SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana No. 35-1773567
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9100 Keystone Crossing, Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [*] No [ ]
As of May 1, 1998, the Registrant had 7,103,944 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PAGE
NUMBER
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income --
For the Three Months Ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Three Months Ended March 31, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows --
For the Three Months Ended March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 11 - 18
Part II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
<S> <C> <C>
1998 1997
(UNAUDITED) (AUDITED)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $384,795 in 1998
and $367,372 in 1997) $389,840 $372,576
Equity securities, at fair value (cost: $2,894 in 1998 and $55 in 1997) 2,893 52
Mortgage loans on real estate 6,664 375
Policy loans 9,378 9,495
Real estate 4,552 2,163
Other invested assets 776 779
Short-term investments 45,944 13,342
Total investments 460,047 398,782
Cash 10,939 4,165
Accrued investment income 6,276 6,512
Amounts due and recoverable from reinsurers 63,557 61,596
Deferred policy acquisition costs 22,952 21,435
Present value of future profits 27,558 20,537
Excess of acquisition cost over net assets acquired 4,462 2,445
Federal income tax recoverable 780 1,854
Other assets 10,564 3,602
Assets held in separate accounts 165,339 148,064
Total assets $772,474 $668,992
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $505,618 $439,390
Accounts payable and accrued expenses 6,177 6,208
Obligations under capital lease -- 141
Notes payable 30,000 26,000
Deferred federal income taxes 5,433 4,488
Excess of net assets acquired over acquisition cost 1,041 1,388
Liabilities related to separate accounts 165,339 148,064
Total liabilities 713,608 625,679
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 1,000,000 shares; none issued and outstanding -- --
Common Stock, no par value:
Authorized 20,000,000 shares; issued 7,973,376 in 1998 and 5,752,499 in 55,645 40,646
1997
Treasury stock, at cost, 878,959 shares in 1998 and 876,009 shares in 1997 (4,595) (4,572)
(deduction)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale 2,117 2,171
Foreign currency translation adjustment (590) (473)
Retained earnings 6,289 5,541
Total shareholders' equity 58,866 43,313
Total liabilities and shareholders' equity $772,474 $668,992
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
<S> <C> <C>
MARCH 31,
1998 1997
Revenues:
Premium income $1,980 $1,897
Net investment income 7,386 7,298
Net realized investment gains 21 174
Policy charges 1,358 1,439
Amortization of excess of net assets acquired over
acquisition cost 347 347
Fees from separate accounts 562 471
Other income 291 393
Total revenue 11,945 12,019
Benefits and expenses:
Benefits and claims 1,880 2,389
Interest credited on interest-sensitive annuities
and other financial products 4,219 3,894
Salaries and wages 1,438 1,452
Amortization 1,011 825
Other operating expenses 1,594 1,976
Interest expense and financing costs 657 530
Total benefits and expenses 10,799 11,066
Income before federal income taxes and preferred stock 1,146 953
dividends
Federal income tax expense 398 310
Net income 748 643
Preferred stock dividends -- 42
Earnings available to common shareholders $748 $601
Earnings per share:
Net income $.14 $.13
Preferred stock dividends -- .01
Earnings available to common shareholders $ .14 $ .12
Earnings per share - assuming dilution:
Net income $ .13 $ .11
Preferred stock dividends -- --
Earnings available to common shareholders $.13 $.11
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Comprehensive Retained
Total Stock Stock Income Earnings
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $39,919 $40,481 $(3,528) $(55) $3,021
Comprehensive income, net of tax:
Net income 643 -- -- -- 643
Other comprehensive income
Change in unrealized gain (loss) on
securities available for sale, net (3,589) -- -- (3,589) --
Change in foreign currency (108) -- -- (108) --
translation adjustment
Other comprehensive income (3,697)
Comprehensive income (3,054)
Reissuance of treasury stock in connection
with exercise of stock options 4 -- 4 -- --
Loss on reissuance of treasury stock (1) -- -- -- (1)
Preferred stock dividend (42) -- -- -- (42)
Balance at March 31, 1997 $36,826 $40,481 $(3,524) $(3,752) $3,621
Balance at January 1, 1998 $43,313 $40,646 $(4,572) $1,698 $5,541
Comprehensive income, net of tax:
Net income 748 -- -- -- 748
Other comprehensive income
Change in unrealized gain (loss) on
securities available for sale, net (54) -- -- (54) --
Change in foreign currency (117) -- -- (117) --
translation adjustment
Other comprehensive income (171)
Comprehensive income 577
Conversion of preferred stock into Common 4 4 -- -- --
Stock
Issuance of Common Stock for Savers Life 14,937 14,937 -- -- --
acquisition
Issuance of Common Stock warrants 30 30 -- -- --
Issuance of Common Stock in connection with
exercise of stock warrants 28 28 -- -- --
Treasury stock acquired (28) -- (28) -- --
Reissuance of treasury stock in connection
with exercise of stock options 5 -- 5 -- --
exercise of stock options
Balance at March 31, 1998 $58,866 $55,645 $(4,595) $1,527 $6,289
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C>
March 31,
1998 1997
OPERATING ACTIVITIES
Net income $748 $643
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 586 330
Policy acquisition costs deferred (2,069) (1,735)
Deferred federal income taxes 467 90
Depreciation and amortization 252 303
Insurance policy liabilities 1,977 786
Net realized investment gains (22) (174)
Accrued investment income 451 (200)
Other (1,647) 368
Net cash provided by operating activities 743 411
FINANCING ACTIVITIES
Borrowings, net of debt issuance costs of $86 in 1998 and $-- in 1997 3,914 --
Repayments on long term debt and obligations under capital lease (153) (135)
Premiums received on interest-sensitive annuities and other financial
products 14,222 12,068
credited to policyholder account balances, net of premiums ceded
Return of policyholder account balances on interest-sensitive annuities
and other (9,419) (5,641)
financial products, net of premiums ceded
Redemption of redeemable preferred stock -- (4)
Reissuance of treasury stock in connection with exercise of stock options 57 4
Purchase of Common Stock for treasury (28) --
Net cash provided by financing activities 8,593 6,292
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (61,724) (45,886)
Sales 43,737 35,369
Maturities, calls and redemptions 7,548 4,422
Short-term investments, net 10,142 (4,416)
Other investments, net (664) 40
Purchase of Savers Life Insurance Company, less cash acquired of $518 (1,601) --
Net cash used by investing activities (2,562) (10,471)
Net increase (decrease) in cash 6,774 (3,768)
Cash at beginning of period 4,165 5,113
Cash at end of period $10,939 $1,345
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
The results of operations for the interim periods shown in this report are not
necessarily indicative of the results that may be expected for the fiscal year.
This is particularly true in the life insurance industry, where mortality
results in interim periods can vary substantially from such results over a
longer period. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such adjustments are
of a normal recurring nature. Certain amounts in the 1997 Consolidated
Financial Statements and Notes have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on previously reported
shareholders' equity or net income during the periods involved.
The nature of the insurance business of Standard Management Corporation
("SMC") and its consolidated subsidiaries (the "Company") requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company uses significant estimates and assumptions in calculating deferred
policy acquisition costs, present value of future profits, goodwill, future
policy benefits and deferred federal income taxes. Such estimates and
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Annual Report on Form 10-K of SMC for the
year ended December 31, 1997.
NOTE 2 -- ACQUISITIONS
On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers
Life"), with Savers Life surviving as a wholly-owned subsidiary of SMC. Each
of the 1,779,908 shares of Savers Life Common Stock outstanding was converted
into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life
Common Stock could elect to receive the $1.50 per share portion of the merger
consideration in the form of additional shares of SMC Common Stock. SMC issued
approximately 2.2 million shares with a value of approximately $14,937,000 and
paid $2,119,000 in cash (excluding acquisition costs) to acquire Savers Life.
SMC increased the Amended and Restated Revolving Line of Credit Agreement with
a bank (the "Amended Credit Agreement") to an amount of $20,000,000 to finance
the acquisition of Savers Life.
Savers Life underwrites, markets and distributes annuities, life
insurance, and Medicare supplement health insurance through a sales force
consisting of approximately 4,000 independent brokers and is licensed to sell
products in North Carolina, South Carolina, Virginia and Florida. Savers Life
had total assets of $72,186,000 at December 31, 1997 and revenues of
$43,047,000 for the year ended December 31, 1997.
The acquisition of Savers Life was accounted for using the purchase
method of accounting and the consolidated financial statements include the
results of Savers Life from March 31, 1998, the effective date of acquisition.
Under purchase accounting, SMC allocated the total purchase price of Savers
Life to the assets and liabilities acquired, based on a preliminary
determination of their values and recorded the excess of total purchase price
over net assets acquired as goodwill. SMC may adjust this allocation when a
final determination of fair values is made. Any adjustment is not expected to
be material, however.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2 -- ACQUISITIONS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Savers Life acquisition described above (in thousands):
Assets acquired:
Fixed maturity securities $ 7,061
Equity securities 2,840
Mortgage loans on real estate 6,273
Real estate 1,750
Policy loans 9
Short term investments 42,745
Cash 518
Present value of future profits 7,400
Other assets 7,378
Total assets acquired 75,974
Liabilities assumed:
Policy reserves 57,889
Deferred federal income taxes 516
Other liabilities 1,061
Total liabilities assumed 59,466
Net assets acquired 16,508
Excess of acquisition cost over
net assets acquired 2,049
Total purchase price $ 18,557
The following are supplemental unaudited pro forma consolidated results of
operations of the Company as if the acquisition of Savers Life and the transfer
of the major medical product line from Savers Life to World Insurance Company
("World") through a reinsurance agreement whereby World assumed, through
coinsurance effective July 1, 1997, 100% of the product line, had occurred at
January 1, 1997 presented at the same purchase price, based on estimates and
assumptions considered appropriate (in thousands, except per share amounts).
Three Months Ended
MARCH 31,
1998 1997
Revenues $20,802 $21,228
Net income 1,158 1,060
Earnings per share .15 .15
Earnings per share,
assuming dilution .14 .13
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable and do not reflect any benefit from savings
which might be achieved from combined operations. The unaudited pro forma
results do not necessarily represent results which would have occurred if the
acquisition of Savers Life and the transfer of the major medical product line
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 3 -- NOTES PAYABLE
Notes payable of the Company were as follows (in thousands):
<TABLE>
<CAPTION>
Interest March 31, December 31,
Rate 1998 1997
<S> <C> <C> <C>
Borrowings under revolving credit 9.11%{ (1)} $20,000 $16,000
agreements
Senior subordinated convertible notes 10.00% 10,000 10,000
due 2004
$30,000 $26,000
</TABLE>
(1) Current weighted average rate at March 31, 1998.
In March 1998, SMC had borrowed an additional $4,000,000 under revolving
credit agreements to purchase Savers Life (SEE NOTE 2).
NOTE 4 -- NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain on
securities available for sale" in shareholders' equity are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
<S> <C> <C>
1998 1997
Fair value of securities available for sale $392,733 $372,628
Amortized cost of securities available for sale 387,689 367,427
Gross unrealized gain on securities available for sale 5,044 5,201
Adjustments for:
Deferred policy acquisition costs (1,673) (1,727)
Present value of future profits (198) (209)
Deferred federal income tax liability (1,056) (1,094)
Net unrealized gain on securities available for sale $2,117 $2,171
</TABLE>
NOTE 5 -- EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." All earnings per
share amounts for all periods presented have been restated to conform to the
SFAS No. 128 requirements. SFAS No. 128 eliminates the presentation of primary
earnings per share and replaces it with basic earnings per share. Basic
earnings per share differs from primary earnings per share because common stock
equivalents are not considered in computing basic earnings per share. Fully
diluted earnings per share are replaced with diluted earnings per share.
Diluted earnings per share is similar to fully diluted earnings per share,
except in determining the number of dilutive shares outstanding for options and
warrants, the proceeds that would be received upon the conversion of all
dilutive options and warrants are assumed to be used to repurchase the
Company's common shares at the average market price of such stock during the
period. For fully diluted earnings per share, the higher of the average market
price or ending market price was used.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 5 -- EARNINGS PER SHARE (CONTINUED)
A reconciliation of the numerator and denominator of the earnings per share
computation is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C>
March 31,
1998 1997
Numerator:
Net income $748 $643
Preferred stock dividends -- 42
Numerator for basic earnings per share -
Income available to common shareholders 748 601
Effect of dilutive securities:
Preferred stock dividends -- 42
Numerator for diluted earnings per share -
Income available to common shareholders after assumed $748 $643
conversions
Denominator:
Denominator for basic earnings per share - weighted -average 5,322,065 5,024,173
shares
Effect of dilutive securities:
Stock options 269,776 105,885
Stock warrants 285,127 185,461
Convertible preferred stock -- 393,701
Dilutive potential common shares 554,903 685,047
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 5,876,968 5,709,220
</TABLE>
The senior subordinated convertible notes (SEE NOTE 3) were not included
in the computation of diluted earnings per share because the effect would be
antidilutive.
NOTE 6 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of SFAS No. 130 had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
securities available for sale and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130. During the
first quarter of 1998 and 1997, total comprehensive income amounted to $576,000
and $(3,054,000).
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 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.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The following discussion highlights the
material factors affecting the results of operations and the significant
changes in balance sheet items of the Company on a consolidated basis for the
periods listed as well as the Company's liquidable and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included in this document, as well as the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATION
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
OPERATING INCOME. The income from operations
(before net realized investment gains) was $734,000 for the first quarter of
1998, an increase of $206,000 or 39%, compared to $528,000 for the comparable
period in 1997. The increase resulted primarily from increased operating
earnings from domestic operations of $113,000 to $287,000 for the first quarter
of 1998 compared to $174,000 for the first quarter of 1997. The increased
domestic operating gains resulted primarily from decreased operating expenses
and favorable mortality experience during the first quarter of 1998.
PREMIUM INCOME. Premium income is composed
of premiums, including renewal premiums, received on ordinary life insurance
policies. The Company's new product sales are composed primarily of annuity
products. Under GAAP, deposits from interest-sensitive annuities and other
financial products are not recorded as revenues. GAAP premium income for the
first quarter of 1998 was $1,980,000, an increase of $83,000 or 4% from
$1,897,000 for the first quarter of 1997.
Net domestic premium deposits received from
the sales of interest-sensitive annuities and other financial products (which
are not recorded as revenues) were $14,222,000 compared to $12,068,000 for the
first quarter of 1998 and 1997, respectively. Gross domestic premium deposits
received from interest-sensitive annuities and financial products were
$17,159,000 for the first quarter of 1998 compared to $14,230,000 for the first
quarter of 1997. Annuity sales increased in 1998 due to the introduction of
new competitive products and an increase in the agency base achieved through
the recruitment of high volume agents and larger managing general agencies and
continued expansion of geographical concentration into such areas as
California. Since the Company's operating income is primarily a function of
its investment spreads, persistency of annuity in force business, mortality
experience, and operating expenses, a change in annuity premium deposits in a
single period does not directly cause operating income to change, although
continued increases or decreases in annuity premiums may affect the growth rate
of total assets on which investment spreads are earned.
NET INVESTMENT INCOME. Net investment income
increased $88,000 or 1% to $7,386,000 for the first quarter of 1998 from
$7,298,000 for the comparable period of 1997. The increase primarily resulted
from an increase in total invested assets (amortized cost) from December 31,
1996 to March 31, 1998, which offset a decrease in the weighted average
annualized yield of the Company's investment portfolio (exclusive of realized
and unrealized gains and losses) to 7.53% from 7.69% for the first quarter of
1998 and 1997, respectively. As of March 31, 1998, yields available on new
investments were declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $153,000 or 88% to $21,000 from $174,000 for the
first quarter of 1998 and 1997, respectively. Net realized investment gains
fluctuate from period to period and arise when securities are sold in response
to changes in the investment environment which provide opportunities to
maximize return on the investment portfolio without adversely affecting the
quality and overall yield of the investment portfolio. The pretax net
unrealized gain on the Company's securities available for sale was $5,044,000
at March 31, 1998. In the absence of decreases in interest rates, the Company
may be unable to realize gains on its investment portfolio at the levels of
prior years or could recognize losses from sales of securities prior to
maturity. The change in market value of the Company's fixed maturity
securities is not expected to have a significant effect on results of
operations because the Company has the present intent and practice to hold most
of its available-for-sale fixed maturity securities to maturity, the Company's
asset/liability management activity is designed to monitor and adjust for the
effects of changes in market interest rates and the Company's focus is to
manage its net spread revenue.
POLICY CHARGES. Policy charges, which
represent the amounts assessed against policyholder account balances for the
cost of insurance, policy administration and surrenders, decreased $81,000 or
6% to $1,358,000 for the first quarter of 1998 compared to $1,439,000 for the
first quarter of 1997. The decrease in policy charges resulted primarily from
a reduction in policy surrender charges on certain deferred annuity products in
1998 when compared to 1997.
FEES FROM SEPARATE ACCOUNTS. Fees from
separate accounts consist of the investment management fees earned by Standard
Management International on its separate account assets and investment
contracts. Management fees and similar income from separate accounts increased
$91,000 or 19% to $562,000 for the first quarter of 1998 from $471,000 for the
first quarter of 1997. The increase is due primarily to an increase in the
value of assets held in separate accounts from $128,546,000 at December 31,
1996 to $165,339,000 at March 31, 1998. Net deposits from sales of unit-linked
products by Standard Management International were $7,686,000 and $4,752,000
for the first quarter of 1998 and 1997, respectively. Such income fluctuates
in relationship to total separate account assets and the return earned on such
assets.
OTHER INCOME. Other income decreased
$102,000 or 26% to $291,000 for the first quarter of 1998 compared to $393,000
for the comparable 1997 period. The decrease resulted primarily from
reductions in experience rating refund adjustments related to reinsurance
agreements.
BENEFIT AND CLAIMS. Benefits and claims
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims decreased $509,000 or 21% to $1,880,000 for the
first quarter of 1998 from $2,389,000 for the first quarter of 1997. The
decrease in benefits and claims resulted from a reduction in net life insurance
claim expense. Throughout the Company's history, it has experienced both
periods of higher and lower benefit claims. Such volatility is not uncommon in
the life insurance industry and, over extended periods of time, periods of
higher claims experience tend to be offset by periods of lower claims
experience.
INTEREST CREDITED ON INTEREST-SENSITIVE
ANNUITIES AND OTHER FINANCIAL PRODUCTS. Interest credited on
interest-sensitive annuities and other financial products was $4,219,000 for
the first quarter of 1998, an increase of $325,000 or 8% from $3,894,000 for
the comparable prior year period. The increase resulted primarily from the
increases in annuity policy reserves from sales. At March 31, 1998, the
weighted average interest credited rate for Standard Life's currently marketed
annuities and other financial product liabilities was 5.39% compared to 5.42%
at March 31, 1997.
AMORTIZATION. Amortization expense primarily
includes charges to operations for the amortization of deferred policy
acquisition costs, the present value of future profits and the excess of cost
over net assets acquired. Amortization expense increased $186,000 or 23% to
$1,011,000 for the first quarter of 1998 from $825,000 for the first quarter of
1997. The increase in current year amortization expense resulted primarily
from increased amortization of deferred policy acquisition costs as gross
profits from business sold in recent years began to emerge and increased
surrenders and their corresponding increase in the amortization of deferred
policy acquisition costs.
OTHER OPERATING EXPENSES. Other operating
expenses decreased $382,000 or 19% to $1,594,000 for the first quarter of 1998
from $1,976,000 for the first quarter of 1997. The decrease in other operating
expenses resulted primarily from eliminating in 1998 the additional cost to
convert the operations in the Shelby Life block and a reduction in
international operating expenses.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $127,000 or 24% to $657,000 in
the first quarter of 1998 from $530,000 in the first quarter of 1997. The
increase in interest expense and financing costs during 1998 resulted from
additional borrowings of $5,600,000 in June 1997 and $4,000,000 in March 1998.
LIQUIDITY AND CAPITAL RESOURCES
SMC is an international financial services
holding company. The liquidity requirements of SMC are met primarily from
management fees, equipment rental fees and payments for other charges and
dividends and interest on Surplus Debentures received from SMC's subsidiaries
as well as SMC's working capital. These are SMC's primary source of funds to
pay operating expenses and meet debt service obligations. The payment of
dividends and interest on Surplus Debentures and management and other fees by
Standard Life Insurance Company of Indiana ("Standard Life") to SMC is subject
to restrictions under the insurance laws of Indiana, Standard Life's
jurisdiction of domicile. Dixie National Life Insurance Company ("Dixie
National Life") is a subsidiary of Standard Life. Accordingly, any dividends
paid by Dixie National Life to Standard Life may be paid to SMC only if
Standard Life is entitled to pay dividends to SMC. The payment of dividends
and management fees by Savers Life to SMC is subject to restrictions under the
insurance laws of North Carolina, Savers Life's jurisdiction of domicile.
These internal sources of liquidity have been supplemented in the past by
external sources such as lines of credit and revolving credit agreements and
long-term debt and equity financing in the capital markets.
The Company reported on a consolidated GAAP
basis net cash provided by operations of $7,764,000 and $1,726,000 for the
years ended December 31, 1997 and 1996, respectively. Although deposits
received on the Company's interest-sensitive annuities and other financial
products are not included in cash flow from operations under GAAP, such funds
are available for use by the Company. Cash provided by operations plus net
deposits received, less net account balances returned to policyholders on
interest-sensitive annuities and other financial products, resulted in positive
cash flow of $19,649,5000 and $26,717,000 for the years ended December 31, 1997
and 1996, respectively. Cash generated on a consolidated basis is available to
SMC only to the extent that it is generated at SMC level or is available to SMC
through dividends, interest, management fees or other payments from
subsidiaries.
In April 1993, SMC instituted a program to
repurchase Common Stock from time to time. The purpose of the stock repurchase
program is to enhance shareholder value. SMC had repurchased 1,138,356 shares
of Common Stock for $5,854,000 as of April 30, 1998. At April 30, 1998, SMC
was authorized to purchase an additional 361,644 shares under this program.
At April 30, 1998, SMC had "parent company
only" cash and short-term investments of $1,933,000. These funds are available
to SMC for general corporate purposes. SMC's "parent company only" operating
expenses (not including interest expense) were $3,420,000 and $3,470,000 for
the years ended December 31, 1997 and 1996, respectively.
Pursuant to the management services agreement
with SMC, Standard Life paid SMC a monthly fee of $167,000 (annual fee of
$2,000,000) during 1997 and the first quarter of 1998 for certain management
services related to the production of business, investment of assets and
evaluation of acquisitions. Pursuant to the management services agreement with
Standard Life, Dixie National Life paid monthly payments of $83,000 (annual fee
of $1,000,000) to Standard Life in 1997 and the first quarter of 1998. Both of
these agreements provide that they may be modified or terminated by the Indiana
and Mississippi department of insurance in the event of financial hardship of
Standard Life or Dixie National Life.
A management services agreement between SMC
and Savers Life was approved by the North Carolina Department of Insurance on
March 11, 1998. The management services agreement calls for the payment of
$83,000 per month by Savers Life to SMC for financial and regulatory reporting,
investment of assets and the production of business. SMC 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. In
addition, as a condition of the acquisition of Savers Life, SMC entered into an
agreement with the North Carolina Department of Insurance to maintain statutory
capital and surplus of Savers Life of at least $6,000,000. The amount of
capital and surplus of Savers Life at March 31, 1998 was $6,548,000.
Pursuant to the management services agreement
with SMC, Premier Life (Luxembourg), a wholly-owned subsidiary of Standard
Management International, paid SMC a management fee of $25,000 per quarter
during 1997 and the first quarter of 1998 for certain management and
administrative services. The agreement provides that it may be modified or
terminated by either SMC or Premier Life (Luxembourg).
At April 1, 1995, SMC sold its property and
equipment to an unaffiliated leasing/financing company for $1,396,000 and
subsequently entered into a capital lease obligation whereby SMC pays a monthly
rental amount of $45,000. SMC charges a monthly equipment rental fee to its
subsidiaries for this equipment and additional equipment purchased after
April 1, 1995. The amount of the rental income received from SMC's
subsidiaries was $262,000 and $1,145,000 for the three months ended March 31,
1998 and year ended December 31, 1997, respectively.
The Amended Credit Agreement permits SMC to
borrow up to $20,000,000 in the form of a seven-year reducing revolving loan
arrangement. SMC has agreed to pay a non-use fee of .50% per annum on the
unused portion of the commitment. In connection with the original and Amended
Credit Agreement, SMC issued warrants to the bank to purchase 73,500 shares of
Common Stock. Borrowing under the Amended Credit Agreement may be used for
contributions to surplus of insurance subsidiaries, acquisition financing, and
repurchases of Common Stock. The debt is secured by a Pledge Agreement of all
of the issued and outstanding shares of common stock of Standard Life and
Standard Marketing. Interest on the borrowing under the Amended Credit
Agreement is determined, at the option of SMC, to be: (i) a fluctuating rate of
interest based on the corporate base rate announced by the bank from time to
time plus 1% per annum, or (ii) a rate at LIBOR plus 3.25%. Annual principal
repayments of $3,333,000 begin in March 2000 and conclude in March 2005.
Indebtedness incurred under the Amended Credit Agreement is subject to certain
restrictions and covenants including, among other things, certain minimum
financial ratios, minimum statutory surplus requirements for the insurance
subsidiaries, minimum consolidated equity requirements for SMC and certain
investment and indebtedness limitations. At March 31, 1998, SMC was in
compliance with all restrictions and covenants in the Amended Credit Agreement.
At March 31, 1998, SMC had borrowed $20,000,000 under the Amended Credit
Agreement at a weighted average interest rate of 9.11%.
In connection with the acquisition of Shelby
Life, the Company borrowed $4,000,000 from an insurance company pursuant to a
subordinated convertible debt agreement which was due in December 2003. At
June 30, 1997, this subordinated convertible debt agreement was amended at the
principal amount of $4,372,000 which is due July 2004 unless previously
converted, and requires interest payments in cash on January 1 and July 1 of
each year at 10% per annum. At June 30, 1997, the Company borrowed an
additional $5,628,000 from an insurance company pursuant to another
subordinated convertible debt agreement (collectively, the "Notes") which is
due July 2004 unless previously converted, and requires interest payments in
cash on January 1 and July 1 of each year at 10% per annum. Proceeds from the
additional borrowings were used for contributions to surplus of insurance
subsidiaries of $2,400,000, redemption of Class S Preferred Stock of
approximately $1,840,000 and the balance for other general corporate purposes.
The Notes are convertible at any time at the option of the noteholder into
Common Stock at the rate of $5.747 per share. The Notes may be prepaid in
whole or in part at the option of the Company commencing on July 1, 2000 at
redemption prices equal to 102% of the principal amount (plus accrued interest)
and declining to 101% of the principal amount (plus accrued interest). The
Notes may be prepaid prior to July 1, 2000 at a redemption price equal to 101%
of the principal amount (plus accrued interest) under certain limited
circumstances. The subordinated convertible debt agreements contain terms and
financial covenants substantially similar to those in the Amended Credit
Agreement.
Assuming the current level of debt under the
Amended Credit Agreement and current interest rates at March 31, 1998 (weighted
average rate of 9.11%) SMC annual debt service in 1998 would be approximately
$2,700,000 in interest paid. In addition, the Company has 1998 obligations
under a capital lease of $151,000.
From the funds borrowed by SMC pursuant to
the Amended Credit Agreement and the subordinated convertible debt agreements,
$13,000,000 was loaned to Standard Life pursuant to an Unsecured Surplus
Debenture Agreement (a "Surplus Debenture") which requires Standard Life to
make quarterly interest payments to SMC at a variable corporate base rate (8.5%
at March 31, 1998) plus 2% per annum, and annual principal payments of
$1,000,000 per year beginning in 2007 and concluding in 2019. The interest and
principal payments are subject to quarterly approval by the Indiana Department
of Insurance, depending upon satisfaction of certain financial tests relating
to levels of Standard Life's capital and surplus and general approval of the
Commissioner of the Indiana Department of Insurance. SMC currently anticipates
these quarterly approvals will be granted. Assuming the approvals are granted
and the March 31, 1998 interest rate of 10.5% continues in 1998, SMC will
receive interest income of $1,365,000 from its Surplus Debenture receivable for
1998.
Dividends from Standard Life to SMC are
limited by laws applicable to insurance companies. As an Indiana domiciled
insurance company, Standard Life may pay a dividend or distribution from its
surplus profits, without the prior approval of the Commissioner of the Indiana
Department of Insurance, if the dividend or distribution, together with all
other dividends and distributions paid within the preceding twelve months, does
not exceed the greater of (i) net gain from operations or (ii) 10% of surplus,
in each case as shown in its preceding annual statutory financial statements.
Also, regulatory approval is required when dividends to be paid exceed
unassigned statutory surplus. For the year ended December 31, 1997, Standard
Life reported statutory net gain from operations before realized capital gains
of $2,374,000 and statutory surplus of $25,923,000, which includes unassigned
surplus of $1,693,000. Standard Life paid dividends of $1,600,000 in 1997.
During 1998, Standard Life can pay dividends of approximately $2,500,000
without regulatory approval.
As a North Carolina domiciled insurance
company, Savers Life may pay a dividend or distribution from its capital and
surplus, without the prior approval of the North Carolina Commissioner of
Insurance, if the dividend or distribution together with all other dividends
and distributions paid within the preceding twelve months, does not exceed the
lesser of (i) net gain from operations or (ii) 10% of capital and surplus, in
each case as shown in its preceding annual statutory financial statements.
Savers Life was not allowed to pay a dividend in 1996 or 1997 without prior
North Carolina Department of Insurance approval due to its statutory net losses
in 1995 and 1996. Savers Life will not be permitted to pay dividends in 1998
without such approval.
SMC anticipates the available cash from its
existing working capital, plus anticipated 1998 dividends, management fees,
rental income and interest payments on its Surplus Debenture receivable will be
more than adequate to meet its anticipated "parent company only" cash
requirements for 1998.
SMC has a note receivable of $2,858,000 from
an affiliate and a note payable of $2,858,000 to a different affiliate. This
note receivable and note payable are eliminated in the consolidated financial
statements.
U.S. INSURANCE OPERATIONS. The principal
liquidity requirements of Standard Life are its contractual obligations to
policyholders, dividend, rent, management fee and Surplus Debenture payments to
SMC and other operating expenses. The primary source of funding for these
obligations has been cash flow from premium income, net investment income,
investment sales and maturities and sales of annuity products. These sources
of liquidity for Standard Life significantly exceed scheduled uses. Liquidity
is also affected by unscheduled benefit payments including death benefits and
policy withdrawals and surrenders. The amount of withdrawals and surrenders is
affected by a variety of factors such as renewal interest crediting rates,
interest rates for competing products, general economic conditions, Standard
Life's A.M. Best Company, Inc. ("A.M. Best") rating (currently rated "B+") and
events in the industry that affect policyholders' confidence.
The policies and annuities issued by Standard
Life contain provisions that allow policyholders to withdraw or surrender their
policies under defined circumstances. These policies and annuities generally
contain provisions which apply penalties or otherwise restrict the ability of
policyholders to make such withdrawals or surrenders. Standard Life closely
monitors the surrender and policy loan activity of its insurance products and
manages the composition of its investment portfolios, including liquidity, in
light of such activity.
Changes in interest rates may affect the
incidence of policy surrenders and other withdrawals. In addition to the
potential effect on liquidity, unanticipated withdrawals in a changing interest
rate environment could adversely affect earnings if the Company were required
to sell investments at reduced values to meet liquidity demands. The Company
manages the asset and liability portfolios in order to minimize the adverse
earnings effect of changing market interest rates. The Company seeks assets
that have duration characteristics similar to the liabilities that they
support. The Company also prepares cash flow projections and performs cash
flow tests under various market interest rate scenarios to assist in evaluating
liquidity needs and adequacy. The Company's U.S. insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.
Statutory surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners
("NAIC"), as modified by the Indiana Department of Insurance, or the states in
which the insurance subsidiaries do business. Statutory accounting rules are
different from GAAP and are intended to reflect a more conservative
perspective. With respect to new business, statutory accounting practices
require that: (i) acquisition costs (primarily commissions and policy issue
costs) and (ii) reserves for future guaranteed principal payments and interest
in excess of statutory rates, be expensed in the year the new business is
written. These items cause a reduction in statutory surplus ("surplus strain")
in the year written for many insurance products. The Company designs its
products to minimize such first-year losses, but certain products continue to
cause a statutory loss in the year written. For each product, the Company
controls the amount of net new premiums written to manage the effect of such
surplus strain. The Company's long-term growth goals contemplate continued
growth in its insurance businesses. To achieve these growth goals, the
Company's U.S. insurance subsidiaries will need to increase statutory surplus.
Additional statutory surplus may be secured through various sources such as
internally generated statutory earnings, equity sales, infusions by the Company
with funds generated through debt or equity offerings or mergers with other
life insurance companies. If additional capital is not available from one or
more of these sources, the Company believes that it could reduce surplus strain
through the use of reinsurance or through reduced writing of new business.
Commencing January 1, 1995, Standard Life
began to reinsure a portion of its annuity business. This reinsurance
agreement has allowed the Company to write volumes of business that it would
not otherwise have been able to write due to regulatory restrictions based on
its ratio of surplus to liabilities as determined by regulatory authorities in
the State of Florida. By reinsuring a portion of the annuity business, the
liability growth is slowed, thereby avoiding the erosion of surplus that occurs
in periods of increasing sales. If the Company's ratio of surplus to
liabilities falls below 4%, the State of Florida could prohibit the Company
from writing new business in Florida. Standard Life's largest annuity
reinsurer at March 31, 1998, Winterthur, is rated "A" ("Excellent") by A.M.
Best. From January 1, 1995 to August 31, 1995, approximately 70% of certain of
Standard Life's annuity business produced was ceded. Standard Life decreased
the quota-share portion of business ceded to 50% at September 1, 1995 and
further reduced it to 25% effective April 1, 1996 to reflect the reduced need
for additional capital and increase current earnings potential. This reduction
was possible since the surplus strain experienced by Standard Life was not as
great as originally anticipated as a result of lower than expected sales in
1995 and the increase in surplus resulting from the sale of First
International. In addition, Standard Life's ability to retain business was
further increased by the capital contribution of $2,400,000 in the second
quarter of 1997. Winterthur limits dividends and other transfers by Standard
Life to SMC in certain circumstances.
Management believes that operational cash
flow of Standard Life will be sufficient to meet its anticipated needs for
1998. As of March 31, 1998, Standard Life had statutory capital and surplus
for regulatory purposes of $26,630,000 compared to $25,923,000 at December 31,
1997. Standard Life produced statutory net gain from operations of $388,000
and $2,374,000 for the three months ended March 31, 1998 and the year ended
December 31, 1997, respectively. SMC contributed $2,400,000 to Standard Life
in the second quarter of 1997 to facilitate growth in new premiums written. As
the life insurance and annuity business produced by Standard Life and Dixie
National Life increases, Standard Life expects to continue to satisfy statutory
capital and surplus requirements through statutory profits, through the
continued reinsurance of a portion of its new business, and through additional
capital contributions by SMC. Net cash flow from operations on a statutory
basis of Standard Life, after payment of benefits and operating expenses, was
$19,588,000 and $17,921,000 for the years ended December 31, 1997 and
December 31, 1996, respectively. If the need arises for cash which is not
readily available, additional liquidity could be obtained from the sale of
invested assets.
State insurance regulatory authorities impose
minimum risk-based capital ("RBC") requirements on insurance enterprises that
were developed by the NAIC. The formulas for determining the amount of RBC
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio (the "RBC Ratio") of the enterprise's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Enterprises below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. The RBC Ratio for Standard Life and Dixie
National Life were in excess of 400% of the minimum RBC requirements and Savers
Life was in excess of 300%; accordingly, the subsidiaries meet the RBC
requirements.
Standard Life's acquisition of Shelby Life,
and merger of Shelby Life into Standard Life, effective November 1, 1996 is
anticipated to have a positive effect on Standard Life's liquidity and cash
flows. Shelby Life ceased writing new business effective November 1, 1996,
thus reducing the surplus strain normally associated with the issuance of new
policies. The anticipated profits from Shelby Life's book of business are
expected to exceed the related interest expense connected with the $13,000,000
of Surplus Debentures issued by Standard Life in connection with the
acquisition of Shelby Life.
SMC's acquisition of Savers Life at March 12,
1998 is anticipated to have a positive effect on SMC's liquidity and cash
flows. SMC anticipates that existing working capital, unused proceeds from
borrowings under the Amended Credit Agreement and management fees by Savers
Life will be adequate to cover debt service on the additional borrowings under
the Amended Credit Agreement through 1998.
INTERNATIONAL OPERATIONS. The consolidated
balance sheet of the Company at March 31, 1998, includes a $1,041,000 credit
representing the negative goodwill on the purchase of Standard Management
International which will be amortized into future earnings. This amortization
is a non-cash credit to the Company statements of operations.
Standard Management International dividends
are limited to its accumulated earnings without regulatory approval. Standard
Management International and Premier Life (Luxembourg) were not permitted to
pay dividends in 1997 due to accumulated losses. Premier Life (Bermuda) did
not pay dividends in 1997. SMC does not anticipate any dividends from these
companies in 1998.
Due to the nature of unit-linked products
issued by Standard Management International, which represent over 90% of
Standard Management International portfolio's assets, the investment risk rests
with the policyholder. Investment risk for Standard Management International
exists where Standard Management International makes investment decisions with
respect to the remaining traditional business and for the assets backing
certain actuarial and regulatory reserves. The investments underlying these
liabilities mostly represent short-term investments and fixed maturity
securities. These short-term investments and fixed maturity securities are
normally bought and/or disposed of only on the advice of independent consulting
actuaries who perform an annual analysis comparing anticipated cash flows on
the insurance portfolio with the cash flows from the fixed maturity securities.
Any resulting material mismatches are then covered by adjusting the securities
in the investment portfolio as appropriate.
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS.
The U.S. insurance industry has experienced an increasing number of mergers,
acquisitions, consolidations and sales of certain business lines. These
consolidations have been driven by a need to reduce costs of distribution and
overhead and maintain business in force. Additionally, increased competition,
regulatory capital requirements and technology costs have also contributed to
the level of consolidation in the industry. These forces are expected to
continue as is the level of industry consolidation.
FOREIGN CURRENCY RISK. Standard Management
International policyholders invest in assets denominated in a wide range of
currencies. Policyholders effectively bear the currency risk, if any, as these
investments are matched by policyholder separate account liabilities.
Therefore, their investment and currency risk is limited to premiums they have
paid. Policyholders are not permitted to invest directly into options, futures
and derivatives. Standard Management International could be exposed to
currency fluctuations if currencies within the conventional investment
portfolio or certain actuarial reserves are mismatched. The assets and
liabilities of this portfolio and the reserves are continually matched by
Standard Management International and at regular intervals by the independent
actuary. In addition, Premier Life (Luxembourg) shareholders' equity is
denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its
translation risk because its shareholders' equity will remain in Luxembourg
francs for the foreseeable future and no significant realized foreign exchange
gains or losses are anticipated.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS.
Included in the Company's financial statements as of March 31, 1998 are certain
assets that are valued for financial statement purposes primarily on the basis
of assumptions established by the Company's management. These assets include
deferred acquisition costs, present value of future profits, costs in excess of
net assets acquired and organization and deferred debt issuance costs. The
total value of these assets reflected in the March 31, 1998 consolidated
balance sheet aggregated $54,457,000 or 7% of the Company's assets. The
Company has established procedures to periodically review the assumptions
utilized to value these assets and determine the need to make any adjustments
in such values in the Company's consolidated financial statements. The Company
has determined that the assumptions utilized in the initial valuation of these
assets are consistent with the operations of the Company as of March 31, 1998.
REGULATORY ENVIRONMENT. Currently,
prescribed or permitted statutory accounting principles ("SAP") may vary
between states and between companies. The NAIC is in the process of codifying
SAP to promote standardization of methods utilized throughout the industry.
Completion of this project might result in changes in statutory accounting
practices for the Company's insurance subsidiaries; however, it is not expected
that such changes would materially affect the Company's insurance subsidiaries'
statutory capital requirements.
FINANCIAL SERVICES DEREGULATION. The United
States Congress is currently considering a number of legislative proposals
intended to reduce or eliminate restrictions on affiliations among financial
services organizations. Proposals are extant which would allow banks to own or
affiliate with insurers and securities firms. An increased presence of banks
in the life insurance and annuity businesses may increase competition in these
markets. The Company cannot predict the impact of these proposals on the
earnings of the Company.
SAFE HARBOR PROVISIONS. All statements,
trend analyses, and other information contained in this Quarterly Report on
Form 10-Q or any document incorporated by reference herein relative to markets
for the Company's products and trends in the Company's operations or financial
results, as well as other statements including words such as "anticipate,"
"believe," "plan,""estimate,""expect,""intend," and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors which may cause actual results
to be materially different from those contemplated by the forward-looking
statements. Such factors include, among other things: (1) general economic
conditions and other factors, including prevailing interest rate levels, stock
market performance and health care inflation, which may affect the ability of
the Company to sell its products, the market value of the Company's investments
and the lapse rate and profitability of the Company's policies; (2) the
Company's ability to achieve anticipated levels of operational efficiencies at
recently acquired companies, as well as through other cost-saving initiatives;
(3) customer response to new products, distribution channels and marketing
initiatives; (4) mortality, morbidity, usage of health care services and other
factors which may affect the profitability of the Company's insurance products;
(5) changes in the Federal income tax laws and regulation which may affect the
relative tax advantages of some of the Company's products; (6) increasing
competition in the sale of the Company's products; (7) regulatory changes or
actions, including those relating to regulation of financial services affecting
(among other things) bank sales and underwriting of insurance products,
regulation of the sale, underwriting and pricing of insurance products, and
health care regulation affecting the Company's supplemental health insurance
products; (8) the availability and terms of future acquisitions; and (9) the
risk factors or uncertainties listed from time to time in any document
incorporated by reference herein.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Special Meeting of
Stockholders held on March 3, 1998, the following proposal was approved:
<TABLE>
<CAPTION>
Shares Shares
Shares For Against Abstaining
<S> <C> <C> <C>
Approve the issuance of Common Stock in
connection with the acquisition by SMC of
Savers Life Insurance Company 2,844,250 126,294 6,658
</TABLE>
A total of 2,977,202 shares were present in person or by proxy at the
Special Meeting of Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 27 Financial Data Schedule, which is submitted
electronically pursuant to Regulation S-K to
the Securities and Exchange Commission (the
"Commission") for information only and not
filed.
(b) REPORTS ON FORM 8-K
A report on Form 8-K dated March 25, 1998, was filed with the Commission
to report under Items 2 and 7 the acquisition of Savers Life effective March
12, 1998.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1998
STANDARD MANAGEMENT CORPORATION
(Registrant)
By: RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President
and
Chief Executive Officer
(Principal Executive Officer)
By: GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 389,840
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,893
<MORTGAGE> 6,664
<REAL-ESTATE> 4,552
<TOTAL-INVEST> 460,047
<CASH> 10,939
<RECOVER-REINSURE> 63,557
<DEFERRED-ACQUISITION> 50,510<F1>
<TOTAL-ASSETS> 772,474
<POLICY-LOSSES> 492,671
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 7,464
<POLICY-HOLDER-FUNDS> 5,483
<NOTES-PAYABLE> 30,000
0
0
<COMMON> 51,050
<OTHER-SE> 7,816<F2>
<TOTAL-LIABILITY-AND-EQUITY> 772,474
1,980
<INVESTMENT-INCOME> 7,386
<INVESTMENT-GAINS> 21
<OTHER-INCOME> 2,558<F3>
<BENEFITS> 6,099<F4>
<UNDERWRITING-AMORTIZATION> 1,011
<UNDERWRITING-OTHER> 3,032
<INCOME-PRETAX> 1,146
<INCOME-TAX> 398
<INCOME-CONTINUING> 748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748
<EPS-PRIMARY> .14
<EPS-DILUTED> .13
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $27,558 of present value of future profits.
<F2>Includes retained earnings of $6,289 and other comprehensive income of $1,527.
<F3>Includes policy charges of $1,358, amortization of negative goodwill of $347
and fees from separate accounts of $562.
<F4>Includes benefits and claims of $1,880 and interest credited on
interest-sensitive annuities and other financial products of $4,219.
</FN>
</TABLE>
