by external sources such as lines of credit
and revolving credit agreements and long-term debt and equity financing in the
capital markets.
SMC reported on a consolidated GAAP basis net cash provided by operations
of $7,764,000 and $1,726,000 for 1997 and 1996, respectively. Although deposits
received on SMC's interest-sensitive annuities and other financial products are
not included in cash flow from operations under GAAP, such funds are available
for use by SMC. Cash provided by operations plus net deposits received, less
net account balances returned to policyholders on interest sensitive annuities
and other financial products, resulted in positive cash flow of $19,649,000 and
$26,717,000 for 1997 and 1996, respectively. Cash generated on a consolidated
basis is available to Standard Management only to the extent that it is
generated at Standard Management level or is available to Standard Management
through dividends, interest, management fees or other payments from
subsidiaries.
In April 1993, Standard Management instituted a program to repurchase SMC
Common Stock from time to time. The purpose of the stock repurchase program is
to enhance shareholder value. Standard Management had repurchased 1,134,356
shares of SMC Common Stock for $5,826,000 as of January 1, 1998. Of the
repurchases, 419,026 shares were paid for through additional borrowings under
the Amended Credit Agreement, 39,016 shares from the proceeds of the additional
borrowings of the subordinated convertible notes, and the remainder were paid
from working capital. At January 1, 1998, Standard Management was authorized to
purchase an additional 365,644 shares under this program.
At February 28, 1998, Standard Management had "parent company only" cash
and short-term investments of $558,000. These funds are available to Standard
Management for general corporate purposes. Standard Management's "parent
company only" operating expenses (not including interest expense) were
$3,420,000 and $3,470,000 for 1997 and 1996, respectively.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $166,667 (annual fee of
$2,000,000) during 1997 for certain management services related to the
production of business, investment of assets and evaluation of acquisitions.
Pursuant to the management service agreements with Standard Life, Dixie
National Life paid monthly payments of $83,333 (annual fee of $1,000,000) to
Standard Life in 1997. Both of these agreements provide that they may be
modified or terminated by the Indiana and Mississippi departments of insurance
in the event of financial hardship of Standard Life or Dixie National Life.
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 $83,333 per month by
Savers Life to SMC for financial and regulatory reporting, investment of
assets and the production of business. SMC has agreed to receive no fee, nor
shall Savers life have an obligation to pay, unless the capital and surplus of
Savers Life is $7,000,000 after the acquisition of Savers Life. The amount
of capital and surplus of Savers Life at December 31, 1997 was $7,134,00.
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.
Pursuant to the management services agreement with Standard Management,
Premier Life (Luxembourg) paid Standard Management a management fee of $25,000
per quarter during 1997 and 1996 for certain management and administrative
services. The agreement provides that it may be modified or terminated by
either Standard Management or Premier Life (Luxembourg).
At April 1, 1995, Standard Management sold its property and equipment to
an unaffiliated leasing/financing company for $1,396,000 and subsequently
entered into a capital lease obligation whereby Standard Management pays a
monthly rental amount of $45,000. Standard Management charges a monthly
equipment rental fee to its subsidiaries for this equipment and additional
equipment purchased after April 1, 1995. The amount of the rental fee income
received from Standard Management's subsidiaries was $1,145,000 and $853,000
for 1997 and 1996, respectively.
On November 8, 1996, Standard Life acquired through merger Shelby Life
from DLAC for approximately $14,650,000, including $13,000,000 in cash, 250,000
shares of restricted SMC Common Stock (valued at $1,250,000) and $400,000 of
acquisition costs. Financing for the Shelby Life transaction was provided by
senior debt of $10,000,000 under the Amended Credit Agreement and $4,000,000 in
subordinated convertible debt described below.
The Amended Credit Agreement permits Standard Management to borrow up to
$20,000,000 in the form of a seven-year reducing revolving loan arrangement.
Standard Management has agreed to pay a non-use fee of .50% per annum on the
unused portion of the commitment. In connection with the original and Amended
Credit Agreement, Standard Management issued warrants to the bank to purchase
77,500 shares of SMC Common Stock. Borrowing under the Amended Credit Agreement
may be used for contributions to surplus of insurance subsidiaries, acquisition
financing, and repurchases of Class S Preferred and SMC Common Stock. The debt
is secured by a Pledge Agreement of all of the issued and outstanding shares of
common stock of Standard Life and Standard Marketing. Interest on the borrowing
under the Amended Credit Agreement is determined, at the option of Standard
Management, to be: (i) a fluctuating rate of interest based on 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 Standard Management and certain investment and indebtedness
limitations. At December 31, 1997, Standard Management had borrowed $16,000,000
under the Amended Credit Agreement at a weighted average interest rate of
9.062%.
In connection with the acquisition of Shelby Life, Standard Management
borrowed $4,000,000 from an insurance company pursuant to a subordinated
convertible debt agreement which is due in December, 2003. At June 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 June 30, 1997, SMC 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 other general corporate
purposes. The Notes are convertible at any time at the option of the
noteholders 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 SMC commencing on July 1, 2000
at redemption prices equal to 105% of the principal amount (plus accrued
interest) and declining to 102% of the principal amount (plus accrued
interest). The Notes may be prepaid prior to July 1, 2000 at a redemption
price equal to 101% of the principal amount plus accrued interest under certain
limited circumstances. The subordinated convertible debt agreements contains
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 December 31, 1997 (weighted average rate of 9.062%),
annual debt service in 1998 would be approximately $2,800,000 in interest paid.
In addition, Standard Management has 1998 obligations under a capital lease of
$151,000.
From the funds borrowed by Standard Management pursuant to the Amended
Credit Agreement and the subordinated convertible debt agreement, $13,000,000
was loaned to Standard Life pursuant to an Unsecured Surplus Debenture
Agreement ("Surplus Debenture") which requires Standard Life to make quarterly
interest payments to Standard Management at a variable corporate base rate plus
2% per annum, and annual principal payments of $1,000,000 per year beginning in
2007 and concluding in 2019. The interest and principal payments are subject to
quarterly approval by the Indiana Department of Insurance, depending upon
satisfaction of certain financial tests relating to levels of Standard Life's
capital and surplus and general approval of the Commissioner of the Indiana
Department of Insurance. Standard Management currently anticipates these
quarterly approvals will be granted. Assuming the approvals are granted and the
December 31, 1997 interest rate of 10.50% continues in 1998, Standard
Management will receive interest income of $1,365,000 from the Surplus
Debenture for 1998.
Dividends from Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Commissioner of the Indiana Department of
Insurance, if the dividend or distribution, together with all other dividends
and distributions paid within the preceding twelve months, does not exceed the
greater of (i) net gain from operations or (ii) 10% of surplus, in each case as
shown in its preceding annual statutory financial statements. Also, regulatory
approval is required when dividends to be paid exceed unassigned statutory
surplus. For the year ended December 31, 1997, Standard Life reported statutory
net gain from operations before realized capital losses of $2,374,000 and
statutory surplus of $25,923,000 which includes unassigned surplus of
$1,693,000. 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.
Standard Management anticipates the available cash from its existing
working capital, plus anticipated 1998 dividends, management fees, rental
income and interest payments on its Surplus Debentures receivable will be more
than adequate to meet its anticipated "parent company only" cash requirements
for 1998.
Standard Management has a note receivable of $2,858,000 from an affiliate
and a note payable of $2,858,000 to a different affiliate. This note receivable
and note payable are eliminated in the consolidated financial statements.
U.S. INSURANCE OPERATIONS. The principal liquidity requirements of
Standard Life are its contractual obligations to policyholders, dividend, rent,
management fee and Surplus Debenture payments to Standard Management and other
operating expenses. The primary source of funding for these obligations has
been cash flow from premium income, net investment income, investment sales and
maturities and sales of FPDAs. These sources of liquidity for Standard Life
significantly exceed scheduled uses. Liquidity is also affected by unscheduled
benefit payments including death benefits and policy withdrawals and
surrenders. The amount of withdrawals and surrenders is affected by a variety
of factors such as renewal interest crediting rates, interest rates for
competing products, general economic conditions, Standard Life's A.M. Best
ratings (currently rated "B+") and events in the industry that affect
policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions
that allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, in light of such activity.
Changes in interest rates may affect the incidence of policy surrenders
and other withdrawals. In addition to the potential effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect earnings if SMC were required to sell investments at reduced
values to meet liquidity demands. SMC manages the asset and liability
portfolios in order to minimize the adverse earnings effect of changing market
interest rates. SMC seeks assets that have duration characteristics similar to
the liabilities that they support. SMC also prepares cash flow projections and
performs cash flow tests under various market interest rate scenarios to assist
in evaluating liquidity needs and adequacy. SMC's U.S. insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the NAIC,
as modified by the Indiana Department of Insurance, or the state in which the
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that:
(i) acquisition costs (primarily commissions and policy issue costs) and
(ii) reserves for future guaranteed principal payments and interest in excess
of statutory rates, be expensed in the year the new business is written. These
items cause a reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. SMC designs its products to minimize such
first-year losses, but certain products continue to cause a statutory loss in
the year written. For each product, SMC controls the amount of net new premiums
written to manage the effect of such surplus strain. SMC's long-term growth
goals contemplate continued growth in its insurance businesses. To achieve
these growth goals, SMC's U.S. insurance subsidiaries will need to increase
statutory surplus. Additional statutory surplus may be secured through various
sources such as internally generated statutory earnings, infusions by Standard
Management with funds generated through debt or equity offerings or mergers
with other life insurance companies. If additional capital is not available
from one or more of these sources, SMC believes that it could reduce surplus
strain through the use of reinsurance or through reduced writing of new
business.
During 1997, Standard Life produced a statutory net income of $1,776,000.
Standard Management contributed $2,400,000 to Standard Life in 1997 to
facilitate growth in premiums written. In March 1996, Standard Life sold its
subsidiary, First International, and realized an increase in statutory capital
and surplus of approximately $4,951,000 from the statutory gain on the sale and
related reinsurance transactions.
Commencing January 1, 1995, Standard Life began to reinsure a portion of
its annuity business. This reinsurance agreement has allowed SMC to write
volumes of business that it would not otherwise have been able to write due to
regulatory restrictions based on its ratio of surplus to liabilities as
determined by regulatory authorities in the State of Florida. By reinsuring a
portion of the annuity business, the liability growth is slowed, thereby
avoiding the erosion of surplus that occurs in periods of increasing sales. If
SMC's ratio of surplus to liabilities falls below 4%, the State of Florida
could prohibit SMC from writing new business in Florida. Standard Life's
largest annuity reinsurer at December 31, 1997, Winterthur, is rated "A"
("Excellent") by A.M. Best. From January 1, 1995 to August 31, 1995
approximately 70% of certain of Standard Life's annuity business produced was
ceded. Standard Life decreased the quota-share portion of business ceded to 50%
at September 1, 1995 and further reduced it to 25% effective April 1, 1996 to
reflect the reduced need for additional capital and increase current earnings
potential. This reduction was possible since the surplus strain experienced by
Standard Life was not as great as originally anticipated as a result of lower
than expected sales in 1995 and the increase in surplus resulting from the sale
of First International. In addition, Standard Life's ability to retain business
was further increased by contributions to surplus of insurance subsidiaries of
$2,400,000 in 1997. Winterthur limits dividends and other transfers by
Standard Life to Standard Management or affiliated companies in certain
circumstances.
Management believes that operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 1998. As of December 31, 1997,
Standard Life had statutory capital and surplus for regulatory purposes of
$25,923,000 compared to $22,970,000 at December 31, 1996. The increase is
primarily due to the capital contribution of $2,400,000 from Standard
Management in 1997. As the life insurance and annuity business produced by
Standard Life and Dixie National Life increases, Standard Life expects to
continue to satisfy statutory capital and surplus requirements through
statutory profits, through the continued reinsurance of a portion of its new
business, and through additional capital contributions by Standard Management.
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
1997 and 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
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the "RBC Ratio") of the enterprise's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level RBC, as defined by the
NAIC. Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. Each of
SMC's insurance subsidiaries has an RBC Ratio that is at least 400% of the
minimum RBC requirements; accordingly, the subsidiaries meet the RBC
requirements.
Standard Life's acquisition of Shelby Life, and merger of Shelby Life
into Standard Life, effective November 1, 1996 is anticipated to have a
positive effect on Standard Life's liquidity and cash flows. Shelby Life ceased
writing new business effective November 1, 1996, thus reducing the surplus
strain normally associated with the issuance of new policies. The anticipated
profits from Shelby Life's book of business are expected to exceed the related
interest expense connected with the $13,000,000 of Surplus Debentures issued by
Standard Life in connection with the acquisition of Shelby Life.
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 SMC at
December 31, 1997, includes a $1,388,000 credit representing negative goodwill
on the purchase of Standard Management International which will be amortized
into earnings during 1998. This amortization is a non-cash credit to SMC
statement 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 and 1996 due to accumulated losses. Premier Life (Bermuda) did not pay
dividends in 1997 and 1996. 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 the Standard Management
International portfolio, the investment risk rests with the policyholder.
Investment risk for Standard Management International exists where Standard
Management International makes investment decisions with respect to the
remaining traditional business and for the assets backing certain actuarial and
regulatory reserves. The investments underlying these liabilities mostly
represent short-term investments and fixed maturity securities. These short
term investments and fixed maturity securities are normally bought and/or
disposed of only on the advice of independent consulting actuaries who perform
an annual analysis comparing anticipated cash flows on the insurance portfolio
with the cash flows from the fixed maturity securities. Any resulting material
mismatches are then covered by adjusting the securities in the investment
portfolio as appropriate.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry
has experienced an increasing number of mergers, acquisitions, consolidations
and sales of certain business lines. These consolidations have been driven by a
need to reduce costs of distribution and overhead and maintain business in
force. Additionally, increased competition, regulatory capital requirements and
technology costs have also contributed to the level of consolidation in the
industry. These forces are expected to continue as is the level of industry
consolidation.
FOREIGN CURRENCY RISK. Standard Management International policyholders
invest in assets denominated in a wide range of currencies. Policyholders
effectively bear the currency risk, if any, as these investments are matched by
policyholder separate account liabilities. Therefore, their investment and
currency risk is limited to premiums they have paid. Policyholders are not
permitted to invest directly into options, futures and derivatives. Standard
Management International could be exposed to currency fluctuations if
currencies within the conventional investment portfolio or certain actuarial
reserves are mismatched. The assets and liabilities of this portfolio and the
reserves are continually matched by the company and at regular intervals by the
independent actuary. In addition, Premier Life (Luxembourg) shareholder's
equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not
hedge translation risk because its stockholder's equity will remain in
Luxembourg francs for the foreseeable future and no significant realized
foreign exchange gains or losses are anticipated. At December 31, 1997, there
was an unrealized loss from foreign currency translation adjustment of
$473,000.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in SMC's financial
statements as of December 31, 1997 are certain assets that are valued for
financial statement purposes primarily on the basis of assumptions established
by SMC's management. These assets include deferred acquisition costs, present
value of future profits, costs in excess of net assets acquired and
organization and deferred debt issuance costs. The total value of these assets
reflected in the December 31, 1997 consolidated balance sheet aggregated
$43,492,000 or 6% of SMC's assets. SMC has established procedures to
periodically review the assumptions utilized to value these assets and
determine the need to make any adjustments in such values in SMC's consolidated
financial statements. SMC has determined that the assumptions utilized in the
initial valuation of these assets are consistent with the current operations of
SMC as of December 31, 1997.
REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between companies.
The NAIC is in the process of codifying SAP to promote standardization of
methods utilized throughout the industry. Completion of this project might
result in changes in statutory accounting practices for SMC's insurance
subsidiaries; however, it is not expected that such changes would materially
affect SMC's insurance subsidiaries' statutory capital requirements.
FINANCIAL SERVICES DEREGULATION. The United States Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. Proposals
are extant which would allow banks to own or affiliate with insurers and
securities firms. An increased presence of banks in the life insurance and
annuity businesses may increase competition in these markets. The Company
cannot predict the impact of these proposals on the earnings of the Company.
IMPACT OF YEAR 2000. Some of the Company's older computer programs were
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send billing
notices, or engage in similar normal business activities.
The Company has completed an assessment and will have minimal
expenditures to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. Modifications and or replacements are estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The Company believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. Additionally,
management has concluded that the Year 2000 Issue will not materially affect
future financial results, or cause reported financial information not to be
indicative of future operating results or future financial condition.
SAFE HARBOR PROVISIONS. All statements, trend analyses, and other
information contained in this Annual Report on Form 10-K 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 difference 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.
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to
this Item 8 are listed in Item 14(a)(1) and included in a separate section of
this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Registrant will file a definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
Company's 1998 Annual Meeting of Shareholders, (the "Proxy Statement") not
later than 120 days after the end of the fiscal year covered by this report,
and certain information included therein is incorporated herein by reference.
Only those sections of the Proxy Statements which specifically address the
items set forth herein are incorporated by reference. Such incorporation does
not include the Compensation Committee Report or the Performance Graph included
in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning SMC's directors required by this item is
incorporated by reference to SMC's Proxy Statement.
The information concerning SMC's executive officers required by this Item
is incorporated by reference herein to the section in Part I, entitled
"Executive Officers."
The information regarding compliance with Section 16 of the Securities
and Exchange Act of 1934 is to be set forth in the Proxy Statement and is
hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
SMC's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
SMC's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
SMC's Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(a)(3) List of Exhibits:
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
2.1 Amended and Restated Agreement and Plan of Merger dated as of
December 9, 1997 among SMC, SAC and Savers Life. (incorporated by
reference to SMC's Registration Statement on Form S-4 (Registration
No. 333-43023).
3.1 Amended and Restated Articles of Incorporation, as amended
(incorporated by reference to SMC's Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1995).
3.2 Amended and Restated Bylaws of SMC as amended (incorporated by
reference to SMC's Registration Statement on Form S-1 (Registration
No. 33-53370) as filed with the Commission on January 27, 1993 and to
Exhibit 3 of SMC's Quarterly Report on Form 10-Q (File No. 0-20882)
for the quarter ended September 30, 1994).
4.1 Form of Senior Note Agreement Warrant (incorporated by reference to
SMC's Registration Statement on Form S-1 (Registration No. 33-53370)).
4.2 Form of Oppbridge Partners Warrant (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No. 33-53370)).
4.3 Registration Rights Agreement, dated as of May 3, 1990 among SMC,
Howard T. Cohn and Joseph J. Piazza and the first amendment thereto,
dated June 4, 1990 (incorporated by reference to SMC's Registration
Statement on Form S-1 (Registration No. 33-53370).
4.4 Amended and Restated Registration Rights Agreement dated as of April
15, 1997 by and between SMC and Fleet National Bank.
4.5 Form of Fleet National Bank Warrant.
4.6 Form of President's Club Warrant (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882)).
4.7 Registration Rights Agreement dated as of November 8, 1996 by and
between SMC and Great American Reserve Insurance Company ("Great
American Reserve") (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1996).
4.8 Form of Sand Brothers & Company, Ltd. Warrant (incorporated by
reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
the year ended December 31, 1997).
9 Voting Trust Agreement dated as of November 8, 1996 among Delta Life
and Annuity Company, Messrs. Ronald D. Hunter and Allen O. Jones, Jr.,
as Voting Trustees, and SMC (incorporated by reference to SMC's
Registration Statement on Form S-4 (Registration No. 333-35447)).
10.1 Amended Advisory Agreement, dated as of August 1, 1991, between
SMC and Conseco Capital Management, Inc., as amended, April 17,
1995 (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31,
1996).
10.2 Second Amended and Restated Employment Contract by and between
SMC and Ronald D. Hunter, dated and effective, as amended,
April 3, 1995 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1995).
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.3 Second Amended and Restated Employment Contract by and between
SMC and Edward T. Stahl, dated and effective, as amended,
April 3, 1995 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1995).
10.4 Second Amended and Restated Employment contract by and between
SMC and Raymond J. Ohlson, dated and effective, as amended,
April 3, 1995 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1995).
10.5 First Amended and Restated Employment Contract by and between
SMC and Stephen M. Coons dated and effective, April 3, 1995
(incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended June 30,
1995).
10.6 Indemnification Agreement between SMC and Stephen M. Coons and
Coons & Saint, dated August 1, 1991 (incorporated by reference
to SMC's Registration Statement on Form S-1 (Registration
No. 33-53370) as filed with the Commission on January 27, 1993).
10.7 Standard Management Corporation Amended and Restated 1992 Stock
Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-35447)
as filed with the Commission on September 11, 1997.
10.8 Lease by and between Standard Life and WRC Properties, Inc.,
dated February 27, 1991 (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No. 33-53370)
as filed with the Commission on January 27, 1993).
10.9 Management Service Agreement between Standard Life and SMC dated
August 1, 1992, as amended on January 1, 1997 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No. 0-20882)
for the year ended December 31, 1996).
10.10 Agreement for Assumption Reinsurance between the National
Organization Of Life and Health Insurance Guaranty Associations
and Standard Life, concerning, The Midwest Life Insurance
Company In Liquidation effective June 1, 1992 (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370) as filed with the Commission on
January 27, 1993).
10.11 Reinsurance Agreement between Standard Life and Swiss Re Life
and Health effective May 1, 1975 (incorporated by reference to
SMC's Registration Statement on Form S-1 (Registration
No. 33-53370) as filed with the Commission on January 27, 1993).
10.12 Reinsurance Agreement between Firstmark Standard Life Insurance
Company and Swiss Re Life and Health effective February 1, 1984
(incorporated by reference to SMC's Registration Statement on
Form S-1 (Registration No. 33-53370) as filed with the
Commission on January 27, 1993).
10.13 Reinsurance Contract between First International and Standard
Life dated July 10, 1992 (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No. 33-53370)
as filed with the Commission on January 27, 1993).
10.14 Amended Reinsurance Agreement between Standard Life and
Winterthur Life Re Insurance Company effective January 1, 1995
(incorporated by reference to SMC's Annual Report on Form 10-K
(File No. 0-20882) for the year ended December 31, 1996).
10.15 Management Service Agreement between Premier Life (Luxembourg)
and SMC dated September 30, 1994 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1994).
10.16 Assignment of Management Contract dated October 2, 1995 of
Management Contract dated January 1, 1987 between DNC and Dixie
National Life to Standard Life (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1996).
<PAGE>
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.17 Automatic Indemnity Reinsurance Agreement between the First
International and The Guardian Insurance & Annuity Company, Inc.
dated and effective January 1, 1996 (incorporated by reference
to SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
10.18 Indemnity Retrocession Agreement between The Guardian
Insurance & Annuity Company, Inc. and the Standard Life dated
and effective January 1, 1996 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1996).
10.19 Automatic Indemnity Reinsurance Agreement between The Guardian
Insurance & Annuity Company, Inc. and the Standard Life dated
and effective January 1, 1996 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1996).
10.20 Administrative Services Agreement between First International
and Standard Life dated and effective March 18, 1996
(incorporated by reference to SMC's Annual Report on Form 10-K
(File No. 0-20882) for the year ended December 31, 1996).
10.21 Amendment No. 1 to Amended and Restated Revolving Line of Credit
Agreement dated as of March 10, 1998 between SMC and Fleet
National Bank.
10.22 Amended and Restated Note Agreement dated as of March 10, 1998
between SMC and Fleet National Bank in the amount of
$20,000,000.
10.23 Amended and Restated Pledge Agreement dated as of March 10, 1998
between SMC and Fleet National Bank.
10.24 Revised Service Contract Agreement dated as of October 16, 1995
and effective January 1, 1995 between Standard Life and Standard
Marketing (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31,
1996).
10.25 Note Agreement dated as of November 8, 1996, as amended and
restated on June 30, 1997, by and between SMC and Great
American Reserve in the amount of $4,371,573 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended June 30, 1997).
10.26 Surplus Debenture dated as of November 8, 1996 by and between
SMC and Standard Life in the amount of $13,000,000 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended September 30, 1996).
10.27 Portfolio Indemnify Reinsurance Agreement between Dixie National
Life and Cologne Life Reinsurance Company dated and effective
December 31, 1996 (incorporated by reference to SMC's Annual
Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1996).
10.28 Note Agreement dated as of June 30, 1997 between SMC, Capitol
American Life Insurance Company and Transport Life Insurance
Company in the amount of $5,628,427 (incorporated by reference
to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1997).
10.29 Senior Subordinated Convertible Note dated as of June 30, 1997
between SMC and Capitol American Life Insurance Company in the
amount of $3,628,427 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter
ended June 30, 1997).
10.30 Senior Subordinated Convertible Note dated as of June 30, 1997
between SMC and Transport Life Insurance Company in the amount
of $2,000,000 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1997).
<PAGE>
Exhibit
NUMBER DESCRIPTION OF DOCUMENT
10.31 Coinsurance Agreement effective as of July 1, 1997 by and
between Savers Life and World Insurance Company (incorporated by
reference to SMC's Registration Statement on Form S-4
(Registration No. 333-35447)).
10.32 Amendment I to the Guardian Indemnity Retrocession Agreement
effective as of January 1, 1996 by and between The Guardian
Insurance and Annuity Company and Standard Life (incorporated by
reference to SMC's Registration Statement on Form S-4
(Registration No. 333-35447)).
10.33 Promissory Note from Ronald D. Hunter to SMC in the amount of
$775,500 executed October 28, 1997 (incorporated by reference to
SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended September 30, 1997).
10.34 Reinsurance Agreement between Standard Life and Life Reassurance
Corporation of America effective September 1, 1997.
10.35 Reinsurance Agreement between Standard Life and Business Men's
Assurance Company of America effective September 1, 1997.
21 List of Subsidiaries of SMC
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit
24 Powers of Attorney
27 Financial Data Schedule, which is submitted electronically pursuant to
Regulation S-K to the Securities and Exchange Commission for
information only and not filed.
The following is a list of each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report.
EXHIBIT
NUMBER
10.2
10.3
10.4
10.5
10.7
10.33
(b) Reports on Form 8-K filed during the fourth quarter of 1997.
The Company filed a Current Report on Form 8-K on October 8, 1997 relating
to the signing of a letter of intent with a proposed acquisition. The Company
subsequently filed a Current Report on Form 8-K on October 29, 1997 to announce
the termination of negotiations regarding the proposed acquisition. The
Company filed a Current Report on Form 8-K on December 23, 1997 to announce the
signing of the Amended and Restated Agreement and Plan of Merger with Savers
Life.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1998
STANDARD MANAGEMENT CORPORATION
RONALD D. HUNTER
Ronald D. Hunter
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1998 by the following persons on
behalf of the Registrant and in the capacities indicated.
RONALD D. HUNTER
Ronald D. Hunter Chairman, President and Chief Executive Officer
(Principal Executive Officer)
*
Paul B. Pheffer Director, Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
*
Gerald R. Hochgesang Senior Vice President -- Finance
(Principal Accounting Officer)
*
Raymond J. Ohlson Director
*
Edward T. Stahl Director
*
Stephen M. Coons Director
*
Martial R. Knieser Director
*
Ramesh H. Bhat Director
*
James C. Lanshe Director
*
Robert A. Borns Director
John J. Dillon Director
*
Jerry E. Francis Director
*By: /s/ RONALD D. HUNTER
Ronald D. Hunter
Attorney-in-Fact
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS
and
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1997
STANDARD MANAGEMENT CORPORATION
INDIANAPOLIS, INDIANA
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included herein
and should be read in
conjunction with the Audited Consolidated Financial Statements.
Schedule II -- Condensed Financial Information of Registrant (Parent Company)
for the Years Ended December 31, 1997, 1996 and 1995 F-27
Schedule IV -- Reinsurance for the Years Ended December 31, 1997,
1996 and 1995 F-31
Schedules not listed above have been omitted because they are not applicable or
are not required, or because the required information is included in the
Audited Consolidated Financial Statements or Notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management Corporation
We have audited the accompanying consolidated balance sheets of Standard
Management Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedules listed in the Index.
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
consolidated balance sheets at September 30, 1997 and 1996 or the consolidated
statements of operations, shareholder's equity and cash flows for the three
years ended September 30, 1997 of Standard Management International S.A. and
subsidiaries, a wholly owned subsidiary group, which financial statements
reflect assets totaling approximately 24% and 23% of the Company's consolidated
assets at December 31, 1997 and 1996 and revenues totaling approximately 9%, 9%
and 12% of consolidated revenues for each of the three years in the period
ended December 31, 1997. Those financial statements, which as explained in Note
1 are included in the Company's consolidated balance sheets at December 31,
1997 and 1996, and the Company's consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997, were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the data included
for Standard Management International S.A., is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Standard Management
Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Indianapolis, Indiana
February 11, 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management International S.A.
We have audited the consolidated balance sheets of Standard Management
International S.A. and subsidiaries as at September 30, 1997 and 1996 and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended September 30, 1997 (none
of which aforementioned financial statements are separately presented herein).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material aspects, the consolidated financial position of Standard
Management International S.A. and subsidiaries as at September 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles in the United States of America.
Luxembourg City, Luxembourg
February 11, 1998
KPMG Audit
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 1996
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: 1997 - $372,576 $347,310
$367,372; 1996 - $349,151)
Equity securities, at fair value (cost: 1997 - $55; 1996 - $58) 52 62
Mortgage loans on real estate 375 3,035
Policy loans 9,495 9,903
Real estate 2,163 546
Other invested assets 779 865
Short-term investments 13,342 8,417
Total investments 398,782 370,138
Cash 4,165 5,113
Accrued investment income 6,512 6,198
Amounts due and recoverable from reinsurers 61,596 68,811
Deferred policy acquisition costs 21,435 18,309
Present value of future profits 20,537 23,806
Excess of acquisition cost over net assets acquired 2,445 2,260
Federal income tax recoverable 1,854 2,397
Other assets 3,602 2,835
Assets held in separate accounts 148,064 128,546
Total assets $668,992 $628,413
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $439,390 $425,324
Accounts payable and accrued expenses 6,208 6,249
Obligations under capital lease 141 637
Notes payable 26,000 20,000
Deferred federal income taxes 4,488 3,206
Excess of net assets acquired over acquisition cost 1,388 2,775
Liabilities related to separate accounts 148,064 128,546
Total liabilities 625,679 586,737
Class S Cumulative Convertible Redeemable Preferred Stock, par value $10 per
share:
Authorized 300,000 shares; issued and outstanding 159,889 shares in 1996 -- 1,757
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and outstanding -- --
Common Stock, no par value:
Authorized 20,000,000 shares 40,646 40,481
Treasury stock (4,572) (3,528)
Unrealized gain (loss) on securities available for sale 2,171 (746)
Foreign currency translation adjustment (473) 691
Retained earnings 5,541 3,021
Total shareholders' equity 43,313 39,919
Total liabilities and shareholders' equity $668,992 $628,413
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Revenues:
Premium income $7,100 $10,468 $5,504
Net investment income 29,516 20,871 18,517
Net realized investment gains 396 1,302 688
Gain on disposal of subsidiaries -- 886 --
Policy charges 5,512 2,551 2,467
Amortization of excess of net assets acquired over 1,388 1,388 1,388
acquisition cost
Fees from separate accounts 1,779 1,564 1,294
Other income 1,178 1,277 380
Total revenues 46,869 40,307 30,238
Benefits and expenses:
Benefits and claims 9,098 9,919 5,791
Interest credited on interest-sensitive annuities and
other 16,281 11,092 10,009
financial products
Salaries and wages 5,608 5,053 4,701
Amortization 3,248 2,592 2,044
Other operating expenses 6,991 7,311 6,019
Interest expense and financing costs 2,381 805 118
Total benefits and expenses 43,607 36,772 28,682
Income before federal income taxes, extraordinary gain and
preferred stock 3,262 3,535 1,556
dividends
Federal income tax expense (credit) 617 (730) 243
Income before extraordinary gain and preferred stock 2,645 4,265 1,313
dividends
Extraordinary gain on early redemption of redeemable
preferred stock, -- 502 --
net of $-- federal income tax
Net income 2,645 4,767 1,313
Preferred stock dividends 97 208 --
Earnings available to common shareholders $2,548 $4,559 $1,313
Earnings per common share:
Income before extraordinary gain and preferred stock $ .54 $ .88 $ .25
dividends
Extraordinary gain -- .10 --
Net income .54 .98 .25
Preferred stock dividends .02 .04 --
Earnings available to common shareholders $ .52 $ .94 $ .25
Earnings per common share - assuming dilutions:
Income before extraordinary gain and preferred stock $ .48 $ .82 $ .25
dividends
Extraordinary gain -- .09 --
Net income .48 .91 .25
Preferred stock dividends .01 .04 --
Earnings available to common shareholders - assuming $ .47 $ .87 $ .25
dilutions
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
Amounts Number of Shares
1997 1996 1995 1997 1996 1995
Common Stock:
Balance, beginning of year $40,481 $39,808 $39,695 5,752,499 5,459,573 5,457,906
Issuance of common stock -- 100 -- -- 20,000 --
5% common stock dividend -- 850 -- -- 272,926 --
Issuance of common stock warrants 165 285 107 -- -- --
Repurchase of common stock warrants -- (600) -- -- -- --
Gain on reissuance of treasury stock
in connection -- 38 -- -- -- --
with purchase of Shelby Life
Issuance of common stock in
connection with -- -- 6 -- -- 1,667
exercise of stock options
Balance, end of year 40,646 40,481 39,808 5,752,499 5,752,499 5,459,573
Treasury stock, at cost:
Balance, beginning of year (3,528) (2,621) (2,221) (728,229) (502,025) (418,425)
Treasury stock acquired (1,079) (2,126) (400) (154,903) (431,026) (83,600)
5% common stock dividend -- -- -- -- (46,402) --
Reissuance of treasury stock in
connection with 35 6 -- 7,123 1,224 --
exercise of stock options
Reissuance of treasury stock in
connection with -- 1,213 -- -- 250,000 --
purchase of Shelby Life
Balance, end of year (4,572) (3,528) (2,621) (876,009) (728,229) (502,025)
Unrealized gain (loss) on securities:
Balance, beginning of year (746) 2,582 (13,411)
Change in unrealized gain (loss) on
securities 2,917 (3,328) 15,993
available for sale, net
Balance, end of year 2,171 (746) 2,582
Foreign currency translation adjustments:
Balance, beginning of year 691 1,159 546
Translation adjustments for the year (1,164) (468) 613
Balance, end of year (473) 691 1,159
Retained earnings (deficit):
Balance, beginning of year 3,021 (686) (1,999)
Net income 2,645 4,767 1,313
5% common stock dividend, plus cash
in lieu of -- (850) --
fractional shares
Loss on reissuance of treasury stock (28) (2) --
Preferred stock dividend (97) (208) --
Balance, end of year 5,541 3,021 (686)
Total shareholders' equity and common shares $43,313 $39,919 $40,242 4,876,490 5,024,270 4,957,548
outstanding
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
OPERATING ACTIVITIES
Net income $2,645 $4,767 $1,313
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 1,456 1,221 1,142
Policy acquisition costs deferred (7,005) (6,400) (1,863)
Deferred federal income taxes 1,187 158 353
Depreciation and amortization 1,085 544 78
Insurance policy liabilities 9,441 4,785 6,273
Net realized investment gains (396) (1,302) (688)
Accrued investment income (314) (770) 347
Extraordinary gain on early redemption of redeemable -- (502) --
preferred stock
Other (335) (775) (624)
Net cash provided by operating activities 7,764 1,726 6,331
FINANCING ACTIVITIES
Issuance of Common Stock, net -- -- 6
Borrowings, net of debt issuance costs of $70 in 1997, $208 in 5,558 16,792 2,923
1996 and $81 in 1995
Repayments on long-term debt and obligations under capital (543) (491) (353)
lease
Short-term borrowings, net -- -- (550)
Premiums received on interest-sensitive annuities and other
financial products credited 49,362 42,347 17,524
to policyholder account balances, net of premiums ceded
Return of policyholder account balances on interest-sensitive
annuities and other (37,477) (17,356) (17,852)
financial products, net of premiums ceded
Redemption of redeemable preferred stock (1,855) (949) --
Repurchase of Common Stock warrants -- (600) --
Proceeds from common and treasury stock sales 138 100 --
Purchase of Common Stock for treasury (1,079) (2,126) (400)
Net cash provided by financing activities 14,104 37,717 1,298
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (205,976) (249,638) (183,183)
Sales 161,891 194,244 191,477
Maturities, calls and redemptions 28,380 10,254 7,812
Short-term investments, net (4,925) 11,890 (21,662)
Other investments, net (2,186) (551) 4,082
Proceeds from sale of property and equipment under capital -- -- 1,396
lease
Purchase of Shelby Life Insurance Company, less cash acquired -- (14,618) --
of $32
Dividends paid by Shelby Life Insurance Company to former -- (3,000) --
parent
Purchase of Dixie National Life Insurance Company, less cash -- -- (3,393)
acquired of $4,626
Proceeds from sale of First International Life Insurance
Company, less cash transferred -- 11,327 --
to seller of $265
Net cash used by investing activities (22,816) (40,092) (3,471)
Net increase (decrease) in cash (948) (649) 4,158
Cash at beginning of year 5,113 5,762 1,604
Cash at end of year $4,165 $5,113 $5,762
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Standard Management Corporation ("SMC") is an international financial
services holding company, which directly and through its subsidiaries acquires
and manages in force life insurance and annuity business and issues and
distributes life insurance and annuity products. SMC offers unit-linked
assurance products through its international subsidiaries.
SMC's active subsidiaries at December 31, 1997 include: (i) Standard Life
Insurance Company of Indiana ("Standard Life") and its subsidiary, Dixie
National Life Insurance Company ("Dixie National Life"), (ii) Standard
Management International S.A. ("Standard Management International") and its
subsidiaries, Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") and
Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)") and (iii) Standard
Marketing Corporation ("Standard Marketing").
BASIS OF PRESENTATION
The accompanying consolidated financial statements of SMC and its
subsidiaries (the "Company") have been prepared in conformity with generally
accepted accounting principles ("GAAP") and include the accounts of SMC and its
majority-owned subsidiaries since acquisition or organization. All significant
intercompany balances and transactions have been eliminated.
The fiscal year end for Standard Management International is September 30.
To facilitate reporting on the consolidated level, the fiscal year end for
Standard Management International was not changed and the consolidated balance
sheets and statements of operations for Standard Management International at
September 30, 1997 and 1996 and for each of the three years in the period ended
September 30, 1997, are included in the Company's consolidated balance sheets
at December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997.
USE OF ESTIMATES
The nature of the Company's insurance businesses requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could
impact the amounts reported and disclosed herein.
INVESTMENTS
The Company classifies its fixed maturity and equity securities as available
for sale and, accordingly, such securities are carried at fair value. Fixed
maturity securities include bonds and redeemable preferred stocks. Changes in
fair values of securities available for sale, after adjustment for deferred
policy acquisition costs, present value of future profits and deferred income
taxes, are reported as unrealized gains or losses directly in shareholders'
equity and, accordingly, have no effect on net income. The deferred policy
acquisition costs and present value of future profits adjustments to the
unrealized gains or losses represent valuation adjustments or reinstatements of
these assets that would have been required as a charge or credit to operations
had such unrealized amounts been realized.
The cost of fixed maturity securities is adjusted for amortization of
premiums and discounts. The amortization is provided on a constant effective
yield method over the life of the securities and is included in net investment
income.
Mortgage-backed and other collateralized securities, classified as fixed
maturity securities in the balance sheet, are comprised principally of
obligations backed by an agency of the United States government (although
generally not by the full faith and credit of the United States government).
The Company has reduced the risk normally associated with these investments by
primarily investing in highly rated securities and in those that provide more
predictable prepayment patterns. The income from these securities is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the income recognized is adjusted
currently to match that which would have been recorded had the effective yield
been applied since the acquisition of the security. This adjustment is included
in net investment income.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans on real estate and policy loans are carried at unpaid
principal balances and are generally collateralized. Real estate investments,
which the Company has the intent to hold for the production of income, are
carried at cost, less accumulated depreciation. Short-term investments are
carried at amortized cost, which approximates fair value.
NET REALIZED INVESTMENT GAINS OR LOSSES
Net realized investment gains and losses are calculated using the specific
identification method and included in the consolidated statements of income.
If the values of investments decline below their amortized cost and this
decline is considered to be other than temporary, the amortized cost of these
investments is reduced to net realizable value and the reduction is recorded as
a realized loss.
FUTURE POLICY BENEFITS
Liabilities for future policy benefits for deferred annuities and universal
life policies are equal to full account value that accrues to the policyholder
(cumulative premiums less certain charges, plus interest credited) with rates
ranging from 4.5% to 12% in 1997 and 4.5% to 9% in 1996.
Future policy benefits for traditional life insurance contracts are computed
using the net level premium method on the basis of assumed investment yields,
mortality and withdrawals which were appropriate at the time the policies were
issued. Assumed investment yields are based on interest rates ranging from 6.5%
to 7.5%. Mortality is based upon various actuarial tables, principally the
1965-1970 Select and Ultimate Table. Withdrawals are based upon Company
experience and vary by issue age, type of coverage, and duration.
RECOGNITION OF INSURANCE POLICY REVENUE AND RELATED BENEFITS AND EXPENSES
Revenue for interest-sensitive annuity contracts consists of policy charges
for surrenders and investment income earned. Premiums received for these
annuity contracts are reflected as premium deposits and are not recorded as
revenues. Expenses related to these annuities include interest credited to
policyholder account balances. Revenue for universal life insurance policies
consists of policy charges for the cost of insurance, policy administration
charges, surrender charges and investment income earned during the period.
Expenses related to universal life policies include interest credited to
policyholder account balances and death benefits incurred in excess of
policyholder account balances.
Traditional life insurance and immediate annuity premiums are recognized as
premium revenue when due over the premium paying period of the policies.
Benefits are charged to expense in the period when claims are incurred and are
associated with related premiums through changes in reserves for future policy
benefits which results in the recognition of profit over the premium paying
period of the policies.
REINSURANCE
Premiums, annuity policy charges, benefits and claims, interest credited and
amortization expense are reported net of reinsurance ceded. Reinsurance
premiums, annuity policy charges, benefits and claims, interest credited and
amortization expense are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts.
SEPARATE ACCOUNTS
Separate accounts are maintained primarily for universal life contracts
written by Standard Management International of which the majority represent
unit-linked business where benefits on surrender and maturity are not
guaranteed and investment contracts under which fixed benefits are paid to the
policyholder and the terms of which are such that there is little or no
mortality risk. Separate accounts generally represent funds maintained in
accounts to meet specific investment objectives of policyholders who bear the
investment risk. The Company records the related liabilities at amounts equal
to the underlying assets. Investment income and investment gains and losses
accrue directly to such policyholders. The assets of each account are
segregated and are not subject to claims that arise out of any other business
of the Company. Deposits, net investment income and realized gains and losses
on separate accounts assets are not reflected in the consolidated statements of
income.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries' balance sheets and statements of income
are translated at the year end exchange rates and average exchange rates for
the year, respectively. The resulting unrealized gain or loss adjustment from
the translation to U.S. dollars is recorded in the foreign currency translation
adjustment as a separate component of shareholders' equity. Other translation
adjustments for foreign exchange gains or losses have been reflected in the
consolidated statements of income. Foreign exchange gains or losses relating to
policyholders' funds in separate accounts are allocated to the relevant
separate account.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change
is enacted.
Standard Life and Dixie National Life filed separate federal income tax
returns for 1996 and prior years and were taxed as separate life insurance
companies. For 1997 and subsequent years, Standard Life and Dixie National Life
plan to file a life/life consolidated return. SMC, Standard Marketing and
other U.S. non-insurance subsidiaries are taxed as regular corporations and
file a consolidated return. SMC and its U.S. non-insurance subsidiaries were
eligible to consolidate with Standard Life for income tax purposes beginning in
1996, but do not currently plan to do so.
Standard Management International is incorporated as a holding company in
the Grand Duchy of Luxembourg and, accordingly, is not currently subject to
taxation on income or capital gains. Standard Management International is
subject to an annual capital tax which is calculated on the nominal value of
the statutory shareholder's equity at an annual rate of .20%. Premier Life
(Luxembourg) is a normal commercial taxable company and is subject to income
tax at regular corporate rates (statutory corporate rate of 39.39%), and annual
capital taxes amounting to approximately 1% of its net equity. Premier Life
(Bermuda) is exempt from taxation on income until March 2016 pursuant to a
decree from the Minister of Finance in Bermuda. To the extent that such income
is taxable under U.S. law, such income will be included in SMC's consolidated
return.
PRESENT VALUE OF FUTURE PROFITS
Present value of future profits is recorded in connection with acquisitions
of insurance companies or a block of policies. The initial value is based on
the actuarially determined present value of the projected future gross profits
from the in-force business acquired. In selecting the interest rate to
calculate the discounted present value of the projected future gross profits,
the Company uses the risk rate of return believed to best reflect the
characteristics of the purchased policies, taking into account the relative
risks of such policies, the cost of funds to acquire the business and other
factors. The value of insurance in force purchased is amortized on a constant
yield basis over the estimated life of the insurance in force at the date of
acquisition in proportion to the emergence of profits over a period of
approximately 20 years. For acquisitions the Company made on or before
November 19, 1992, the Company amortizes the asset with interest at the same
discount rate used to determine the present value of future profits at date of
purchase. For acquisitions after November 19, 1992, including the acquisitions
of Dixie National Life and Shelby Life, the Company amortizes the asset using
the interest rate credited to the underlying policies.
DEFERRED POLICY ACQUISITION COSTS
Costs relating to the production of new business (primarily commissions and
certain costs of marketing, policy issuance and underwriting) are deferred and
included in the deferred policy acquisition cost asset to the extent that such
costs are recoverable from future related policy revenues. For
interest-sensitive annuities and other financial products, deferred policy
acquisition costs, with interest, are amortized over the lives of the policies
and products in a constant relationship to the present value of estimated
future gross profits, discounted using the interest rate credited to the
policy. Traditional life insurance deferred policy acquisition costs are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves.
The Company reviews the recoverability of the carrying value of the deferred
policy acquisition costs each year. For interest-sensitive annuities and other
financial products, the Company considers estimated future gross profits in
determining whether the carrying value is appropriate; for other insurance
products, the Company considers estimated future premiums. In all cases, the
Company considers expected mortality, interest earned and crediting rates,
persistency and expenses. Amortization is adjusted retrospectively for
interest-sensitive annuities and other financial products when estimates of
future gross profits to be realized are revised.
EXCESS OF ACQUISITION COST OVER NET ASSETS ACQUIRED
The excess of the cost to acquire purchased companies over the fair value of
net assets acquired is being amortized on a straight-line basis over periods
that generally correspond with the benefits expected to be derived from the
acquisitions, usually 20 to 40 years. Accumulated amortization was $428,000 and
$314,000 at December 31, 1997 and 1996, respectively. The Company continually
monitors the value of excess of acquisition cost over net assets acquired
("goodwill") based on estimates of future earnings. If it determines that
goodwill has been impaired, the carrying value is reduced with a corresponding
charge to expense.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF NET ASSETS ACQUIRED OVER ACQUISITION COST
The excess of the net assets acquired over the cost to acquire purchased
companies ("negative goodwill"), after reducing the basis in property and
equipment and other noncurrent assets to zero, is being amortized into earnings
on a straight-line basis over a five year period. Accumulated amortization was
$5,227,000 and $3,839,000 at December 31, 1997 and 1996, respectively.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option plan using
the intrinsic value method of accounting. Under the terms of the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date, or other measurement date, over the
amount an employee must pay to acquire the stock. Under the Company's stock
option plans, no expense is recognized since the exercise price equals or
exceeds the market price at the measurement date.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The Company adopted SFAS No. 128 on December 31, 1997. 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for all
changes in a company's equity during a period except those resulting from
investments by owners and distributions to owners. SFAS No. 130 is effective
for financial statements issued for fiscal years beginning after December 15,
1997 and will be adopted by the Company in the first quarter of 1998. Because
the statement is merely a change in presentation, the Company does not expect
the adoption of this statement to have any impact on the amount of net income,
earnings per share or total shareholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. 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.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements and
notes have been reclassified to conform with the 1997 presentation. These
reclassifications had no effect on previously reported shareholders' equity or
net income during the periods involved.
2. ACQUISITIONS AND DISPOSALS
On November 8, 1996, Standard Life acquired through merger Shelby Life
Insurance Company ("Shelby Life") from Delta Life and Annuity Corporation
("DLAC"), a life insurance company located in Memphis, Tennessee (the "Shelby
Merger"). The purchase price was approximately $14,650,000, including
$13,000,000 in cash, 250,000 shares of restricted Common Stock (valued at
$1,250,000) and acquisition costs of $400,000. Financing for the Shelby Merger
was provided by senior debt of $10,000,000 and $4,000,000 in subordinated
convertible debt.
The acquisition of Shelby Life was accounted for using the purchase method
of accounting and the consolidated financial statements include the results of
Shelby Life from November 1, 1996, the effective date of acquisition. Under
purchase accounting, Standard Life allocated the total purchase price of Shelby
Life to the assets and liabilities acquired, based on a determination of their
fair values and recorded the excess of acquisition cost over net assets
acquired as goodwill, which will be amortized on a straight-line basis over
20 years.
<PAGE>
2. ACQUISITIONS AND DISPOSALS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Shelby Life acquisition described above (in thousands):
Assets acquired:
Fixed maturity securities $ 93,376 Policy loans
2,430 Short term investments 4,725 Cash 32 Present
value of future profits 7,998 Other assets
2,880
Total assets acquired 111,441
Liabilities assumed:
Policy reserves 92,322
Deferred federal income taxes 376
Other liabilities 1,102
Dividends payable to DLAC 3,000
Total liabilities assumed 96,800
Net assets acquired 14,641
Excess of acquisition cost over net assets acquired 9
Total purchase price $ 14,650
The following are supplemental unaudited pro forma consolidated results
of operations of the Company for year ended December 31, 1996 as if the
acquisition for Shelby Life had occurred at January 1, 1996 presented at the
same purchase price, based on estimates and assumptions considered appropriate
(in thousands).
Revenues $49,344
Income before extraordinary gain 4,242
Net income 4,536
Earnings per share:
Income before extraordinary gain .83
Net income .89
Earnings per share, assuming dilution:
Income before extraordinary gain .73
Net income .82
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
acquisitions had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
On October 2, 1995, Standard Life completed its acquisition of 99.3% of
Dixie National Life from Dixie National Corporation ("DNC"), a life insurance
holding company located in Jackson, Mississippi. Dixie National Life markets a
variety of life insurance products throughout the Mid-South offering primarily
"burial expense" policies. The purchase price was $8,019,000, including costs
of $684,000, the forgiveness of a $3,689,000 DNC note payable to Standard Life
and a $1,720,000 repayment of a DNC note payable. The remaining purchase price
of $1,926,000 was paid in cash from internally generated funds.
The acquisition was accounted for using the purchase method of accounting
and the consolidated financial statements include the results of Dixie National
Life from the date of acquisition. Under purchase accounting, Standard Life
allocated the total purchase price of Dixie National Life to the assets and
liabilities acquired, based on a determination of their fair values. Standard
Life recorded goodwill of $1,589,000 which will be amortized on a straight-line
basis over 40 years.
On March 18, 1996, Standard Life completed the sale of a duplicate charter
associated with First International Life Insurance Company ("First
International") to The Guardian Insurance and Annuity Company, Inc. ("GIAC"), a
subsidiary of The Guardian Group, New York, NY. Standard Life received proceeds
of approximately $10,393,000, including $1,500,000 for the charter and licenses
associated with First International. Standard Life realized a net pretax gain
of $1,042,000 and a tax benefit of $1,420,000 on this sale, or $2,462,000. In
addition, First International, Standard Life and GIAC have entered into a
series of reinsurance and other agreements that include provisions for Standard
Life to administer First International policies in force at the date of sale,
and for Standard Life to continue to receive the profit stream from certain
First International policies in force at the date of such sale (SEE NOTE 9).
<PAGE>
2. ACQUISITIONS AND DISPOSALS (CONTINUED)
SMC decided in February 1996 to terminate the reinsurance agreement between
Standard Reinsurance of North America Ltd. ("Standard Reinsurance") and
Salamandra Joint-Stock Insurance Company in Ukraine ("Salamandra"), and to not
renew the Barbados license of Standard Reinsurance. This resulted in the
termination of Standard Reinsurance operations and the write-off of SMC's
investment in Standard Reinsurance and certain intangible assets of Standard
Reinsurance amounting to $156,000.
3. INVESTMENTS
The amortized cost, gross unrealized gain (loss) and estimated fair value of
securities available for sale are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain (Loss) Value
Securities available for sale:
Fixed maturity securities:
United States Treasury
securities and
obligations of United States $27,613 $174 $(90) $27,697
government agencies
Obligations of states and
political 3,790 204 (26) 3,968
subdivisions
Foreign government securities 30,558 497 (3,296) 27,759
Utilities 26,606 534 (109) 27,031
Corporate bonds 223,958 8,140 (1,609) 230,489
Mortgaged-backed securities 51,266 657 (60) 51,863
Redeemable preferred stock 3,581 188 -- 3,769
Total fixed maturity 367,372 10,394 (5,190) 372,576
securities
Equity securities 55 -- (3) 52
Total securities available for $367,427 $10,394 $(5,193) $372,628
sale
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain (Loss) Value
Securities available for sale:
Fixed maturity securities:
United States Treasury
securities and
obligations of United States $20,753 $51 $(420) $20,384
government agencies
Obligations of states and
political 3,588 106 -- 3,694
subdivisions
Foreign government securities 10,042 51 (166) 9,927
Utilities 31,000 295 (675) 30,620
Corporate bonds 210,977 3,086 (3,539) 210,524
Mortgaged-backed securities 72,264 247 (919) 71,592
Redeemable preferred stock 527 42 -- 569
Total fixed maturity 349,151 3,878 (5,719) 347,310
securities
Equity securities 58 4 -- 62
Total securities available for $349,209 $3,882 $(5,719) $347,372
sale
</TABLE>
The estimated fair values for fixed maturity securities are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services, or by discounting expected future cash flows using a current
market rate applicable to the coupon rate, credit, and maturity of the
investments.
<PAGE>
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1997 by contractual maturity are shown below (in thousands).
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their lives.
Amortized Fair
<TABLE>
<CAPTION>
COST VALUE
<S> <C> <C>
Due in one year or less $ 4,560 $ 4,551
Due after one year through five years 31,597 32,048
Due after five years through ten years 141,806 140,972
Due after ten years 134,562 139,373
Subtotal 312,525 316,944
Redeemable preferred stock 3,581 3,769
Mortgage-backed securities 51,266 51,863
Total fixed maturity securities $ 367,372 $ 372,576
</TABLE>
The Company maintains a highly-diversified investment portfolio with
limited concentration of financial instruments in any given region, industry or
economic characteristic. Investments in any entity in excess of 10% of
shareholders' equity at December 31, 1997, other than asset-backed securities
and investments issued or guaranteed by the U.S. government or a U.S.
government agency, all of which were classified as fixed maturity securities
available for sale, were as follows (in thousands):
Amortized Fair
<TABLE>
<CAPTION>
INVESTMENT COST VALUE
<S> <C> <C>
Continental Cablevision $ 5,302 $ 5,509
AMERCO 4,994 5,042
Eastern Energy Limited 4,975 5,068
Republic of Indonesia 4,636 3,596
</TABLE>
Net investment income was attributable to the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Fixed maturity securities $27,151 $19,865 $17,457
Mortgage loans on real estate 123 309 152
Policy loans 618 447 305
Real estate 58 65 120
Short-term investments and other 2,098 602 990
Gross investment income 30,048 21,288 19,024
Investment expenses 532 417 507
Net investment income $29,516 $20,871 $18,517
</TABLE>
Net realized investment gains arose from the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Fixed maturity securities available for sale:
Gross realized gains $2,181 $2,012 $2,115
Gross realized losses 1,695 911 1,662
Net 486 1,101 453
Real estate 26 -- 124
Other gains (losses) (116) 201 111
Net realized investment gains $396 $1,302 $688
</TABLE>
<PAGE>
3. INVESTMENTS (CONTINUED)
Life insurance companies are required to maintain certain amounts of
assets with state or other regulatory authorities. At December 31, 1997 fixed
maturity securities of $12,658,000 and short-term investments of $1,498,000
were held on deposit by various state regulatory authorities in compliance with
statutory regulations. Additionally, fixed maturity securities of $851,000 and
short-term investments of $3,590,000 of Standard Management International were
held by a custodian bank approved by the Luxembourg regulatory authorities to
comply with local insurance laws.
4. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
The activity related to the deferred policy acquisition costs of business
produced is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Balance, beginning of year $18,309 $10,054 $12,206
Additions 7,005 6,400 1,863
Amortization (1,456) (1,221) (1,142)
Adjustment relating to net unrealized (gain)
loss on (2,423) 3,076 (2,873)
securities available for sale
Balance, end of year $21,435 $18,309 $10,054
</TABLE>
The activity
related to the present value of future profits of the business acquired is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Balance, beginning of year $23,806 $15,246 $8,299
Amounts related to acquisitions and disposals (1,374) 9,615 7,901
Interest accreted on unamortized balance 3,178 2,563 1,566
Gross amortization during the year (4,844) (3,812) (2,346)
Adjustments relating to net unrealized (gain)
loss on securities available for sale (229) 194 (174)
Balance, end of year $20,537 $23,806 $15,246
</TABLE>
The percentages of future expected net amortization of the beginning
balance of the present value of future profits before the effect of net
unrealized gains and losses, based on the present value of future profits at
December 31, 1997 and current assumptions as to future events on all policies
in force, will be between 6% and 8% in each of the years 1998 through 2002.
The discount rate used to calculate the present value of future profits
reflected in the Company's consolidated balance sheets at December 31, 1997,
ranged from 7.5% to 18%. The Company used a 15% discount rate to calculate the
present value of future profits on the Shelby Life and Dixie National Life
acquisitions.
5. NOTES PAYABLE
SMC has outstanding borrowings at December 31, 1997 pursuant to an
Amended Revolving Line of Credit Agreement with a bank (the "Amended Credit
Agreement") that provides for it to borrow up to $16,000,000 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 61,500 shares of Common Stock. Borrowings under the Amended Credit
Agreement may be used for contributions to surplus of insurance subsidiaries,
acquisition financing, and repurchases of Class S Cumulative Convertible
Redeemable Preferred Stock ("Class S Preferred Stock") and 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
borrowings under the Amended Credit Agreement is determined, at the option of
SMC, to be: (i) a fluctuating rate of interest to the corporate base rate
announced by the bank from time to time plus 1% per annum, or (ii) a rate at
LIBOR plus 3.25%. Annual principal repayments of $2,667,000 begin in November
1998 and conclude in November 2003. Indebtedness incurred under the Amended
Credit Agreement is subject to certain restrictions and covenants including,
among other things, certain minimum financial ratios, minimum consolidated
<PAGE>
5. NOTES PAYABLE (CONTINUED)
equity requirements for SMC, positive net income, minimum statutory surplus
requirements for the Company's insurance subsidiaries and certain limitations
on acquisitions, additional indebtedness, investments, mergers, consolidations
and sales of assets. At December 31, 1997, SMC had borrowed $16,000,000 under
this Amended Credit Agreement at a weighted average interest rate of 9.069%.
In connection with the acquisition of Shelby Life, SMC borrowed
$4,000,000 from an insurance company pursuant to a subordinated convertible
debt agreement which was due in December 2003. At June 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 June 30, 1997, SMC 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 (SEE NOTE 7), and other
general corporate purposes. The Notes are convertible at any time at the
option of the noteholders into SMC Common Stock at the rate of $5.747 per
share. The Notes may be prepaid in whole or in part at the option of SMC
commencing on July 1, 2000 at redemption prices equal to 105% of the principal
amount (plus accrued interest) and declining to 102% of the principal amount
plus accrued interest. The Notes may be prepaid prior to July 1, 2000 at a
redemption price equal to 101% of the principal amount (plus accrued interest)
under certain limited circumstances. The Notes are subject to certain
restrictions and covenants substantially similar to those in the Amended Credit
Agreement.
Standard Management International has an unused line of credit of
$1,615,000, with no borrowings in connection with this line of credit in 1997
or 1996.
Interest expense on debt during 1997, 1996 and 1995 was $2,310,000,
$773,000 and $116,000, respectively. Cash paid for interest was $1,464,000,
$356,000 and $100,000 in 1997, 1996 and 1995, respectively.
6. INCOME TAXES
The components of the federal income tax expense (credit), applicable to
pre-tax income before extraordinary gains, were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Current taxes (credit) $(570) $(888) $(110)
Deferred taxes 1,187 158 353
$617 $(730) $243
</TABLE>
The effective tax rate on pre-tax income before extraordinary gain is lower
than the statutory corporate federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Federal income tax expense at statutory rates (34%) $1,109 $1,202 $529
Small insurance company deduction -- -- (128)
Nonrecognition of losses in SMC consolidated return and in
foreign 314 543 372
subsidiaries
Amortization of excess of net assets acquired over (472) (472) (472)
acquisition cost
Tax benefit from disposal of subsidiary -- (1,420) --
Tax benefits from capital loss carryforwards not (200) -- --
previously recognized
Release of reserve for tax adjustments (100) (325) --
Other items, net (34) (258) (58)
Federal income tax expense (credit) $617 $(730) $243
Effective tax rate 19% (21)% 16%
</TABLE>
<PAGE>
6. INCOME TAXES (CONTINUED)
The Company recovered $1,313,000, $130,000 and $280,000 in federal income
taxes in 1997, 1996 and 1995, respectively and paid federal income taxes of
$200,000 and $900,000 in 1997 and 1996, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax return purposes. Significant temporary
differences included in the Company's deferred tax assets (liabilities) are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 1996
Deferred income tax assets:
Unrealized loss on securities available for sale $ -- $355
Future policy benefits 9,368 8,267
Capital and net operating loss carryforwards 6,123 7,719
Other-net 1,126 1,385
Gross deferred tax assets 16,617 17,726
Valuation allowance for deferred tax assets (6,962) (8,750)
Deferred income tax assets, net of valuation allowance 9,655 8,976
Deferred income tax liabilities:
Unrealized gain on securities available for sale (1,820) --
Present value of future profits (6,983) (8,093)
Deferred policy acquisition costs (5,340) (4,089)
Total deferred income tax liabilities (14,143) (12,182)
Net deferred income tax liabilities $(4,488) $(3,206)
</TABLE>
The Company is required to establish a "valuation allowance" for any portion
of its deferred tax assets which are unlikely to be realized. The valuation
allowance for deferred tax assets includes $1,560,000 at December 31, 1997 with
respect to corporate income tax loss carryforwards of Standard Management
International which, if recognized in the future, will result in an addition to
negative goodwill and be amortized into income over its remaining life. The
valuation allowance for deferred tax assets includes $1,770,000 at December 31,
1997 with respect to deferred tax assets at the date of acquisition and net tax
operating loss carryforwards of Dixie National Life and Shelby Life which, if
recognized in the future, will result in a reduction to goodwill and be
amortized into income over its remaining life by reducing goodwill amortization
expense.
As of December 31, 1997, SMC and its noninsurance subsidiaries had
consolidated net operating loss carryforwards of approximately $9,320,000 for
tax return purposes which expire from 2005 through 2012. These carryforwards
will only be available to reduce the taxable income of SMC. At December 31,
1997, the Standard Life consolidated return had tax return net operating loss
carryforwards of approximately $4,100,000 which expire in 2010 and 2012. These
carryforwards will only be available to reduce the taxable income of the
Standard Life consolidated return. At December 31, 1997, Premier Life
(Luxembourg) had accumulated corporate income tax loss carryforwards of
approximately $3,960,000, all of which may be carried forward indefinitely.
The Internal Revenue Service has completed its examination of the Company
for years through 1993 in 1996. All adjustments to taxable income determined by
completed examinations, which were not material, have reduced the net operating
loss carryforwards. Upon completion of the examination, a tax reserve for
adjustments of $325,000 was released and recorded in income in 1996. In 1997,
the Internal Revenue Service completed its examination of Standard Life through
1995. All adjustments including a tax benefit from previously expired capital
loss carryforwards were settled during 1997 resulting in a net tax benefit of
approximately $200,000 during 1997 and upon completion of the examination, a
tax reserve for adjustments of $100,000 was released into income in 1997.
7. SHAREHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
Shareholders have authorized 1,000,000 shares of Preferred Stock. Other
terms, including preferences, voting and conversion rights, may be established
by the Board of Directors. In March 1995, 300,000 of these shares designated as
Class S Preferred Stock, $10.00 per share par value, were issued February 8,
1996. In February 1996, SMC instituted a program to repurchase from time to
time up to 300,000 shares of its Class S Preferred Stock in the open market or
privately negotiated
7. SHAREHOLDERS' EQUITY (CONTINUED)
transactions. Through December 31, 1996, SMC had repurchased and retired
140,111 shares of its Class S Preferred Stock on the open market at a cost of
$949,000. These repurchases resulted in an extraordinary gain of $502,000 in
1996. Effective as of August 1, 1997, SMC redeemed all of the issued and
outstanding Class S Preferred Stock at an aggregate redemption value of
$1,840,000 ($10.00 per share plus accumulated and unpaid dividends).
COMMON STOCK
The Company has a stock repurchase program and repurchases its Common Stock
from time to time. The Company repurchased 154,903, 431,026 and 83,600 shares
of Common Stock for $1,079,000, $2,126,000 and $400,000 in 1997, 1996 and 1995,
respectively. At December 31, 1997, the Company is authorized to purchase an
additional 365,644 shares under this program.
The following table represents outstanding warrants to purchase Common Stock
as of December 31, 1997:
Exercise Warrants
ISSUE DATE EXPIRATION DATE PRICE OUTSTANDING
June 1989 December 1999 $3.5216 236,858
July 1992 June 1998 3.5296 175,800
January 1994 January 1998 7.8571 42,000
September 1995 September 1998 5.2381 4,200
November 1995 November 2002 4.5238 31,500
July 1996 July 2003 4.3750 30,000
August 1996 August 1998 4.3125 100,000
September 1996 September 1998 5.0000 25,000
September 1996 September 1999 5.5000 17,000
July 1997 July 2000 5.7500 75,000
September 1997 September 2000 7.5000 15,000
752,358
UNREALIZED GAIN (LOSS) ON SECURITIES
The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 1996
Fair value of securities available for sale $372,628 $347,372
Amortized cost of securities available for sale 367,427 349,209
Gross unrealized gain (loss) on securities available for sale 5,201 (1,837)
Adjustments for:
Deferred policy acquisition costs (1,727) 696
Present value of future profits (209) 20
Deferred federal income tax recoverable (liability) (1,094) 375
Net unrealized gain (loss) on securities available for sale $2,171 $ (746)
</TABLE>
8. STOCK OPTION PLAN
SMC has a non-qualified Stock Option Plan (the "Plan") under which
2,500,000 (increased by 1,000,000 shares effective October 29, 1997) shares of
Common Stock are reserved for grants of stock options to employees and
directors. The purchase price per share specified in any Plan option must be at
least equal to the fair market value of common stock at the grant date. Options
generally become exercisable over a three-year period and have a term of
10 years. The Plan is administered by the Board of Directors and officers of
SMC. The terms of the options, including the number of shares and the exercise
price, are subject to the sole discretion of the Board of Directors. A total
of 562,988 shares are available for future issuance for the Plan as of December
31, 1997.
<PAGE>
8. STOCK OPTION PLAN (CONTINUED)
SFAS No. 123 entitled "Accounting for Stock-Based Compensation" issued in
October 1995, was adopted by the Company as of December 31, 1996. The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the fair value of
the options been expensed. The Company has elected to continue its practice of
recognizing compensation expense for its Plan using the intrinsic value based
method of accounting and to provide the required pro forma information. Had
compensation cost for the Plan been determined based on the fair value at the
grant date for awards under the Plan consistent with the provisions of SFAS
No. 123, the Company's pro forma net income and pro forma earnings per share
would have been the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Net income $1,945 $3,847 $685
Earnings per share .37 .75 .13
Earnings per share, assuming .35 .71 .13
dilution
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-valuation model with the following
weighted-average assumptions :
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C>
Risk-free interest rates 5.7% 5.9% 6.6%
Volatility factors .37 .49 .39
Weighted average expected life 7 years 7 years 7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its employee stock options. Because SFAS No. 123
is effective only for awards granted after January 1, 1995, the pro forma
disclosures provided may not be representative of the effects on reported net
income for future years.
A summary of the Company's stock option activity and related information
for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares Shares Shares
Options outstanding, beginning 1,446,169 $5.98 1,164,720 $6.46 520,294 $7.73
of year
Exercised (17,300) 4.52 (1,224) 3.57 (1,667) 3.75
Granted 685,000 6.29 769,122 6.14 655,008 5.40
Expired or forfeited (197,049) 4.30 (486,449) 7.56 (8,915) 5.50
Options outstanding, end of 1,916,820 6.08 1,446,169 5.98 1,164,720 6.46
year
Options exercisable, end of 1,467,185 1,097,028 762,374
year
Weighted-average fair value of
options $3.10 $3.62 $2.90
granted during the year
</TABLE>
<PAGE>
8. STOCK OPTION PLAN (CONTINUED)
Information with respect to stock options outstanding at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
<S> <C> <C> <C> <C> <C>
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Price Exercisable Price
Life
(years)
$3-$5 367,650 9 Years $4.37 231,350 $4.31
$5-$7 1,036,949 9 Years 5.98 723,614 5.76
$7-$9 492,533 5 Years 7.41 492,533 7.41
$9-$11 19,688 6 Years 9.40 19,688 9.40
1,916,820 1,467,185
</TABLE>
9. REINSURANCE
The Company's insurance subsidiaries have entered into reinsurance
agreements with non-affiliated companies to limit the net loss arising from
large risks, maintain their exposure to loss within capital resources, provide
additional capacity for future growth, and effect sharing arrangements. The
maximum amount of life insurance retained on any one life ranges from $30,000
to $150,000. Amounts of standard risk in excess of that limit are reinsured.
Reinsurance premiums ceded to other insurers were $4,821,000, $2,152,000
and $4,312,000 in 1997, 1996 and 1995, respectively. Reinsurance ceded has
reduced benefits and claims incurred by $5,383,000, $6,201,000 and $1,369,000
in 1997, 1996 and 1995, respectively. A contingent liability exists to the
extent any of the reinsuring companies are unable to meet their obligations
under the reinsurance agreements. To minimize exposure to significant losses
from reinsurance insolvencies, the Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers.
Based on its periodic reviews of these companies, the Company believes the
assuming companies are able to honor all contractual commitments under the
reinsurance agreements.
The Company's largest annuity reinsurer at December 31, 1997 represented
$32,194,000, or 52.3% of total reinsurance recoverable, $8,707,000 of premium
deposits ceded in 1997 and is rated "A" (Excellent) by A.M. Best. From January
1, 1995 to August 31, 1995, approximately 70% of Standard Life's annuity
business pursuant to the terms of the agreement produced after December 31,
1994 was ceded. Standard Life decreased the quota-share portion of business
ceded pursuant to this agreement to 50% at September 1, 1995, and further
reduced it to 25% effective April 1, 1996. This agreement limits dividends and
other transfers by Standard Life to SMC or affiliated companies in certain
circumstances.
All the inforce business of First International effective January 1, 1996
was ceded to GIAC through a coinsurance indemnity reinsurance agreement. Under
the terms of the agreement, approximately $18,841,000 of First International's
reserves and the related assets were ceded to GIAC as of January 1, 1996.
Effective at January 1, 1996, GIAC entered into a modified coinsurance
indemnity reinsurance agreement with Standard Life relating to this business.
Under the terms of the agreement, approximately $18,841,000 of Standard Life's
reserves were assumed from GIAC as of January 1, 1996. In addition, at the
date of the sale of First International to GIAC, Standard Life ceded a block of
business with policy reserves of $12,514,000 and related assets to GIAC.
In June 1988, Standard Life ceded a block of business to National Mutual
Life Insurance Company ("National Mutual"). Effective May 31, 1996, Standard
Life terminated by recapture the reinsurance agreement with National Mutual.
As a result of this recapture, Standard Life received premium income, and
corresponding increase in reserves, of $4,234,000 and agreed to pay National
Mutual a net recapture fee of $825,000.
10. RELATED PARTY TRANSACTIONS
SMC is a guarantor on a $70,000 loan to a director and officer. The
guaranty will be effective until the earlier of repayment of the loan or
June 25, 1999.
On October 28, 1997, SMC made an interest-free loan to an officer and
director of SMC, in the amount of $778,000, representing a new loan in the sum
of $438,000 and consolidation of an existing loan. The principal balance of
the loan was $778,000 and $338,000 at December 31, 1997 and 1996, respectively.
Repayment is due within 10 days of the officer's voluntary termination or
resignation as an officer of SMC. In the event of a termination of the
officer's employment with SMC following a change in control, the loan is deemed
to be forgiven.
10. RELATED PARTY TRANSACTIONS (CONTINUED)
SMC entered into a covenant not to compete agreement with a former
officer and director in February 1997, effective July 1, 1996, the date his
employment agreement terminated. In accordance with the covenant not to compete
agreement, the officer and director received payments of $275,000 in 1997, and
will receive $125,000 in 1998 and $100,000 in 1999.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents office and storage space under noncancellable operating
leases. The Company incurred rent expense for operating leases of $932,000,
$1,037,000 and $1,092,000 in 1997, 1996 and 1995, respectively. Pursuant to the
terms of a lease agreement effective June 1, 1991, Standard Life has agreed to
lease office space for a ten year period. After the initial ten year lease
period, Standard Life may continue to lease the premises on a month to month
basis at a rental of 125% of the prevailing market rate for the leased premises
in effect at that time.
In April 1995, SMC sold its equipment and leased it back under a capital
lease. SMC has the option to renew or purchase the equipment at the end of the
lease term in April 1998. The cost of the equipment was $1,396,000 and
accumulated depreciation of $1,279,000 and $814,000 at December 31, 1997 and
1996, respectively.
Future required minimum rental payments, by year and in the aggregate,
under noncancellable capital leases and operating leases as of December 31,
1997, are as follows (in thousands):
Capital Operating
LEASES LEASES
1998 $144 $ 779
1999 -- 790
2000 -- 721
2001 -- 366
2002 -- 128
Thereafter -- 128
Total minimum lease payments 144 $2,912
Less amounts representing interest 3
Present value of net minimum lease
payments under capital lease $141
EMPLOYMENT AGREEMENTS
Certain officers are employed pursuant to executive employment agreements
that create certain liabilities in the event of the termination of the covered
executives following a change in control of the Company. The commitment under
these agreements is approximately three times their current annual salaries.
Additionally, following termination from the Company following a change in
control, each executive is entitled to receive a lump sum payment equal to all
unexercised stock options granted multiplied by the highest per share fair
market value during the six month period ending on the date of termination.
There were unexercised options outstanding to these executives to buy 1,177,880
shares at December 31, 1997.
12. LITIGATION
An officer and director of SMC resigned effective as of April 15, 1997.
On June 19, 1997, this former officer commenced an action in the Superior Court
of Marion County, Indiana, against SMC claiming that his employment agreement
contained a provision to the effect that, following a termination of his
employment with SMC under certain circumstances, he would be entitled to
receive certain benefits. This former officer has asserted to SMC that he is
entitled to a lump sum termination payment of $1,654,000 and liquidated damages
not exceeding $3,308,000 by virtue of his voluntarily leaving SMC's employment.
SMC disputes those claims. SMC filed its Answer and Counterclaim on September
11, 1997. SMC's investigation since the action was filed revealed a basis for
the termination of employment of the former officer for cause relative to
after-acquired evidence. On October 14, 1997, the Board of Directors of SMC
terminated the former officer for cause effective as of March 15, 1997. Such
termination will also be argued by SMC as a complete defense to all claims
asserted by the former officer. The ultimate outcome of the action cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the consolidated financial statements. Management
believes that the conclusion of such litigation will not have a material
adverse effect on SMC's consolidated financial condition.
<PAGE>
12. LITIGATION (CONTINUED)
In addition, the Company is involved in various legal proceedings in the
normal course of business. In most cases, such proceedings involve claims under
insurance policies or other contracts of the Company. The outcomes of these
legal proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity, or future results of operations of
the Company based on the Company's current understanding of the relevant facts
and law.
13. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES
The Company's U.S. life insurance subsidiaries maintain their records in
conformity with statutory accounting practices prescribed or permitted by state
insurance regulatory authorities. Statutory accounting practices differ in
certain respects from GAAP. In consolidation, adjustments have been made to
conform the Company's domestic subsidiaries' accounts with GAAP.
The Company's U.S. life insurance subsidiaries had consolidated statutory
capital and surplus of $25,923,000 and $22,970,000 at December 31, 1997 and
1996, respectively, after appropriate eliminations of intercompany accounts
among such subsidiaries. Consolidated net income (loss) of the Company's life
insurance subsidiaries on a statutory basis, after appropriate eliminations of
intercompany accounts among such subsidiaries, was $1,776,000, $3,291,000 and
$(1,339,000) for the years ended December 31, 1997, 1996 and 1995,
respectively. Minimum statutory capital and surplus required by the Indiana
Insurance Code was $450,000 as of December 31, 1997.
"Prescribed" statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations, and general administrative rules.
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in the future.
The NAIC currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that insurance enterprises use to prepare their statutory
financial statements.
Policy reserves for Dixie National Life's fixed premium universal life
policies were calculated according to the Commissioners' Reserve Valuation
Method ("CRVM") for traditional whole life policies. This differs from
prescribed statutory accounting practices. Effective October 2, 1995, Dixie
National Life received permission from the Mississippi Insurance Department to
strengthen the reserves for these policies by using the CRVM methodology as
modified by the Universal Life Model Regulation. This reserve strengthening
will be recorded quarterly through September 30, 1998. This permitted
accounting practice increased statutory surplus by $451,000 and $1,053,000 as
of December 31, 1997 and 1996, respectively.
From the funds borrowed by SMC pursuant to the Amended Credit Agreement
and the subordinated convertible debt agreement, $13,000,000 was loaned to
Standard Life pursuant to an Unsecured Surplus Debenture Agreement ("Surplus
Debenture") which requires Standard Life to make quarterly interest payments to
SMC at a variable corporate base rate plus 2% per annum, and annual principal
payments of $1,000,000 per year beginning in 2007 and concluding in 2019. As
required by state regulatory authorities, the balance of the surplus debenture
at December 31, 1997 of $13,000,000 is classified as a part of capital and
surplus of Standard Life. 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's ability to pay operating expenses and meet debt service obligations
is partially dependent upon the amount of dividends received from Standard
Life. Standard Life's ability to pay cash dividends to SMC is, in turn,
restricted by law or subject to approval by the insurance regulatory
authorities of Indiana. Dividends are permitted based on, among other things,
the level of preceding year statutory surplus and net income. In 1997 and
1996, Standard Life paid dividends of $1,600,000 and $1,000,000, respectively,
to SMC. In 1995, Standard Life paid no dividends to SMC. During 1998,
Standard Life can pay dividends of $2,592,000 without regulatory approval;
Standard Life must notify the Indiana regulatory authorities of the intent to
pay dividends at least thirty days prior to payment.
State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of investment and insurance
risks. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Enterprises below
specific trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. Each of the Company's insurance
subsidiaries has a Ratio that is at least 400% of the minimum RBC requirements;
accordingly, the subsidiaries meet the RBC requirements.
<PAGE>
13. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES (CONTINUED)
The statutory capital and surplus for Premier Life (Luxembourg) was
$7,288,000 and $8,243,000 at fiscal years ended 1997 and 1996, respectively,
and minimum capital and surplus under local insurance regulations was
$2,915,000 and $3,295,000 at fiscal years ended 1997 and 1996, respectively.
The statutory capital and surplus for Premier Life (Bermuda) was $1,357,000 and
$1,307,000 at fiscal years ended 1997 and 1996, respectively, and minimum
capital and surplus under local insurance regulations was $250,000 at fiscal
years ended 1997 and 1996. 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 under Luxembourg law in 1997 and 1996 due to accumulated losses.
14. OPERATIONS BY GEOGRAPHIC AREA
The Company operates exclusively in one business segment -- the sale and
administration of life insurance business (principally annuities and other
financial products).
The revenues, pre-tax income and assets by geographic segment for 1997
through 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Revenues:
United States $42,651 $36,524 $26,851
International 4,218 3,783 3,387
Total $46,869 $40,307 $30,238
Income before federal income taxes, extraordinary Year Ended
gain and December 31,
preferred stock dividends:
United States $1,541 $2,313 $1,224
International 1,721 1,222 332
Total $3,262 $3,535 $1,556
At December 31,
1997 1996 1995
Assets:
United States $508,476 $486,576 $343,040
International 160,516 141,837 136,558
Total $668,992 $628,413 $479,598
</TABLE>
The states in the U.S. with the largest share of U.S. premiums collected
in 1997 were Indiana (21%), California (11%), Ohio (10%), and Florida (10%).
No other state accounted for more than 5% of total collected premiums.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methods and assumptions used by the
Company in estimating its fair value disclosures for its financial instrument
assets and liabilities. Because fair values for all balance sheet items are
not required to be disclosed pursuant to SFAS No. 107, "Disclosures about Fair
Values of Financial Instruments", the aggregate fair value amounts presented
herein do not necessarily represent the underlying value of the Company;
likewise, care should be exercised in deriving conclusions about the Company's
business or financial condition based on the fair value information presented
herein.
FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are
based on quoted market prices from broker-dealers, where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services, or, in the case of private
placements, are estimated by discounting the expected future cash flows using
current market rates applicable to the coupon rate, credit, and maturity of the
investments.
EQUITY SECURITIES: The fair values for equity securities are based on
the quoted market prices.
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS AND POLICY LOANS: The estimated fair values for mortgage
loans and policy loans are estimated using discounted cash flow analyses and
interest rates currently being offered for similar loans to borrowers with
similar credit ratings.
ASSETS AND LIABILITIES HELD IN SEPARATE ACCOUNTS: Fair values for the
assets held in separate accounts are determined from broker-dealer market
makers, or valuations supplied by internationally recognized statistical rating
organizations. The separate account liability represents the Company's
obligations to policyholders and approximates fair value.
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: Fair values for the
Company's liabilities under investment-type insurance contracts are estimated
using discounted cash flow calculations, based on interest rates currently
being offered for similar contracts with maturities consistent with those
remaining contracts being valued. The estimated fair value of the liabilities
for investment contracts was approximately equal to its carrying value at
December 31, 1997 and 1996, as credited rates on the vast majority of account
balances approximate current rates paid on similar investments and because
these rates are generally not guaranteed beyond one year.
INSURANCE LIABILITIES FOR NON-INVESTMENT CONTRACTS: Fair value
disclosures for the Company's reserves for insurance contracts other than
investment-type contracts are not required and have not been determined by the
Company. However, the Company closely monitors the level of its insurance
liabilities and the fair value of reserves under all insurance contracts are
taken into consideration in the Company's overall management of interest rate
risk.
NOTES PAYABLE: The Company believes the fair value of its variable rate
long-term debt was equal to its carrying value at December 31, 1997 and 1996.
The Company negotiated the terms of its Amended Credit Agreement with its
lenders in November 1996. Those negotiations were based on the financial
condition of the Company and market conditions at that time. The financial
condition of the Company has not changed significantly since the negotiations
and although market conditions have changed, the Company pays a variable rate
of interest on the debt which reflects the change in market conditions. The
fair value of the subordinated convertible debt is based on quoted market
prices for the amount of shares convertible at December 31, 1997.
The carrying amount for all other financial instruments approximates
their fair values.
The fair value of the Company's financial instruments is shown below
using a summarized version of the Company's assets and liabilities at December
31, 1997 and 1996 (in thousands). Refer to Note 3 for additional information
relating to the fair value for investments.
<TABLE>
<CAPTION>
December 31,
<S> <C> <C> <C> <C>
1997 1996
Fair Carrying Fair Carrying
Value Amount Value Amount
Assets:
Investments:
Securities available for sale:
Fixed maturity securities $372,576 $372,576 $347,310 $347,310
Equity securities 52 52 62 62
Mortgage loans on real estate 377 375 3,041 3,035
Policy loans 8,978 9,495 7,767 9,903
Other invested assets 779 779 888 865
Short-term investments 13,342 13,342 8,417 8,417
Assets held in separate 148,064 148,064 128,546 128,546
accounts
Liabilities:
Insurance liabilities for 350,607 350,607 333,633 333,633
investment contracts
Obligations under capital lease 141 141 637 637
Notes payable 27,419 26,000 20,000 20,000
Liabilities related to separate 148,064 148,064 128,546 128,546
accounts
</TABLE>
<PAGE>
16. EARNINGS PER SHARE
A reconciliation of the numerator and denominator of the earnings per
share computation is as follows (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Income before extraordinary gain and preferred stock $2,645 $4,265 $1,313
dividends
Extraordinary gain on early redemption of redeemable -- 502 --
preferred stock
Preferred stock dividends (97) (208) --
Numerator for basic earnings per share -
Income available to common shareholders 2,548 4,559 1,313
Effect of dilutive securities:
Preferred stock dividends 97 208 --
14% subordinated convertible debt -- 82 --
10% subordinated convertible debt -- -- --
97 290 1,313
Numerator for diluted earnings per share -
Income available to common sharehodlers after assumed $2,645 $4,849 $1,313
conversions
Denominator:
Denominator for basic earnings per share - weighted - 4,948,302 4,856,316 5,244,495
average shares
Effect of dilutive securities:
Stock options 182,615 24,311 5,240
Stock warrants 230,285 108,062 96,202
Convertible preferred stock 230,015 393,701 --
14% subordinated convertible debt -- 166,667 --
10% subordinated convertible debt -- -- --
Dilutive potential common shares 642,915 692,741 101,442
Denominator for diluted earnings per share - adjusted
weighted -average 5,591,217 5,549,057 5,345,937
shares and assumed conversions
Basic earnings per share $ .52 $ .94 $ .25
Diluted earnings per share $ .47 $ .87 $ .25
</TABLE>
The Notes convertible in 1997 (SEE NOTE 5) were not included in the
computation of diluted earnings per share in 1997 because the effect would be
antidilutive.
17. PENDING ACQUISITION
On December 9, 1997, SMC and Savers Life Insurance Company ("Savers
Life") entered into an Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement") with Savers Life surviving as a wholly-owned subsidiary of
SMC. Subject to the terms and conditions of the Merger Agreement, each share
of Savers Life Common Stock outstanding immediately prior to the Effective Time
(as defined in the Merger Agreement) of the Merger will be converted into 1.2
shares of SMC Common Stock plus $1.50. Each holder of Savers Life Common Stock
may elect to receive the $1.50 per share portion of the merger consideration in
the form of additional shares of SMC Common Stock. Assuming each holder of
Savers Life Common Stock elects to receive $1.50 per share cash consideration
in lieu of electing to receive shares of SMC Common Stock and a value per share
of $7.00 per share, SMC will issue 2.1 million shares with a value of
approximately $15 million to acquire the Savers Life Common Stock. SMC has
received a commitment to increase the Amended Credit Agreement to $20,000,000
to finance the acquisition of Savers Life. The acquisition is expected to
close in March 1998.
Savers Life underwrites, markets and distributes annuities, life
insurance, and Medicare supplement health insurance through a sales force
consisting of 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.
<PAGE>
18. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Earnings per common and common equivalent share for each quarter are
computed independently of earnings per share for the year. Due to the
transactions affecting the weighted average number of shares outstanding in
each quarter and due to the uneven distribution of earnings during the year,
the sum of the quarterly earnings per share may not equal the earnings per
share for the year. The 1996 and first three quarters of 1997 earnings per
share amounts have been restated to comply with SFAS No. 128.
<TABLE>
<CAPTION>
1997 Quarters
<S> <C> <C> <C> <C>
First Second Third Fourth
Total revenues $12,019 $11,292 $11,599 $11,959
Components of net income:
Operating income $528 $661 $537 $658
Net realized investment gains 115 21 53 72
Net income $643 $682 $590 $730
Net income per common share $ .13 $ .14 $ .12 $ .15
Net income per common share, assuming
dilution $ .11 $ .12 $ .11 $ .13
1996 Quarters
First Second Third Fourth
Total revenues $8,856 $12,665 $7,969 $10,817
Components of net income:
Operating income $214 $(187) $342 $804
Net realized investment gains 145 125 129 387
Gain on disposal of subsidiaries 2,306 -- -- --
Extraordinary gain on early
redemption of 101 166 233 2
redeemable preferred stock
Net income $2,766 $104 $704 $1,193
Net income per common share $ .55 $ .02 $ .15 $ .24
Net income per common share, assuming
dilution $ .51 $ .02 $ .13 $ .21
</TABLE>
Reporting the results of insurance operations on a quarterly basis
requires the use of numerous estimates throughout the year, primarily in the
computation of reserves, amortization of deferred policy acquisition costs and
present value of future profits, and the effective rate for income taxes. It
is the Company's practice to review estimates at the end of each quarter and,
if necessary, make appropriate adjustments, with the effect of such adjustments
being reported in current operations. Only at year-end is the Company able to
assess the accuracy of its previous quarterly estimates. The Company's fourth
quarter results include the effect of the difference between previous estimates
and actual year-end results. Therefore, the results of an interim period may
not be indicative of the results of the entire year.
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 1996
ASSETS
Investments:
Investment in subsidiaries $52,005 $46,422
Surplus debenture due from Standard Life 13,000 13,000
Equity securities available for sale, at fair value (amortized 2 12
cost: 1997 - $5; 1996 -$8)
Real estate 130 139
Investment in joint venture -- 320
Notes receivable from officers and directors 778 338
Short-term investments, at cost, which approximates fair value 79 124
65,994 60,355
Cash 1,327 900
Property and equipment, less accumulated depreciation of $1,636 in 1997 879 1,087
and $989 in 1996
Note receivable from affiliate 2,858 2,858
Amounts receivable from subsidiaries 1,212 638
Other assets 1,892 829
Total assets $74,162 $66,667
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Obligations under capital lease $141 $637
Notes payable 26,000 20,000
Note payable to affiliate 2,858 2,858
Amounts due to subsidiaries 397 473
Other liabilities 1,453 1,023
Total liabilities 30,849 24,991
Class S Cumulative Convertible Redeemable Preferred Stock, par value $10
per share:
Authorized 300,000 shares; issued and outstanding 159,889 shares in -- 1,757
1996
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and outstanding -- --
Common Stock, no par value:
Authorized 20,000,000 shares; issued 5,752,499 shares 40,646 40,481
Treasury stock, at cost, 876,009 shares in 1997 and 728,229 shares in (4,572) (3,528)
1996
Unrealized gain (loss) on securities available for sale of subsidiaries 2,171 (746)
Foreign currency translation adjustment of subsidiaries (473) 691
Retained earnings 5,541 3,021
Total shareholders' equity 43,313 39,919
Total liabilities and shareholders' equity $74,162 $66,667
</TABLE>
See accompanying notes to condensed financial statements.
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Revenues:
Net investment income $ -- $32 $112
Interest income from subsidiaries 1,519 357 172
Net realized investment gains -- -- 23
Loss on disposal of subsidiary -- (156) --
Other income 154 135 28
Rental income from subsidiaries 1,145 853 715
Management fees from subsidiaries 2,100 1,905 1,930
Total revenues 4,918 3,126 2,980
Expenses:
Other operating expenses 3,420 3,470 2,479
Interest expense and financing costs 2,367 799 110
Interest expense on note payable to affiliate 162 161 172
Total expenses 5,949 4,430 2,761
Income (loss) before federal income taxes, equity
in earnings
of consolidated subsidiaries, extraordinary gain (1,031) (1,304) 219
and preferred stock dividends
Federal income tax expense (credit) (76) -- (57)
Income (loss) before equity in earnings of
consolidated
subsidiaries, extraordinary gain and preferred (955) (1,304) 276
stock dividends
Equity in earnings of consolidated subsidiaries 3,600 5,569 1,037
Income before extraordinary gain and preferred 2,645 4,265 1,313
stock dividends
Extraordinary gain on early redemption of
redeemable -- 502 --
preferred stock, net of $-- federal income tax
Net income 2,645 4,767 1,313
Preferred stock dividends 97 208 --
Earnings available to common shareholders $2,548 $4,559 $1,313
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
OPERATING ACTIVITIES
Net income $2,645 $4,767 $1,313
Adjustments to reconcile net income to net cash
provided by
operating activities:
Amortization of deferred debt issuance costs 71 32 2
Depreciation and amortization 646 564 562
Equity in earnings of subsidiaries (3,600) (5,569) (1,037)
Accrued interest payable 435 320 --
Other liabilities 79 192 480
Net realized investment gain -- -- (23)
Dividend from Standard Life 1,600 1,000 --
Extraordinary gain -- (502) --
Other (370) 165 (905)
Net cash provided by operating activities 1,506 969 392
FINANCING ACTIVITIES
Issuance of Common Stock, net -- -- 6
Borrowings, net of debt issuance costs of $70 in 1997,
$208 in 1996 5,558 16,792 2,923
and $81 in 1995
Repayments on long-term debt and obligations under (543) (491) (312)
capital lease
Short-term borrowings, net -- -- (550)
Redemption of redeemable preferred stock (1,855) (949) --
Repurchase of stock warrants -- (600) --
Proceeds from common and treasury stock sales 138 100 --
Purchase of Common Stock for treasury (503) (2,126) (822)
Net cash provided by financing activities 2,795 12,726 1,245
INVESTING ACTIVITIES
Investments, net (1,035) 197 653
Proceeds from sale of property and equipment under -- -- 1,396
sales leaseback
Purchase of property and equipment, net (439) (246) (475)
Surplus debenture contributed to Standard Life -- (13,000) --
Capital contribution to Standard Life (2,400) -- (3,000)
Capital contribution to Standard Management -- -- (170)
International
Capital contribution to Standard Advertising, Inc. -- -- (173)
Capital contribution to Standard Reinsurance -- -- (6)
Net cash used by investing activities (3,874) (13,049) (1,775)
Net increase (decrease) in cash 427 646 (138)
Cash at beginning of year 900 254 392
Cash at end of year $1,327 $900 $254
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
For purposes of these condensed financial statements, Standard Management
Corporation ("SMC") carries its investments in subsidiaries at cost plus equity
in undistributed earnings of subsidiaries since date of acquisition. Net income
of its subsidiaries is included in income using the equity method. These
condensed financial statements should be read in conjunction with SMC's
consolidated financial statements included elsewhere in this document.
2. DIVIDENDS FROM SUBSIDIARIES
SMC received a cash dividend from subsidiaries of $1,600,000 and $1,000,000
in 1997 and 1996, respectively. There were no cash dividends paid to SMC from
its subsidiaries in 1995.
<PAGE>
SCHEDULE IV -- REINSURANCE
STANDARD MANAGEMENT CORPORATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Assumed
Amount Companies Companies Net Amount to Net
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Life insurance in force $2,447,782 $1,269,848 $237 $1,178,171 .02%
Premiums
Life insurance and annuities $11,735 $4,821 $-- $6,914
Accident and health insurance 17 -- -- 17
Supplementary contract and other
funds 169 -- -- 169
on deposit
Total premiums $11,921 $4,821 $-- $7,100
YEAR ENDED DECEMBER 31, 1996
Life insurance in force $3,000,763 $1,633,340 $252 $1,367,675 .02%
Premiums
Life insurance and annuities $11,862 $2,152 $-- $9,710
Accident and health insurance 21 -- -- 21
Supplementary contract and other
funds 737 -- -- 737
on deposit
Total premiums $12,620 $2,152 $-- $10,468
YEAR ENDED DECEMBER 31, 1995
Life insurance in force $2,316,826 $1,490,812 $282 $826,296 .03%
Premiums
Life insurance and annuities $9,574 $4,312 $-- $5,262
Accident and health insurance 22 -- -- 22
Supplementary contract and other
funds 220 -- -- 220
on deposit
Total premiums $9,816 $4,312 $-- $5,504
</TABLE>
EXHIBIT D
Amended and Restated Registration Rights Agreement
between
STANDARD MANAGEMENT CORPORATION
and
FLEET NATIONAL BANK
<PAGE>
1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"AGREEMENT") is made as of April 15, 1997 by and between STANDARD MANAGEMENT
CORPORATION, an Indiana corporation (the "COMPANY"), and FLEET NATIONAL BANK, a
national banking association (the "STOCKHOLDER").
WHEREAS, the Company and the Stockholder entered into an Amended
and Restated Revolving Line of Credit Agreement dated as of November 8, 1996
(the "Existing Credit Agreement") pursuant to which the Company was indebted to
the Stockholder for up to the principal amount of $16,000,000; and
WHEREAS, in connection therewith, the Company executed certain
Warrants To Purchase Common Stock of the Company dated as of November 21, 1995
and July 18, 1996, respectively, in favor of the Stockholder (the "Initial
Warrants"), and also entered into an Amended and Restated Registration Rights
Agreement dated as of November 8, 1996 by and between the Stockholder and the
Company (the "Existing Registration Rights Agreement"); and
WHEREAS, the Company has requested that the Stockholder increase
the funds available to the Company under the Existing Credit Agreement up to
the principal amount of $20,000,000; and
WHEREAS, it is a condition precedent to the Stockholder making said
increase available to the Company that (i) the Existing Credit Agreement be
amended pursuant to a certain Amendment No. 1 to Revolving Line of Credit
Agreement and Other Loan Documents dated as of the date hereof between the
Company and the Stockholder, (ii) the Company deliver an additional Warrant To
Purchase Common Stock of the Company dated as of the date hereof (collectively,
with the Initial Warrants, referred to herein as the "WARRANTS") entitling the
Stockholder to subscribe for and purchase 12,000 additional shares of common
stock of the Company; and (iii) that the Existing Registration Rights Agreement
be amended and restated in its entirety; and
WHEREAS, certain capitalized terms used herein are used as defined
in Article 11 herein and in the Initial Warrants and the other Warrants.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. DEMAND REGISTRATION
1.1. REQUESTS FOR REGISTRATION. (i) At any time, a holder of Warrants or
Warrant Stock may demand registration under the Securities Act of all or
any portion of the Registrable Securities owned by such holder. In order
to accomplish such demand, a holder shall send written notice of the
demand to the Company, and such notice shall specify the number of
Registrable Securities sought to be registered. Unless the Company
elects, at its sole option, to make a cash payment to the holder of the
Warrants or Warrant Stock as more particularly described in Section
1.1(ii) below in lieu of proceeding with a Demand Registration, the
Company shall proceed with any Demand Registration requested by a holder
of Warrants or Warrant Stock if the number of Registrable Securities
which the Stockholders (including the holder requesting the Demand
Registration) shall have elected to include in such Demand Registration
pursuant to this Section 1.1 shall be at least 51% of the Warrant Stock
issued or issuable upon exercise of the Warrants (excluding Warrant Stock
already the subject of a Demand Registration). The minimum share amounts
specified in this Section 1.1 shall be appropriately adjusted to account
for any stock dividend, stock split, recapitalization, merger,
consolidation, reorganization or other action as a result of which
additional shares of Common Stock are issued on account of, in conversion
of or in exchange for shares of outstanding Common Stock.
(ii) If the holder of the Warrants or Warrant Stock makes a
demand for a Demand Registration of all or a portion of the Registrable
Securities owned by such holder, the Company may, instead, at its sole
option, elect to make a cash payment to such holder equal to the value of
the Warrants or Warrant Stock (or the portion thereof being exercised) in
an amount computed using the formula set forth in Section 2.1(iii)(2) of
the Warrants.
1.2. MAXIMUM NUMBER OF DEMAND REGISTRATIONS. In no event shall the
total number of Demand Registrations exceed two.
1.3. PROCEDURE. Within 10 days after receipt of a demand pursuant
to Section 1.1 hereof, the Company shall give written notice of such
requested registration to all other Stockholders and will include in such
registration, subject to the allocation provisions below, all other
Registrable Securities with respect to which the Company has received
written requests for inclusion within 20 days after the Company's mailing
of such notice, plus any securities of the Company that the Company
chooses to include on its own behalf.
1.4. EXPENSES. The Company will pay the Registration Expenses of
any Demand Registration, but the Underwriting Commissions, if such Demand
Registration is underwritten, will be paid by the Selling Stockholders in
proportion to any Registrable Securities to be included on their behalf.
1.5. EXPENSES. The Company shall pay the Registration Expenses of
the first Demand Registration, but the Underwriting Commissions, if such
first Demand Registration is underwritten, will be paid by the Selling
Stockholders in proportion to any Registrable Securities to be included
on their behalf. The Selling Stockholders shall pay the Registration
Expenses and the Underwriting Commissions, if any, of all other Demand
Registrations in proportion to the Registrable Securities included on
their behalf.
1.6. PRIORITY ON DEMAND REGISTRATIONS. If a Demand Registration is
underwritten and the managing underwriters advise the Company in writing
that in their opinion the number of Registrable Securities requested to
be included exceeds the number that can be sold in such offering, at a
price reasonably related to the fair value, the Company will allocate the
Registrable Securities to be included in such Demand Registration, first,
to the holders of Warrants and Warrant Stock PRO RATA on the basis of the
number of shares of Warrant Stock for which the Company has received
written requests for inclusion, and, second, to the Company, and, third,
PRO RATA on the basis of the number of Registrable Securities owned by
the Selling Stockholders.
1.7. SELECTION OF UNDERWRITERS. Any Demand Registration may be
underwritten, at the election of the Selling Stockholders, and the
selection of investment banker(s) and manager(s) and the other decisions
regarding the underwriting arrangements for any such offering will be
made by the Selling Stockholders; PROVIDED, HOWEVER, that the selection
of investment banker(s) and manager(s) shall be subject to the consent of
the Company, such consent not to be unreasonably withheld.
2. PIGGYBACK REGISTRATIONS
2.1. RIGHT TO PIGGYBACK. Whenever the Company proposes to register the
offer, sale or offer and sale of any of its securities for its own behalf
under the Securities Act (other than a Demand Registration), and the
registration form to be used may be used for the registrations of
Registrable Securities to be sold in the manner proposed by the Selling
Stockholders (a "PIGGYBACK REGISTRATION"), the Company will give prompt
written notice to all Stockholders and will include in such Piggyback
Registration, subject to the allocation provisions below, all Registrable
Securities with respect to which the Company has received written
requests for inclusion within 20 days after the Company's mailing of such
notice. The Company shall not select a Restricted Form that would
preclude registration of the Registrable Securities that the Company has
been requested to include in such registration if the Company could use
another available form of registration statement which is not a
Restricted form and the use of which would not give rise to added
Registration Expenses.
2.2. PIGGYBACK EXPENSES. In all Piggyback Registrations, the
Company will pay the Registration Expenses related to the Registrable
Securities of the Selling Stockholders, but the Underwriting Commissions
will be paid by the Selling Stockholders in proportion to any Registrable
Securities included on their behalf.
2.3. PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback
Registration is an underwritten registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such
registration exceeds the number that can be sold in such offering, at a
price reasonable related to fair value, the Company will allocate the
securities to be included as follows: first, the securities the Company
proposes to sell on its own behalf; second, Registrable Securities
requested to be included in such registration, PRO RATA on the basis of
the number of Registrable Securities owned, among the Selling
Stockholders; and third, securities requested to be included in such
registration by any stockholders of the Company other than the Selling
Stockholders.
2.4. WITHDRAWAL OR ABANDONMENT. Nothing contained in this Section 2
shall be construed as limiting or otherwise interfering with the right of
the Company to withdraw or abandon in its sole discretion any
registration statement filed by it in connection with a Piggyback
Registration notwithstanding the inclusion therein of Registrable
Securities.
3. HOLDBACK AGREEMENTS
Each of the Stockholder and the Company agree not to effect any public
sale or public distribution of equity securities of the Company of any
securities convertible into or exchangeable or exercisable for such
securities during the 7 days prior to and the 180 days after any
underwritten registration of equity securities of the Company becomes
effective (except as part of such underwritten registration or except in
connection with obligations of the Company existing on the effective date
of the registration statement relating to such underwritten offering).
4. REGISTRATION PROCEDURES
Whenever the Stockholders have requested that any Registrable Securities
be registered pursuant to Section 1 of this Agreement, unless the Company
elects, at its sole option, to make a cash payment to the holder of the
Warrants or Warrant Stock as more particularly described in Section
1.1(ii) above in lieu of proceeding with a Demand Registration, the
Company will, as expeditiously as possible, or whenever the Stockholders
have requested that any Registrable Securities be registered pursuant to
Section 2 of this Agreement, the Company will, to the extent applicable:
(a) PREPARATION AND FILING OF REGISTRATION STATEMENT.
Prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and
use its best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company will
furnish each Selling Stockholder with copies of all such documents
proposed to be filed).
(b) PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS.
Prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for the greater of (x) a period of not
less than 120 days or (y) until the Registrable Securities included
therein have been sold.
(c) COPIES OF DOCUMENTS. Furnish to each Selling Stockholder
such number of copies of such registration statement, each amendment and
supplement thereto and the prospectus included in such registration
statement (including each preliminary prospectus), and such other
documents as such Selling Stockholder may reasonably request in order to
facilitate the disposition of the Registrable Securities included therein
owned by such Selling Stockholder.
(d) BLUE SKY QUALIFICATIONS. Use its best efforts to
register or quality such Registrable Securities under such other
securities or blue sky laws of such jurisdictions as the Selling
Stockholders or managing underwriters may reasonably request; PROVIDED,
HOWEVER, that in connection with any such registration or qualification
the Company shall not be obligated to file a general consent to service
of process, or to qualify to do business as a foreign corporation, or
otherwise subject itself to taxation in connection with such
qualification or compliance.
(e) NOTIFICATION OF EFFECTIVENESS; AMENDMENTS. Notify each
Selling Stockholder at any time when a prospectus relating to the
Registrable Securities included therein is required to be delivered under
the Securities Act within the period that the Company is required to keep
the registration statement effective of the happening of any event as a
result of which the prospectus included in such registration statement as
theretofore amended or supplemented contains an untrue statement of a
material fact or omits any material fact necessary to make the statements
therein not misleading, and, at the request of any such Selling
Stockholder, the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading.
(f) LISTING. Cause all such Registrable Securities to be
listed or included on securities exchanges on which similar securities
issued by the Company are then listed or included.
(g) TRANSFER AGENT AND REGISTRAR. Provide a transfer agent
and registrar for all such Registrable Securities not later than the
effective date of such registration statement.
(h) OTHER AGREEMENTS. Enter into such customary agreement
(including an underwriting agreement containing customary terms and
conditions, including usual and customary indemnification provisions, in
form reasonably acceptable to the Company) and take such other customary
actions as may be reasonable necessary to expedite or facilitate the
disposition of such Registrable Securities.
(i) LETTERS FROM INDEPENDENT ACCOUNTANTS. Obtain a "cold
comfort" letter addressed to the Company from its independent accountants
in such form and covering such matters of the type customarily covered by
"cold comfort" letters delivered by such public accountants.
(j) INSPECTION OF RECORDS. Make available for inspection by
any Selling Stockholder, and, upon execution of a confidentiality
agreement mutually acceptable to all parties, by any underwriter
participating in any disposition pursuant to such registration statement
and any attorney, accountant or other agent retained by any such seller
or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent
in connection with such registration statement.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Stockholders:
5.1. DUE ORGANIZATION AND GOOD STANDING. The Company is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation in each jurisdiction in which the failure to be so qualified
could reasonably be expected to have a material adverse effect on the
Company.
5.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery
of this Agreement by the Company has been duly authorized by all
necessary corporate action and this Agreement constitutes the legal,
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
5.3. NO VIOLATION OR DEFAULT. The execution and delivery by the
Company of this Agreement does not, and the performance by the Company of
its obligations hereunder will not, violate any provisions of its charter
or by-laws or constitute a default under any other agreement to which the
Company is a party or by which it or its assets may be bound.
6. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder represents and warrants to the Company:
6.1. DUE ORGANIZATION AND GOOD STANDING. The Stockholder is a
national banking association, duly organized and validly existing under
the laws of the United States of America and is duly qualified as a
foreign corporation in each jurisdiction in which the failure to be so
qualified could reasonably be expected to have a material adverse effect
on such Stockholder.
6.2. DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery
of this Agreement by the Stockholder has been duly authorized by all
necessary action and this Agreement constitutes the legal, valid and
binding obligation of such Stockholder enforceable against such
Stockholder in accordance with its terms.
6.3. NO VIOLATION. The execution and delivery of this Agreement by
the Stockholder does not, and the performance by such Stockholder of its
obligations hereunder will not, violate any provision of the
organizational documents of such Stockholder.
6.4. NO DEFAULT. The execution and delivery of this Agreement by
the Stockholder does not, and the performance by such Stockholder of its
obligations hereunder will not, violate any other agreement to which such
Stockholder is a party or by which any of its assets may be bound.
7. Information Regarding Selling Stockholders
Each Selling Stockholder shall provide to the Company such information
as may be reasonably requested by the Company for use in the preparation
and filing of any registration statement covering Registrable Securities
owned by such Selling Stockholder, and the obligation of the Company to
include Registrable Securities in any registration statement on behalf of
any Selling Stockholder shall be subject to such Selling Stockholder's
providing such information as promptly as practicable.
8. Indemnification
8.1. INDEMNIFICATION BY THE COMPANY. The Company hereby indemnifies, to
the extent permitted by law, each Selling Stockholder, its officers and
directors, and each person who controls such holder (within the meaning
of the Securities Act), against all losses, claims, damages, liabilities
and expenses arising out of or resulting from any untrue or alleged
untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading except
insofar as the same occurs in reliance upon and in conformity with any
information furnished in writing to the Company by any Selling
Stockholder expressly for use therein or is caused by any such Selling
Stockholder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such Selling Stockholder with copies of the same.
8.2. INDEMNIFICATION BY THE SELLING STOCKHOLDERS. In connection
with any registration statement in which a Selling Stockholder is
participating, each such Selling Stockholder will furnish to the Company
in writing such information as is reasonably requested by the Company for
use in such registration statement or prospectus and will indemnify, to
the extent permitted by law, the Company, its directors and officers and
each person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and
expenses arising out of or resulting from any untrue or alleged untrue
statement of material fact or any omission or alleged omission of a
material fact required to be stated in the registration statement or
prospectus or any amendment thereof or supplement thereto or necessary to
make the statements therein not misleading, but only to the extent that
such untrue statement or omission or such alleged untrue statement or
alleged omission occurs in reliance upon and in conformity with
information so furnished in writing by such Selling Stockholder
specifically for use in the registration statement.
8.3. PROCEDURES AS TO INDEMNIFICATION. Any person entitled to
indemnification hereunder shall (i) give prompt notice to the
indemnifying party of any claim with respect to which it may seek
indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying
party to assume the defense of such claim with counsel reasonable
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any
settlement made without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay
the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless
in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
8.4. CONTRIBUTION. If the indemnification provided for in this
Section 8 is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any loss, liability, claim,
damage, or expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party hereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of
such loss, liability, claim, damage, or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and of the indemnified party on the other in connection with
the statements or omissions that resulted in such loss, liability, claim,
damage, or expense (including legal fees or expenses) as well as any
other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or
omission. The Company and each holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this
Section 8.4 were determined by PRO RATA allocation or by any other method
of allocation which does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 8, an indemnified Holder
shall not be required to contribute any amount in excess of the net
proceeds received by the indemnified Holder from the sale of the
Registrable Securities. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
9. Condition to the Company's Obligations
In connection with an underwritten offering, it shall be a condition to
the Company's obligations to include Registrable Securities on behalf of
any Selling Stockholder that the underwriters agree to indemnify the
Company, its directors and officers and each person who controls the
Company (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses arising out of or resulting
from any untrue or alleged untrue statement of material fact or any
omission or alleged omission of a material fact required to be stated in
the registration statement or prospectus or any amendment thereof or
supplement thereto or necessary to make the statements therein no
misleading, but only to the extent that such untrue statement or omission
or such alleged untrue statement or alleged omission is contained in
information furnished in writing by such underwriters on their own behalf
specifically for use in preparing the registration statement.
10. FORM S-3 AND RULE 144
10.1. AVAILABILITY OF SHORT FORM. The Company represents and warrants
that it meets and will use its best efforts to continue to meet the
requirements which must be met by the Company in order for the
Registrable Securities to be registered in a Demand Registration on Form
S-3 under the Securities Act or any comparable or successor form or
forms; and the Company further represents and warrants that it has
registered the Common Stock and will use its best efforts to register any
other Registrable Securities and maintain the registration of any
securities registered under the Securities Exchange Act of 1934 in
accordance with the provisions of that Act.
10.2. CONDITIONS OF RULE 144. The Company represents and warrants
that it satisfies and will use its best efforts to continue to satisfy
the conditions set forth in Rule 144 under the Securities Act which must
be satisfied by an issuer in order for a holder of restricted securities
to sell such securities under the provisions of such rule, including the
timely filing of all reports required to be filed under the Securities
Exchange Act of 1934, as amended.
11. Definitions
11.1. AGREEMENT. The term "AGREEMENT" shall mean this Registration
Rights Agreement, as the same may be amended from time to time.
11.2. COMMON STOCK. The term "COMMON STOCK" shall mean the Common
Stock, no par value, of the Company.
11.3. COMPANY. The term "COMPANY" shall have the meaning set forth
in the first paragraph of this Agreement.
11.4. DEMAND REGISTRATION. The term "DEMAND REGISTRATION" shall
have the meaning set forth in Section 1.1 hereof.
11.6. PIGGYBACK REGISTRATION. The term "PIGGYBACK REGISTRATION"
shall have the meaning set forth in Section 2.1 hereof.
11.7. REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES"
means any Common Stock registered in the names of the Stockholders from
time to time, any Warrant Stock issued or issuable upon exercise of
Warrant, and any securities issued or to be issued with respect to such
securities by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or
other reorganization. As to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have been
(i) effectively registered under the Securities Act or disposed of in
accordance with the registration statement covering them or (ii)
transferred pursuant to Rule 144 under the Securities Act (or any similar
rule then in force).
11.8. REGISTRATION EXPENSES. The term "REGISTRATION EXPENSES" means
all expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws,
printing expenses, messenger and delivery expenses, expenses and fees for
listing the securities to be registered on exchanges or trading system on
which similar securities issued by the Company are then listed or
included, and fees and disbursements of counsel for the Company.
11.9. RESTRICTED FORM. The term "RESTRICTED FORM" shall mean a form
of registration statement under the Securities Act which imposes for its
use a limitation on the maximum value or number of securities to be
included therein.
11.10. SECURITIES ACT. The term "SECURITIES ACT" shall mean the
Securities Act of 1933, as amended.
11.11. SELLING STOCKHOLDER. The term "SELLING STOCKHOLDER" means
any Stockholder who requests inclusion of all or a portion of its shares
of Registrable Securities in a Demand Registration pursuant to Sections 1
herein or a Piggyback Registration pursuant to Section 2.
11.12. SHORT FORM. The term "SHORT FORM" shall have the meaning set
forth in Section 1.1 hereof.
11.13. STOCKHOLDERS. The term "STOCKHOLDER" or shall have the
meaning set forth in the first paragraph hereof, and the term
"STOCKHOLDERS" shall mean, collectively, the Stockholder and any other
holder(s) of Warrants issued by the Company.
11.14. UNDERWRITING COMMISSIONS. The term "UNDERWRITING
COMMISSIONS" means all underwriting discounts or commissions relating to
the sale of securities of the Company, but excludes any expenses
reimbursed to underwriters.
12. Miscellaneous
12.1. NOTICES. Any notices required hereunder shall be sent by certified
or registered mail, and shall be addressed to the address of the
Company's corporate headquartered in the case of any notice to the
Company, and until changed by notice to the Company, to the Stockholders
at their address set forth opposite their signatures hereto.
12.2. AMENDMENTS AND WAIVERS. The provisions of this Agreement may
be amended and the Company may take any action herein prohibited, or omit
to perform any act herein required to be performed by it, if the Company
has obtained the written consent of the Stockholders which own 51% of the
Registrable Securities.
12.3. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and
inure to the benefit of the respective transferees, successors and
personal representatives of the Stockholders. The rights to cause the
Company to register Registrable Securities pursuant to this Agreement
shall follow the Warrants, and the Warrant Stock and shall be exercisable
by the holders of any Warrants or Warrant Stock, including any
transferees of Warrants or Warrant Stock.
12.4. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law
of the State of Connecticut.
12.5. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be considered to be an original
instrument and to be effective as of the date first written above.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
STANDARD MANAGEMENT CORPORATION
By STEPHEN M. COONS
Name: Stephen M. Coons, Esq.
Title: Executive Vice President
and General Counsel
FLEET NATIONAL BANK
By MILDRED CHAVARRIA JONES
Name: Mildred Chavarria Jones
Title: Vice President
EXHIBIT C
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE
SECURITIES ACT.
No. of Shares of Common Stock: Warrant No. 4
WARRANT
To Purchase Common Stock of
STANDARD MANAGEMENT CORPORATION
THIS IS TO CERTIFY THAT FLEET NATIONAL BANK, or its registered
assigns, is entitled, at any time or from time to time prior to the Expiration
Date (as hereinafter defined), to purchase from Standard Management
Corporation, an Indiana corporation (the "COMPANY"), 12,000 shares of Common
Stock (as hereinafter defined and subject to adjustment as provided herein), in
whole or in part, at a purchase price of $5.125 per share, all on the terms and
conditions and pursuant to the provisions hereinafter set forth.
1 DEFINITIONS. As used in this Warrant, the following terms have the
respective meanings set forth below:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common
Stock issued or issuable by the Company after the Closing Date, other than the
Warrant Stock.
"AFFILIATE" shall have the meaning set forth in the Revolving Line
of Credit Agreement.
"ASSIGNED VALUE" shall mean, in respect of any share of Common
Stock on any date herein specified (i) if there is a public market for Common
Stock, the average closing price of the Common Stock on the largest exchange on
which such shares are traded (or if not traded on an exchange, then the average
of the closing bid and ask prices quoted over-the-counter) over the 10 trading
days prior to the date of the determination (as such prices are reported in The
Wall Street Journal or if not so reported, in any nationally recognized
financial journal or newspaper), (ii) if there is no public market for Common
Stock, the highest price at which shares of Common Stock are offered for sale
in a public offering registered pursuant to the Securities Act or in an
arms-length private offering, if any such offering is pending (unless such
offer is revoked prior to such sale) on the date of determination of the
Assigned Value, or (iii) if there is no public market for Common Stock and no
such offering is pending, the fair market value per share of Common Stock as
determined in good faith by the Company's board of directors.
"BUSINESS DAY" shall mean any day that is not a Saturday or Sunday
or a day on which banks are required or permitted to be closed in the State of
Connecticut.
"CAPITAL STOCK" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
capital stock, including each class of common stock and preferred stock of such
Person.
"CLOSING DATE" shall mean April 15, 1997.
"COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency then administering the Securities Act and other
federal securities laws.
"COMMON STOCK" shall mean (except where the context otherwise
indicates) the Common Stock, no par value, of the Company as constituted on the
Closing Date, and any Capital Stock into which such Common Stock may thereafter
be changed, and shall also include (i) Capital Stock of the Company of any
other class (regardless of how denominated) issued to the holders of shares of
Common Stock upon any reclassification thereof which is also not preferred as
to dividends or assets over any other class of stock of the Company and which
is not subject to redemption and (ii) shares of common stock of any successor
or acquiring corporation (as defined in Section 4.7) received by or distributed
to the holders of Common Stock of the Company in the circumstances contemplated
by Section 4.7.
"COMMON STOCK OUTSTANDING" shall mean, at any date as of which the
number of shares thereof is to be determined, all issued and outstanding shares
of Common Stock and shall include all shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in shares of Common
Stock.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
Additional Shares of Common Stock, either immediately or upon the occurrence of
a specified date or a specified event.
"CURRENT MARKET PRICE" shall mean, in respect of any share of
Common Stock on any date herein specified, the Assigned Value per share of
Common Stock as at such date.
"CURRENT WARRANT PRICE" shall mean, in respect of a share of Common
Stock at any date herein specified, the price at which a share of Common Stock
may be purchased pursuant to exercise of this Warrant on such date.
"EXPIRATION DATE" shall mean April 15, 2004.
"FULLY-DILUTED OUTSTANDING" shall mean, (i) when used with
reference to Common Stock, at any date as of which the number of shares thereof
is to be determined, the number of shares of Common Stock Outstanding at such
date and the number of shares of Common Stock which would be outstanding if the
Warrants, the Company's convertible preferred stock, if any, and all other
outstanding rights, options or warrants to purchase, or securities convertible
into, shares of Common Stock and all security convertible or exchangeable into
any of the foregoing, that are "in-the-money" were converted into or exercised
or exchanged for shares of Common Stock on such date, and (ii) when used with
reference to Voting Securities, at any date as of which the number of shares
thereof is to be determined, the number of shares of Voting Securities
Outstanding at such date and the number of shares of Voting Securities which
would be outstanding if any outstanding rights, warrants or options to
purchase, or securities convertible into, shares of Voting Securities and all
securities convertible or exchangeable into any of the foregoing, that are "in-
the-money" were converted into or exercised or exchanged for shares of Voting
Securities on such date.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect.
"HOLDER" shall mean the Person or Persons in whose name this
Warrant or, as applicable, the Warrant Stock, is registered on the books of the
Company maintained for such purpose.
"INITIAL PUBLIC OFFERING" shall mean the first time a registration
statement filed by the Company under the Securities Act with respect to its
securities, whether on behalf of itself or otherwise, is declared effective,
other than a registration statement filed on Form S-8 or any successor forms
thereto.
"LIEN" means any mortgage, pledge, lien, encumbrance, charge or
adverse claim affecting title or resulting in an encumbrance against real or
personal property, or a security interest of any kind (including, without
limitation, any conditional sale or other title retention agreement or any
lease in the nature thereof, and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"MAJORITY HOLDERS" shall mean Holders of more than 50% of (i)
Warrants exercisable for the aggregate number of shares of Common Stock then
purchasable upon exercise of all Warrants, whether or not then exercisable,
PLUS (ii) where a provision affects Holders of the Warrant Stock, the Warrant
Stock.
"OTHER PROPERTY" is defined in Section 4.7.
"PERSON" shall have the meaning defined in the Revolving Line of
Credit Agreement.
"REGISTRATION RIGHTS AGREEMENT" shall mean that certain Amended and
Restated Registration Rights Agreement dated as of April 15, 1997 by and
between the Company and Holder.
"RESTRICTED COMMON STOCK" shall mean shares of Common Stock which
are, or which upon their issuance on the exercise of this Warrant would be,
evidenced by a certificate bearing the restrictive legend set forth in Section
9 herein.
"REVOLVING LINE OF CREDIT AGREEMENT" shall mean that certain
Amended and Restated Revolving Line of Credit Agreement dated as of November 8,
1996, by and between the Company and Holder, as amended by that certain
Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement and
Other Loan Documents dated as of March 10, 1998 by and between the Company and
Holder.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SUBSIDIARY" shall have the meaning set forth in the Revolving Line
of Credit Agreement.
"VOTING SECURITIES" means any class of Capital Stock of a
corporation or other equity shares, interests, participations, rights in or
other equivalents (however designated) of a Person other than a corporation,
and any rights (including without limitation debt securities convertible into
Capital Stock), warrants or options exercisable or exchangeable for or
convertible into such Capital Stock or other equity securities, pursuant to
which the holders thereof have (or would have upon exercise, conversion or
exchange) the general voting power under ordinary circumstances to vote for the
election of directors, managers, trustees or general partners of any Person
(irrespective of whether or not at the time any other class or classes will
have or might have voting power by reason of the happening of any contingency).
"VOTING SECURITIES OUTSTANDING" shall mean, at any date as of which
the number of shares thereof is to be determined, all issued and outstanding
shares of Voting Securities, and shall include all shares issuable in respect
of outstanding scrip or any certificates representing fractional interests in
shares of Voting Securities.
"WARRANTS" shall mean all of the Warrants of the Company issued
prior to or on the date hereof or to be issued subsequent to the date hereof
pursuant to the Revolving Line of Credit Agreement, including this Warrant, and
all warrants issued upon transfer, division or combination of, or in
substitution for, any thereof. All Warrants shall at all times be identical as
to terms and conditions, except as to date of issuance, the purchase price, the
number of shares of Common Stock for which they may be exercised and the date
by which such Warrants must be exercised.
"WARRANT PRICE" shall mean an amount equal to (i) the number of
shares of Common Stock being purchased upon exercise of this Warrant pursuant
to Section 2.1 multiplied by (ii) the Current Warrant Price as of the date of
such exercise.
"WARRANT STOCK" shall mean the shares of Common Stock issuable to
the Holders upon the exercise of this Warrant.
2 EXERCISE OF WARRANT: OTHER AGREEMENTS
3 MANNER OF EXERCISE.
I. From and after the date hereof until 5:00 P.M., New
York City time, on the Expiration Date, Holder may exercise this Warrant, on
any Business Day, for all or any part of the number of shares of Common Stock
purchasable hereunder. In order to exercise this Warrant, in whole or in part,
Holder shall deliver to the Company at its principal office at 9100 Keystone
Crossing, Suite 600, Indianapolis, Indiana 46240, or at the office or agency
designated by the Company pursuant to Section 11, (a) a written notice of
Holder's election to exercise this Warrant, which notice shall specify the
number of shares of Common Stock to be purchased, (b) this Warrant, (c) payment
of the Warrant Price by certified or official bank check from Holder, unless
the Holder is making a cashless exercise pursuant to Section 2.1(iii) herein,
and (d) if the Holder is making a cashless exercise pursuant to Section
2.1(iii) herein, a statement. Such notice shall be substantially in the form
of EXHIBIT A hereto, duly executed by Holder or its agent or attorney.
II. Upon receipt thereof, the Company shall, as promptly
as practicable, and in any event within ten (10) Business Days thereafter,
execute or cause to be executed and deliver or cause to be delivered to Holder
a certificate or certificates representing the aggregate number of shares of
Common Stock issuable upon such exercise as hereinafter provided. The stock
certificate or certificates so delivered shall be, to the extent possible, in
such denomination or denominations as such Holder shall request in the notice
and shall be registered in the name of Holder or such other name as shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
Holder or any other Person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
the notice, together with the check or checks and this Warrant, is received by
the Company as described above and all taxes required to be paid by Holder, if
any, pursuant to Section 2.2 prior to the issuance of such shares have been
paid. If this Warrant shall have been exercised in part, the Company shall, at
the time of delivery of the certificate or certificates representing the
Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder
to purchase the unpurchased shares of Common Stock called for by this Warrant,
which new Warrant shall in all other respects be identical with this Warrant,
or, at the request of Holder, appropriate notation may be made on this Warrant
and the same returned to Holder.
(iii) A. In lieu of paying the Warrant Price, Holder may elect to receive
shares of the Company's Common Stock equal to the value of this Warrant (or the
portion thereof being exercised), in which event the Company shall issue to
Holder the number of shares of the Company's Common Stock computed using the
following formula:
X = Y (A-B)
A
Where:
X = the number of shares of Warrant Stock to be issued
to the Holder;
Y = the number of shares of Warrant Stock otherwise
purchasable (or the portion thereof being exercised)
under this Warrant (at the date of exercise);
A = the Current Market Price of one share of the
Company's Common Stock (at the date of such exercise);
and
B = the Current Warrant Price (as adjusted to the date
of such exercise).
III. In lieu of paying the Warrant Price, Holder
may elect to receive cash equal to the value of this Warrant (or the portion
thereof being exercised), in which event the Company shall pay to Holder cash
in an amount computed using the following formula:
X = Y (A-B)
Where:
X = the amount of cash to be paid to Holder;
Y = the number of shares of Warrant Stock otherwise
purchasable (or the portion thereof being exercised)
under this Warrant (at the date of exercise);
A = the Current Market Price of one share of the
Company's Common Stock (at the date of such exercise);
and
B = the Current Warrant Price (as adjusted to the date
of such exercise).
1 PAYMENT OF TAXES. All shares of Common Stock issuable upon
the exercise of this Warrant pursuant to the terms hereof shall be validly
issued, fully paid and nonassessable and, to the extent permitted by law, free
of liens or preemptive rights. The Company shall pay all expenses in connection
with, and all taxes and other governmental charges that may be imposed with
respect to, the issue or delivery thereof unless such tax is imposed by law on
Holder, in which case such tax or charge shall be paid by Holder. The Company
shall not be required, however, to pay any tax or other charge imposed in
connection with any transfer involved in the issue of any certificate for
shares of Common Stock issuable upon exercise of this Warrant in any name other
than that of Holder, and in such case, the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the satisfaction of the Company that no such
tax or other charge is due.
2 OTHER AGREEMENTS. This Warrant and the Warrant Stock
shall be governed by the terms of this Warrant, the Registration Rights
Agreement and, to the extent applicable, the Revolving Line of Credit Agreement
(the terms of which are hereby incorporated herein by this reference). Each
Holder agrees to be bound by, and shall enjoy the benefits of, this Warrant,
the Registration Rights Agreement and the Revolving Line of Credit Agreement.
The registered holder of the Warrant Stock issued upon exercise of this Warrant
(in whole or in part) shall be entitled to all rights granted pursuant to the
Registration Rights Agreement and agrees to be bound by all of the obligations
and limitations thereof, including the ability of the Company to elect to make
a cash payment to the Holder as more particularly described in Section 1.1(ii)
of the Registration Rights Agreement in lieu of proceeding with a Demand
Registration (as such term is defined in the Registration Rights Agreement).
3 TRANSFER. DIVISION AND COMBINATION.
4 TRANSFER. Subject to compliance with Section 9 herein,
Holder shall have the right to transfer of this Warrant and all rights
hereunder and the Warrant Stock, in each case, in whole or in part. Such
transfer shall be registered on the books of the Company to be maintained for
such purpose, upon surrender of this Warrant or the Warrant Stock at the
principal office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 11, together with, in the
case of this Warrant, a written assignment of this Warrant substantially in the
form of EXHIBIT B hereto duly executed by Holder or its agent or attorney and,
in the case of Warrant Stock, stock powers or other instrument of assignment
duly executed, and, in each case, funds sufficient to pay any transfer taxes
payable upon the making of such transfer.
5 DIVISION AND COMBINATION. This Warrant may be divided or
combined with other Warrants upon presentation hereof at the aforesaid office
or agency of the Company, together with a written notice specifying the names
and denominations in which new Warrants are to be issued, signed by Holder or
its agent or attorney. Subject to compliance with this Section 3, as to any
transfer which may be involved in such division or combination, the Company
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
6 EXPENSES. The Company shall prepare, issue and deliver at
its own expense (other than transfer taxes) the new Warrant or Warrants under
this Section 3.
7 MAINTENANCE OF BOOKS. The Company agrees to maintain, at
its aforesaid office or agency, books for the registration and the registration
of transfer of the Warrants.
8 ADJUSTMENTS.
The number of shares of Common Stock for which this Warrant is
exercisable shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give each Holder notice of any event
described below which requires an adjustment pursuant to this Section 4 at the
time of such event.
9 STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS. If, at
any time, the Company shall:
I. pay holders of its Common Stock a dividend in, or
otherwise make a distribution of, Additional Shares of Common Stock,
II. subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock,
III. combine its outstanding shares of Common Stock into
a smaller number of shares of Common Stock, or
IV. issue any shares of equity securities pursuant to a
reclassification of shares of Common Stock,
then the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be
adjusted to equal the number of shares of Common Stock which a record
holder of the same number of shares of Common Stock for which this
Warrant is exercisable immediately prior to the occurrence of such event
would own or be entitled to receive after the happening of such event.
The Current Warrant Price shall be adjusted to equal the Current
Warrant Price hereunder immediately prior to any such adjustment multiplied by
a fraction, the numerator of which shall be the number of shares on a Fully
Diluted Outstanding basis immediately prior to such adjustment and the
denominator of which shall be the number of shares on a Fully Diluted
Outstanding basis immediately after such event.
1 CERTAIN OTHER DISTRIBUTIONS. If, at any time, the Company
shall pay holders of its Common Stock a dividend in, or otherwise distribute:
I. cash,
II. any evidences of its indebtedness, any shares of its
stock or any other securities or property of any nature whatsoever (other than
cash, Convertible Securities or Additional Shares of Common Stock), or
III. any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness, any shares of its stock or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock),
then the number of shares of Common Stock for which this Warrant is
exercisable shall be adjusted to equal the product of the number of
shares of Common Stock for which this Warrant is exercisable immediately
prior to such adjustment by a fraction (I) the numerator of which shall
be the Current Market Price per share of Common Stock at the date of such
payment and (II) the denominator of which shall be (x) such Current
Market Price per share of Common Stock minus (y) the amount allocable to
one share of Common Stock of any such cash so distributable and of the
fair value (as determined in good faith by the Board of Directors of the
Company) of any and all such evidences of indebtedness, shares of stock,
other securities or property or warrants or other subscription or
purchase rights so distributable. A reclassification of the Common Stock
(other than a change in par value, or from par value to no par value or
from no par value to par value) into shares of Common Stock and shares of
any other class of stock shall be deemed a distribution by the Company to
the holders of its Common Stock of such shares of such other class of
stock within the meaning of this Section 4.2 and, if the outstanding
shares of Common Stock shall be changed into a larger or smaller number
of shares of Common Stock as a part of such reclassification, such change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 4.1.
The Current Warrant Price shall be adjusted to equal the Current
Warrant Price hereunder immediately prior to any such adjustment multiplied by
a fraction, the numerator of which shall be the number of shares for which this
Warrant is exercisable immediately prior to such adjustment and the denominator
of which shall be the number of shares for which this Warrant is exercisable
immediately after such adjustment, as calculated above.
1 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
I. If at any time the Company shall (except as
hereinafter provided) issue or sell any Additional Shares of Common Stock for
consideration in an amount per Additional Share of Common Stock less than the
Current Market Price, then the number of shares of Common Stock for which this
Warrant is exercisable shall be adjusted to equal the product obtained by
multiplying the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such issue or sale by a fraction (I) the
numerator of which shall be the number of Fully Diluted Outstanding shares of
Common Stock immediately after such issue or sale, and (II) the denominator of
which shall be the number of Fully Diluted Outstanding shares of Common Stock
immediately prior to such issue or sale plus the number of shares which the
aggregate offering price of the total number of such Additional Shares of
Common Stock would purchase at the then Current Market Price. Current Warrant
Price shall be adjusted to equal the Current Warrant Price hereunder
immediately prior to any such adjustment multiplied by a fraction, the
numerator of which shall be the number of shares for which this Warrant is
exercisable immediately prior to such adjustment, and the denominator is the
number of shares for which this Warrant is exercisable immediately after such
adjustment, as calculated above.
II. The provisions of Section 4.3(i) shall not apply to
any issuance of Additional Shares of Common Stock for which an adjustment is
provided under Section 4.1. No adjustment of the number of shares of Common
Stock for which this Warrant shall be exercisable shall be made under Section
4.3(i) upon the issuance of any Additional Shares of Common Stock which are
issued pursuant to the exercise of any warrants, options or other subscription
or purchase rights or pursuant to the exercise of any conversion or exchange
rights in any Convertible Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants or other rights or upon the
issuance of such Convertible Securities (or upon the issuance of any warrant or
other rights therefor) pursuant to Section 4.4.
1 ISSUANCE OF WARRANTS, CONVERTIBLE SECURITIES OR OTHER
RIGHTS. If, at any time, the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a distribution of, or
shall in any manner (whether directly or by assumption in a merger in which the
Company is the surviving corporation or otherwise) issue or sell, any warrants,
options or other rights to subscribe for or purchase any Additional Shares of
Common Stock or any Convertible Securities, whether or not the rights to
exercise, purchase, exchange or convert thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such warrants, options or other rights or upon conversion or exchange of such
Convertible Securities shall be less than the Current Market Price in effect
immediately prior to the exercise of this Warrant, then the number of shares
for which this Warrant is exercisable and the Current Warrant Price shall each
be adjusted as provided in Section 4.3 on the basis that the maximum number of
Additional Shares of Common Stock issuable (assuming immediate exercisability
for all shares covered) pursuant to all such warrants, options or other rights
or necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the date of the exercise
of this Warrant. No further adjustments of the number of shares for which this
Warrant is exercisable or the Current Warrant Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities upon
exercise of such warrants or other rights or upon the actual issue of such
Common Stock upon such conversion or exchange of such Convertible Securities.
2 OTHER ACTION AFFECTING WARRANT. If at any time or from
time to time the Company shall take any action in respect of or affecting the
Common Stock other than an action described in any of the foregoing Sections
4.1 to 4.4, inclusive, then, unless in the reasonable judgment of the Board of
Directors of the Company such action will not have a materially adverse effect
upon the rights of any Holder, the number of shares of Common Stock for which
this Warrant is exercisable shall be adjusted in such manner and at such time
as the Board of Directors of the Company may in good faith determine to be
equitable under the circumstances.
3 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER SECTION
4.6. The following provisions shall be applicable to the making of adjustments
of the number of shares of Common Stock for which this Warrant is exercisable
provided for in this Section 4:
I. COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
warrants, options or other rights to subscribe for or purchase any Additional
Shares of Common Stock or any Convertible Securities shall be issued for cash
consideration, the consideration received by the Company therefor shall be the
amount of the cash received by the Company therefor, or, if such Additional
Shares of Common Stock or Convertible Securities are offered by the Company for
subscription, the subscription price, or, if such Additional Shares of Common
Stock or Convertible Securities are sold to underwriters or dealers for public
offering without a subscription offering, the initial public offering price (in
any such case subtracting any amounts paid or receivable for accrued interest
or accrued dividends and without taking into account any compensation,
discounts or expenses paid or incurred by the Company for and in the
underwriting of, or otherwise in connection with, the issuance thereof). To the
extent that such issuance shall be for a consideration other than cash, then,
except as herein otherwise expressly provided, the amount of such consideration
shall be deemed to be the fair value of such consideration at the time of such
issuance as determined in good faith by the Board of Directors of the Company
(excluding therefrom any director designated by the transferor thereof). In
case any Additional Shares of Common Stock or any Convertible Securities or any
warrants, options or other rights to subscribe for or purchase such Additional
Shares of Common Stock or Convertible Securities shall be issued in connection
with any merger in which the Company issues any securities, the amount of
consideration therefor shall be deemed to be the fair value, as determined in
good faith by the Board of Directors of the Company (excluding therefrom any
director designated by the transferor thereof), of such portion of the assets
and business of the nonsurviving corporation as such Board in good faith shall
determine to be attributable to such Additional Shares of Common Stock,
Convertible Securities, warrants, options or other rights, as the case may be.
The consideration for any Additional Shares of Common Stock issuable pursuant
to any warrants, options or other rights to subscribe for or purchase the same
shall be the consideration received by the Company for issuing such warrants,
options or other rights plus the additional consideration payable to the
Company upon exercise of such warrants or other rights. The consideration for
any Additional Shares of Common Stock issuable pursuant to the terms of any
Convertible Securities shall be the consideration received by the Company for
issuing warrants, options or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to the Company
in respect of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to the Company upon the
exercise of the right of conversion or exchange in such Convertible Securities.
In case of the issuance at any time of any Additional Shares of Common Stock or
Convertible Securities in payment or satisfaction of any dividends upon any
class of stock other than Common Stock, the Company shall be deemed to have
received for such Additional Shares of Common Stock or Convertible Securities a
consideration equal to the amount of such dividend so paid or satisfied.
II. WHEN ADJUSTMENTS TO BE MADE. The adjustments
required by this Section 4 shall be made whenever and as often as any specified
event requiring an adjustment shall occur, except that any adjustment of the
number of shares of Common Stock for which this Warrant is exercisable that
would otherwise be required may be postponed (except in the case of a
subdivision or combination of shares of the Common Stock, as provided for in
Section 4.1) up to, but not beyond the date of exercise if such adjustment
either by itself or with other adjustments not previously made adds or
subtracts less than 1% of the shares of Common Stock for which this Warrant is
exercisable immediately prior to the making of such adjustment. Any adjustment
representing a change of less than such minimum amount (except as aforesaid)
which is postponed shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this Section 4 and not
previously made, would result in a minimum adjustment or on the date of
exercise. For the purpose of any adjustment, any specified event shall be
deemed to have occurred at the close of business on the date of its occurrence.
III. FRACTIONAL INTERESTS. In computing adjustments under
this Section 4, fractional interests in Common Stock shall be taken into
account to the nearest one-tenth of a share.
IV. WHEN ADJUSTMENT NOT REQUIRED. If the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase rights
and shall, thereafter and before the distribution to stockholders thereof,
legally abandon its plan to pay or deliver such dividend, distribution,
subscription or purchase rights, then thereafter no adjustment shall be
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
1 REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS.
I. In case the Company shall reorganize its capital,
reclassify its Capital Stock, consolidate or merge with or into another
corporation, or sell, transfer or otherwise dispose of all or substantially all
its property, assets or business to another corporation and, pursuant to the
terms of such reorganization, reclassification, merger, consolidation or
disposition of assets, shares of common stock of the successor or acquiring
corporation, or any cash, shares of stock or other securities or property of
any nature whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the successor or acquiring
corporation ("OTHER PROPERTY"), are to be received by or distributed to the
holders of Common Stock of the Company, then each Holder shall have the right
thereafter to receive, upon exercise of such Warrant, the number of shares of
common stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and Other Property receivable upon or as a result
of such reorganization, reclassification, merger, consolidation or disposition
of assets by a holder of the number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such event.
II. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, (a) Holder
shall continue to enjoy, with respect to any shares of common stock of the
successor or acquiring corporation or the Company or any Other Property
consisting of Capital Stock or warrants acquired by Holder, all the rights and
benefits available to Holder pursuant to this Warrant and all other agreements
executed in connection with this Warrant and/or the Warrant Stock, and (b) the
successor or acquiring corporation (if other than the Company) shall expressly
assume the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by the
Company and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Company) in order to provide for adjustments of
shares of the Common Stock for which this Warrant is exercisable which shall be
as nearly equivalent as practicable to the adjustments provided for in this
Section 3.
III. For purposes of this Section 4.7, "COMMON STOCK OF
THE SUCCESSOR OR ACQUIRING CORPORATION" shall include stock of such corporation
of any class which is not preferred as to dividends or assets over any other
class of stock of such corporation and which is not subject to redemption and
shall also include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock,
either immediately or upon the arrival of a specified date or the happening of
a specified event and any warrants or other rights to subscribe for or purchase
any such stock. The foregoing provisions of this Section 4.7 shall similarly
apply to successive reorganizations, reclassifications, mergers, consolidations
or disposition of assets.
IV. The Company shall not consolidate or merge with or
into an Affiliate of the Company, nor sell, transfer or otherwise dispose of
all or substantially all its property, assets or business to such an Affiliate
unless and until (a) such consolidation, merger, sale, transfer or disposition
is fair and equitable to the Company, each Holder and all holders of Warrant
Stock and is on terms which are at least as favorable as those that would be
obtainable in a similar transaction with an unrelated third party, and (b) each
Holder shall have received, at the Company's sole cost and expense, the opinion
of a financial advisor satisfactory to such Holder in such Holder's reasonable
discretion to the effect that the proposed consolidation, merger, sale,
transfer or disposition satisfies the conditions set forth in the immediately
preceding clause (a).
1 CERTAIN LIMITATIONS. Notwithstanding anything to the
contrary contained in the Company's Articles of Incorporation, Bylaws or other
documents governing the terms of the Company's Capital Stock, the Company
agrees not to amend its Articles of Incorporation or Bylaws, enter into any
other transaction or execute any other document that would cause a reduction in
the par value per share of Common Stock below the Current Warrant Price.
2 NOTICES TO WARRANT HOLDERS.
3 NOTICE OF ADJUSTMENTS. Whenever the number of shares of
Common Stock for which this Warrant is exercisable is subject to adjustment
pursuant to Section 4, the Company shall forthwith prepare a certificate to be
executed by the chief financial officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a description of the basis on which
the Board of Directors of the Company determined the fair value of any
evidences of indebtedness shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in Section
4.6(i)), specifying the number of shares of Common Stock for which this Warrant
is exercisable and (if such adjustment was made pursuant to Section 4.7)
describing the number and kind of any other shares of stock or Other Property
for which this Warrant is exercisable, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. The Company
shall promptly cause a signed copy of such certificate to be delivered to each
Holder in accordance with Section 17.1. The Company shall keep at its office or
agency designated pursuant to Section 11 copies of all such certificates and
cause the same to be available for inspection at said office during normal
business hours by any Holder or any prospective purchaser of a Warrant
designated by a Holder thereof.
4 NOTICE OF CORPORATE ACTION. If at any time:
I. the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a dividend (other
than a cash dividend payable out of earnings or earned surplus legally
available for the payment of dividends under the laws of the jurisdiction of
incorporation of the Company) or other distribution, or any right to subscribe
for or purchase any evidences of its indebtedness, any shares of stock of any
class or any other securities or property, or to receive any other right, or
II. there shall be any capital reorganization of the
Company, any reclassification or recapitalization of the Capital Stock of the
Company or any consolidation or merger of the Company with, or any sale,
transfer or other disposition of all or substantially all the property, assets
or business of the Company to, another corporation, or
III. there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder
(a) at least 20 days' prior written notice of the date on which a record
date shall be selected for such dividend, distribution or right or for
determining rights to vote in respect of any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up, and (b) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 20 days'
prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clauses also shall specify (I)
with respect to clause (a), the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, the date
on which the holders of Common Stock shall be entitled to any such
dividend, distribution or right, and the amount and character thereof,
and (II) with respect to clauses (a) and (b), the date on which any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up is to take place and
the time, if any such time is to be fixed, as of which the holders of
Common Stock shall be entitled to exchange their shares of Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up. Each such written notice shall be
sufficiently given if addressed to Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with
Section 17.1.
1 NO IMPAIRMENT. The Company shall not by any action, including, without
limitation, amending its articles of incorporation or through any
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, winding up, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder against impairment.
Without limiting the generality of the foregoing, the Company will (i) not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (ii) take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, including reducing the par value of its Common Stock,
and (iii) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this Warrant.
2 RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH OR APPROVAL
OF ANY GOVERNMENTAL AUTHORITY.
From and after the date hereof, the Company shall at all times reserve and keep
available for issue upon the exercise of Warrants such number of its authorized
but unissued shares of Common Stock as will be sufficient to permit the
exercise in full of all outstanding Warrants. All shares of Common Stock which
shall be so issuable, when issued upon exercise of any Warrant and payment
therefor in accordance with the terms of such Warrant, shall be duly and
validly issued and fully paid and nonassessable, and, to the extent permitted
by law, free of liens or preemptive rights.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
3 TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS. In the case of all
dividends or other distributions by the Company to the holders of its Common
Stock with respect to which any provision of Section 4 refers to the taking of
a record of such holders, the Company will in each such case take such a record
as of the close of business on a Business Day. The Company will not, at any
time, except upon dissolution, liquidation or winding up of the Company, close
its stock transfer books or Warrant transfer books so as to result in
preventing or delaying the exercise or transfer of any Warrant.
4 RESTRICTIONS OF TRANSFERABILITY. Each Warrant shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE
OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "1933 ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE
SECURITIES ACT."
5 LOSS OR MUTILATION. Upon receipt by the Company from any Holder of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it, and in case of mutilation upon surrender and cancellation hereof, the
Company will execute and deliver in lieu hereof a new Warrant of like tenor to
such Holder; PROVIDED, in the case of mutilation, no indemnity shall be
required if this Warrant in identifiable form is surrendered to the Company for
cancellation.
6 OFFICE OF THE COMPANY. As long as any of the Warrants remain outstanding,
the Company shall maintain an office or agency (which may be the principal
executive offices of the Company) where the Warrants may be presented for
exercise, registration of transfer, division or combination as provided in this
Warrant. The Company shall notify each Holder in writing prior to any change
of address of the office at which the Warrants may be presented.
7 LIMITATION OF LIABILITY. No provision hereof, in the absence of affirmative
action by Holder to purchase shares of Common Stock, and no enumeration herein
of the rights or privileges of Holder hereof, shall give rise to any liability
of such Holder for the purchase price of any Common Stock or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
8 CAPITALIZATION. As of April 15, 1997, there are outstanding 5,025,143
shares of Common Stock; 727,356 shares of treasury stock of the Company; and
159,289 outstanding shares of Class S preferred stock and 140,711 shares of
treasury Class S preferred stock, which are convertible into a maximum number
of 209,040 shares of Common Stock.
9 REGISTERED HOLDER. Notwithstanding any other provision of this Warrant,
Holder and/or its affiliates may exercise this Warrant solely to the extent
such exercise would not result in Holder and/or its affiliates holding,
directly or indirectly, in excess of 4.99% of the outstanding Common Stock of
the Company (such determination to be made by Holder), except for an exercise
in connection with (i) a widely dispersed public offering of the Warrant Stock,
(ii) a sale of the Warrant Stock in the secondary market pursuant to the
transaction and volume limitations of Rule 144 under the Securities Act
(irrespective of holding periods), or (iii) a private placement or sale,
including those made pursuant to Rule 144A under the Securities Act, so long as
Holder and/or its affiliates do not collectively acquire more than 2% of the
Common Stock of the Company pursuant to any such transfer.
10 UNDERTAKINGS. Holder covenants with the Company that it will not exercise
or attempt to exercise influence over the management or policies of the Company
in connection with this Warrant or any shares of Common Stock for which this
Warrant may be exercised.
11 SHAREHOLDER COMMUNICATIONS. The Company will provide the Registered Holder
with copies of all written communications distributed to shareholders
generally.
12 MISCELLANEOUS.
13 NOTICE GENERALLY. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid, or
by telecopy and confirmed by telecopy answerback, addressed as follows:
I. If to any Holder or holder of the Warrant Stock, at
its last known address appearing on the books of the Company maintained for
such purpose.
II. If to the Company at:
9100 Keystone Crossing
Suite 600
Indianapolis, Indiana 46240
Attention: Stephen M. Coons, Esq.
Telecopy: (317) 574-6227
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice
demand, request, consent, approval, declaration, delivery or other
communication hereunder shall be deemed to have been duly given or served
on the date on which personally delivered, with receipt acknowledged,
telecopied and confirmed by telecopy answerback, or three (3) Business
Days after the same shall have been deposited in the United States mail.
Failure or delay in delivering copies of any notice, demand, request,
approval, declaration, delivery or other communication to the person
designated above to receive a copy shall in no way adversely affect the
effectiveness of such notice, demand, request, approval, declaration,
delivery or other communication.
1 SUCCESSORS AND ASSIGNS. This Warrant and the rights
evidenced hereby (including, without limitation, those relating to the Warrant
Stock) shall inure to the benefit of and be binding upon the successors of the
Company and the successors and assigns of Holder. The provisions of this
Warrant are intended to be for the benefit of all Holders from time to time of
this Warrant and all Holders from time to time of the Warrant Stock, and shall
be enforceable by any such Holder(s).
2 AMENDMENT.
I. This Warrant and all other Warrants may be modified
or amended or the provisions hereof waived with the written consent of the
Company and the Majority Holders, PROVIDED that no such Warrant may be modified
or amended to reduce the number of shares of Common Stock for which such
Warrant is exercisable or to increase the Warrant Price without the prior
written consent of Holder thereof.
II. No waivers of, or exceptions to, any term, condition
or provision of this Warrant, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
1 SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
2 HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
3 GOVERNING LAW. This Warrant shall be governed by the laws
of the State of Connecticut, without regard to the provisions thereof relating
to conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed.
Dated: April 15, 1997
STANDARD MANAGEMENT CORPORATION
By:STEPHEN M. COONS
Name:
Stephen M. Coons, Esq.
Its:
Executive Vice President and General
Counsel
-2-
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for the purchase of _______ shares of Common Stock
of the Company, and herewith makes payment in the amount of $________
therefor, and requests that certificates for the shares of Common Stock
hereby purchased (and any securities or other property issuable upon such
exercise) be issued in the name of and delivered to ___________, whose
address is ____________ and, if such shares of Common Stock shall not
include all of the shares of Common Stock issuable as provided in this
Warrant, that a new Warrant of like tenor and date for the balance of the
shares of Common Stock issuable hereunder be delivered to the
undersigned. In lieu of paying the purchase price, I hereby make a
cashless exercise of this Warrant for the purchase of _______ shares of
Common Stock of the Company pursuant to Section 2.1(iii) of this Warrant
and request that [$______] [certificates representing _____ shares] be
[paid][issued] and delivered to _______, whose address is ____________.
____________________________________
(Name of Registered Owner)
(Signature of Registered Owner)
(Street Address)
(City) (State) (Zip Code)
-2-
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below
all of the rights of the undersigned under this Warrant, with respect to
the number of shares of Common Stock set forth below:
NAME AND ADDRESS OF ASSIGNEE No. of Shares of Common Stock
and does hereby irrevocably constitute and appoint __________________
attorney-in-fact to register such transfer on the books of
______________________ maintained for the purpose, with full power of
substitution in the premises.
Dated: Print Name:
Signature:
Witness:
NOTICE: The signature on this assignment must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
-2-
AMENDMENT NO. 1 TO REVOLVING LINE OF CREDIT AGREEMENT AND OTHER LOAN
DOCUMENTS
Dated as of March 10, 1998
This AMENDMENT NO. 1 TO REVOLVING LINE OF CREDIT AGREEMENT AND
OTHER LOAN DOCUMENTS between STANDARD MANAGEMENT CORPORATION, an Indiana
corporation (the "Borrower"), and FLEET NATIONAL BANK, a national banking
association (formerly known as Shawmut Bank Connecticut, National Association)
(the "Bank").
PRELIMINARY STATEMENT.
A. The Borrower and the Bank have entered into an Amended and
Restated Revolving Line of Credit Agreement dated as of November 8, 1996 (the
"Existing Credit Agreement"; the terms defined therein being used herein as
therein defined unless otherwise defined herein).
B. The Borrower and the Bank have agreed to amend the Existing
Credit Agreement, the Note and the other Loan Documents to increase the
principal amount available thereunder from $16,000,000 to $20,000,000.
SECTION
1 AMENDMENTS TO EXISTING CREDIT AGREEMENT AND NOTE.
I. EXISTING CREDIT AGREEMENT. The Existing Credit
Agreement and the Note are, effective as of the date hereof and subject to the
satisfaction of the conditions precedent set forth in Section 2 hereof, hereby
amended as follows:
(i) COMMITMENT. The term "Commitment" contained in
Section 2.1 is hereby modified to read as follows:
"Commitment" means the obligation of the Bank to make
the Loans to the Borrower under this Agreement up to the
aggregate principal amount not to exceed at any time
outstanding Twenty Million Dollars ($20,000,000), as such
amount may be reduced or otherwise modified from time to
time.
(ii) REDUCTION OF COMMITMENT. Section 2.2 is hereby
deleted in its entirety and the following is substituted in
lieu thereof:
The Commitment shall be reduced to (i) $16,666,667 on
March 10, 2000 so that, for the period beginning March 10,
2000 through March 9, 2001, the Revolving Credit Loans made
by the Bank to the Borrower shall not in the aggregate
exceed $16,666,667; (ii) $13,333,334 on March 10, 2001 so
that, for the period beginning March 10, 2001 through March
9, 2002, the Revolving Credit Loans made by the Bank to the
Borrower shall not in the aggregate exceed $13,333,334;
(iii) $10,000,001 on March 10, 2002 so that, for the period
beginning March 10, 2002 through March 9, 2003, the
Revolving Credit Loans made by the Bank to the Borrower
shall not in the aggregate exceed $10,000,001; (iv)
$6,666,668 on March 10, 2003 so that, for the period
beginning March 10, 2003 through March 9, 2004, the
Revolving Credit Loans made by the Bank to the Borrower
shall not in the aggregate exceed $6,666,668; (v) $3,333,335
on March 10, 2004 so that, for the period beginning March
10, 2004 through March 10, 2005, the Revolving Credit Loans
made by the Bank to the Borrower shall not in the aggregate
exceed $3,333,335.
(iii) TERMINATION DATE. The term "Termination Date"
set forth in Section 1.1 is hereby modified to read as
follows:
"Termination Date" means the earlier to occur of (a)
March 10, 2005, (b)(i) the final date on which all the
indebtedness due under the Subordinated Instruments (as
defined below) is paid in full, or (ii) the occurrence of a
default or event of default under the Subordinated
Instruments, whichever comes first, and (c) such earlier
date as payment of the Loans shall be due (whether by
acceleration or otherwise). For purposes herein, the term
"Subordinated Instruments" means, collectively, the Note
Agreement dated as of June 30, 1997 by and between the
Borrower and each of Capitol American Life Insurance Company
("Capital American") and Transport Life Insurance Company
("Transport"), the Senior Subordinated Convertible Note
dated June 30, 1997 in the principal amount of $3,628,427
made by the Borrower in favor of Capitol American, the
Senior Subordinated Convertible Note dated June 30, 1997 in
the principal amount of $2,000,000 made by the Borrower in
favor of Transport, the Amended and Restated Note Agreement
dated as of November 8, 1996, as amended and restated on
June 30, 1997, by and between the Borrower and Great
American Rese,rve Insurance Company
<PAGE>
1
("GARCO"), the Amended and Restated Senior
Subordinated Convertible Note dated November 8, 1996, as
amended and restated as of June 30, 1997 in the principal
amount of $4,371,573 made by the Borrower in favor of GARCO,
and any and all documents executed in connection therewith,
and including any amendments of any of the foregoing.
(iv) CLOSING FEE. In order to induce the Bank to
enter into this Amendment, the Borrower agrees to pay to the
Bank a closing fee in an amount equal to $40,000 on the date
of this Agreement.
(v) COMMITMENT FEE. In order to induce the Bank to
enter into this Amendment, the Borrower agrees to pay to the
Bank a commitment fee on $4,000,000 at the rate of one-
quarter of one percent (1/4 of 1%) per annum, based on a
year of 360 days for the actual days elapsed, payable for
the period beginning on April 18, 1997 and ending on March
9, 1998.
(vi) USE OF PROCEEDS. The $4,000,000 increase in the
Commitment afforded to the Borrower pursuant to this
Amendment shall be used by the Borrower to finance the
transactions contemplated under the Amended and Restated
Agreement and Plan of Merger dated as of December 9, 1997
among the Borrower, Standard Acquisition Corporation and
Savers Life Insurance Company, a North Carolina domestic
stock insurance company (the "Plan of Merger").
(vii) WARRANTS. In order to induce the Bank to enter
into this Amendment, the Borrower shall deliver to the Bank
on or prior to the date hereof, a Warrant, in the form
attached hereto as EXHIBIT C, entitling the Bank to
subscribe for and purchase 12,000 additional shares of
common stock of the Borrower (said Warrant being referred to
herein as the "Fourth Warrant"). The Bank has the immediate
right under the Fourth Warrant to purchase 12,000 shares of
common stock of the Borrower. The Bank acknowledges that
the maximum number of shares of common stock of the Borrower
which the Bank shall be entitled to purchase under the
Fourth Warrant is 12,000 and that such shares must be
purchased on or before April 15, 2004 pursuant to the terms
of the Fourth Warrant.
(viii) ACCOUNTING TERMS. The section reference
preceding the heading "Accounting Terms" on page 9 of the
Existing Credit Agreement shall be corrected to refer to
Section 1.2.
(ix) DEBT. Section 8.2 of the Existing Credit
Agreement shall be modified to allow the Borrower to enter
into the transactions contemplated under the Subordinated
Instruments, provided, however, that the Borrower
acknowledges that any and all amendments to the Subordinated
Instruments shall be conditioned upon the written consent of
the Bank.
II. NOTE. The Note is, effective as of the date hereof
and subject to the satisfaction of the conditions precedent set forth in
Section 2 hereof, hereby amended and restated in its entirety in the form of
EXHIBIT A hereto.
SECTION 1
CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective when, and only when, the Bank shall have received counterparts
of this Amendment executed by the Borrower and the Bank, and Section 1
hereof shall become effective when, and only when, the Bank shall have
additionally received all of the following documents, each document
(unless otherwise indicated) being dated the date of receipt thereof by
the Bank (which date shall be the same for all such documents), in form
and substance satisfactory to the Bank:
I. The executed Amended and Restated Note in the form of
EXHIBIT A hereto.
II. The executed Amended and Restated Pledge Agreement in
the form of EXHIBIT B hereto, together with certificates representing the
Pledged Shares referred to therein, accompanied by undated stock powers
executed in blank.
III. The Fourth Warrant.
IV. The executed Amended and Restated Registration Rights
Agreement in the form of EXHIBIT D hereto.
V. Evidence with respect to the consummation of the
merger described in the Plan of Merger.
VI. Evidence of all applicable insurance regulatory
approvals, if any, which are necessary or required in connection with the
Borrower's execution, delivery and performance of the Loan Documents.
VII. A schedule of insurance then in effect pursuant to
Section 7.5 of the Existing Credit Agreement.
VIII. Certified copies of (i) the resolutions of the
Borrower approving this Amendment and the matters contemplated hereby and
thereby and (ii) all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to this Amendment and the matters
contemplated hereby.
IX. A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying the names and true signatures of the
officers of the Borrower, authorized to sign this Amendment and the other
documents to be delivered hereunder.
X. A certificate of existence for each of the Borrower,
Standard Life, Standard Marketing, Dixie National and Savers Life Insurance
Company.
XI. A favorable opinion of counsel for the Borrower (which
may be delivered by in-house counsel) to the effect that this Amendment, and
the Amended and Restated Note have been duly authorized, executed and delivered
by the Borrower, and such instruments constitute the legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance with
their respective terms, with references therein to the Credit Agreement to mean
the Existing Credit Agreement as amended by this Amendment.
XII. A certificate signed by a duly authorized officer of
each Borrower stating that:
XIII. The representations and warranties contained in
herein, in Article 6 of the Existing Credit Agreement and in each other Loan
Document are true and correct on and as of the date of such certificate as
though made on and as of such date;
XIV. No event has occurred and is continuing which
constitutes a Default or Event of Default; and
XV. There has been no material adverse change in the
business, management, operations, properties, prospects or condition (financial
or otherwise) of the Borrower or any of its respective Affiliates or
Subsidiaries since November 8, 1996.
XVI. Acknowledgment agreements executed by Capitol
American, Transport and GARCO with respect to the subordination of the
indebtedness owed under the Subordinated Instruments to the indebtedness owed
to the Bank under the Note.
XVII. Any other closing items reasonably required by the
Bank.
SECTION
1 REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each Borrower
represents and warrants as follows:
I. The execution, delivery and performance by the
Borrower of this Amendment, the Amended and Restated Note and the Loan
Documents, as amended hereby, to which it is a party have been duly authorized
by all necessary action and do not and will not: (a) require any consent or
approval of its shareholders; (b) contravene its certificate of incorporation
and bylaws; (c) violate any provision of, or require any filing, registration,
consent or approval under, any law, rule, regulation (including, without
limitation, Regulation U), order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the Borrower
or any of its Subsidiaries or Affiliates; (d) result in a breach of or
constitute a default or require any consent under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which such
Borrower is a party or by which it or its properties may be bound or affected;
(e) result in, or require, the creation or imposition of any Lien, upon or with
respect to any of the properties now owned or hereafter acquired by such
Borrower; or (f) cause the Borrower (or any Subsidiary or Affiliate, as the
case may be) to be in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
II. This Amendment, the Amended and Restated Note and each
other Loan Document, as amended hereby, to which the Borrower is a party is, or
when delivered under this Amendment will be, a legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms, except to the extent that such enforcement may be limited by
applicable bankruptcy, insolvency and other similar laws affecting creditors'
rights generally.
III. There are no actions, suits or proceedings pending or,
to the knowledge of the Borrower, threatened, against or affecting the Borrower
or any of its Subsidiaries before any court, governmental agency or arbitrator,
which may, in any one case or in the aggregate, materially adversely affect the
ability of the Borrower to perform its obligation under this Amendment, the
Amended and Restated Promissory Note or any of the other Loan Documents, as
amended hereby.
SECTION
1 REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS.
I. Upon the effectiveness of Section 1 hereof, on and
after the date hereof each reference in the Existing Credit Agreement to "this
Agreement," "hereunder," "hereof," "herein" or words of like import, and each
reference in the other Loan Documents to the Credit Agreement and Note, shall
mean and be a reference to the Existing Credit Agreement and Note, as amended
hereby. In addition, each reference in the other Loan Documents to the "Loan
Documents" shall mean and be a reference to the Existing Credit Agreement and
Note, as amended hereby, together with each of the other documents to be
delivered pursuant to Section 2 of this Amendment.
II. Except as specifically amended above and except to the
extent that any of the Loan Documents are substituted for and replaced by the
documents to be delivered pursuant to Section 2 of this Amendment, the Existing
Credit Agreement and the Note, and all other Loan Documents, shall remain in
full force and effect and are hereby ratified and confirmed.
III. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of the Bank under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION
1 COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses, if any (including, without limitation,
reasonable counsel fees and expenses), in connection with the enforcement
(whether through negotiations, legal proceedings or otherwise) of this
Amendment, the Amended and Restated Note and the other instruments and
documents to be delivered hereunder, including, without limitation,
reasonable counsel fees and expenses in connection with the enforcement
of rights under this Section 5. In addition, the Borrower shall pay any
and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this Amendment, the Amended
and Restated Note and the other instruments and documents to be delivered
hereunder, and agree to save the Bank harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
SECTION 1.11837.11838.63.0 EXECUTION IN COUNTERPARTS. This
Amendment may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
SECTION 2.11837.11838.63.0 GOVERNING LAW. This Amendment shall be
governed by, and construed in accordance with, the laws of the State of
Connecticut.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
STANDARD MANAGEMENT CORPORATION
BySTEPHEN M. COONS
Name: Stephen M. Coons, Esq.
Title: Executive Vice President and General
Counsel
FLEET NATIONAL BANK
By MILDRED CHAVARRIA JONES
Name: Mildred Chavarria Jones
Title: Vice President
EXHIBIT A
AMENDED AND RESTATED NOTE
$20,000,000 March 10, 1998
STANDARD MANAGEMENT CORPORATION, a corporation organized under the
laws of Indiana (the "Borrower"), for value received, hereby promises to pay to
the order of FLEET NATIONAL BANK, a national banking association having an
office at 777 Main Street, Hartford, Connecticut (the "Bank"), the principal
sum of TWENTY MILLION DOLLARS ($20,000,000), or, if less, the amount loaned by
the Bank to the Borrower pursuant to the Revolving Line of Credit Agreement
referred to below, in lawful money of the United States of America and in
immediately available funds, on the date(s) and in the manner provided in said
Agreement. The Borrower also promises to pay interest on the unpaid principal
balance hereof, for the period such balance is outstanding, at said principal
office, in like money, at the rates of interest as provided in the Agreement
described below, on the date(s) and in the manner provided in said Agreement.
The date and amount of each type of loan made by the Bank to the
Borrower under this Note and the Agreement referred to below, and each payment
of principal thereof, shall be recorded by the Bank on its books and, prior to
any transfer of this Note (or, at the discretion of the Bank, at any other
time), endorsed by the Bank on the schedule attached hereto or any continuation
thereof.
This is the Note referred to in that certain Amended and Restated
Revolving Line of Credit Agreement dated as of November 8, 1996 by and between
the Borrower and the Bank, as amended by that certain Amendment No. 1 to
Amended and Restated Revolving Line of Credit Agreement dated as of the date
hereof by and between the Borrower and the Bank (as further amended from time
to time the "Agreement"), and evidences the Loans issued by the Bank
thereunder. All terms not defined herein shall have the meanings given to them
in the Agreement.
The Agreement provides for the acceleration of the maturity of
principal upon the occurrence of certain Events of Default and for prepayments
on the terms and conditions specified therein.
The Borrower waives presentment, notice of dishonor, protest and
any other notice or formality with respect to this Note.
This Note is being substituted for and replaces that certain Note
dated November 8, 1996 in the principal amount of $16,000,000 made by the
Borrower in favor of the Bank. Nothing herein shall be construed to constitute
payment or discharge of any of the indebtedness due and owing under said prior
promissory note.
This Note shall be governed by, and interpreted and construed in
accordance with, the laws of the State of Connecticut.
STANDARD MANAGEMENT CORPORATION
By STEPHEN M. COONS
Name:Stephen M. Coons, Esq.
Title:Executive Vice President and
General Counsel
<PAGE>
1
Amount of Loan Amount of Payment Balance
DATE Outstanding Notation By
EXHIBIT B
AMENDED AND RESTATED PLEDGE AGREEMENT
AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of March 10, 1998,
between FLEET NATIONAL BANK, a national banking association (the "Bank"), and
STANDARD MANAGEMENT CORPORATION, an Indiana corporation (the "Pledgor").
WHEREAS, the Pledgor is the owner of all of the issued and
outstanding capital stock (the "Pledged Shares") of Standard Life Insurance
Company of Indiana, an Indiana corporation ("Standard Life"), and of Standard
Marketing Corporation, an Indiana corporation ("Standard Marketing," and
collectively referred to herein with Standard Life as the "Subsidiaries"); and
WHEREAS, the Bank and the Pledgor entered into an Amended and
Restated Revolving Line of Credit Agreement dated as of November 8, 1996 (the
"Existing Credit Agreement") pursuant to which the Bank agreed to make certain
loans to the Pledgor in the principal amount of up to $16,000,000; and
WHEREAS, as of the date hereof, the Bank and the Pledgor are
entering into an Amendment No. 1 to Amended and Restated Revolving Line of
Credit Agreement and Other Loan Documents (the Existing Credit Agreement, as
amended by said Amendment No. 1 and as it may hereafter be amended or otherwise
modified from time to time, being hereinafter referred to as the "Revolving
Line of Credit Agreement"; terms used herein and not otherwise defined having
the meaning set forth therein) in order to increase the Commitment of the Bank
to make Revolving Credit Loans to the Pledgor under the Existing Credit
Agreement in the principal amount of up to $20,000,000; and
WHEREAS, it is a condition precedent to the making of the Loans by
the Bank to the Pledgor under the Revolving Line of Credit Agreement that the
Pledgor shall have made the pledge and granted the Bank a perfected security
interest in the Pledged Shares as contemplated by this Amended and Restated
Pledge Agreement; and
WHEREAS, each of the parties hereto desires to take such other
actions as may be necessary or desirable so that the Bank will have a perfected
security interest in the Pledged Shares; and
WHEREAS, all terms used herein and not otherwise defined shall have
the meanings set forth in the Revolving Line of Credit Agreement.
NOW THEREFORE, in consideration of the premises contained herein
and in order to induce the Bank to make the Loans under the Revolving Line of
Credit Agreement, the parties hereto hereby agree as follows:
SECTION I. PLEDGE AND GRANT OF SECURITY. The Pledgor hereby
pledges to the Bank and grants to the Bank a security interest in the following
(the "Pledged Collateral"):
II. the Pledged Shares and the certificates
representing the Pledged Shares, and all dividends, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Pledged Shares;
III. all additional shares of stock of any issuer
from time to time acquired by the Pledgor in substitution for or in addition to
the Pledged Shares or otherwise in any manner, and the certificates
representing such substituted or additional shares, and all dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
shares; and
IV. all proceeds of any and all of the foregoing
Pledged Collateral.
SECTION V. SECURITY FOR OBLIGATIONS.
(VI. This Agreement secures the payment of all
obligations of the Pledgor to the Bank under the Revolving Line of Credit
Agreement, the Note and the other Loan Documents, now or hereafter existing,
whether for principal, interest, fees, expenses or otherwise, and all
obligations of the Pledgor now or hereafter existing under this Agreement (all
such obligations of the Pledgor being the "Obligations").
(VII. The Pledgor immediately shall cause to be duly
and properly filed all necessary financing statements in all locations required
by applicable law in order to effectuate the perfected security interest
contemplated hereby, including immediately filing amendments or other financing
statements upon any substitution or addition to the Pledged Collateral.
SECTION VIII. DELIVERY OR OTHER TRANSFER OF PLEDGED COLLATERAL.
All certificates or instruments representing or evidencing the Pledged
Collateral shall be delivered to and held by the Bank pursuant hereto and shall
be in suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, all in form
satisfactory to the Bank.
SECTION IX. REPRESENTATIONS AND WARRANTIES. The Pledgor
represents and warrants as follows:
(X. The Pledged Shares have been duly authorized
and validly issued and are fully paid and non-assessable.
(XI. The Pledgor is the legal and beneficial owner
of the Pledged Collateral, free and clear of any lien, security interest,
option or other charge or encumbrance except for the security interest created
by this Agreement.
(XII. The pledge of, and grant of a security
interest in, the Pledged Collateral pursuant to this Agreement creates a valid
and perfected first priority security interest in the Pledged Collateral,
securing the payment of the Obligations.
(XIII. All filings and other actions necessary or
desirable to perfect and protect the security interest created by this
Agreement have been duly made or taken, as the case may be, including the
filings of UCC financing statements on Form UCC-1 in the locations set forth on
Schedule A attached hereto, which filings are the only filings necessary to
perfect the Bank's security interest in the Pledged Collateral. Except for
such financing statements as may have been filed in favor of the Bank relating
to the security interest created by this Agreement, no effective financing
statement or other instrument similar in effect covering all or any part of the
Pledged Collateral is on file in any recording office.
(XIV. No authorization, approval, or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required either (i) for the pledge of, and grant of a security interest
in, the Pledged Collateral by the Pledgor pursuant to this Agreement or for the
execution, delivery or performance of this Agreement by the Pledgor or (ii) for
the exercise by the Bank of the voting or other rights provided for in this
Agreement or the remedies in respect of the Pledged Collateral pursuant to this
Agreement.
(XV. Each of Standard Life and Standard Marketing
are wholly-owned subsidiaries of the Pledgor. In addition, more than 99% of
the outstanding shares of stock of Dixie National are owned by Standard Life.
(XVI. The Pledged Shares constitute one hundred
percent (100%) of the issued and outstanding shares of stock of each of
Standard Life and Standard Marketing as indicated on Schedule I attached
hereto.
(XVII. The Pledged Shares are not subject to any
shareholder or other agreement relating to the sale, pledge, transfer or
disposition of the Pledged Shares.
SECTION A. PERFECTION OF SECURITY INTEREST IN PROCEEDS OR
ADDITIONAL PLEDGED COLLATERAL. In order to perfect the security interest of
the Bank in any proceeds of the Pledged Collateral or any additional shares of
stock or indebtedness which may be acquired by or otherwise come into the
possession of the Pledgor in substitution for or in addition to any of the
Pledged Collateral, the Pledgor shall cause to be delivered to the Bank any
cash or other property payable in consideration of the sale of any Pledged
Shares and all certificates representing the Pledged Shares or other securities
among the Pledged Collateral, along with duly executed instruments of transfer
or assignment in blank.
SECTION XVIII. VOTING RIGHTS; DIVIDENDS, ETC.
(XIX. So long as no Event of Default (as defined in the
Revolving Line of Credit Agreement) shall have occurred and be continuing:
XX. The Pledgor shall be entitled to exercise any
and all voting and other consensual rights pertaining to the Pledged Collateral
or any part thereof for any purposes not inconsistent with the terms of this
Agreement or the Revolving Line of Credit Agreement.
XXI. The Pledgor shall be entitled to receive and
retain any and all dividends and interest paid in respect of the Pledged
Collateral; PROVIDED, HOWEVER, that any and all
(A) dividends and interest paid or payable other than in cash in respect of, and
instruments and other property received, receivable or otherwise distributed in
respect of, or in exchange for, any Pledged Collateral;
(B) dividends and other distributions paid or payable in cash in respect of any
Pledged Collateral in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in-surplus; and
(C) cash paid, payable or otherwise distributed in respect of principal of, or
in redemption of, or in exchange for, any Pledged Collateral,
shall be delivered forthwith to the Bank to hold as Pledged Collateral
and shall, if received by the Pledgor, be received in trust for the
benefit of the Bank, be segregated from the other property or funds of
the Pledgor, and be forthwith delivered to the Bank as Pledged Collateral
in the same form as so received (with any necessary endorsement).
(XXII. Upon the occurrence and during the continuance of an
Event of Default:
XXIII. All rights of the Pledgor to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise pursuant to Section 6(a)(i) hereof and to receive the dividends and
interest payments which it would otherwise be authorized to receive and retain
pursuant to Section 6(a)(ii) hereof shall cease, and all such rights shall
thereupon become vested in the Bank, which shall thereupon have the sole right
to exercise such voting and other consensual rights and to receive and hold as
Pledged Collateral such dividends and interest payments. The Bank agrees to
promptly notify the Pledgor of any such vesting of rights pursuant to this
Section 6(b)(i), provided that the failure to give such notice shall not affect
the validity of any such vesting or otherwise impair the rights or remedies of
the Bank hereunder or otherwise.
XXIV. All dividends and interest payments which are
received by the Pledgor contrary to the provisions of paragraph (i) of this
Section 6(b) shall be received in trust for the benefit of the Bank or its
nominee, shall be segregated from other funds of the Pledgor and shall be
forthwith paid over to the Bank or its nominee, as Pledged Collateral in the
same form as so received (with any necessary endorsement).
SECTION XXV. TRANSFERS AND OTHER LIENS; ADDITIONAL SECURITIES.
(XXVI. The Pledgor agrees that it will not (i) sell
or otherwise dispose of, or grant any option with respect to, any of the
Pledged Collateral, or (ii) create or permit to exist any lien, security
interest, or other charge or encumbrance upon or with respect to any of the
Pledged Collateral, except for the security interest under this Agreement.
(27. The Pledgor agrees that it will cause each of
the Subsidiaries to deliver directly to the Bank or its nominee any stock or
other securities which may be issued in addition to, in substitution for or as
a dividend or distribution relating to any of the Pledged Collateral, and the
Pledgor will promptly take any other action reasonably requested by the Bank to
pledge to the Bank immediately upon acquisition thereof by the Pledgor (whether
directly or indirectly), such additional shares of stock or other securities or
indebtedness to be included in the Pledged Collateral.
(28. The Pledgor agrees that it will cause Standard
Life not to (i) sell, pledge, assign or otherwise dispose of, or grant any
option with respect to, any of the capital stock of Dixie National, or
(ii) create or permit to exist any lien, security interest, or other charge or
encumbrance upon or with respect to any of the capital stock of Dixie National.
SECTION 29. BANK MAY PERFORM. If the Pledgor fails to perform
any agreement contained herein, the Bank may itself perform, or cause
performance of, such agreement, and the expenses of the Bank incurred in
connection therewith shall be payable by the Pledgor under Section 11.
SECTION 30. REASONABLE CARE. The Bank shall be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially equal to that which the Bank accords its own property.
SECTION 31. REMEDIES UPON DEFAULT. If any Event of Default
shall have occurred and be continuing:
(32. The Bank may exercise in respect of the
Pledged Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a secured
party on default under the Uniform Commercial Code in effect in the State of
Connecticut at that time (the "Code") (whether or not the Code applies to the
affected Collateral), and may also, without notice except as specified below,
sell the Pledged Collateral or any part thereof in one or more parcels at
public or private sale, at any exchange, broker's board or at any of the Bank's
offices or elsewhere, for cash, on credit or for future delivery, and upon such
other terms as the Bank may deem commercially reasonable. The Bank agrees to
attempt to obtain the reasonable value of the Pledged Collateral upon any such
sale. The Pledgor agrees that, to the extent notice of sale shall be required
by law, at least ten days' notice to the Pledgor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Bank shall not be obligated to make
any sale of Pledged Collateral regardless of notice of sale having been given.
The Bank may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.
(33. Any cash held by the Bank as Pledged
Collateral and all cash proceeds received by the Bank in respect of any sale
of, collection from, or other realization upon all or any part of the Pledged
Collateral may, in the discretion of the Bank, be transferred to the Bank as
collateral for, and/or then or at any time thereafter applied in whole or in
part by the Bank against all or any part of the Obligations in such order as
the Bank shall elect. Any surplus of such cash or cash proceeds held by the
Bank and remaining after payment in full of all the Obligations shall be paid
over to the Pledgor or to whomsoever may be lawfully entitled to receive such
surplus.
SECTION 34. FEES AND EXPENSES. The Pledgor will upon demand pay
to the Bank the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents,
which the Bank may incur in connection with (a) the administration of this
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Pledged Collateral, (c) the exercise or
enforcement of any of the rights of the Bank hereunder or (d) the failure by
the Pledgor to perform or observe any of the provisions hereof.
SECTION 35. AMENDMENTS; ETC. No amendment or waiver of any
provisions of this Agreement nor consent to any departure herefrom, shall in
any event be effective unless, in the case of an amendment, the same shall be
in writing and signed by the Pledgor and the Bank and, in the case of a waiver
and consent, the same shall be in writing and signed by the Bank, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
SECTION 36. ADDRESSES FOR NOTICES. All notices and other
communications provided for hereunder shall be in writing (including
telegraphic communication) and mailed, telegraphed or delivered,
If to the Pledgor:
Standard Management Corporation
9100 Keystone Crossing
Indianapolis, Indiana 46240
Attention: Stephen M. Coons, Esq.
Executive Vice President and General Counsel
If to the Bank:
Fleet National Bank
777 Main Street
Hartford, Connecticut 06115
Attention: Mildred Chavarria Jones
Vice President
or as to any party at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery
with the terms of this Section. All such notices and other
communications shall, when mailed or telegraphed, respectively, be
effective when deposited in the mails or delivered to the telegraph
company or in the case of personal delivery, upon delivery, in each case,
addressed as aforesaid, except that with respect to notice to the Bank
hereunder, the same shall be effective only upon receipt.
SECTION 37. FURTHER ASSURANCES. The Pledgor agrees that at any
time and from time to time, at the expense of the Pledgor, the Pledgor will
promptly execute and deliver all further instruments and documents, and take
all further action, that may be necessary or desirable, or that the Bank may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Bank to exercise and
enforce its rights and remedies hereunder with respect to any Pledged
Collateral.
SECTION 38. CONTINUING SECURITY INTERESTS; TRANSFER OF NOTE.
This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (a) remain in full force and effect until payment in full
of the Obligations, (b) be binding upon the Pledgor, its successors and
assigns, (c) be binding upon the Bank, its successors and assigns and (d) inure
to the benefit of the Bank and its successors, transferees and assigns. Upon
the payment in full of the Obligations, the Pledgor shall be entitled to the
return, upon its request and at its expense, of such of the Pledged Collateral
as shall not have been sold or otherwise applied pursuant to the terms hereof.
SECTION 39. GOVERNING LAW; TERMS. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Connecticut. Unless otherwise defined herein or in the Revolving Line of
Credit Agreement, terms defined in Articles 8 or 9 of the Uniform Commercial
Code in the State of Connecticut are used herein as therein defined.
<PAGE>
2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date first above written.
FLEET NATIONAL BANK
By: MILDRED CHAVARRIA JONES
Name: Mildred Chavarria Jones
Title: Vice President
STANDARD MANAGEMENT CORPORATION
By: STEPHEN M. COONS
Name: Stephen M. Coons, Esq.
Title: Executive Vice President and
General Counsel
<PAGE>
2
SCHEDULE A
Locations for Filing
UCC FINANCING STATEMENTS ON FORM UCC-1
Office of the Secretary of State of Indiana
Marion, Indiana County Recorder Office
<PAGE>
2
SCHEDULE I
Attached to and forming a part of that certain Amended and Restated
Pledge
Agreement dated as of March 10, 1998 by and between
STANDARD MANAGEMENT CORPORATION and
FLEET NATIONAL BANK
<TABLE>
<CAPTION>
Percentage
Stock of
STOCK Class of Certificate Number of Outstanding
ISSUER STOCK NO(S). PAR VALUE SHARES SHARES
<S> <C> <C> <C> <C> <C>
Standard Life Common 1 None 897,033 100%
Insurance Company
of Indiana
Standard Marketing Common 1 None 1,000 100%
Corporation
</TABLE>
REINSURANCE AGREEMENT #6550-1
(AUTOMATIC YEARLY RENEWABLE TERM BULK UNIVERSAL LIFE)
(hereinafter referred to as "Agreement")
between
STANDARD LIFE INSURANCE COMPANY OF INDIANA
(INDIANAPOLIS, INDIANA)
(hereinafter referred to as the "Company")
and
LIFE REASSURANCE CORPORATION OF AMERICA
(STAMFORD, CONNECTICUT)
(hereinafter referred to as "Life Re")
EFFECTIVE: SEPTEMBER 1, 1997
LIFE REASSURANCE CORPORATION OF AMERICA
969 HIGH RIDGE ROAD
STAMFORD, CT 06905
<PAGE>
TABLE OF CONTENTS
PREAMBLE 1
ARTICLE I - METHOD OF REINSURANCE AND INSURANCE 1
1. Effective Date 1
2. Method 1
3. Amounts 1
4. Minimum Amounts 2
ARTICLE II - AUTOMATIC REINSURANCE 2
1. Insurance 2
2. Coverages 3
3. Jumbo Risk 3
4. Waiver Acceptance and Participation Limits 3
5. Regular Limits of Retention 3
ARTICLE III - FACULTATIVE REINSURANCE 3
ARTICLE IV - PROCEDURES FOR REPORTING 4
1. General Information 4
2. Self-Administered Reporting 4
ARTICLE V - PREMIUMS 6
1. Life Insurance and Waiver 6
2. Associated Riders 6
3. Premium Taxes 7
4. Payments 7
5. Nonpayment of Reinsurance Premiums 7
6. Interest on Delinquent Payments 7
7. Misstatements 7
ARTICLE VI - CLAIMS 8
1. Notice 8
2. Contested Claims 8
3. Expenses 8
4. Misstatements 9
5. Payment 9
6. Assistance and Advice 9
ARTICLE VII - REDUCTIONS, REINSTATEMENTS & CHANGES 9
1. Reductions and Terminations 9
2. Reinstatements 10
3. Nonforfeiture Benefits 10
4. Contractual Conversions and Exchanges 10
5. Non Contractual Exchanges 11
6. Program of Internal Replacement 11
LIFE RE AGREEMENT #6550-1
<PAGE>
Table of Contents . . .
ARTICLE VIII - DAC TAX 11
ARTICLE IX - RECAPTURE 12
1. Standards for Recapture 12
2. Method of Recapture 12
ARTICLE X - INSOLVENCY 12
ARTICLE XI - ARBITRATION 13
ARTICLE XII - GENERAL PROVISIONS 14
1. Reinsurer's Right of Notice of Unusual Practices 14
2. Policy Forms and Rates 14
3. Reinsurance Conditions 14
4. Errors and Omissions 15
5. Offset 15
6. Inspection 15
7. Entire Agreement 15
8. Amendment 15
9. Counterparts 16
10. No Assignment 16
11. Binding Effect 16
12. Notices 16
ARTICLE XIII - DURATION OF AGREEMENT 17
ARTICLE XIV - EXECUTION 18
SCHEDULE A - Retention Limits, Automatic Binding Limits, Plans Covered
SCHEDULE B - Reporting Forms
SCHEDULE C
PART I - Premium Rates
PART II - Percentages
SCHEDULE D - Discounts
LIFE RE AGREEMENT #6550-1
<PAGE>
PREAMBLE
This Reinsurance Agreement ("Agreement") is entered into by and between
STANDARD LIFE INSURANCE COMPANY OF INDIANA, an Indiana insurance
corporation (the "Company") and LIFE REASSURANCE CORPORATION OF AMERICA, a
Connecticut insurance corporation ("Life Re"). The Company and Life Re
mutually agree to reinsure on the terms and conditions set forth in this
Agreement. This Agreement is solely between the Company and Life Re, and
performance of the obligations of each party under this Agreement will be
rendered solely to the other party. In no instance will anyone other than
the Company or Life Re have any rights under this Agreement.
ARTICLE I - METHOD OF REINSURANCE AND INSURANCE
1. EFFECTIVE DATE
The reinsurance under this Agreement is effective as of SEPTEMBER 1,
1997.
2. METHOD
Reinsurance of life insurance risks ("Life Insurance") under this
Agreement and waiver of premium benefits ("Waiver") is on the yearly
renewable term ("YRT") plan for the amount at risk under the policy
reinsured. The Company will cede and Life Re will accept reinsurance under
the policies or plans set forth in Schedule A, written by the Company on
citizens of the United States or Canada, domiciled in the United States or
Canada at the time of application. The policies set forth in Schedule A
that are reinsured under this Agreement are hereinafter referred to
collectively as "Reinsured Policies" and individually as a "Reinsured
Policy." Said policies will have been underwritten in accordance with the
Company's individual ordinary life underwriting rules and practices.
3. AMOUNTS
For the purpose of this Agreement, the reinsured amount at risk (R) is
calculated as follows:
(1) For Option 1:
R = D - X - A, where
D = Death benefit
X = The Company's retention
A = The Accumulation Fund Value or Cash Value, whichever
is applicable under base plan
LIFE RE AGREEMENT #6550-1
<PAGE>
(2) For Option 2:
R = D - X, where
D = Death benefit
X = The Company's retention
4. MINIMUM AMOUNTS
Amounts of initial reinsurance less than $5,000 will not be ceded under
this Agreement.
ARTICLE II - AUTOMATIC REINSURANCE
1. INSURANCE
The Company will cede and Life Re will accept automatically reinsurance
in amounts not exceeding the binding limits per life in Schedule A of this
Agreement. If the Company has more than one agreement with Life Re, the
total amount per life automatically ceded to Life Re under all agreements
combined will not exceed the automatic binding limit available to the
Company under the agreement with the highest binding authority. Life Re
will accept automatic reinsurance when (a) the Company already has for its
own account its maximum limit of retention on the risk and for this reason
alone is not retaining any portion of the insurance applied for on a
current application, and (b) in the Company's opinion there has been no
adverse change in the insurability of the risk since the Company's last
acceptance for its own retention. A risk as defined in the following
categories is not eligible for reinsurance under this paragraph:
(a) A jumbo risk as defined in paragraph 3 below.
(b) A risk which has been sent to Life Re or any other reinsurer for
facultative underwriting consideration.
(c) Life Insurance resulting from a group conversion, where full
evidence of insurability has not been secured.
(d) Any risk which is not fully underwritten or any risk where the
Company has not followed its usual underwriting practice.
The liability of Life Re on any automatic reinsurance under this
Agreement begins and ends at the same time as that of the Company, provided
that such an automatic application shall not have been submitted to Life Re
or to any other reinsurer for facultative underwriting consideration.
LIFE RE AGREEMENT #6550-1
<PAGE>
2. COVERAGES
Life Insurance, Waiver for an amount not greater than the corresponding
life insurance, and Associated Riders are exclusively the coverages or
risks reinsured automatically under this Agreement. Life Re will not
participate in a unilateral enhancement of policy provisions unless agreed
to in writing prior to the granting of the enhancement. Life Insurance
includes both basic policies and term riders providing life insurance
protection.
3. JUMBO RISK
A jumbo risk is one where the papers of the Company, including all
papers that are part of the current application, indicate that the person
to be insured has or will have total insurance in force with all companies
greater than:
LIFE
All Ages $10,000,000
4. WAIVER ACCEPTANCE AND PARTICIPATION LIMITS
Life Re's maximum acceptance limit for Waiver is $2,000,000 per life,
and the maximum participation limit for such benefits is $3,000,000 per
life.
5. REGULAR LIMITS OF RETENTION
The Company may modify its regular limits of retention, detailed in
Schedule A, by giving thirty days' written notice to Life Re. The amount
of reinsurance to be ceded and accepted automatically after the new limits
take effect will be determined by mutual written agreement by Life Re and
the Company.
ARTICLE III - FACULTATIVE REINSURANCE
The Company may choose to submit for consideration by Life Re, a
request for any amount of reinsurance of the coverages in Article II that
the Company may require. Reinsurance may be requested for any amount
without regard for the limits of retention detailed in Schedule A, but the
Company will notify Life Re promptly of any changes in its limits of
retention.
LIFE RE AGREEMENT #6550-1
<PAGE>
When the Company requests facultative reinsurance, the application will
be made by submitting to Life Re a mutually agreeable form. The Company
will send to Life Re any and all information the Company has about the
risk, including without limitation, copies of the application, medical
examiners' reports, attending physicians' statements, inspection reports,
and other reports and other papers bearing on the insurability of the risk.
Promptly upon receipt of the application, Life Re will analyze the risk and
notify the Company of Life Re's decision and Life Re's classification of
the risk. If the Company elects to accept Life Re's unconditional offer of
acceptance for reinsurance of the risk, the Company will notify Life Re
within 120 days of Life Re's offer.
The liability of Life Re on any facultative reinsurance under this
Agreement begins and ends at the same time as that of the Company, provided
that:
(a) Life Re has given the Company an unconditional offer of acceptance
after the application for reinsurance, AND
(b) the Company has notified Life Re of its acceptance of such offer
within 120 days of said offer.
ARTICLE IV - PROCEDURES FOR REPORTING
1. GENERAL INFORMATION
Life Re will accept, on a self administered basis, reinsurance in
amounts per life up to the amounts set forth in Schedule A.
2. SELF-ADMINISTERED REPORTING
The Company will remit a check for the balance indicated in the monthly
statements to Life Re along with the reporting form set forth in Schedule B
or a mutually agreed upon form submitted by the Company. If a balance is
due the Company, it will be remitted by Life Re promptly. Within ten (10)
days following the close of each calendar month, the Company will forward
to Life Re on computer tape or other acceptable form, reports in
substantial conformity with the following:
A. MONTHLY NEW BUSINESS REPORT
(1) policy number; (10) amount reinsured;
(2) full name of insured; (11) automatic/facultative indicator;
(3) date of birth; (12) state of residence;
(4) sex; (13) table rating;
(5) issue age; (14) flat extra (amount + number of years);
(6) policy date; (15) death benefit option (UL products);
(7) underwriting; (16) amount at risk classification;
(8) plan of insurance; (17) transaction code;
(9) amount issued; (18) currency if other than U.S.; and
(19) qualified pension (yes/no).
LIFE RE AGREEMENT #6550-1
<PAGE>
B. MONTHLY CONVERSION REPORT
The Company will furnish Life Re with a separate listing of
reinsurance policies that are conversions or replacements to the
plan(s) as stated in Schedule A. The listing should provide the
following information:
(1) 1 through 19 in 2.A above; (4) attained age;
(2) original policy date; (5) duration; and
(3) original policy number; (6) effective date if other than
policy date.
C. MONTHLY PREMIUM REPORT
The Company will furnish Life Re a listing of all reinsurance
policies issued or renewing during the past month accompanied by the
reinsurance premiums for such policies. The listing should be
segregated into first year issues and renewals and should provide the
following information:
(1) 1 through 19 in 2.A above;
(2) current amount at risk; and
(3) the net reinsurance premium due for each reinsured policy with the
premium for life and each supplemental benefit separated.
D. MONTHLY CHANGE REPORT
The Company will report the details of all policy terminations and
changes on the reinsured policies. In addition to the data indicated
in 2.A, above, the report should provide information about the nature,
the effective date, and the financial result of the change with respect
to reinsurance.
E. MONTHLY POLICY EXHIBIT REPORT
The Company will provide a summary of new issues, terminations,
recaptures, changes, death claims and reinstatements during the month
and the inforce reinsurance at the end of the month.
F. QUARTERLY INFORCE AND RESERVE LISTING
Within ten (10) days after the close of each calendar quarter, the
Company will furnish Life Re with a listing of reinsurance in force by
policy, by year of issue and include statutory reserves for the same.
The listing must show sufficient detail such that reserve calculations
can be independently verified by Life Re's auditors and examiners. The
listing should be segregated into first year issues and renewals and
should provide the following information:
1 through 19 in 2.A above
For the fourth quarter, Federal Income Tax reserves must also be
furnished. They may be included in the fourth quarter statutory report
or they may be submitted separately, but in the same format as the
statutory report.
LIFE RE AGREEMENT #6550-1
<PAGE>
G. ELECTRONIC DATA TRANSMISSION
If the Company reports its reinsurance transactions via electronic
media, the Company will consult with Life Re to determine the
appropriate reporting format. Should the Company subsequently desire
to make changes in the data format or the code structure, the Company
will communicate such changes to Life Re prior to the use of such
changes in reports to Life Re.
ARTICLE V - PREMIUMS
1. LIFE INSURANCE AND WAIVER
Premiums per $1,000 for Life Insurance are shown in Part I of
Schedule C and will be multiplied by the percentages shown in Part II of
Schedule C. The premiums per $1,000 are applied to the amount of life
reinsurance as outlined in Article I. A policy fee, when applicable, is
charged in each year in addition to the premium based on amount of life
reinsurance. Life Re anticipates that these premiums will be continued
indefinitely for all business ceded under this Agreement. For the purpose
of satisfying requirements for deficiency reserves imposed by various state
insurance departments, Life Re will guaranty for renewal the greater of the
premiums provided in this Agreement or premiums based on the 1980 CSO Table
at 2.5% interest. When the Company charges a flat extra premium, whether
alone or in addition to a premium based on a multiple table, the Company
will pay this premium less the discounts detailed in Schedule D, on the
reinsurance amount in addition to the standard or multiple table premium
for the rating and plan of reinsurance.
Premium for Waiver will be paid at the same rate as the Company charges
for the benefit on which reinsurance with Life Re is based. Discounts for
waiver are detailed in Schedule D.
2. ASSOCIATED RIDERS
Benefits under Associated Riders are shown in Schedule A, Plans
Covered. Premiums for these benefits, when they are included in the
coverage under this Agreement, are detailed in Parts I and II of
Schedule C. Discounts are outlined in Schedule D.
LIFE RE AGREEMENT #6550-1
<PAGE>
3. PREMIUM TAXES
Life Re will not reimburse the Company for state premium taxes on
reinsurance premiums received from the Company.
4. PAYMENTS
Premiums are payable monthly in advance. If reinsurance is reduced,
terminated, increased or reinstated, monthly, pro-rata adjustment will be
made by Life Re and the Company on all premium items except policy fees.
5. NONPAYMENT OF REINSURANCE PREMIUMS
The payment of reinsurance premiums is a condition precedent to the
liability of Life Re under this Agreement. If the Company does not pay
premiums to Life Re as provided in this Agreement and such amounts are more
than 120 days in arrears, Life Re will have the right to terminate the
reinsurance under this Agreement.
6. INTEREST ON DELINQUENT PAYMENTS
If the Company is more than 90 days in arrears in remitting premiums to
Life Re, such premiums will be considered delinquent and interest will be
added to the amount to be remitted. Interest will be calculated from (i)
the time the premiums are due Life Re to (ii) the date the Company pays the
premium to Life Re. The rate of interest charged on delinquent payments
will be equal to the rate listed in the Federal Reserve Statistical
Release, as promulgated by the Board of Governors of the Federal Reserve
System, for the monthly average of Corporate bonds, Moody's seasoned Aaa
(the "Interest Rate").
7. MISSTATEMENTS
If the insured's age or sex was misstated and the amount of insurance
on the Company's policies is adjusted, the Company and Life Re will share
the adjustment in proportion to the amount of liability of each at the time
of issue of the policies. Premiums will be recalculated for the correct
age or sex and amounts according to the proportion as above and adjusted
without interest. If the insured is still alive, the method above will be
used for past years and the amount of reinsurance and premium will be
adjusted for the future to the amount that would have been correct at
issue.
LIFE RE AGREEMENT #6550-1
<PAGE>
ARTICLE VI - CLAIMS
1. NOTICE
The Company will notify Life Re promptly after receipt of any
information on a claim where reinsurance is involved. The Company will
furnish to Life Re as soon as possible the completed reinsurance claim form
and copies of all claim papers and proofs. However, if the amount
reinsured with Life Re is more than the amount retained by the Company and
the claim is contestable, all papers in connection with such claim,
including all underwriting and investigation papers must be submitted to
Life Re for its recommendation before admission of any liability on the
part of the Company.
2. CONTESTED CLAIMS
Whenever the Company has formed a preliminary opinion that a claim
might be denied or contested, and prior to any final action by the Company
indicating to the claimant that the claim is being denied or contested, the
Company will give Life Re the opportunity to review the complete claim
file. Life Re will review this file promptly and, at its option, (a) pay
Life Re's full share as if the claim was not contested, in full discharge
of Life Re's obligation to the Company for that claim, or (b) after
consultation with the Company join in the contest, or ratify the denial, in
which case Life Re will communicate to the Company in writing Life Re's
decision to participate in the contest, or ratify the denial, with respect
to that claim.
3. EXPENSES
Life Re will share in the claim expense of any contest or compromise of
a claim in the same proportion that the amount at risk reinsured under this
Agreement bears to the total risk of the Company on all policies being
contested by the Company, and Life Re will share in the total amount of any
reduction in liability in the same proportion. Claim expense will include
without limitation the cost of investigation, legal fees, court costs, and
interest charges. Compensation of salaried officers and employees and any
possible extra-contractual damages will not be considered covered expenses.
Life Re will not be liable for expenses incurred in connection with a
dispute or contest arising out of conflicting claims of entitlement to
policy proceeds or benefits.
LIFE RE AGREEMENT #6550-1
<PAGE>
4. MISSTATEMENTS
In the event of an increase or reduction in the amount of the Company's
insurance on any policy reinsured hereunder because of an overstatement or
understatement of age or misstatement of sex, established after the death
of the insured, the Company and Life Re will share in such increase or
reduction in proportion to their respective amounts at risk under that
policy.
5. PAYMENT
For Life Insurance, Life Re will pay its share in a lump sum to the
Company, without regard to the form of claim settlement of the Company.
For a Waiver claim, the Company will continue to pay premiums for
reinsurance except the premium for disability reinsurance. Life Re will
pay its proportionate share of the gross premium waived by the Company on
the original policy, including its share of the premiums for benefits that
remain in effect during disability.
6. ASSISTANCE AND ADVICE
At the request of the Company, Life Re will advise the Company on any
claim concerning business reinsured under this Agreement and, when such a
claim appears to be of doubtful validity, Life Re will assist the Company
in its determination of liability and in the best procedure to follow with
respect to the claim.
ARTICLE VII - REDUCTIONS, REINSTATEMENTS & CHANGES
1. REDUCTIONS AND TERMINATIONS
Reinsurance amounts are calculated in terms of coverages on the life of
a person. If any of the Company's policies or riders on the person are
reduced or terminated, the reinsurance in force will be reduced by the
corresponding amount. The reduction will not be applied to force the
Company to reassume more than its regular retention limit at the time of
the reduction for the age at issue, mortality rating and form of the policy
or policies for which reinsurance is being terminated. The reduction first
will be applied to reinsurance, if any, on the particular policy reduced.
If the reduction exceeds the amount of reinsurance on that policy, the
reduction will then be applied to reinsurance on other policies on that
life in the order in which the policies were effected, i.e., the first
effected will be the first terminated or reduced. If reinsurance has been
ceded to more than one reinsurer, the reduction in Life Re's reinsurance
will be in proportion to the reduction in the total. After the proportion
has been determined, the rules above will be used.
LIFE RE AGREEMENT #6550-1
<PAGE>
2. REINSTATEMENTS
(a) AUTOMATIC REINSURANCE
A policy of the Company, ceded to Life Re on an automatic basis,
that was reduced, terminated, or lapsed, if reinstated by the
Company under its regular rules, will be reinstated automatically
to the amount that would be in force had the policy not been
reduced, terminated, or lapsed.
(b) FACULTATIVE REINSURANCE
A Reinsured Policy ceded to Life Re that was reduced, terminated,
or lapsed, on a facultative basis, (i) will require approval by
Life Re prior to reinstatement if the Company has retained less
than 50% of the risk, or (ii) will be reinstated automatically by
Life Re if the Company has retained more than 50% of the risk and
reinstates the Reinsured Policy under its regular rules. Upon
reinstatement, reinsurance for the policy will be for the amount
that would be in force had the policy not been reduced, terminated,
or lapsed.
In connection with all reinstatements the Company will pay Life Re all
reinsurance premiums and interest in like manner as the Company has
received under its policy.
3. NONFORFEITURE BENEFITS
Life Re will not participate in nonforfeiture benefits.
4. CONTRACTUAL CONVERSIONS AND EXCHANGES
In the event of a contractual conversion or exchange (i.e., conversion
or exchange that requires no evidence of insurability) Life Re will
reinsure the risk resulting from such conversion or exchange at the rates
and percentages shown in Parts I and II of Schedule C on point-in-scale
basis (using the original issue age and duration from the original issue)
and the discounts of Schedule D on a point-in-scale basis. The reinsured
amount at risk on the policy or policies being converted may not exceed the
current reinsured amount at risk on the policy or policies being converted
or exchanged. If the conversion or exchange results in an increase of
risk, the amount of increase will be subject to evidence of insurability.
LIFE RE AGREEMENT #6550-1
<PAGE>
5. NON CONTRACTUAL EXCHANGES
Non contractual exchanges are subject to evidence of insurability.
Premiums for the risk resulting from the exchange will be reflected in
Parts I and II of Schedule C.
6. PROGRAM OF INTERNAL REPLACEMENT
Should the Company, its affiliates, successors, or assigns, initiate a
program of internal replacement, as defined below, that would include any
of the risks reinsured hereunder, the Company will immediately notify the
reinsurer. For each risk reinsured hereunder that has been replaced under
a program of internal replacement, the reinsurer shall have the option, at
its sole discretion, of either treating the risks reinsured as recaptured,
or continuing reinsurance on the new policy under this Agreement. The term
"program of internal replacement" shall mean any program offered to a class
of policy owners in which a policy or any portion of a policy is exchanged
for another policy, not reinsured under this Agreement, which is written by
the Company, its affiliates, successors, or assigns.
ARTICLE VIII - DAC TAX
Life Re and the Company hereby agree to the following pursuant to
Section 1.848-2(g)(8) of the Income Tax Regulation under Section 848 of the
Internal Revenue Code of 1986, as amended.
(a) The term "party" will refer to either Life Re or the Company as
appropriate.
(b) The terms used in this Article are defined by reference to
Regulation 1.848-2. The term "net consideration" will refer to
either net consideration as defined in Regulation Section 1.848-
2(f) or gross amount of premiums and other consideration as defined
in Regulation Section 1.848-3(b) as appropriate.
(c) Each party shall attach a schedule to its federal income tax return
which identifies the relevant reinsurance agreements for which the
joint election under the Regulation has been made.
(d) The party with net positive consideration, as defined in the
Regulation promulgated under Code Section 848, for such agreement
for each taxable year, shall capitalize specified policy
acquisition expenses with respect to such agreement without regard
to the general deductions limitation of Section 848(c)(1).
(e) Each party agrees to exchange information pertaining to the amount
of net consideration under such agreement each year to ensure
consistency.
LIFE RE AGREEMENT #6550-1
<PAGE>
ARTICLE IX - RECAPTURE
1. STANDARDS FOR RECAPTURE
If the Company increases its maximum retention from the maximum limit
of retention set forth in Schedule A, the Company may elect to recapture
that portion of each Reinsured Policy equal to the difference between the
Company's new limit of retention and the Company's old limit of retention,
subject to the provisions of this Article IX. If the Company elects this
type of recapture, the Company may only recapture Reinsured Policies that
meet both of the following requirements: (a) Reinsured Policies that have
been in force for ten (10) years and (b) Reinsured Policies for which the
Company maintained its maximum limit of retention at the time the Reinsured
Policy was issued.
2. METHOD OF RECAPTURE
If the Company elects to recapture, the Company will notify Life Re in
writing within ninety days from the effective date of the increase in its
limit of retention. If the Company elects to recapture one Reinsured
Policy under this provision, the Company must recapture every Reinsured
Policy that meets the requirements set forth in Article IX, Section 1,
above.
Recapture for each Reinsured Policy will occur on the later to occur of
(a) the next anniversary of the Reinsured Policy or (b) the tenth (10th)
anniversary of the Reinsured Policy. The amount of reinsurance on the
Reinsured Policy will be reduced so that the total amount of risk retained
by the Company will be equal to the Company's maximum limit of retention.
If two or more reinsurers have reinsurance on the same Reinsured
Policy, Life Re's portion of the reduction will be in proportion to Life
Re's share of the total reinsurance on the Reinsured Policy.
ARTICLE X - INSOLVENCY
All reinsurance under this Agreement will be paid on demand by Life Re
directly to the Company, its liquidator, receiver, or statutory successor,
on the basis of the liability of the Company under the policy or policies
reinsured without diminution because of the insolvency of the Company. In
the event of the insolvency of the Company, the liquidator, receiver, or
statutory successor of the Company will give written notice to Life Re of a
pending claim against Life Re or the Company on any policy reinsured within
a reasonable time after the claim is filed in the conservation,
liquidation, or insolvency proceedings. While the claim is pending,
Life Re may investigate and interpose, at its own expense, in the
proceedings where the claim is to be adjudicated, any defenses which it may
deem available to the Company or its liquidator, receiver, or statutory
successor. The expense incurred by Life Re will be charged, subject to
court approval, against the Company as an expense of the conservation,
liquidation, or insolvency to the extent of a proportionate share of the
benefit that accrues to the Company as a result of the defenses by Life Re.
Where two or more reinsurers are involved and a majority in interest elect
to defend a claim, the expense will be apportioned in accordance with the
terms of this Agreement as if the expense had been incurred by the Company.
ARTICLE XI - ARBITRATION
Life Re and the Company intend that any dispute between them under or
with respect to this Agreement be resolved without resort to any
litigation. Accordingly, Life Re and the Company agree that they will
negotiate diligently and in good faith to agree on a mutually satisfactory
resolution of any such dispute; PROVIDED, HOWEVER, that if any such dispute
cannot be so resolved by them within sixty calendar days (or such longer
period as the parties may agree) after commencing such negotiations, Life
Re and the Company agree that they will submit such dispute to arbitration
in the manner specified in, and such arbitration proceeding will be
conducted in accordance with, the rules of the American Arbitration
Association.
The arbitration hearing will be before a panel of three arbitrators,
each of whom must be a present or former officer of a life insurance or
life reinsurance company. Life Re and the Company will each appoint one
arbitrator by written notification to the other party within thirty
calendar days after the date of the mailing of the notification initiating
the arbitration. These two arbitrators will then select the third
arbitrator within sixty calendar days after the date of the mailing of the
notification initiating arbitration.
If either Life Re or the Company fails to appoint an arbitrator, or
should the two arbitrators be unable to agree upon the choice of a third
arbitrator, the president of the American Arbitration Association or of its
successor organization or (if necessary) the president of any similar
organization designated by lot of Life Re and the Company within thirty
calendar days after the request will appoint the necessary arbitrators.
The vote or approval of a majority of the arbitrators will decide any
question considered by the arbitrators; PROVIDED, HOWEVER, that if no two
arbitrators reach the same decision, then the average of the two closest
mathematical determinations will constitute the decision of all three
arbitrators. The place of arbitration will be Stamford, Connecticut. Each
decision (including without limitation each award) of the arbitrators will
be final and binding on all parties and will be nonappealable, and (at the
request of either Life Re or the Company) any award of the arbitrators may
be confirmed by a judgment entered by any court of competent jurisdiction.
No such award or judgment will bear interest. Each party will be
responsible for paying (a) all fees and expenses charged by its respective
counsel, accountants, actuaries, and other representatives in conjunction
with such arbitration and (b) one-half of the fees and expenses charged by
each arbitrator.
ARTICLE XII - GENERAL PROVISIONS
1. REINSURER'S RIGHT OF NOTICE OF UNUSUAL PRACTICES
In providing reinsurance facilities to the Company under this
Agreement, Life Re has granted the Company considerable authority with
respect to automatic binding power, reinstatements, claim settlements, and
the general administration of the reinsurance account. To facilitate
transactions, Life Re has required the minimum amount of information and
documentation possible, reflecting its utmost faith and confidence in the
Company. Life Re assumes that, except as otherwise notified by the
Company, the underwriting, claims and other insurance practices employed by
the Company with respect to reinsurance ceded under this Agreement are
generally consistent with the customary and usual practices of the
insurance industry as a whole. If the Company changes or modifies its
practices or engages in exceptional or uncustomary practices, the Company
agrees to make those practices known to Life Re before assigning any
liability to Life Re with respect to any reinsurance issued under such
practices.
2. POLICY FORMS AND RATES
Upon request, the Company will furnish Life Re with a copy of its
application forms, policy and rider forms, premium and non-forfeiture value
manuals, reserve tables, actuarial memoranda, and any other forms or tables
needed for proper handling of reinsurance under this Agreement. Life Re
must agree in writing before incurring additional liability resulting from
any changes to policies, policy riders or amendments reinsured under this
Agreement.
3. REINSURANCE CONDITIONS
The reinsurance is subject to the same limitations and conditions as
the insurance under the policy or policies written by the Company on which
the reinsurance is based.
LIFE RE AGREEMENT #6550-1
<PAGE>
4. ERRORS AND OMISSIONS
If either the Company or Life Re unintentionally fails to perform an
obligation that affects this Agreement and such failure results in an error
on the part of the Company or Life Re, the error will be corrected by
restoring both the Company and Life Re to the positions they would have
occupied had no such error occurred. For business reported but not covered
under the provisions of this Agreement, Life Re shall be obligated only for
the return of premium paid, plus interest as provided below.
Any amounts due under this Section 4 will bear interest at a rate
agreed upon by the Company and Life Re or at a rate equal to the Interest
Rate as described in Article V.6.
5. OFFSET
Any amount which either the Company or Life Re is contractually
obligated to pay to the other party may be paid out of any amount which is
due and unpaid under this Agreement. The application of this offset
provision will not be deemed to constitute diminution in the event of
insolvency.
6. INSPECTION
Upon reasonable notice, Life Re may inspect any and all books, records,
documents or similar information relating to or affecting reinsurance under
this Agreement at the home office of the Company during normal business
hours.
7. ENTIRE AGREEMENT
This Agreement and the Schedules attached hereto supersede all prior
discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement. This Agreement and the
Schedules attached hereto contain the sole and entire agreement between the
parties hereto with respect to the subject matter hereof.
8. AMENDMENT
This Agreement may be modified or amended only with a written
instrument properly signed on behalf of the Company and Life Re.
LIFE RE AGREEMENT #6550-1
<PAGE>
9. COUNTERPARTS
This Agreement may be executed simultaneously in any number of
counterparts, each of which will be deemed an original, but all of which
will constitute one and the same instrument.
10. NO ASSIGNMENT
Except as otherwise provided herein, neither party hereto may assign
this Agreement or any right hereunder or part hereof without the prior
written consent of the other party hereto.
11. BINDING EFFECT
This Agreement is binding upon and will inure to the benefit of the
parties and their respective successors and permitted assignees.
12. NOTICES
Any notice, request, instruction, or other document to be given
hereunder by any party hereto to the other party hereto will be in writing
and (a) delivered personally, (b) sent by facsimile, (c) delivered by
overnight express, or (d) sent by registered or certified mail, postage
prepaid, as follows:
If to the Company, to:
Standard Life Insurance Company of Indiana
9100 Keystone Crossing
Indianapolis, IN 46240
Attention: Reinsurance Administration
Facsimile: 317/574-6272
If to Life Re, to:
Life Reassurance Corporation of America
969 High Ridge Road
Stamford, Connecticut 06905
Attention: Vice President, Administration
Facsimile: 203/321-3200
LIFE RE AGREEMENT #6550-1
<PAGE>
or at such other address for a party as will be specified by like notice.
Each notice or other communication required or permitted under this
Agreement that is addressed as provided in this Article XII will, if
delivered personally or by overnight express, be deemed given upon
delivery; will, if delivered by facsimile or similar facsimile
transmission, be deemed delivered when electronically confirmed; and will,
if delivered by mail in the manner described above, be deemed given on the
third business day after the day it is deposited in a regular depository of
the United States Mail.
Please send all cash remittances to:
Life Reassurance Corporation of America
P.O. Box 1797
Stamford, Connecticut 06904
ARTICLE XIII - DURATION OF AGREEMENT
This Agreement will be effective on and after the effective date stated
in Article I. It is unlimited in duration but may be amended by mutual
consent of the Company and Life Re. This Agreement may be terminated as to
new reinsurance by either party giving 90 days' written notice to the
other. Termination as to new reinsurance does not affect existing
reinsurance. Existing reinsurance will remain in force until termination
of the Company's policy or policies on which the reinsurance is based in
accordance with the terms of this Agreement. Notwithstanding the
foregoing, Life Re may terminate this Agreement as to new and existing
reinsurance in the event the Company does not pay premiums to Life Re, as
provided in Article V.
LIFE RE AGREEMENT #6550-1
<PAGE>
ARTICLE XIV - EXECUTION
IN WITNESS WHEREOF, Life Re and the Company have executed this
Agreement on the dates set forth below.
STANDARD LIFE INSURANCE COMPANY OF INDIANA
Date: December 8, 1997 By: Edward T. Stahl
Place: Indianapolis, IN Title: Executive Vice President and Secretary
Witness: Carla J. James
LIFE REASSURANCE CORPORATION OF AMERICA
Date: September 29, 1997 By: Claudia Cannatara
Place: Stamford, CT Title: Vice President
Witness: Sarah L. Komar
LIFE RE AGREEMENT #6550-1
<PAGE>
AGREEMENT NUMBER 6550-1
RETENTION LIMITS
A. LIFE
The Company will cede 100% of the excess over the retention shown
below:
AGES RETENTION
0 - 80 $25,000
B. WAIVER OF PREMIUM
Same as Life
LIFE RE'S SHARE
Life Re's share of the ceded reinsurance amount will be 50%.
AUTOMATIC BINDING LIMITS
A. LIFE
Fourteen times the retention up to a maximum of $350,000, of which
Life Re's share is 50% or $175,000.
B. WAIVER OF PREMIUM
Same as Life
PLANS COVERED
The preceding schedules refer to insured lives whose surnames begin
with the letters A through Z under the following plans:
PLAN Secure Life (Form ULS197U)
RIDERS Waiver of Premium
Term Insurance Rider
Spouse Term Rider
AGREEMENT NUMBER 6550-1
Reinsurance premiums will be based on Standard Life Insurance Company's
upper band ($100,000+) cost of insurance rates, age last birthday,
multiplied by the following percentages:
YEAR SELECT NON-SMOKER SELECT SMOKER
1 O% 0%
2 - 10 40% 50%
11 + 60% 80%
LIFE RE AGREEMENT #6550-1
<PAGE>
AGREEMENT NUMBER 6550-1
The discounts granted for reinsurance amounts expressed as a percentage of
the premium rate charged by the Company are shown below for each applicable
benefit:
BENEFIT FIRST YEAR RENEWAL YEARS
LIFE INSURANCE - FLAT EXTRA PREMIUMS
Aviation Hazards 10% 10%
Temporary Extras (<= 5 years) 10% 10%
Permanent Extras (> 5 years) 75% 10%
WAIVER OF PREMIUM DISABILITY 75% 10%
* On cessions in excess of $10,000,000, Life Re reserves the right to
adjust the discounts/rates and expenses.
LIFE RE AGREEMENT #6550-1
<PAGE>
AGREEMENT NUMBER 6550-1
RETENTION LIMITS
A. LIFE
The Company will cede 100% of the excess over the retention
shown below:
AGES RETENTION
0 - 80 $25,000
B. WAIVER OF PREMIUM
Same as Life
LIFE RE'S SHARE
Life Re's share of the ceded reinsurance amount will be 50%.
AUTOMATIC BINDING LIMITS
A. LIFE
Seven times the retention up to a maximum of $350,000, of
which Life Re's share is 50% or $162,500.
B. WAIVER OF PREMIUM
Same as Life
PLANS COVERED
The preceding schedules refer to insured lives whose surnames
begin with the letters A through Z under the following plans:
PLAN Secure Life (Form ULS197U)
RIDERS Waiver of Premium
Term Insurance Rider
Spouse Term Rider
LIFE RE AGREEMENT #6550-1
11/25/1997
<PAGE>
ARTICLE I
BASIS OF REINSURANCE
REINSURANCE UNDER THIS AGREEMENT MUST BE INDIVIDUAL INSURANCE. THE CEDING
COMPANY SHALL AUTOMATICALLY REINSURE THE LIFE INSURANCE FOR THE PLAN(S) AS
STATED IN SCHEDULE A.
1. REQUIREMENTS FOR AUTOMATIC REINSURANCE
A. The individual risk must be a permanent resident of the United States.
B. The individual risk must be underwritten by the CEDING COMPANY
according to the standard underwriting practices and guidelines as
shown in Exhibit IA. The CEDING COMPANY shall immediately notify
BMA of any changes in underwriting practices or guidelines. Any
risk falling into a category of special underwriting programs shall
be excluded from this Agreement.
C. Any risk offered on a facultative basis to BMA or any other
reinsurer shall not qualify for automatic reinsurance.
D. The maximum issue age on any risk shall be as stated in Schedule A.
Applications with issue ages over the limit stated in Schedule A
must be submitted facultatively.
E. The mortality rating on any one risk shall not exceed the Table
Rating stated in Schedule A, or its equivalent on a flat extra
premium basis. Cases exceeding the Table Rating stated in Schedule
A, or its equivalent must be submitted facultatively.
F. The maximum amount of insurance issued and applied for in all
companies on any one risk shall not exceed the Jumbo limits as
stated in Schedule A.
G. On any risk, the CEDING COMPANY must retain the amounts of insurance
as stated in Exhibit I.
H. The maximum amounts of insurance to be reinsured on any one life
shall not exceed the automatic binding limits as stated in Schedule
A.
I. The minimum amount of insurance to be ceded shall be as stated in
Schedule A.
2. REQUIREMENTS FOR FACULTATIVE REINSURANCE
A. Plan of Insurance Listed in Schedule A:
(1) If the Requirements for Automatic Reinsurance are met but the
CEDING COMPANY prefers to apply for facultative reinsurance, or
(2) If Requirements for Automatic Reinsurance are not met then the
CEDING COMPANY must submit to BMA all the underwriting
documentation relating to the insurability of the individual
risk for facultative reinsurance.
B. Plan of Insurance Not Listed in Schedule A:
On a Yearly Renewable Term treaty the CEDING COMPANY may submit an
application for facultative reinsurance on any plan(s).
On a Coinsurance treaty the Ceding Company cannot submit an
application for facultative reinsurance on plan(s) other than the
plan(s) listed in Schedule A.
C. An application for facultative reinsurance may include life
insurance with or without either disability waiver of premium or
accidental death or both. Supplemental benefits without life are
not accepted on an individual cession basis.
D. Copies of all underwriting papers relating to the insurability of
the individual risk must be sent to BMA for facultative reinsurance.
After BMA has examined the underwriting papers, BMA will promptly
notify the CEDING COMPANY of the underwriting offer subject to
additional requirements, the final underwriting offer or
declination. Any final underwriting offer on the individual risk
will automatically terminate upon the earliest of:
(1) The date BMA receives notice of a withdrawal/cancellation by
the CEDING COMPANY,
(2) 120 days after the date on which the offer was made, or
(3) The date specified in BMA's approval to extend the offer.
E. The minimum amount of insurance to be ceded shall be as stated in
Schedule A.
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ARTICLE II
LIABILITY
1. BMA's liability for automatic reinsurance shall begin simultaneously with
the CEDING COMPANY's liability.
2. Except for additional coverage pertaining to conditional receipt as
described in Schedule C, BMA's liability for facultative reinsurance on
individual risks shall not begin unless and until the CEDING COMPANY has
accepted BMA's final and unconditional written offer on the application
for facultative reinsurance.
3. BMA's liability for reinsurance on individual risks shall terminate when
the CEDING COMPANY's liability terminates.
4. As long as the original policy remains in full force, all paid-up
additions and accumulated dividends shall be the liability of the CEDING
COMPANY.
5. In no event shall reinsurance under this Agreement be in force unless the
insurance issued directly by the CEDING COMPANY is in force and is issued
and delivered in a jurisdiction in which the CEDING COMPANY is properly
licensed.
6. The payment of reinsurance premiums in accordance with this Agreement
shall be a condition precedent to the liability of BMA under reinsurance
covered by this Agreement
ARTICLE III
ADMINISTRATIVE REPORTING
1. Self-Administered Business
Promptly after liability for insurance has begun on an individual risk,
the CEDING COMPANY shall have the responsibility of maintaining adequate
records for the administration of the reinsurance account and shall
furnish BMA with monthly reports, in substantial conformity with the
following:
A. MONTHLY NEW BUSINESS REPORT
(1) policy number (10) amount reinsured
(2) full name of insured (11) automatic/facultative indicator
(3) date of birth (12) state of residence
(4) sex (13) table rating
(5) issue age (14) flat extra (amount + number of years)
(6) policy date (15) death benefit option (UL products)
(7) underwriting classification (16) net amount at risk
(8) plan of insurance (17) transaction code
(9) amount issued (18) currency if other than U.S.
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B. MONTHLY CONVERSION REPORT
The CEDING COMPANY shall furnish BMA with a separate listing of
reinsurance policies that are conversions or replacements to the plan(s)
as stated in Schedule A. The listing should provide the following
information:
(1) 1 through 18 in 1.A above (4) attained age
(2) original policy date (5) duration
(3) original policy number (6) effective date if other than
policy date
C. MONTHLY PREMIUM REPORT
At the end of each month the CEDING COMPANY shall send to BMA a listing of
all reinsurance policies issued or renewing during the past month
accompanied by the reinsurance premiums for such policies. The listing
should be segregated into first year issues and renewals and should
provide the following information:
(1) 1 through 18 in 1.A above
(2) current net amount at risk
(3) On Yearly Renewable Term treaties the net reinsurance premium
due for each reinsured policy with the premium for life and
each supplemental benefit separated.
(4) On Coinsurance treaties the gross reinsurance premium,
commissions, net reinsurance premium and other amounts (e.g.
dividends, cash surrender values) with premium separated for
life and each supplemental benefit.
All monthly lists shall be submitted to BMA no later than the 20th day of
the following month.
D. MONTHLY CHANGE REPORT
The CEDING COMPANY shall report the details of all policy terminations and
changes on the reinsured policies. In addition to the data indicated in
1.A, above, the report should provide information about the nature, the
effective date, and the financial result of the change with respect to
reinsurance.
E. MONTHLY POLICY EXHIBIT REPORT
The CEDING COMPANY shall provide a summary of new issues, terminations,
recaptures, changes, death claims and reinstatements during the month and
the inforce reinsurance at the end of the month.
F. QUARTERLY REPORTING
1. Within ten (10) days following the end of the quarter, the CEDING
COMPANY shall provide BMA with Premiums Due and Unpaid and
Commissions Due and Unpaid. This report may be in summary form
reporting totals by line of business with separate totals for first
year and renewals.
2. Within ten (10) days following the end of the quarter, the CEDING
COMPANY shall provide BMA with totals for the reserve liability
including statutory reserves by valuation basis segregated by Yearly
Renewable Term and Coinsurance.
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G. ANNUAL INFORCE LISTING
Within ten (10) days after the close of the year, the CEDING COMPANY shall
furnish BMA a listing of reinsurance in force by policy, by year of issue,
segregated by Yearly Renewable Term and Coinsurance and include statutory
reserves for the same.
H. CLAIMS
Claims shall be reported as incurred on an individual basis.
2. Individual Cession Business
Promptly after liability for reinsurance has begun on the individual risk
the CEDING COMPANY shall send BMA a "Reinsurance Cession". Based on the
information on the "Reinsurance Cession", BMA will prepare and send the
CEDING COMPANY a "Client Individual Cession Record Report". When
reinsurance is reduced or changed the CEDING COMPANY shall send BMA an
"Amended Reinsurance Cession".
ARTICLE IV
PLANS OF REINSURANCE
1. Life reinsurance shall be ceded on the basis stated in Schedule A.
2. Copies of all life insurance policies, riders, rate manuals, benefit
forms, commuted value tables and cash value tables shall be provided by
the CEDING COMPANY to BMA, and BMA shall be promptly notified of any
changes therein.
ARTICLE V
REINSURANCE PREMIUMS
1. Life Reinsurance Premiums
A. Life Reinsurance Premiums Paid on a Coinsurance Basis
The CEDING COMPANY shall pay the current premium as shown in Exhibit II
based on the amount of life insurance reinsured, less the allowance stated
in Exhibit III. In addition, the CEDING COMPANY shall pay any substandard
table extra and flat extra premiums, but shall exclude the policy fee. In
the event the current premium is changed, BMA shall be notified by the
CEDING COMPANY immediately.
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<PAGE>
B. Life Reinsurance Premiums on a Yearly Renewable Term Basis
The life reinsurance premium on the net amount at risk shall be based on
rates shown in Exhibit II.
For those premiums less than the valuation net premium based on the 1980
CSO Table at 3% interest, only the latter premiums shall be guaranteed.
Should BMA increase the reinsurance premiums to the valuation net premium
based on the 1980 CSO Table at 3% interest, then the CEDING COMPANY shall
have the right to immediately recapture any business affected by that
change.
ARTICLE VI
PREMIUM ACCOUNTING
1. Payment of Reinsurance Premium.
A. The reinsurance premiums shall be paid to BMA using the rates shown
in Exhibit II.
B. On issues ceded by individual cessions BMA shall send the CEDING
COMPANY each month two copies of a statement listing first year and
renewal reinsurance premiums less refunds and allowances which are
due during the current month.
C. On self-administered business the CEDING COMPANY shall provide the
statement to BMA using the format described in Article III Self-
Administered Business.
D. If a net reinsurance premium balance is payable to BMA the CEDING
COMPANY shall pay this balance within forty-five (45) days after the
close of that month. If the full balance is not received within the
forty-five (45) day period, the reinsurance premiums for reinsurance
risks listed on the statement, for which payment was not received,
shall be delinquent and the liability of BMA shall cease as of the
date reinsurance premium were due.
E. If a net reinsurance premium balance is payable to the CEDING
COMPANY, BMA shall pay this net balance within forty-five (45) days
after the monthly statement was sent to the CEDING COMPANY. If the
monthly statement has not been returned within forty-five (45) days,
BMA shall assume the CEDING COMPANY has verified and is in agreement
with the net balance and shall make payment to the CEDING COMPANY.
2. Currency.
The reinsurance premiums and benefits payable under this Agreement shall
be payable in the lawful money of the United States.
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<PAGE>
ARTICLE VII
OVERSIGHTS
If there is an unintentional oversight or clerical error in the administration
of this Agreement by either the CEDING COMPANY or BMA, it can be corrected
provided the correction takes place promptly after the time the oversight or
clerical error is first discovered. In that event, the CEDING COMPANY and BMA
will be restored to the position they would have occupied had such oversight
or clerical error not occurred.
ARTICLE VIII
REDUCTIONS, TERMINATIONS AND CHANGES
1. A. If in accordance with policy provisions the original policy is
converted to permanent life insurance, the life risk under the
converted policy which exceeds the amount of risk originally
retained by the CEDING COMPANY shall continue to be reinsured with
BMA.
B. If there is a replacement where full underwriting evidence is not
required according to the CEDING COMPANY regular underwriting rules,
the life risk which exceeds the amount of risk originally retained
by the CEDING COMPANY shall continue to be reinsured with BMA.
C. If there is a replacement where full underwriting evidence is
required by the CEDING COMPANY, reinsurance may be ceded to BMA
subject to a written agreement between BMA and the CEDING COMPANY.
2. If the amount of insurance under a policy or rider reinsured under this
Agreement increases and
A. The increase is subject to new underwriting evidence, the provisions
of Article I shall apply to the increase in reinsurance.
B. The increase is not subject to new underwriting evidence, BMA shall
accept automatically the increase in reinsurance but not to exceed
the automatic binding limit as stated in Schedule A.
3. If the amount of insurance under a policy or rider reinsured under this
Agreement is increased or reduced, any increase or reduction in
reinsurance for the risk involved shall be effective on the effective date
of the increase or reduction in the amount of insurance.
4. If any portion of the prior insurance retained by the CEDING COMPANY on an
individual life reduces or terminates, any reinsurance under this
Agreement based on the same life shall also be reduced or terminated. The
CEDING COMPANY shall reduce its reinsurance by applying the retention
limits which were in effect at the time the policy was issued. The
"reinsurance adjustment due to lapse or reduction of previous insurance"
shall be effective on the same date as the lapse or reduction of prior
insurance. The reinsurance to be terminated or reduced shall be
determined in chronological order by the date the risk was first
reinsured. Two or more policies issued the same date shall be considered
one policy.
6
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5. If the insurance for a risk is shared by more than one reinsurer, BMA's
percentage of the increased or reduced reinsurance shall be the same as
BMA's percentage of initial reinsurance of the individual risk.
6. If a risk reinsured under this Agreement is terminated, the reinsurance
for that risk shall be terminated as of the effective date of the
termination.
7. For facultative reinsurance, if the CEDING COMPANY reduces the mortality
rating, the reduction shall be subject to the facultative provisions of
this Agreement as stated in Article I, Section 2.
8. BMA shall refund all unearned reinsurance premiums not including policy
fees, less applicable allowances, arising from reductions, terminations
and changes as described in this Article.
ARTICLE IX
INCREASE IN RETENTION
AND RECAPTURES
1. If the CEDING COMPANY changes its retention limits, as listed in Exhibit
I, prompt written notice of the change shall be provided to BMA.
2. The CEDING COMPANY shall have the option of recapturing the reinsurance
under this Agreement in the event the CEDING COMPANY increases its
retention limit and the policies have been in force the required length of
time as stated in Schedule A. The CEDING COMPANY may exercise its option
to recapture by giving written notice to BMA within ninety (90) days after
the effective date of the increase in retention. If the recapture option
is not exercised within ninety days (90) days after the effective date of
the increase in retention the CEDING COMPANY may choose to recapture at a
later date. In that case, the date of the written notification to BMA
shall determine the effective date the recapture program shall begin.
3. If the CEDING COMPANY exercises its option to recapture, then:
A. The CEDING COMPANY shall reduce the reinsurance on all individual
risks on which it retained its maximum retention for the age and
mortality rating that was in effect at the time the reinsurance was
ceded.
B. The CEDING COMPANY shall increase its total amount of retained
insurance on the individual risk up to its new retention limit by
reducing the amount of reinsurance. If an individual risk is shared
by more than one reinsurer, BMA's percentage of the reduced
reinsurance shall be the same as BMA's initial percentage of
reinsurance on the individual risk.
C. The reduction of reinsurance shall become effective on the later of
the following dates:
(1) The policy anniversary date immediately following the date the
recapture program is to begin as determined by paragraph 2 of
this Article;
(2) The number of years stated in Schedule A starting with the
"policy date."
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D. In the event the CEDING COMPANY overlooks any reduction in the
amount of a reinsurance policy because of an increase in the CEDING
COMPANY's retention, the acceptance by BMA of reinsurance premiums
under these circumstances shall not constitute a liability on the
part of BMA for such reinsurance. BMA shall be liable only for a
refund of premiums.
4. No recapture shall be permitted for reinsurance on an individual risk if
(a) the CEDING COMPANY retained less than its maximum retention for the
age and mortality rating in effect at the time the reinsurance was ceded
to BMA, or if (b) the CEDING COMPANY did not retain any of the individual
risk.
ARTICLE X
REINSTATEMENT
If a policy reinsured under this Agreement lapses for nonpayment of premium or
is continued on the Reduced Paid-up or Extended Term Insurance basis, and is
reinstated in accordance with the terms of the policy and the CEDING COMPANY's
rules, the reinsurance on such policy shall automatically be reinstated by BMA
upon written notice of such reinstatement. The CEDING COMPANY shall pay BMA all
back reinsurance premiums.
ARTICLE XI
EXPENSE OF ORIGINAL POLICY
The CEDING COMPANY shall bear the expense of all medical examinations,
inspection fees, and other charges in connection with the issuance of the
insurance.
ARTICLE XII
CLAIMS
1. The CEDING COMPANY shall give BMA prompt notice of any claim. Copies of
the proofs obtained by the CEDING COMPANY together with a statement
showing the amount due or paid on such claim by the CEDING COMPANY shall
be furnished to BMA at the time payment is requested.
2. BMA shall accept the decision of the CEDING COMPANY in settling the claim
and shall pay its portion to the CEDING COMPANY upon receipt of proof that
the CEDING COMPANY has paid the claimant. It is agreed, however, that if a
lesser amount at risk is retained by the CEDING COMPANY than the amount
ceded to BMA, the CEDING COMPANY shall consult with BMA concerning its
investigation and/or payment of the claim, although the final decision
shall be that of the CEDING COMPANY.
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3. The CEDING COMPANY shall notify BMA of its intention to contest,
compromise, or litigate a claim involving reinsurance, and BMA shall pay
its share of the payment and specific claim expenses therein involved,
unless it declines to be a party to the contest, compromise, or litigation
in which case it shall pay the full amount of the reinsurance to the
CEDING COMPANY. "Claim expenses" shall be deemed to mean only the
reasonable legal and investigative expenses connected with the litigation
or settlement of claims. "Claim expenses" shall not include expenses
incurred in connection with a dispute or contest arising out of
conflicting claims of entitlement to policy proceeds which the CEDING
COMPANY admits are payable or any routine claim administrative expenses,
Home Office or otherwise.
4. In the event the amount of insurance provided by a policy or policies
reinsured hereunder is increased or reduced because of a misstatement of
age or sex established after the death of the insured, BMA shall share in
the increase or reduction in the proportion that the net liability of BMA
bore to the sum of the retained net liability of the CEDING COMPANY and
the net liability of other reinsurers immediately prior to such increase
or reduction. The reinsurance with BMA shall be written from commencement
on the basis of the adjusted amounts using premiums and reserves at the
correct ages and sex. The adjustment for the difference in premiums shall
be made without interest.
5. It is understood and agreed that the payment of a death claim by BMA shall
be made in one sum regardless of the mode of settlement under the policy
of the CEDING COMPANY.
6. In no event shall BMA have any liability for any Extra Contractual Damages
which are assessed against the CEDING COMPANY as a result of acts,
omissions or course of conduct committed by the CEDING COMPANY or its
agents, other than a good faith decision to deny claim liability, in
connection with insurance reinsured under this Agreement. It is
recognized that there may be special circumstances involved which indicate
that BMA should participate in certain assessed damages. These
circumstances are not amenable to advance specific definition, but could
include those situations in which BMA was an active party in the act,
omission or course of conduct which ultimately results in the assessment
of such damages. The extent of such participation will be determined on a
good faith assessment of culpability in each case, but all factors being
equal, the division of any such assessment will generally be in the
proportion of net liability borne by each party.
7. If a claim is approved for disability waiver of premium insurance
reinsured under this Agreement, the CEDING COMPANY shall continue to pay
reinsurance premiums to BMA. BMA shall reimburse the CEDING COMPANY BMA's
proportionate share of the premium waived by the CEDING COMPANY.
ARTICLE XIII
TAX CREDITS
In jurisdictions which impose premium taxes on the CEDING COMPANY without
deduction for reinsurance, BMA shall reimburse the CEDING COMPANY for taxes
paid on the amount of the reinsurance premiums on the basis shown in Schedule
A, unless BMA itself is required to pay a direct tax on such reinsurance
premiums.
ARTICLE XIV
DEFERRED ACQUISITION COSTS TAX
The CEDING COMPANY and BMA elect under Regulation 1.848-2(g) (8) to compute
"specified policy acquisition expense", as defined in section 848(c) of the
Internal Revenue Code, in the following manner:
The party with net positive consideration as determined under Reg. 1.848-2(f)
and Reg. 1.848-3 shall compute specified policy acquisition expenses without
regard to the general deductions limitation of section 848(c)(1) for each
taxable year.
The parties will exchange information pertaining to the aggregate amount of net
consideration as determined under Regs. 1.848-2(f) and 1.848-3, for all
reinsurance agreements in force between them, to insure consistency for the
purposes of computing specified policy acquisition expenses. BMA shall provide
the CEDING COMPANY with the amount of such net consideration for each taxable
year no later than May 1 following the end of such year. The CEDING COMPANY
shall advise BMA if it disagrees with the amounts provided, and the parties
agree to amicably resolve any difference. The amounts provided by BMA shall be
presumed correct if it does not receive a response from the CEDING COMPANY by
May 31.
BMA represents and warrants that it is subject to U.S. taxation under
Subchapter L of the Internal Revenue Code.
ARTICLE XV
INSPECTION OF RECORDS
BMA shall have the right, at any reasonable time, to inspect at the office of
the CEDING COMPANY, all books and documents which relate to reinsurance under
this Agreement.
ARTICLE XVI
INSOLVENCY
1. In the event of insolvency of the CEDING COMPANY, all reinsurance shall be
payable by BMA directly to the CEDING COMPANY or its liquidator, receiver,
or statutory successor, on the basis of the liability of the CEDING
COMPANY under the policy or policies reinsured, without diminution because
of the insolvency of the CEDING COMPANY.
2. It is agreed that the liquidator, receiver, or statutory successor of the
insolvent CEDING COMPANY shall give written notice to BMA of the pending
of a claim against the insolvent CEDING COMPANY on any policy reinsured
within a reasonable time after such claim is filed in the insolvency
proceedings. During the pendency of any such claim BMA may investigate
such claim and interpose, in the proceeding where such claim is to be
adjudicated, any defense or defenses which BMA may deem available to the
CEDING COMPANY or its liquidator, receiver, or statutory successor. The
expense thus incurred by BMA shall be chargeable, subject to court
approval, against the insolvent CEDING COMPANY as part of the expense of
liquidation to the extent of a proportionate share of the benefit which
may accrue to the CEDING COMPANY solely as a result of the defense
undertaken by BMA.
3. Where two or more reinsurers are participating in the same claim and a
majority in interest elect to interpose a defense to such claim, the
expense shall be apportioned in accordance with the terms of the Agreement
as though such expenses had been incurred by the CEDING COMPANY.
4. Any debts or credits, matured or unmatured, liquidated or unliquidated, in
favor of or against either the CEDING COMPANY or BMA with respect to this
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.
ARTICLE XVII
ARBITRATION
1. It is the intention of the CEDING COMPANY and BMA that the customs and
practices of the insurance and reinsurance industry shall be given full
effect in the operation and interpretation of this Agreement. The parties
agree to act in all things with the highest good faith. However, if BMA
and the CEDING COMPANY cannot mutually resolve a dispute or claim which
arises out of or relates to this agreement, the dispute or claim shall be
settled through arbitration.
2. The arbitrators shall be impartial regarding the dispute, and shall base
their decision on the terms and conditions of this agreement plus, as
necessary, on the customs and practices of the insurance and reinsurance
industry.
3. There shall be three arbitrators who must be officers of life insurance
companies other than the parties to this agreement or their subsidiaries.
Each of the parties to this agreement shall appoint one of the arbitrators
and these two arbitrators shall select the third. If a party to this
agreement fails to appoint an arbitrator within thirty (30) days after the
other party to this agreement has given notice of the arbitrator
appointment, the American Arbitration Association shall appoint an
arbitrator for the party to this Agreement that has failed to do so.
Should the two arbitrators be unable to agree on the choice of the third,
then the appointment of this arbitrator is left to the American
Arbitration Association.
4. Except for the appointment of arbitrators in accordance with the
provisions of Section 3 of this Article, arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association which are in effect on the date of delivery of
demand for arbitration. Arbitration shall be conducted in Kansas City,
Missouri.
5. Each party to this agreement shall pay part of the arbitration expenses
which are apportioned to it by the arbitrators.
6. The award agreed by the arbitrators shall be final, and judgment may be
entered upon it in any court having jurisdiction.
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ARTICLE XVIII
PARTIES TO AGREEMENT
This is an Agreement for indemnity reinsurance solely between the CEDING
COMPANY and BMA. The acceptance of reinsurance under this Agreement shall not
create any right or legal relation whatever between BMA and the insured, owner,
or any other party to or under any policy reinsured under this Agreement.
ARTICLE XIX
ENTIRE CONTRACT
1. This agreement shall constitute the entire agreement between the parties
with respect to business being reinsured hereunder and that there are no
understandings between the parties other than those expressed in this
agreement.
2. Any change or modification to this agreement shall be null and void unless
made by addendum to this agreement signed by both parties.
ARTICLE XX
TERMINATION OF AGREEMENT
1. This Agreement may be terminated at any time by either party giving at
least ninety (90) days written notice of termination. The day the notice
is deposited in the mail addressed to the Home Office, or to an Officer of
either company shall be the first day of the ninety-day (90) period.
2. The CEDING COMPANY shall continue to cede reinsurance and BMA shall
continue to accept reinsurance, as provided for by the terms of this
Agreement, until the date of termination.
3. All automatic reinsurance which became effective prior to the termination
of this Agreement and all facultative reinsurance approved by BMA based
upon applications received prior to termination of this Agreement shall
remain in effect until its termination or expiration, unless the CEDING
COMPANY and BMA mutually decide otherwise.
10
<PAGE>
IN WITNESS WHEREOF, this agreement shall be effective with policies dated 12:01
A.M. September 1, 1997 and is hereby executed in duplicate between
STANDARD LIFE INSURANCE COMPANY OF INDIANA
Indianapolis, Indiana
referred to as the CEDING COMPANY
and
BUSINESS MEN'S ASSURANCE COMPANY OF AMERICA
Kansas City, Missouri
referred to as BMA,
and duly signed by both parties' respective officers as follows:
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED
BY THE PARTIES.
CEDING COMPANY
Edward T. Stahl Executive Vice President and Secretary
signature title
Gerald R. Hochgesang Senior Vice President
signature title
December 8, 1997
date
BMA
SENIOR VICE PRESIDENT/REINSURANCE
signature title
Vice President
REINSURANCE ACTUARY
signature title
date
<PAGE>
BMA REINSURANCE TREATY #: 199709 - 002 - 0
AUTOMATIC TREATY
TABLE OF CONTENTS
ARTICLE PAGE
I BASIS OF REINSURANCE 1
II LIABILITY 3
III ADMINISTRATIVE REPORTING 3
IV PLANS OF REINSURANCE 5
V REINSURANCE PREMIUMS 5
VI PREMIUM ACCOUNTING 6
VII OVERSIGHTS 7
VIII REDUCTIONS, TERMINATIONS AND CHANGES 7
IX INCREASE IN RETENTION AND RECAPTURES 8
X REINSTATEMENTS 9
XI EXPENSE OF ORIGINAL POLICY 9
XII CLAIMS 9
XIII TAX CREDITS 10
XIV DAC TAX 11
XV INSPECTION OF RECORDS 11
XVI INSOLVENCY 11
XVII ARBITRATION 12
XVIII PARTIES TO AGREEMENT 13
XIX ENTIRE CONTRACT.. 13
XX TERMINATION OF AGREEMENT 13
SCHEDULES
A SPECIFICATIONS
B BENEFITS AND NAR CALCULATIONS
C ADDITIONAL INFORMATION AND EXCEPTIONS
EXHIBITS
I RETENTION LIMITS
IA UNDERWRITING GUIDELINES
II REINSURANCE PREMIUMS
IIA POLICY FEES, FLAT EXTRAS, SUBSTANDARD PREMIUMS
III COMMISSIONS AND ALLOWANCES (COINSURANCE)
EXHIBIT 21
SUBSIDIARIES OF STANDARD MANAGEMENT CORPORATION
STATE
PERCENTAGE OF OR COUNTRY IN
NAME OF SUBSIDIARY OUTSTANDING WHICH ORGANIZED
Standard Life Insurance Company of Indiana 100% Indiana
Dixie National Life Insurance Company 99.4% Mississippi
Standard Marketing Corporation 100% Indiana
Standard Marketing International, Ltd. 100% Bermuda
Standard Investor Services Corporation 100% Indiana
Standard Administrative Services, Inc. 100% Indiana
Standard Management International S.A. 100% Luxembourg
Premier Life (Luxembourg) S.A. 100% Luxembourg
Premier Life (Bermuda) Limited 100% Bermuda
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-92906) pertaining to the Second Amended and Restated Stock
Option Plan of Standard Management Corporation, the Registration Statement
(Form S-8 No. 333-41119) pertaining to the Amended and Restated Stock Option
Plan of Standard Management Corporation and the Registration Statement (Form S-
8 No. 333-41117) pertaining to the Standard Management Corporation Savings Plan
of our report dated February 11, 1998, with respect to the consolidated
financial statements and schedules of Standard Management Corporation and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
Ernst & Young LLP
Indianapolis, Indiana
March 26, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-92906) pertaining to the Second Amended and
Restated Stock Option Plan of Standard Management Corporation, the
Registration Statement (Form S-8 No. 333-41119) pertaining to the Amended and
Restated Stock Option Plan of Standard Management Corporation and the
Registration Statement (Form S-8 No. 333-41117) pertaining to the Standard
Management Corporation Savings Plan of our report dated February 11, 1998, with
respect to the consolidated financial statements of Standard Management
International S.A. and subsidiaries included in the Annual Report
(Form 10-K) for the year ended December 31, 1997 of Standard Management
Corporation.
KPMG Audit
Luxembourg
March 26, 1998
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons
whose signature appear immediately below, does hereby constitute and appoint
Ronald D. Hunter and Stephen M. Coons, each with full power to act alone, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign on behalf of the undersigned an Annual Report on Form 10-K
("Form 10-K") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agent, or his substitute lawfully do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of March,
1998.
/S/ RONALD D. HUNTER /S/ PAUL B. PHEFFER
Ronald D. Hunter Paul B. Pheffer
/S/ GERALD R. HOCHGESANG /S/ RAYMOND J. OHLSON
Gerald R. Hochgesang Raymond J. Ohlson
/S/ EDWARD T. STAHL /S/ STEPHEN M. COONS
Edward T. Stahl Stephen M. Coons
/S/ MARTIAL R. KNIESER /S/ RAMESH H. BHAT
Martial R. Knieser Ramesh H. Bhat
/S/ JAMES C. LANSHE /S/ ROBERT A. BORNS
James C. Lanshe Robert A. Borns
/S/ JERRY E. FRANCIS
John J. Dillon Jerry E. Francis
<PAGE>
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