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 JUNE 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana No. 35-1773567
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9100 Keystone Crossing, Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [*] No [ ]
As of August 1, 1998, the Registrant had 7,227,158 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PAGE NUMBER
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income --
For the Three and Six Months Ended June 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Six Months Ended June 30, 1998 and 1997
(Unaudited) 5
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 1998 and 1997
(Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 12 - 21
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
<S> <C> <C>
1998 1997
(UNAUDITED) (AUDITED)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $416,874 in 1998
and $367,372 in 1997) $424,609 $372,576
Equity securities, at fair value (cost: $2,745 in 1998 and $55 in 1997) 2,759 52
Mortgage loans on real estate 7,427 375
Policy loans 9,213 9,495
Real estate 4,763 2,163
Other invested assets 775 779
Short-term investments 24,760 13,342
Total investments 474,306 398,782
Cash 7,326 4,165
Accrued investment income 7,262 6,512
Amounts due and recoverable from reinsurers 63,593 61,596
Deferred policy acquisition costs 24,543 21,435
Present value of future profits 26,937 20,537
Excess of acquisition cost over net assets acquired 4,885 2,445
Federal income tax recoverable 259 1,854
Other assets 4,889 3,602
Assets held in separate accounts 181,034 148,064
Total assets $795,034 $668,992
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $509,370 $439,390
Accounts payable and accrued expenses 5,870 6,208
Obligations under capital lease -- 141
Notes payable 30,000 26,000
Deferred federal income taxes 6,634 4,488
Excess of net assets acquired over acquisition cost 694 1,388
Liabilities related to separate accounts 181,034 148,064
Total liabilities 733,602 625,679
Series A Convertible Redeemable Preferred Stock, par value $100 per share;
Authorized 130,000; none issued and outstanding -- --
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 870,000 shares; none issued and outstanding -- --
Common Stock, no par value:
Authorized 20,000,000 shares; issued 8,105,860 in 1998 and 5,752,499 in 55,938 40,646
1997
Treasury stock, at cost, 859,802 shares in 1998 and 876,009 shares in 1997 (4,571) (4,572)
(deduction)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale 3,359 2,171
Foreign currency translation adjustment (829) (473)
Retained earnings 7,535 5,541
Total shareholders' equity 61,432 43,313
Total liabilities and shareholders' equity $795,034 $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 SIX MONTHS ENDED
<S> <C> <C> <C> <C>
JUNE 30, JUNE 30,
1998 1997 1998 1997
Revenues:
Premium income - life $1,928 $1,665 $3,908 $3,562
Premium income - health 5,992 -- 5,992 --
Net investment income 8,463 7,147 15,849 14,346
Net realized investment gains 25 32 46 206
Policy charges 1,794 1,344 3,152 2,783
Amortization of excess of net assets acquired
over 347 347 694 694
acquisition cost
Fees from separate accounts 590 367 1,152 838
Other income 1,167 390 1,458 881
Total revenue 20,306 11,292 32,251 23,310
Benefits and expenses:
Benefits and claims - life 2,065 1,979 3,946 4,368
Benefits and claims - health 4,821 -- 4,821 --
Interest credited on interest-sensitive
annuities and other 4,646 4,172 8,865 8,166
financial products
Salaries and wages 1,702 1,453 3,140 2,904
Amortization 1,213 752 2,224 1,577
Other operating expenses 2,139 1,441 3,732 3,317
Commission expense - health 784 -- 784 --
Interest expense and financing costs 772 548 1,429 1,078
Total benefits and expenses 18,142 10,345 28,941 21,410
Income before federal income taxes and preferred
stock dividends 2,164 947 3,310 1,900
Federal income tax expense 871 265 1,269 575
Net income 1,293 682 2,041 1,325
Preferred stock dividends -- 41 -- 83
Earnings available to common shareholders $1,293 $641 $2,041 $1,242
Earnings per share:
Net income $.18 $.13 $.33 $.25
Preferred stock dividends -- .01 -- .01
Earnings available to common shareholders $.18 $.12 $.33 $.24
Earnings per share - assuming dilution:
Net income $.16 $.12 $.30 $.23
Preferred stock dividends -- -- -- --
Earnings available to common shareholders $.16 $.12 $.30 $.23
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Common Treasury Comprehensive Retained
Total Stock Stock Income Earnings
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $39,919 $40,481 $(3,528) $(55) $3,021
Comprehensive income, net of tax:
Net income 1,325 1,325
Other comprehensive income:
Change in unrealized gain (loss) on
securities (89) (89)
available for sale, net
Change in foreign currency (692) (692)
translation adjustment
Other comprehensive income (781)
Comprehensive income 544
Treasury stock acquired (132) (132)
Preferred stock dividend (83) (83)
Balance at June 30, 1997 $40,248 $40,481 $(3,660) $(836) $4,263
Balance at January 1, 1998 $43,313 $40,646 $(4,572) $1,698 $5,541
Comprehensive income, net of tax:
Net income 2,041 2,041
Other comprehensive income
Change in unrealized gain (loss) on
securities 1,188 1,188
available for sale, net
Change in foreign currency (356) (356)
translation adjustment
Other comprehensive income 832
Comprehensive income 2,873
Issuance of Common Stock for Savers Life 15,024 15,024
acquisition
Issuance of Common Stock warrants 30 30
Issuance of Common Stock in connection with
exercise of stock warrants 233 234 (1)
Treasury stock acquired (50) (50)
Conversion of preferred stock into 4 4
Common Stock
Reissuance of treasury stock in connection
with 5 51 (46)
exercise of stock options
Balance at June 30, 1998 $61,432 $55,938 $(4,571) $2,530 $7,535
</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>
Six Months Ended
<S> <C> <C>
June 30,
1998 1997
OPERATING ACTIVITIES
Net income $2,041 $1,325
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 1,217 469
Policy acquisition costs deferred (5,169) (3,598)
Deferred federal income taxes 1,274 270
Depreciation and amortization 603 728
Insurance policy liabilities 2,673 5,539
Net realized investment gains (46) (206)
Accrued investment income (534) (327)
Other 3,614 190
Net cash provided by operating activities 5,673 4,390
FINANCING ACTIVITIES
Borrowings, net of debt issuance costs of $86 in 1998 and $-- in 1997 3,914 5,628
Repayments on long term debt and obligations under capital lease (153) (265)
Premiums received on interest-sensitive annuities and other financial
products 30,082 25,127
credited to policyholder account balances, net of premiums ceded
Return of policyholder account balances on interest-sensitive annuities
and other (21,661) (17,317)
financial products, net of premiums ceded
Redemption of redeemable preferred stock -- (15)
Reissuance of treasury stock in connection with exercise of stock options 233 4
and warrants
Purchase of Common Stock for treasury (50) (136)
Net cash provided by financing activities 12,365 13,026
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (138,942) (90,762)
Sales 85,105 70,702
Maturities, calls and redemptions 12,230 16,241
Short-term investments, net 31,326 (9,965)
Other investments, net (2,427) 1,078
Purchase of Savers Life Insurance Company, less cash acquired of $518 (2,169) --
Net cash used by investing activities (14,877) (12,706)
Net increase in cash 3,161 4,710
Cash at beginning of period 4,165 5,113
Cash at end of period $7,326 $9,823
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
The results of operations for the interim periods shown in this report are not
necessarily indicative of the results that may be expected for the fiscal year.
This is particularly true in the life insurance industry, where mortality
results in interim periods can vary substantially from such results over a
longer period. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such adjustments are
of a normal recurring nature. Certain amounts in the 1997 Consolidated
Financial Statements and Notes have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on previously reported
shareholders' equity or net income during the periods involved.
The nature of the insurance business of Standard Management Corporation
("SMC") and its consolidated subsidiaries (the "Company") requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company uses significant estimates and assumptions in calculating deferred
policy acquisition costs, present value of future profits, goodwill, future
policy benefits and deferred federal income taxes. Such estimates and
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Annual Report on Form 10-K of SMC for the
year ended December 31, 1997.
NOTE 2 -- ACQUISITIONS
On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers
Life"), with Savers Life surviving as a wholly-owned subsidiary of SMC. Each
of the 1,779,908 shares of Savers Life Common Stock outstanding was converted
into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life
Common Stock could elect to receive the $1.50 per share portion of the merger
consideration in the form of additional shares of SMC Common Stock. SMC issued
approximately 2.2 million shares with a value of approximately $14,937,000 and
paid $2,119,000 in cash (excluding acquisition costs) to acquire Savers Life.
SMC increased the Amended and Restated Revolving Line of Credit Agreement with
a bank (the "Amended Credit Agreement") to an amount of $20,000,000 to finance
the acquisition of Savers Life.
Savers Life underwrites, markets and distributes annuities, life
insurance, and Medicare supplement health insurance through a sales force
consisting of approximately 4,000 independent brokers and is licensed to sell
products in North Carolina, South Carolina, Virginia and Florida. Savers Life
had total assets of $72,186,000 at December 31, 1997 and revenues of
$43,047,000 for the year ended December 31, 1997.
The acquisition of Savers Life was accounted for using the purchase
method of accounting and the consolidated financial statements include the
results of Savers Life from the date of acquisition. Under purchase
accounting, SMC allocated the total purchase price of Savers Life to the
assets and liabilities acquired, based on a preliminary
determination of their values and recorded the excess of total purchase price
over net assets acquired as goodwill. SMC may adjust this allocation when a
final determination of fair values is made. Any adjustment is not expected to
be material.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2 -- ACQUISITIONS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Savers Life acquisition described above (in thousands):
Assets acquired:
Fixed maturity securities $ 7,061
Equity securities 2,840
Mortgage loans on real estate 6,273
Real estate 1,750
Policy loans 9
Short term investments 42,745
Cash 518
Present value of future profits 7,400
Other assets 7,378
Total assets acquired 75,974
Liabilities assumed:
Policy reserves 57,889
Deferred federal income taxes 516
Other liabilities 1,061
Total liabilities assumed 59,466
Net assets acquired 16,508
Excess of acquisition cost over net
assets acquired 2,049
Total purchase price $ 18,557
The following are supplemental unaudited pro forma consolidated results of
operations of the Company as if the acquisition of Savers Life and the transfer
of the major medical product line from Savers Life to World Insurance Company
("World") through a reinsurance agreement whereby World assumed, through
coinsurance effective July 1, 1997, 100% of the product line, had occurred at
January 1, 1997 presented at the same purchase price, based on estimates and
assumptions considered appropriate (in thousands, except per share amounts).
Six Months Ended
JUNE 30,
1998 1997
Revenues $41,108 $40,811
Net income 2,460 1,668
Earnings per share .29 .23
Earnings per share, assuming dilution .27 .21
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 June 30, December 31,
Rate 1998 1997
<S> <C> <C> <C>
Borrowings under revolving credit 9.24%{ (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 June 30, 1998.
In March 1998, SMC had borrowed an additional $4,000,000 under revolving
credit agreements to purchase Savers Life.
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>
June 30, December 31,
<S> <C> <C>
1998 1997
Fair value of securities available for sale $427,368 $372,628
Amortized cost of securities available for sale 419,619 367,427
Gross unrealized gain on securities available for 7,749 5,201
sale
Adjustments for:
Deferred policy acquisition costs (2,402) (1,727)
Present value of future profits (388) (209)
Deferred federal income tax liability (1,600) (1,094)
Net unrealized gain on securities available for sale $3,359 $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>
Six Months Ended
<S> <C> <C>
June 30,
1998 1997
Numerator:
Net income $2,041 $1,325
Preferred stock dividends -- 83
Numerator for basic earnings per share -
Income available to common shareholders 2,041 1,242
Effect of dilutive securities:
Preferred stock dividends -- 83
Interest on subordinated convertible debt 500 --
Numerator for diluted earnings per share -
Income available to common shareholders after assumed $2,541 $1,325
conversions
Denominator:
Denominator for basic earnings per share - weighted -average 6,229,581 5,019,136
shares
Effect of dilutive securities:
Stock options 297,561 90,054
Stock warrants 252,562 177,516
Convertible preferred stock -- 393,701
Subordinated convertible debt 1,740,038 --
Dilutive potential common shares 2,290,161 661,271
Denominator for diluted earnings per share - adjusted
weighted -average 8,519,742 5,680,407
shares and assumed conversions
</TABLE>
The senior subordinated convertible notes were not included
in the computation of diluted earnings per share because the effect would be
antidilutive.
NOTE 6 -- REDEEMABLE PREFERRED STOCK
The Board of Directors has authorized the issuance of up to 130,000
shares of preferred stock designated as Series A Convertible Redeemable
Preferred Stock, $100 par value per share. The Series A Preferred Stock is
redeemable on July 1, 2005, has a 7 3/4 % annual dividend payable on a
quarterly basis, and is convertible into 11.7647 shares of SMC common stock for
each Series A Preferred Stock share (convertible into SMC common stock based on
a conversion price of $8.50 for each SMC common stock share). SMC may
voluntarily redeem the Series A Preferred Stock after July 1, 1999 and
it may redeem the Series A Preferred Stock prior to July 1, 1999 under
certain limited circumstances. During July, 1998, SMC issued 37,300 shares
of the Series A Preferred Stock receiving gross proceeds of $3,730,000.
SMC, during July, 1998, used $3,000,000 of these proceeds to pay down
$3,000,000 on its $20,000,000 Amended Revolving Line of Credit Agreement.
NOTE 7 -- DISPOSAL OF MEDICARE SUPPLEMENT BUSINESS.
The Company has accepted a non-binding letter of intent to sell Savers
Life's Medicare supplement business, which represents substantially all of the
Company's health business. The proposed sale would be effective July 1,
1998 and is subject to executing definitive agreements, the approval of
the Company's and purchaser's Board of Directors and regulatory approvals. The
consumation of this transaction would result in the Company exiting from
Medicare supplement business it acquired with the Savers Life acquisition.
NOTE 8 -- PENDING ACQUISITION
The Company has entered into a Stock Purchase Agreement dated as of June
4, 1998, as amended, to purchase Midwestern National Life Insurance Company of
Ohio ("Midwestern National Life"). The Company will pay approximately
$15,011,000 plus acquisition costs for Midwestern National Life. Midwestern
National Life reported total revenues of $11,759,000 and a net loss of $240,000
for the ten months ended December 31, 1997 and it reported total assets of
$133,384,000 at December 31, 1997. For the six months ended June 30, 1998,
Midwestern National Life reported total revenues of $4,123,000 and a net loss
of $1,426,000 and it reported total assets of $125,467,000 at June 30, 1998.
The proposed acquisition is subject to normal closing conditions including SMC
and seller shareholder approval and approval by applicable regulatory
authorities.
NOTE 9 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of SFAS No. 130 had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
securities available for sale and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 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 JUNE 30, 1998 AND 1997
OPERATING INCOME. The income from operations
(before net realized investment gains) was $1,277,000 for the second quarter of
1998, an increase of $616,000 or 93%, compared to $661,000 for the comparable
period in 1997. The increase resulted primarily from increased operating
earnings from domestic operations of $775,000 compared to $192,000 for the
second quarter of 1998 and 1997 respectively. The increased domestic
operating gains resulted primarily from increased spread revenues and from
favorable mortality experience during the second quarter of 1998 and the
inclusion of Savers Life in the Company's operating results from March 12,
1998, the acquisition date of Savers Life.
PREMIUM INCOME. Premium income-life is
composed of premiums, including renewal premiums, received on ordinary life
insurance policies. The Company's new product sales are composed primarily of
annuity products. Under GAAP, deposits from interest-sensitive annuities and
other financial products are not recorded as revenues. GAAP premium income-
life for the second quarter of 1998 was $1,928,000 an increase of $263,000 or
16% from $1,665,000 for the second quarter of 1997. Premium income-health of
$5,992,000 for the second quarter of 1998 is premium received on Medicare
supplement insurance obtained as part of the Savers Life acquisition. This
premium income is included in the Company's operating results from March 12,
1998, the acquisition date of Savers Life.
Net domestic premium deposits received from
the sales of interest-sensitive annuities and other financial products (which
are not recorded as revenues) were $15,860,000 compared to $13,553,000 for the
second quarter of 1998 and 1997, respectively. Gross domestic premium deposits
received from interest-sensitive annuities and financial products were
$17,524,000 for the second quarter of 1998 compared to $16,098,000 for the
second 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 $1,316,000 or 18% to $8,463,000 for the second quarter of 1998 from
$7,147,000 for the comparable period of 1997. The increase primarily resulted
from an increase in total invested assets (amortized cost) from December 31,
1996 to June 30, 1998, of $94,582,000 or 25%. This increase included
$67,800,000 from the Savers Life acquisition. The weighted average annualized
yield of the Company's investment portfolio (exclusive of realized and
unrealized gains and losses) was 7.49% for the second quarter of 1998 and 1997,
respectively. As of June 30, 1998, yields available on new investments were
declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $7,000 or 22% to $25,000 from $32,000 for the second
quarter of 1998 and 1997, respectively. Net realized investment gains
fluctuate from period to period and arise when securities are sold in response
to changes in the investment environment which provide opportunities to
maximize return on the investment portfolio without adversely affecting the
quality and overall yield of the investment portfolio. The pretax net
unrealized gain on the Company's securities available for sale was $7,749,000
at June 30, 1998. In the absence of decreases in interest rates, the Company
may be unable to realize gains on its investment portfolio at the levels of
prior years or could recognize losses from sales of securities prior to
maturity. The change in market value of the Company's fixed maturity
securities is not expected to have a significant effect on results of
operations because the Company has the present intent and practice to hold most
of its available-for-sale fixed maturity securities to maturity, the Company's
asset/liability management activity is designed to monitor and adjust for the
effects of changes in market interest rates, and the Company's focus is to
manage its net spread revenue.
POLICY CHARGES. Policy charges, which
represent the amounts assessed against policyholder account balances for the
cost of insurance, policy administration and surrenders, increased $450,000 or
33% to $1,794,000 for the second quarter of 1998 compared to $1,344,000 for the
second quarter of 1997. The increase in policy charges resulted primarily from
an increase in policy surrender charges on certain deferred annuity products in
1998 when compared to 1997 and from the inclusion of Savers Life in the results
of operations from March 12, 1998, the acquisition date of Savers Life.
FEES FROM SEPARATE ACCOUNTS. Fees from
separate accounts consist of the investment management fees earned by Standard
Management International on its separate account assets and investment
contracts. Management fees and similar income from separate accounts increased
$223,000 or 61% to $590,000 for the second quarter of 1998 from $367,000 for
the second 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 $181,034,000 at June 30, 1998. Net deposits from sales of unit-linked
products by Standard Management International were $12,379,000 and $2,325,000
for the second 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 increased
$777,000 or 199% to $1,167,000 for the second quarter of 1998 compared to
$390,000 for the comparable 1997 period. The increase primarily resulted from
the inclusion of Savers Life in the Company's operating results from March 12,
1998, the acquisition date of Savers Life.
BENEFIT AND CLAIMS. Benefits and claims-life
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims-life increased $86,000 or 4% to $2,065,000 for
the second quarter of 1998 from $1,979,000 for the second quarter of 1997.
Benefits and claims-health of $4,821,000 for the second quarter of 1998 are
benefits and claims incurred on Medicare supplement insurance obtained as part
of the Savers Life acquisition. These benefits and claims are included in the
Company's operating results from March 12, 1998, the acquisition date of Savers
Life. Throughout the Company's history, it has experienced both periods of
higher and lower benefit claims. Such volatility is not uncommon in the life
insurance industry and, over extended periods of time, periods of higher claims
experience tend to be offset by periods of lower claims experience.
INTEREST CREDITED ON INTEREST-SENSITIVE
ANNUITIES AND OTHER FINANCIAL PRODUCTS. Interest credited on
interest-sensitive annuities and other financial products was $4,646,000 for
the second quarter of 1998, an increase of $474,000 or 11% from $4,172,000 for
the comparable prior year period. The increase resulted from the inclusion of
Savers Life interest credited in the Company's operating results from March 12,
1998, the acquisition date of Savers Life. At June 30, 1998, the weighted
average interest credited rate for Standard Life's currently marketed annuities
and other financial product liabilities was 5.45% compared to 5.54% at June 30,
1997.
AMORTIZATION. Amortization expense primarily
includes charges to operations for the amortization of deferred policy
acquisition costs, the present value of future profits and the excess of cost
over net assets acquired. Amortization expense increased $461,000 or 61% to
$1,213,000 for the second quarter of 1998 from $752,000 for the second quarter
of 1997. The increase in current year amortization expense resulted primarily
from increased amortization of deferred policy acquisition costs as gross
profits from business sold in recent years began to emerge, and increased
surrenders and a corresponding increase in the amortization of deferred policy
acquisition costs. The current year increase in amortization expense also
includes $195,000 of such expense from including Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
OTHER OPERATING EXPENSES. Other operating
expenses increased $698,000 or 48% to $2,139,000 for the second quarter of 1998
from $1,441,000 for the second quarter of 1997. The increase in other
operating expenses resulted primarily from including Savers Life in the
Company's operating results from March 12, 1998, the acquisition date of Savers
Life.
COMMISSION EXPENSE - HEALTH. Commission
expense - health of $784,000 for the second quarter of 1998 is commission
expense on Medicare supplement insurance obtained as part of the Savers Life
acquisition. This commission expense is included in the Company's operating
results from March 12, 1998, the acquisition date of Savers Life.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $224,000 or 41% to $772,000 in
the second quarter of 1998 from $548,000 in the second 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.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OPERATING INCOME. The income from operations
(before net realized investment gains) was $2,011,000 in the first six months
of 1998, an increase of $822,000 or 69%, compared to $1,189,000 for the
comparable period in 1997. The increase resulted primarily from increased
operating earnings from domestic operations of $696,000 to $1,062,000 for the
first six months of 1998 compared to $366,000 for the first six months of 1997.
The increased domestic operating gains resulted primarily from increased
spread revenues and from favorable mortality experience during the first
six months of 1998 and the inclusion of Savers Life in the Company's
operations results from March 12, 1998, the acquisition date of Savers
Life.
PREMIUM INCOME. Premium income-life is
composed of premiums, including renewal premiums, received on ordinary life
insurance policies. The Company's new product sales are composed primarily of
annuity products. Under GAAP, deposits from interest-sensitive annuities and
other financial products are not recorded as revenues. GAAP premium income-
life for the first six months of 1998 was $3,908,000, an increase of $346,000
or 10% from $3,562,000 for the first six months of 1997. Premium income-health
of $5,992,000 for the first six months of 1998 is premiums received on Medicare
supplement insurance obtained as part of the Savers Life acquisition. This
premium income is included in the Company's operating results from March 12,
1998, the acquisition date of Savers Life.
Net domestic premium deposits received from
the sales of interest-sensitive annuities and other financial products (which
are not recorded as revenues) were $30,082,000 compared to $26,355,000 for the
first six months of 1998 and 1997, respectively. Gross domestic premium
deposits received from interest-sensitive annuities and financial products were
$34,684,000 for the six months ended June 30, 1998 compared to $31,061,000 for
the six months ended June 30, 1997. Annuity sales increased in 1998 due to the
introduction of new competitive products and an increase in the agency base
achieved through the recruitment of high volume agents and larger managing
general agencies and continued expansion of geographical concentration into
such areas as California. Since the Company's operating income is primarily a
function of its investment spreads, persistency of annuity in force business,
mortality experience, and operating expenses, a change in annuity premium
deposits in a single period does not directly cause operating income to change,
although continued increases or decreases in annuity premiums may affect the
growth rate of total assets on which investment spreads are earned.
NET INVESTMENT INCOME. Net investment income
increased $1,503,000 or 10% to $15,849,000 for the first six months of 1998
from $14,346,000 for the comparable period of 1997. The increase primarily
resulted from an increase in total invested assets (amortized cost) from
December 31, 1996 to June 30, 1998 of $94,582,000 or 25%. This increase
included $67,800,000 from the Savers Life acquisition. The weighted average
annualized yield of the Company's investment portfolio (exclusive of realized
and unrealized gains and losses) was 7.49% for the first six months of 1998
and 1997, respectively. As of June 30, 1998, yields available on new
investments were declining.
NET REALIZED INVESTMENT GAINS. Net realized
investment gains decreased $160,000 or 78% to $46,000 from $206,000 for the
first six months of 1998 and 1997, respectively. Net realized investment gains
fluctuate from period to period and arise when securities are sold in response
to changes in the investment environment which provide opportunities to
maximize return on the investment portfolio without adversely affecting the
quality and overall yield of the investment portfolio. The pretax net
unrealized gain on the Company's securities available for sale was $7,749,000
at June 30, 1998. In the absence of decreases in interest rates, the Company
may be unable to realize gains on its investment portfolio at the levels of
prior years or could recognize losses from sales of securities prior to
maturity. The change in market value of the Company's fixed maturity
securities is not expected to have a significant effect on results of
operations because the Company has the present intent and practice to hold most
of its available-for-sale fixed maturity securities to maturity, the Company's
asset/liability management activity is designed to monitor and adjust for the
effects of changes in market interest rates and the Company's focus is to
manage its net spread revenue.
POLICY CHARGES. Policy charges, which
represent the amounts assessed against policyholder account balances for the
cost of insurance, policy administration and surrenders, increased $369,000 or
13% to $3,152,000 for the six months ended June 30, 1998 compared to $2,783,000
for the six months ended June 30, 1997. The increase in policy charges
resulted from an increase in policy surrender charges on certain deferred
annuity products in 1998 when compared to 1997 and from the inclusion of Savers
Life in the Company's results of operations from March 12, 1998, the
acquisition date of Savers Life.
FEES FROM SEPARATE ACCOUNTS. Fees from
separate accounts consist of the investment management fees earned by Standard
Management International on its separate account assets and investment
contracts. Management fees and similar income from separate accounts increased
$314,000 or 37% to $1,152,000 for the first six months of 1998 from $838,000
for the first six months 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 $181,034,000 at June 30, 1998. Net deposits from sales of unit-
linked products by Standard Management International were $20,065,000 and
$7,077,000 for the six months ended June 30, 1998 and 1997, respectively.
Such income fluctuates in relationship to total separate account assets and the
return earned on such assets.
OTHER INCOME. Other income increased 577,000
or 65% to $1,458,000 for the first six months of 1998 compared to $881,000 for
the comparable 1997 period. The increase primarily resulted from the inclusion
of Savers Life in the Company's operating results from March 12, 1998, the
acquisition date of Savers Life.
BENEFIT AND CLAIMS. Benefits and claims-life
include life insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims-life decreased $422,000 or 10% to $3,946,000 for
the first six months of 1998 from $4,368,000 for the first six months of 1997.
The decrease in benefits and claims-life resulted from a reduction in net life
insurance claim expense. Benefits and claims-health of $4,821,000 for the six
months ended June 30, 1998 are benefits and claims incurred on Medicare
supplement insurance obtained as part of the Savers Life acquisition. These
benefits and claims are included in the Company's operating results from March
12, 1998, the acquisition date of Savers Life. Throughout the Company's
history, it has experienced both periods of higher and lower benefit claims.
Such volatility is not uncommon in the life insurance industry and, over
extended periods of time, periods of higher claims experience tend to be offset
by periods of lower claims experience.
INTEREST CREDITED ON INTEREST-SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS. Interest credited on interest-sensitive annuities and other
financial products was $8,865,000 for the first six months of 1998, an increase
of $699,000 or 9% from $8,166,000 for the comparable prior year period. The
increase resulted from the inclusion of Savers Life interest credited in the
Company's operating results from March 12, 1998 the acquisition date of Savers
Life. At June 30, 1998, the weighted average interest credited rate for
Standard Life's currently marketed annuities and other financial product
liabilities was 5.45% compared to 5.54% at June 30, 1997.
AMORTIZATION. Amortization expense primarily
includes charges to operations for the amortization of deferred policy
acquisition costs, the present value of future profits and the excess of cost
over net assets acquired. Amortization expense increased $647,000 or 41% to
$2,224,000 for the first six months of 1998 from $1,577,000 for the first six
months of 1997. The increase in current year amortization expense resulted
primarily from increased amortization of deferred policy acquisition costs as
gross profits from business sold in recent years began to emerge, and increased
surrenders and a corresponding increase in the amortization of deferred policy
acquisition costs. The current year increase in amortization expense also
includes $195,000 of such expense from including Savers Life in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
OTHER OPERATING EXPENSES. Other operating
expenses increased $415,000 or 13% to $3,732,000 for the first six months of
1998 from $3,317,000 for the first six months of 1997. The increase in other
operating expenses resulted primarily from including Savers Life operating
expenses in the Company's operating results from March 12, 1998, the
acquisition date of Savers Life.
COMMISSION EXPENSE - HEALTH. Commission
expense - health of $784,000 for the six months ended June 30, 1998 is
commission expense on Medicare supplement insurance obtained as part of the
Savers Life acquisition. This commission expense is included in the Company's
operating results from March 12, 1998, the acquisition date of Savers Life.
INTEREST EXPENSE AND FINANCING COSTS.
Interest expense and financing costs increased $351,000 or 33% to $1,429,000 in
the six months ended June 30, 1998 from $1,078,000 in the six months ended June
30, 1997. The increase in interest expense and financing costs during 1998
resulted from additional borrowings of $5,600,000 in June 1997 and $4,000,000
in March 1998.
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 $19,649,500 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 1,160,256 shares
of Common Stock for $6,019,661 as of July 31, 1998. At July 31, 1998, SMC was
authorized to purchase an additional 339,744 shares under this program.
At July 31, 1998, SMC had "parent company
only" cash and short-term investments of $500,000. In addition, SMC had
$3,000,000 available for draw down at July 31, 1998 on its $20,000,000
Amended Revolving Line of Credit Agreement. These funds are available to SMC
for general corporate purposes. During July, 1998, SMC received gross
proceeds of $3,730,000 from the sale of 37,300 shares of Series A
Convertible Redeemable Preferred Stock. SMC, during July, 1998, used
$3,000,000 of these proceeds to pay down $3,000,000 on its $20,000,000
Amended Revolving Line of Credit Agreement. SMC's "parent company only"
operating expenses (not including interest expense) were $3,420,000 and
$3,470,000 for the years ended December 31, 1997 and 1996, respectively.
Pursuant to the management services
agreement with SMC, Standard Life paid SMC a monthly fee of $167,000 (annual
fee of $2,000,000) during 1997 and the first six months of 1998 for certain
management services related to the production of business, investment
of assets and evaluation of acquisitions. Pursuant to the management
services agreement with Standard Life, Dixie National Life paid monthly
payments of $83,000 (annual fee of $1,000,000) to Standard Life in 1997
and the first six months of 1998. Both of these agreements provide that they
may be modified or terminated by the Indiana and Mississippi Departments of
Insurance in the event of financial hardship of Standard Life or Dixie
National Life.
A management services agreement between SMC
and Savers Life was approved by the North Carolina Department of
Insurance on March 11, 1998. The management services agreement calls for the
payment of $83,000 per month by Savers Life to SMC for financial and
regulatory reporting, investment of assets and the production of business.
SMC has agreed to receive no fee, nor shall Savers Life have an
obligation to pay such fee, unless the capital and surplus of Savers Life is
greater than $7,000,000 after the acquisition of Savers Life. In addition,
as a condition of the acquisition of Savers Life, SMC entered into an
agreement with the North Carolina Department of Insurance to maintain
statutory capital and surplus of Savers Life of at least
$6,000,000. The amount of capital and surplus of Savers Life at June 30,
1998 was $6,824,000.
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 six months of 1998 for certain
management and administrative services. The agreement provides that it may
be modified or terminated by either SMC or Premier Life (Luxembourg).
At April 1, 1995, SMC sold its property and
equipment to an unaffiliated leasing/financing company for $1,396,000 and
subsequently entered into a capital lease obligation whereby SMC pays a
monthly rental amount of $45,000. During the second quarter of 1998, the
lease was terminated and the property and equipment was repurchased for
$116,000. SMC charges a monthly equipment rental fee to its subsidiaries
for this equipment and additional equipment purchased after April 1, 1995.
The amount of the rental income received from SMC's subsidiaries was
$525,000 and $1,145,000 for the six months ended June 30, 1998 and
year ended December 31, 1997, respectively.
The Amended Credit Agreement permits SMC
to borrow up to $20,000,000 in the form of a seven-year reducing revolving
loan arrangement. SMC has agreed to pay a non-use fee of .50% per annum on
the unused portion of the commitment. In connection with the original and
Amended Credit Agreement, SMC issued warrants to the bank to purchase
73,500 shares of Common Stock. Borrowing under the Amended Credit Agreement
may be used for contributions to surplus of insurance subsidiaries,
acquisition financing, and repurchases of Common Stock. The debt is secured
by a Pledge Agreement of all of the issued and outstanding shares of common
stock of Standard Life and Standard Marketing. Interest on the borrowing
under the Amended Credit Agreement is determined, at the option of SMC,
to be: (i) a fluctuating rate of interest based on the corporate base rate
announced by the bank from time to time plus 1% per annum, or (ii) a rate at
LIBOR plus 3.25%. Annual principal repayments of $3,333,000 begin in March
2000 and conclude in March 2005. Indebtedness incurred under the Amended
Credit Agreement is subject to certain restrictions and covenants including,
among other things, certain minimum financial ratios, minimum statutory
surplus requirements for the insurance subsidiaries, minimum consolidated
equity requirements for SMC and certain investment and indebtedness
limitations. At June 30, 1998, SMC was in compliance with all restrictions
and covenants in the Amended Credit Agreement. At June 30, 1998, SMC had
borrowed $20,000,000 under the Amended Credit Agreement at a weighted average
interest rate of 9.24%.
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 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, the Company borrowed an additional $5,628,000 from an insurance
company pursuant to another subordinated convertible debt agreement
(collectively, the "Notes") which is due July 2004 unless previously
converted, and requires interest payments in cash on January 1 and July 1
of each year at 10% per annum. Proceeds from the additional borrowings
were used for contributions to surplus of insurance subsidiaries of
$2,400,000, redemption of Class S Preferred Stock of approximately
$1,840,000 and the balance for other general corporate purposes. The Notes
are convertible at any time at the option of the note holder into Common
Stock at the rate of $5.747 per share. The Notes may be prepaid in whole
or in part at the option of the Company commencing on July 1, 2000 at
redemption prices equal to 102% of the principal amount
(plus accrued interest) and declining to 101% of the principal amount
(plus accrued interest). The Notes may be prepaid prior to July 1, 2000 at a
redemption price equal to 101% of the principal amount (plus accrued
interest) under certain limited circumstances. The subordinated convertible
debt agreements contain terms and financial covenants substantially
similar to those in the Amended Credit Agreement.
Assuming the current level of debt under
the Amended Credit Agreement and current interest rates at June 30, 1998
(weighted average rate of 9.24%) SMC annual debt service in 1998 would
be approximately $2,850,000 in interest paid.
From the funds borrowed by SMC pursuant to
the Amended Credit Agreement and the subordinated convertible debt
agreements, $13,000,000 was loaned to Standard Life pursuant to an
Unsecured Surplus Debenture Agreement (the "Surplus Debenture") which
requires Standard Life to make quarterly interest payments to SMC at a
variable corporate base rate (8.5% at June 30, 1998) plus 2% per annum, and
annual principal payments of $1,000,000 per year beginning in 2007 and
concluding in 2019. The interest and principal payments are subject to
quarterly approval by the Indiana Department of Insurance, depending
upon satisfaction of certain financial tests relating to levels of
Standard Life's capital and surplus and general approval of the
Commissioner of the Indiana Department of Insurance. SMC currently
anticipates these quarterly approvals will be granted. Assuming the
approvals are granted and the June 30, 1998 interest rate of 10.5%
continues in 1998, SMC will receive interest income of $1,365,000 from the
Surplus Debenture during 1998.
Dividends from Standard Life to SMC are
limited by laws applicable to insurance companies. As an Indiana domiciled
insurance company, Standard Life may pay a dividend or distribution from its
surplus profits, without the prior approval of the Commissioner of
the Indiana Department of Insurance, if the dividend or distribution,
together with all other dividends and distributions paid within the preceding
twelve months, does not exceed the greater of (i) net gain from operations or
(ii) 10% of surplus, in each case as shown in its preceding annual
statutory financial statements. Also, regulatory approval is required
when dividends to be paid exceed unassigned statutory surplus. For the
year ended December 31, 1997, Standard Life reported statutory net gain
from operations before realized capital gains of $2,374,000 and statutory
surplus of $25,923,000, which includes unassigned surplus of $1,693,000.
Standard Life paid dividends of $1,600,000 in 1997. During 1998, Standard
Life can pay dividends of approximately $2,500,000 without regulatory
approval.
As a North Carolina domiciled insurance
company, Savers Life may pay a dividend or distribution from its capital and
surplus, without the prior approval of the North Carolina Commissioner
of Insurance, if the dividend or distribution together with all other
dividends and distributions paid within the preceding twelve months, does not
exceed the lesser of (i) net gain from operations or (ii) 10% of
capital and surplus, in each case as shown in its preceding annual statutory
financial statements. Savers Life was not allowed to pay a dividend in
1996 or 1997 without prior North Carolina Department of Insurance approval
due to its statutory net losses in 1995 and 1996. Savers Life will not be
permitted to pay dividends in 1998 without such approval.
SMC anticipates the available cash from
its existing working capital, plus anticipated 1998 dividends, management
fees, rental income and interest payments on its Surplus Debenture
receivable will be more than adequate to meet its anticipated "parent company
only" cash requirements for 1998.
SMC has a note receivable of $2,858,000
from an affiliate and a note payable of $2,858,000 to a different
affiliate. This note receivable and note payable are eliminated in the
consolidated financial statements.
U.S. INSURANCE OPERATIONS. The
principal liquidity requirements of Standard Life are its contractual
obligations to policyholders, dividend, rent, management fee and Surplus
Debenture payments to SMC and other operating expenses. The primary
source of funding for these obligations has been cash flow from premium
income, net investment income, investment sales and maturities and sales
of annuity products. These sources of liquidity for Standard Life
significantly exceed scheduled uses. Liquidity is also affected by
unscheduled benefit payments including death benefits and policy
withdrawals and surrenders. The amount of withdrawals and surrenders is
affected by a variety of factors such as renewal interest crediting rates,
interest rates for competing products, general economic conditions, Standard
Life's A.M. Best Company, Inc. ("A.M. Best") rating
(currently rated "B+") and events in the industry that affect policyholders'
confidence.
The policies and annuities issued by
Standard Life contain provisions that allow policyholders to withdraw or
surrender their policies under defined circumstances. These policies and
annuities generally contain provisions which apply penalties or otherwise
restrict the ability of policyholders to make such withdrawals or surrenders.
Standard Life closely monitors the surrender and policy loan activity of its
insurance products and manages the composition of its investment portfolios,
including liquidity, in light of such activity.
Changes in interest rates may affect the
incidence of policy surrenders and other withdrawals. In addition to the
potential effect on liquidity, unanticipated withdrawals in a changing
interest rate environment could adversely affect earnings if the Company were
required to sell investments at reduced values to meet liquidity demands.
The Company manages the asset and liability portfolios in order to minimize
the adverse earnings effect of changing market interest rates. The Company
seeks assets that have duration characteristics similar to the liabilities
that they support. The Company also prepares cash flow projections and
performs cash flow tests under various market interest rate scenarios to
assist in evaluating liquidity needs and adequacy. The Company's U.S.
insurance subsidiaries currently expect available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
Statutory surplus is computed according to
rules prescribed by the National Association of Insurance
Commissioners ("NAIC"), as modified by the Indiana Department of
Insurance, or the states in which the insurance subsidiaries do business.
Statutory accounting rules are different from GAAP and are intended to
reflect a more conservative perspective. With respect to new
business, statutory accounting practices require that: (i) acquisition
costs (primarily commissions and policy issue costs) and (ii) reserves for
future guaranteed principal payments and interest in excess of statutory
rates, be expensed in the year the new business is written. These items
cause a reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. The Company designs its products to
minimize such first-year losses, but certain products continue to cause a
statutory loss in the year written. For each product, the Company
controls the amount of 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 June 30, 1998, Winterthur, is rated "A"
("Excellent") by A.M. Best. From January 1, 1995 to August 31, 1995,
approximately 70% of certain of Standard Life's annuity business produced was
ceded. Standard Life decreased the quota-share portion of business ceded
to 50% at September 1, 1995 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 June 30, 1998, Standard Life had statutory capital and
surplus for regulatory purposes of $26,874,000 compared to $25,923,000 at
December 31, 1997. Standard Life produced statutory net gain from operations
of $734,000 and $2,374,000 for the six months ended June 30, 1998 and the year
ended December 31, 1997, respectively. SMC contributed $2,400,000 to
Standard Life in the second quarter of 1997 to facilitate growth in new
premiums written. As the life insurance and annuity business produced by
Standard Life and Dixie National Life increases, Standard Life expects to
continue to satisfy statutory capital and surplus requirements through
statutory profits, 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 June 30, 1998, includes a
$694,000 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 June 30, 1998 are certain
assets that are valued for financial statement purposes primarily on the basis
of assumptions established by the Company's management. These assets include
deferred acquisition costs, present value of future profits, costs in excess of
net assets acquired and organization and deferred debt issuance costs. The
total value of these assets reflected in the June 30, 1998 consolidated balance
sheet aggregated $56,172,000 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 June 30, 1998.
REGULATORY ENVIRONMENT. Currently,
prescribed or permitted statutory accounting principles ("SAP") may vary
between states and between companies. The NAIC is in the process of codifying
SAP to promote standardization of methods utilized throughout the industry.
Completion of this project might result in changes in statutory accounting
practices for the Company's insurance subsidiaries; however, it is not expected
that such changes would materially affect the Company's insurance subsidiaries'
statutory capital requirements.
FINANCIAL SERVICES DEREGULATION. The United
States Congress is currently considering a number of legislative proposals
intended to reduce or eliminate restrictions on affiliations among financial
services organizations. Proposals are extant which would allow banks to own or
affiliate with insurers and securities firms. An increased presence of banks
in the life insurance and annuity businesses may increase competition in these
markets. The Company cannot predict the impact of these proposals on the
earnings of the Company.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
___________________
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 SMC's Annual Meeting of Stockholders held
on June 10, 1998, the following individuals were elected to the Board of
Directors:
SHARES FOR SHARES WITHHELD
RONALD D.HUNTER 6,052,182 93,033
EDWARD T. STAHL 6,051,558 93,657
JOHN J. DILLON 6,054,707 90,508
JERRY E. FRANCIS 6,039,211 106,004
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.36 Management Services Agreement between Savers Life and
SMC dated March 11, 1998.
10.37 Indemnity Reinsurance Agreement between Standard Life
and the Mercantile and General Life Reassurance
Company of America dated March 30, 1998 and effective
June 1, 1997.
10.38 Certificate of Designations for Series A Convertible
Redeemable Preferred Stock.
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 May 22, 1998, was
filed with the Commission to report under Item 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: August 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)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 424,609
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,759
<MORTGAGE> 7,427
<REAL-ESTATE> 4,763
<TOTAL-INVEST> 474,306
<CASH> 7,362
<RECOVER-REINSURE> 63,593
<DEFERRED-ACQUISITION> <F1> 51,480
<TOTAL-ASSETS> 795,034
<POLICY-LOSSES> 496,904
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 7,602
<POLICY-HOLDER-FUNDS> 4,864
<NOTES-PAYABLE> 30,000
0
0
<COMMON> 51,367
<OTHER-SE> <F2> 10,065
<TOTAL-LIABILITY-AND-EQUITY> 795,034
9,900
<INVESTMENT-INCOME> 15,849
<INVESTMENT-GAINS> 46
<OTHER-INCOME> <F3> 4,998
<BENEFITS> <F4> 17,632
<UNDERWRITING-AMORTIZATION> 2,224
<UNDERWRITING-OTHER> 7,656
<INCOME-PRETAX> 3,310
<INCOME-TAX> 1,269
<INCOME-CONTINUING> 2,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,041
<EPS-PRIMARY> .33
<EPS-DILUTED> .30
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<F1>Includes $26,937 of present value of future profits.
<F2>Includes retained earnings of $7,535 and other comprehensive income of
$2,530.
<F3>Includes policy charges of $3,152 amortization of negative goodwill of
$694 and fees from separate accounts of $1,152.
<F4>Includes benefits and claims of $8,767 and interest credited on
interest-sensitive annuities and other financial products of $8,865.
[TYPE] EX-10.36
[TEXT]
MANAGEMENT SERVICE AGREEMENT
THIS AGREEMENT is made this _____ day of _________, 1998, between
Savers Life Insurance Company, a North Carolina stock life insurance
company ("Savers") and Standard Management Corporation, an Indiana stock
life insurance holding company ("Company").
WHEREAS, the parties to this Agreement are affiliated companies, and
WHEREAS, Savers desires that certain management services, and other
services in connection with production of business, investment of assets
and financial and regulatory reporting for Savers be provided by the
Company, and
WHEREAS, the Company is willing to provide such services:
NOW, THEREFORE, for and in consideration of the promises, agreements
and undertakings to be assumed and performed by each of the parties
hereto as hereinafter set forth, the parties hereto agree as follows:
1. The Company shall, subject to the direction of Savers' Board of
Directors, provide to Savers management and other services in connection
with the production of business, investment of assets and financial and
regulatory reporting. The Company acknowledges the activities enumerated
herein are subject to specific statutory and regulatory requirements and
agrees that all sales, investment and reporting management services shall
be in accordance with the statutes and regulations controlling the
conduct of insurance business in North Carolina.
2. All information made available by Savers or that becomes
available to the Company by virtue of this Agreement or the relationship
created by this Agreement shall be held in strict confidence by the
Company.
3. The provision of any of the services described in this
Agreement may be terminated by either party at any time, without penalty,
upon giving written notice, which notice shall be given no less than
thirty (30) days prior to such termination.
4. In consideration for the services provided in paragraphs 1, 2
and 3, Savers agrees to pay the Company a monthly fee of Eighty Three
Thousand Three Hundred Thirty-Three and 00/100 Dollars ($83,333.00) which
is due and payable within ten (10) days from the receipt of the invoice.
The Company and Savers agree that the charges for services outlined
herein are fair and reasonable and reflect both the value of services
rendered and reasonable, customary and usual charges therefor. Both the
Company and Savers will maintain their books and records to disclose
clearly and accurately the nature and detail of all transactions between
the parties pursuant to this Agreement. THE ABOVE NOTHWITHSTANDING, THE
COMPANY AGREES THAT IT SHALL NOT RECEIVE, NOR SHALL SAVERS HAVE ANY
OBLIGATION TO PAY, A MONTHLY FEE UNLESS AND UNTIL THE CAPITAL AND SURPLUS
OF SAVERS SHALL EXCEED $7,000,000 AFTER PAYMENT OF SUCH FEE.
5. The Agreement shall be governed by the laws of North Carolina,
both as to interpretation and performance.
6. Except as otherwise specified in paragraph 4 above, all
balances due between the parties shall be settled within thirty (30)
days.
7. This Agreement shall inure to the benefit of, and be binding
upon, the parties and their respective successors and assigns. Neither
party may assign its rights and obligations hereunder.
8. Management service fees paid pursuant to this Agreement may be
adjusted annually by the Board of Directors of Savers and the Company.
Savers shall give the North Carolina Insurance Commissioner at least 30
days notice of any proposed changes to the terms or monthly management
fees provided in this Agreement.
9. This Agreement may be modified by written request of the North
Carolina Commissioner in the event of financial hardship of Savers.
10. The Company shall make available for audit and review by the
Commissioner of Insurance all books and records pertaining to management
of Savers.
11. Any notice or other communication requested or permitted
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by
certified, registered or express mail, postage prepaid. Any such notice
shall be deemed given when so delivered personally, telegraphed, telexed
or sent by facsimile transmission or, if mailed, two days after the date
of deposit in the United States mails, as follows:
if to Savers:
Savers Life Insurance Company of Indiana
8064 North Point Boulevard
Winston-Salem, North Carolina 27106
Attention: Raymond J. Ohlson, President
if to Company:
Standard Management Corporation
9100 Keystone Crossing, Suite 600
Indianapolis, Indiana 46240
Attention: Ronald D. Hunter
Chairman of the Board
if to the Commissioner:
North Carolina Commissioner
North Carolina Department of Insurance
Dobbs Building, 430 N. Salisbury Street
Raleigh, North Carolina 27611
Any party may by notice given in accordance with this Section to the
other parties designate another address or person for receipt of notices
hereunder.
12. Any waiver by any party of any provision of this Agreement
shall not imply a subsequent waiver of that or any other provision.
13. This Agreement shall constitute the entire agreement between
the parties for the objects and purposes set forth herein.
IN WITNESS WHEREOF, the parties hereto executed this Agreement on
the date first above written.
STANDARD MANAGEMENT CORPORATION
By: ______________________________________
Ronald D. Hunter
Chairman of the Board
SAVERS LIFE INSURANCE COMPANY
By: ______________________________________
Raymond J. Ohlson
President
H:\USER\JAMESCAR\DOCS\SAVERS\MANAGSER.DOC
</TABLE>
THIS REINSURANCE AGREEMENT
is made between
STANDARD LIFE INSURANCE COMPANY OF INDIANA
of Indianapolis, Indiana
(hereinafter referred to as "the Company")
and
THE MERCANTILE AND GENERAL LIFE
REASSURANCE COMPANY OF AMERICA
(A MEMBER OF THE SWISS RE GROUP)
of Lansing, Michigan
Executive Offices: 161 Bay Street, Suite 3000, Canada Trust Tower
Toronto, Ontario M5J 2T6
(hereinafter referred to as "the Reinsurer")
The following Articles, qualified by the
Exhibits of the Agreement, will form
the basis of the Agreement.
This Agreement may be referred to as Agreement No. SBA206-97
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TABLE OF CONTENTS
ARTICLES
I Business Covered - Forms, Manuals, Issue Rules
II Automatic Coverage - Facultative Coverage
III Reinsurance Basis - Reinsurance Premiums - Currency
IV Mode of Submission - Data Notification
V Premium Accounting
VI Policy Changes - Lapses - Reinstatements - Minimum Reinsurance Limit
VII Increase in Retention - Recapture
VIII Liability
IX Claims
X Oversights - Arbitration
XI Insolvency
XII DAC Tax - Taxes and Expenses
XIII Alterations to Agreement - Parties to Agreement - Good Faith -
Confidentiality
XIV Duration of Agreement - Severability - Benefit - Construction
EXHIBITS
A-I Business Covered
A-II Underwriting Forms and Issue Rules
B Application for Reinsurance
C Premium Rates and General Terms, Administration Instructions
D The Company's Retention Limits and Issue Limits
E The Reinsurer's Acceptance Limits
F Reinsurance Reports
G DAC Tax Election
ARTICLE I
Business This Agreement applies to all insurance policies and
Covered supplementary benefits and riders attached thereto (hereinafter
referred to as "policies"), as listed in Exhibit A-I, which
have been issued directly by the Company in accordance
with its underwriting rules, premium rates and policy forms
provided to the Reinsurer.
The Company will cede, and the Reinsurer will accept amounts of
these policies in accordance with the terms and conditions of
this Agreement.
The amounts retained by the Company on the business covered by
this Agreement shall not be reinsured elsewhere by the
Company on any basis whatsoever without prior written consent
from the Reinsurer.
Forms The Company shall provide full disclosure of all material facts
Manuals, regarding the policies. The forms, manuals and issue rules the
ISSUE RULES Company shall file with the Reinsurer include but are not limited
to the copies of the applicable policy forms, rates, retention
schedules, application forms, underwriting requirements
(inspection limits, non-smoking criteria, financial
questionnaires, smoking questionnaires etc.) and
authorization forms for release of medical information.
The underwriting evidence and issue rules to be filed with the
Reinsurer are also listed in Exhibit A-II. The Company hereby
declares that its forms are in accordance with current M.I.B.
regulations.
IF NEW MATERIAL IS PUBLISHED, OR CHANGES ARE MADE IN THE MATERIAL
ALREADY FILED, THE COMPANY AGREES TO PROMPTLY PROVIDE THE
REINSURER WITH COPIES OF SUCH MATERIAL. ANY MATERIAL CHANGE IN
THE UNDERWRITING AND ISSUE RULES SHALL BE SUBJECT TO THE APPROVAL
OF THE REINSURER BEFORE BEING APPLIED TO POLICIES COVERED BY
THIS AGREEMENT.
<PAGE>
1
ARTICLE II
Automatic Except as provided below for facultative coverage, the Company
Coverage will retain the amount stipulated in Exhibit D according to
the age and morbidity rating at the time of underwriting. The
Company will automatically cede the amount of reinsurance
to the Reinsurer according to the Automatic Acceptance Limits
specified in Exhibit E, taking into account the age and
morbidity rating at the time of underwriting.
If any of the following situations have occurred, the Reinsurer
may revise the Automatic Acceptance Limits in Exhibit E by
giving ninety (90) days written notice to the Company of the new
limits and their effective date:
(a) the Reinsurer has conducted an audit of the records,
books and documents relating to the reinsurance under this
Agreement;
(b) the Company has changed its practices and procedures
applicable to the policies covered under this Agreement;
(c) a material change in the underwriting personnel of the
Company has occurred.
It is understood that the amount retained by the Company shall
include its critical illness retention under any in force policies.
Facultative Ifthe Company receives an application that meets any of the
reinsurance criteria below, the Coverage shall be on a facultative basis:
(a) the amount applied for exceeds the sum of the Company's
Retention Limit set out in Exhibit D and the Automatic Acceptance
Limit set out in Exhibit E;
(b) the total of the new reinsurance required and the
amount already reinsured on that life under this Agreement and
all other Agreements between the Reinsurer and the Company,
exceeds the Automatic Acceptance Limits set out in Exhibit E;
(c) the Company intends to retain less than the Retention Limit
set out in Exhibit D taking into account the applicant's
age and morbidity rating;
(d) the amount applied for and the amount already in force on
the same life exceeds the Jumbo Limit set out in Exhibit E;
(e) the application is on a life for which an application
had been submitted by the Company on a facultative basis to
the Reinsurer or any other reinsurer, within the last 3 years
unless the reason for submitting facultatively no longer applies.
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Any application for a policy on any plan, supplementary benefits or rider
shown in Exhibit A-I may be offered facultatively.
The relevant terms and conditions of this Agreement shall apply to those
facultative applications that are accepted by the Reinsurer.
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ARTICLE III
Reinsurance Policies reinsured under this Agreement shall be on the basis
Basis set out in Exhibit C.
Reinsurance The premiums to be paid to the Reinsurer by the Company for
Premiums reinsurance shall be in accordance with the terms set out in
Exhibit C.
Currency All submissions under this Agreement shall be effected in
the currency specified in Exhibit A-I and the premiums
and liabilities shall be expressed and payable in that currency.
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ARTICLE IV
Mode of AUTOMATIC SUBMISSIONS
Submission For all automatic submissions the Company shall advise the
Reinsurer in the manner described in Exhibit F.
The Company agrees to send to the Reinsurer upon request,
copies of the application, underwriting papers and other papers
on any life reinsured automatically under this Agreement.
FACULTATIVE SUBMISSIONS
The Company may apply for reinsurance by sending to the Reinsurer,
copies of all pertinent papers, including the original
application, medical examination, inspection reports, physician's
statements, urinalyses, and all other information which the
Company may have relating to the insurability of the risk
along with an Application for reinsurance, a sample of which
is attached as Exhibit B.
After consideration of the reinsurance application and
papers, the Reinsurer shall promptly inform the Company of its
underwriting decision.
If the underwriting decision is acceptable to the Company and the
Company's policy is subsequently placed in force in
accordance with the issuance rules provided to the Reinsurer, the
Company shall advise the Reinsurer in the manner described in
Exhibit F.
If any application to the Reinsurer is not to be placed with the
Reinsurer, the Company shall advise the Reinsurer in writing
(indicating the reason for non-placement) so that the Reinsurer
can complete its records.
Data For all business reinsured under this Agreement, the Company
Notification shall self-administer reinsurance transactions in a format
in substantial accordance with the Society of Actuaries
Guidelines. The Company shall provide the Reinsurer with
the reports as set out in Exhibit F. The Company, upon
request, will provide the Reinsurer with any additional
information related to the business reinsured under this
Agreement and which the Reinsurer requires in order to
complete its financial statements.
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ARTICLE V
Premium Reporting
Accountin The Company undertakes to send to the Reinsurer, during
each accounting period, a report as set out in Exhibit F
showing all first year and renewal premiums which became
due during the previous accounting period. Also included
will be any adjustments made necessary by changes in
reinsurance effective during the previous period, or changes
due to any corrections to a previous report.
The balance due shall then become payable. If the balance so
calculated is due to the Reinsurer, the Company shall forward
a remittance in settlement with the report. If the balance is
due to the Company, the Reinsurer shall forward a remittance
in settlement within fifteen (15) days of receipt of the report.
Interest may be charged on overdue premiums.
NON-PAYMENT OF PREMIUMS
The Reinsurer may terminate its liability for any reinsurance
for which the reinsurance premiums have not been paid within
sixty (60) days after billing,by giving fifteen (15) days
written notice by registered mail of such action to the Company.
The Reinsurer's right to terminate reinsurance for
non-payment of premium shall not prejudice its right to
collect premiums for the period the reinsurance was in
force.
During the period premiums are outstanding, the Reinsurer
may offset the amount of any premiums in arrears against amounts
owed to the Company.
The Company shall not force termination under the
provisions of this paragraph solely to avoid the recapture
requirements or to transfer to another reinsurer the block of
business reinsured under this Agreement.
UNEARNED PREMIUM
The Company shall take credit, without interest, for any
unearned premiums, net of allowances, arising due to
reductions or lapses or cancellations or critical illness claims
or death claims, in its account. The Company shall pay the
balance of arrears of premiums due under a reinstated policy.
In the event of termination, lapse, or critical illness
claim, or death claim, unearned premiums, net of allowances
and policy fees, will be refunded.
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ARTICLE VI
Policy Changes to policies reinsured under this Agreement shall
Changes be made in accordance with the provisions set out below.
If the change affects the plan, the amount of reinsurance,
premiums or allowances under the submission, the Company shall
inform the Reinsurer in the subsequent Reinsurance Report as set
out in Exhibit F.
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PLAN CHANGES
(i) Automatic Submissions:
Unless otherwise agreed, whenever the plan of insurance on any
policy reinsured hereunder is being changed to a new critical
illness plan, including internal replacements, and the Company
is not obtaining evidence in accordance with the Company's full
new business issue underwriting rules, the reinsurance shall remain
in effect with the Reinsurer on the following basis;
(a) the reinsurance rates and the durations shall
be based on those applicable to the original submission;
(b) the reinsurance amount at risk shall be determined
according to the terms of this Agreement but in no event
shall be more than the original submission at the time
of the change in plan.
(ii) Facultative Submissions:
Any changes shall be subject to the Reinsurer's approval only
if the Company is obtaining evidence in accordance with the
Company's new business underwriting rules. The applicable
reinsurance terms shall be agreed by the Company and the Reinsurer.
INCREASE IN AMOUNT AND REUNDERWRITING
(i) Automatic Submissions:
Any reunderwriting, (including any change in morbidity rating), or
non-contractual increase in amount at risk for any submission
shall be subject to the Company's full new business underwriting
rules or as agreed otherwise with the Reinsurer.
The amount of the increase shall be subject to the terms set
out in Exhibit C.
If the amount of the policy shall increase above the jumbo limit
(Exhibit E) or if the amount to be reinsured exceeds the
automatic coverage limits, the increase shall be subject to the
Reinsurer's approval.
(ii) Facultative Submissions:
Any reunderwriting or non-contractual increase, including any
change in morbidity rating shall be subject to the Reinsurer's
approval.
REDUCTIONS
If the amount of insurance of a policy issued by the Company is
reduced then the amount of reinsurance on that life shall be reduced
effective the same date by the lesser of the full amount of the
reduction under the original policy or the full amount of reinsurance,
unless the reinsurance is a quota share of the policy issued by the
Company, in which case the reduction would be proportional.
The reduction will first apply to any reinsurance on the policy being
reduced and then in a chronological order according to policy date
("first in, first out") to any reinsurance on other critical illness
policies in force on the life. However, the Company shall not be
required to assume a risk for an amount in excess of its regular
retention for the age at issue and the morbidity rating of the
policy under which reinsurance is being terminated.
If the reinsurance for a policy has been placed with more than one
reinsurer, the reduction shall be applied to all reinsurers in
proportion to the amounts originally reinsured with each reinsurer.
SPECIAL CHANGES
If any special or unusual change, which is not covered above and
which may affect the terms of the submission in question, is requested,
the Reinsurer's approval shall be obtained before such a change
becomes effective.
Lapses When a reinsured policy lapses, the submission in question
shall be canceled effective the same date.
Reinstatements If a policy reinsured on an automatic basis is reinstated in
accordance with its terms or the rules of the Company,
as provided to the Reinsurer, the reinsurance shall be
reinstated automatically by the Reinsurer. The
Reinsurer's approval is required only for the reinstatement
of a facultative policy when the Company's regular
reinstatement rules indicate that more evidence than a
Statement of Good Health is required.
Minimum The minimum amount to be reinsured shall be as set out in
Reinsurance Exhibit C.
LIMIT
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ARTICLE VII
Increase in The reinsurance under this Agreement shall be maintained in
Retention force without reduction except as specifically provided for
elsewhere in this Agreement.
The Company may increase the maximum dollar amount(s) of its
limits of retention, as opposed to its quota share of each
policy, on new business being issued at any time by giving
written notice to the Reinsurer of the new limits of
retention and the effective date of such new retention
schedule.
The Company's critical illness retention limits are set out in
Exhibit D.
Recapture The Company may apply the new limits of critical illness
retention to existing reinsurances and reduce reinsurance in
force provided:
(a) The Company gives the Reinsurer written notice of its
intention to recapture within 90 days of the effective date of
the increase in its retention.
(b) Such reductions are made on the next anniversary of
each policy affected and with no reduction being made until
such reinsurance has been in force for the period stated in
Exhibit C.
(c) The Company had retained its full critical illness
retention (not a special retention limit) for the plan, age
and morbidity rating at the time the policy was issued.
(d) The Company has applied its increase in retention in a
consistent manner to all categories of its Retention Limits
set out in Exhibit D.
No reduction shall be made if the Company has either obtained
or increased stop loss reinsurance coverage as
justification for the increase in retention.
In applying its new retention to existing reinsurance, the
rating at the time of issue and the issue age of the existing
reinsurance shall be used to determine the amount of the
Company's new retention.
Recapture as provided herein shall be optional with the
Company, but if any reinsurance is recaptured, all reinsurance
eligible for recapture under the provisions of this Article
must be recaptured. If there is reinsurance in other companies
on risks eligible for recapture, the necessary reduction is to
be applied pro rata to the total outstanding reinsurance.
The amount of reinsurance eligible for recapture is based on
the reinsurance net amount at risk as of the date of recapture.
The Reinsurer shall not be liable, after the effective date of
recapture, for any reinsured policies or portions of such
policies eligible for recapture, which the Company has
overlooked. The Reinsurer shall be liable only for a credit of
the premiums received after the recapture date, less any
allowance and without interest.
The terms and conditions for the Company to recapture
reinsurance in force under this Agreement due to the
insolvency of the Reinsurer are set out in the Insolvency
clause in Article XI of this Agreement.
If the Company transfers business which is reinsured under this
Agreement to a successor company, then the successor company
has the option to recapture the reinsurance, in accordance with
the recapture criteria outlined in this Article, only if the
successor company has a higher retention limit than the Company.
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ARTICLE VIII
Liability AUTOMATIC REINSURANCE
The Reinsurer's liability for any policy ceded automatically
under this Agreement shall begin simultaneously with the
Company's contractual liability for the policy reinsured.
FACULTATIVE REINSURANCE
If a policy covered under this Agreement is offered
facultatively to the Reinsurer only, then the Reinsurer's
liability shall begin simultaneously with the Company's
contractual liability for this facultative policy. The amount
of the Reinsurer's liability shall be the lesser of the
Reinsurer's offer or the Automatic Acceptance Limits set
out in Exhibit E. The Reinsurer's liability ceases if
the Reinsurer declines the risk and duly notifies the Company.
The Reinsurer's liability would also cease if the Company
declines the Reinsurer's offer.
If, however, a policy is offered facultatively to any other
reinsurer, in addition to the Reinsurer, the liability of the
Reinsurer shall commence when the Reinsurer has received
notice from the Company, during the lifetime of the
insured, that the Reinsurer's offer has been accepted. The
Company shall have one hundred and twenty (120) days from the
date of the Reinsurer's final offer in which to place the
policy with the insured/owner, after which time the
Reinsurer's offer shall expire unless the Reinsurer explicitly
states in writing that the offer is extended for some further
period.
The Reinsurer may assume liability for claims arising prior to
the time of notification if it is shown to the satisfaction of
the Reinsurer that the policy would have been reinsured with the
Reinsurer.
DURATION
The liability of the Reinsurer for all submissions under
this Agreement shall cease at the same time as the liability
of the Company ceases and shall not exceed the Company's
contractual liability under the terms of its policies.
Notwithstanding the foregoing, the Reinsurer may terminate
its liability for any policies for which premium payments are
in arrears, according to the terms set out in Article V of this
Agreement.
It is understood that the Reinsurer's liability for a claim
shall be based on the reinsured net amount at risk as of the
date the claim is incurred.
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ARTICLE IX
Claims Notice
The Company will notify the Reinsurer as soon as reasonably
possible after the Company receives the claim. All papers
in connection with the claim shall be submitted to the
Reinsurer and the Company shall wait for up to ten days from
the date of submission for the Reinsurer's recommendation
before conceding liability or making settlement to the claimant.
The Company shall provide the Reinsurer with all further
reports and papers required by the Reinsurer for its
consideration of the claim.
PAYMENT
Provided there is no existing breach of this Agreement by the
Company, the Reinsurer shall be liable to the Company for
the benefits reinsured and the reinsurance shall not exceed
the Company's contractual liability under the terms of its
policies. The Reinsurer's share of interest, which is based
on the critical illness proceeds paid by the Company, shall
be payable in addition to the critical illness claim settlement.
CONTESTED CLAIMS
The Company will notify the Reinsurer of its intention
to contest, compromise or litigate a claim involving a
reinsured policy. The Company will also provide the Reinsurer
prompt notice of any legal proceedings initiated against the
Company in response to its denial of a claim on a reinsured
policy. Should any claim be settled on a reduced compromise
basis, or should a contested claim be settled for a
reduced sum, the Company and the Reinsurer shall participate
in such reductions in proportion to their respective
liabilities under the policy or policies reinsured.
EXPENSES
The Reinsurer shall pay its share of reasonable
investigation and legal expenses incurred in adjudicating
or litigating the claim. The Reinsurer shall not be liable
for any portion of any routine investigative or
administrative expenses incidental to the settlement of
claims (such as compensation of salaried employees) which are
incurred by the Company; nor for any expenses incurred in
connection with a dispute or contest arising out of
conflicting claims of entitlement to policy proceeds or
benefits that the Company admits are payable.
In the event that the Reinsurer does not deem it advisable to
contest a claim, and pays the Reinsurer's share of the
critical illness benefit, the Reinsurer shall not be liable
for any subsequent expenses incurred by the Company.
EXTRA CONTRACTUAL OBLIGATIONS
Extra contractual obligations include punitive damages, bad
faith damages, compensatory damages, other damages or
statutory penalties which may arise from the willful and/or
negligent acts or omissions by the Company.
The Reinsurer is not liable for extra contractual obligations
unless it concurred in writing and in advance of the Company's
actions which ultimately led to the imposition of the extra
contractual obligations.
In such circumstances, the Company and the Reinsurer shall
share in extra contractual obligations, in equitable
proportions, but all factors being equal, the division of any
such assessments would be in proportion to the total risk
accepted by each party for the plan of insurance involved.
Notwithstanding anything stated herein, this Agreement will not
apply to any extra contractual obligations incurred by the
Company as a result of any fraudulent and/or criminal act by
any employee of the Company acting individually, collectively
or in collusion in the presentation, defense, or settlement of
any claim.
MISSTATEMENT OF AGE OR SEX
In the event of an increase or reduction in the amount payable
under a policy due to misstatement in age or sex, the
proportionate liabilities under this Agreement shall be the
basis for determining each party's share of any increase or
reduction in settlement of the claim. The Reinsurance shall
be rewritten from commencement on the basis of the adjusted
amounts using premiums and amounts at risk for the correct ages
and sex, and the proper adjustment for the difference in
reinsurance premiums, without interest, shall be made.
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ARTICLE X
Oversights Any unintentional or accidental failure to comply with the
terms of this Agreement which can be shown to be the result of
an oversight, misunderstanding or clerical error on the part of
either party shall not be deemed to be an abrogation of the
Agreement or an invalidation of the reinsurance. Upon
discovery, the error shall be promptly corrected by both
parties being restored to the position they would have
occupied had the oversight, misunderstanding or clerical
error not occurred. Should it not be possible to restore
both parties to such a position, the party responsible
for the oversight, misunderstanding or clerical error shall
be responsible for any resulting liabilities and expenses.
This provision shall apply only to oversights,
misunderstandings or clerical errors relating to the
administration of reinsurance covered by this Agreement
and not to the administration of the insurance provided by
the Company to its insured. Any negligent or deliberate acts
or omissions by the Company regarding the insurance provided
are the responsibility of the Company and its liability
insurer, if any, but not that of the Reinsurer. For example,
if the Company decides to perform an alpha index search only
on its applications for amounts over a certain limit, then
the Reinsurer shall not be liable for any amounts not reported
for reinsurance as a result of this practice.
Arbitration Any controversy or claim arising out of or relating to this
contract, or the breach thereof, shall be settled by
arbitration, and the arbitrators, who shall regard this
Agreement from the standpoint of practical business as well
as the law, are empowered to determine as to the
interpretation of the treaty obligation.
Each party shall appoint one arbitrator and these two
arbitrators shall select a third arbitrator within two weeks
of the appointment of the second. The second arbitrator is to
be selected within two weeks after the notice is provided that
the first arbitrator is selected. Should the two arbitrators
not agree on the choice of the third, then each party shall
name four (4) candidates to serve as the arbitrator.
Beginning with the party who did not initiate arbitration, each
party shall eliminate one candidate from the eight listed
until one candidate remains. If this candidate declines to
serve as the arbitrator, the candidate last eliminated will
be approached to serve. This process shall be repeated until a
candidate has agreed to serve as the third arbitrator. All
three arbitrators must be officers of Life Insurance Companies
or Life Reinsurance Companies, excluding however, officers of
the two parties to this Agreement, their affiliates or
subsidiaries or past employees of any of these entities. The
place of meeting of the arbitrators shall be decided by a
majority vote of the arbitrators. The written decision of a
majority of the arbitrators shall be final and binding on both
parties and their respective successors and assigns. All costs
of the arbitration and expenses and fees of the arbitrators
shall be borne equally by the parties, unless otherwise ordered
by the arbitrators.
The arbitrators shall render a decision within four
months of the appointment of the third arbitrator, unless both
parties agree otherwise.
In the event no decision is rendered within four months, new
arbitrators shall be selected as above.
Alternatively, if both parties consent, any controversy may
be settled by arbitration in accordance with the rules of the
American Arbitration Association.
Judgement upon the award rendered by the arbitrator(s) may
be entered in any court having jurisdiction thereof.
It is specifically the intent of both parties that these
arbitration provisions shall replace and be in lieu of any
statutory arbitration provision, if the law so permits.
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ARTICLE XI
Insolvency For the purpose of this Agreement, the Company or the Reinsurer
shall be deemed "insolvent" when it:
(a) applies for or consents to the appointment of a
rehabilitator, conservator, liquidator or statutory successor
of its properties or assets; or
(b) makes an assignment for the benefit of its creditors; or
(c) is adjudicated as bankrupt or insolvent; or
(d) files or consents to the filing of a petition in
bankruptcy, seeks reorganization or an arrangement with
creditors or takes advantage of any bankruptcy, dissolution,
liquidation, or similar law or statute; or
(e) becomes the subject of an order to rehabilitate or
an order to liquidate as defined by the insurance code of the
jurisdiction of the domicile of the Company or the Reinsurer, as
the case may be.
In the event of the insolvency of either the Reinsurer or the
Company, any amounts owed by the Company to the Reinsurer and
by the Reinsurer to the Company with respect to this Agreement
shall be set-off and only the balance shall be paid.
The Reinsurer shall be liable only for the amounts reinsured and
shall not be or become liable for any amounts or reserves to be
held by the Company on policies reinsured under this Agreement.
In the event of the insolvency of the Company, the reinsurance
obligations under this Agreement shall be payable by the
Reinsurer directly to the Company, its liquidator,
rehabilitator, conservator or statutory successor, immediately
upon demand, with reasonable provision for verification on the
basis of the claims allowed against the insolvent company by
any court of competent jurisdiction or by any rehabilitator,
conservator, liquidator or statutory successor having
authority to allow such claims without diminution
because of the insolvency of the Company, or because the
rehabilitator, conservator, liquidator or statutory successor
has failed to pay all or a portion of any claims.
It is understood, however, that in the event of such
insolvency, the rehabilitator, conservator, liquidator or
statutory successor of the Company shall give written notice of
the pendency of a claim against the Company on the policy
reinsured within a reasonable time after such claim is filed
in the insolvency proceedings, and that during the pendency
of such claim the Reinsurer may investigate such claim and
interpose, at its own expense, in the proceedings where such
claim is to be adjudicated, any defense or defenses which it
may deem available to the Company or its liquidator,
rehabilitator, conservator or statutory successor.
It is further understood that the expense thus incurred by the
Reinsurer shall be chargeable, subject to court approval,
against the Company as part of the expense of conservation or
liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of
the defense undertaken by the Reinsurer. Where two or more
reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense
shall be apportioned in accordance with the terms of the
Agreement as though such expense had been incurred by the
Company.
In the event of the insolvency of the Reinsurer, the Company may
cancel this Agreement for new business by promptly providing
the Reinsurer, its rehabilitator, conservator, liquidator or
statutory successor with written notice of the cancellation
effective the date on which the Reinsurer's insolvency is
established by the authority responsible for such determination.
Any requirement for a notification period prior to the
cancellation of the Agreement would not apply under such
circumstances.
In addition, the Company may provide the Reinsurer, its
rehabilitator, conservator, liquidator or statutory successor
with written notice of its intent to recapture all reinsurance
in force under this Agreement regardless of the duration the
reinsurance has been in force or the amount retained by the
Company on the policies reinsured hereunder. The effective
date of a recapture due to insolvency would be the date on
which the Reinsurer's insolvency is established by the authority
responsible for such determination. Such a recapture would be
subject to the monetary terms specified in Exhibit C.
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ARTICLE XII
DAC Tax The Company and the Reinsurer agree to the DAC Tax Election
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,
whereby:
(a) the party with the net positive consideration for this
Agreement for each taxable year will capitalize specified policy
acquisition expenses with respect to this Agreement without regard
to the general deductions limitation of Section 848(c)(1); and
(b) both parties agree to exchange information pertaining to the
amount of net consideration under this Agreement each year to
ensure consistency.
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).
The method and timing of the exchange of this information is set
out in Exhibit G.
This DAC Tax Election shall be effective for all years for which
this Agreement remains in effect.
The Company and the Reinsurer represent and warrant that they are
subject to U.S. taxation under either the provisions of
subchapter L of Chapter 1 or the provisions of subpart F of
subchapter N of Chapter 1 of the Internal Revenue Code of 1986,
as amended.
Taxes and Apart from any taxes, allowances, refunds, and expenses
Expenses specifically referred to elsewhere in this Agreement,
no allowances, taxes or proportion of any expense shall be paid
by the Reinsurer to the Company in respect of any submission.
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ARTICLE XIII
Alterations Any alteration to this Agreement shall be null and void unless
to Agreement attached to the Agreement and signed by both parties.
Parties to This is an Agreement solely between the Company and the
Agreement Reinsurer. The acceptance of reinsurance hereunder shall
not create any right or legal relation between the Reinsurer
and the insured, beneficiary, or any other party to any
policy of the Company which may be reinsured hereunder.
This Agreement represents the entire agreement between the
Company and the Reinsurer and supersedes, with respect to its
subject matter, any prior oral or written agreements between
the parties.
Good Faith The Company and Reinsurer agree that all matters with
respect to this Agreement require the utmost good faith of
both parties.
The Reinsurer, or its duly appointed representatives, shall
have access to the records of the Company concerning the
business reinsured hereunder for the purpose of inspecting,
auditing and photocopying those records. Such access shall
be provided at the office of the Company and shall be during
reasonable business hours.
Provided there is business in force under this Agreement,
the Reinsurer's right of access as specified above will
survive the term of the Agreement.
Each party represents and warrants to the other party that it
is solvent on a statutory basis in all states in which it
does business or is licensed. Each party agrees to promptly
notify the other if it is subsequently financially impaired.
The Reinsurer has entered into this Agreement in
reliance upon the Company's representations and warranties.
The Company affirms that it has and will continue to
disclose all matters material to this Agreement and each
submission. Examples of such matters are a change in
underwriting or issue practices or philosophy, a change
in underwriting management personnel, or a change in the
Company's ownership or control.
Confidentiality Both the Company and the Reinsurer will hold confidential
and not disclose or make competitive use of any shared
proprietary information unless otherwise agreed in writing,
or unless the information otherwise becomes publicly
available or the disclosure of which is required for
retrocession purposes or has been mandated by law.
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ARTICLE XIV
Duration of This Agreement is effective as of the effective date set out
Agreement in Exhibit A-I and is unlimited as to its duration. It may be
terminated for further new reinsurance on all or certain
policies specified in Exhibit A-I by either party giving at
least ninety (90) days notice to that effect in writing to the
other party. During the period of such ninety (90) days the
Reinsurer shall continue to accept new reinsurance under the
terms of this Agreement. This notification period would be
waived in the event the Reinsurer is deemed insolvent.
Further, the Reinsurer remains liable for all reinsured
policies existing at the date of the expiration set forth in
the notice until their natural expiration, unless the parties
mutually decide otherwise or as specified otherwise in this
Agreement.
Notwithstanding the above, the Company agrees, in
recognition of the Reinsurer's contribution to the product
development of critical illness business, to reinsure its
critical illness products exclusively with the Reinsurer for
a period of three (3) years commencing with the effective
date of this Agreement.
If, during this initial three year period, circumstances
in the market place develop which necessitate a revision to the
critical illness products reinsured under this Agreement, the
Company is bound to work with Reinsurer in developing revised
critical illness products and reinsure them with the
Reinsurer. Should the Reinsurer be unable to support the
revision, the above exclusivity provision would not apply.
The Company would then not be obligated to develop or reinsure
the revised critical illness products with the Reinsurer.
Severability If any provision of this Agreement is determined to be
invalid or unenforceable, such determination will not affect or
impair the validity or the enforceability of the remaining
provisions of this Agreement.
Benefit Except as otherwise provided, this Agreement shall be
binding upon the parties hereto and their respective successors
and assigns.
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Construction This Agreement shall be construed and administered in
accordance with the laws of the State of Indiana and the
rights and obligations of this Agreement shall, at all times,
be regulated under the laws of the State of Indiana.
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Made in duplicate and executed by both parties.
Signed for and on behalf of STANDARD LIFE INSURANCE COMPANY OF INDIANA
Indianapolis, this day of , 19
Signed for and on behalf of THE MERCANTILE AND GENERAL LIFE REASSURANCE COMPANY
OF AMERICA (A MEMBER OF THE SWISS RE GROUP)
Toronto, this day of , 19
Prepared by _________________________
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EXHIBIT A-I
BUSINESS COVERED
EFFECTIVE DATE:
June 1, 1997. The commencement dates for specific business are shown below.
BUSINESS COVERED:
The policies on the plans shown below with policy issue dates falling in the
period that begins with the Commencement Date and ends with the Termination
Date are covered subject to any limitations shown below or elsewhere in this
Agreement.
Riders and supplementary benefits shall also be covered in accordance with the
Limitations, Commencement Date and Termination Date of the base policy to which
they are attached unless stated otherwise.
These policies, riders and supplementary benefits are on lives resident in the
United States or territories of the United States.
CURRENCY: US$
LIMITATIONS:
1. A seventy percent (70%) first dollar quota share of each policy, up to
the limits specified in Exhibit E, is eligible for automatic coverage on
all policies on lives with surnames commencing with the letters A to Z
inclusive. (Any application may be offered on a facultative basis.)
PLANS, RIDERS AND BENEFITS:
PLAN(S) AND EXHIBIT COMMENCEMENT TERMINATION
Form No(s). Reference Limitations` Date Date
Critical Choice, S/NS C, C- I 1. June 1, 1997
Policy Form: CIS197A
RIDERS
N/A
SUPPLEMENTARY BENEFITS
N/A
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EXHIBIT A-II
COMPANY'S UNDERWRITING FORMS AND
EVIDENCE AND ISSUE RULES
The following information and items are to be provided to the Reinsurer:
1. Policy Application Form
2. Policy Delivery Rules and Reinstatement Rules
3. Non-medical and Medical Requirements
4. Financial and Non-smoking Questionnaires
5. Preferred Underwriting Guidelines, if applicable
It is understood that the Company will be using the Reinsurer's critical
illness underwriting manual.
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EXHIBIT C
GENERAL TERMS
1. REINSURANCE BASIS: Coinsurance
2. RATE CRITERIA: The rates set out in the sub-section(s) of Exhibit C
shall be used for automatic reinsurance of any policy covered by this
Agreement. These rates also apply to the reinsurance of a facultative
policy covered by this Agreement provided the Company retains:
(i) at least 25% of the policy to be reinsured, or
(ii) the Company's maximum retention then available for the issue
age and rating applicable to the policy to be reinsured.
3. ALLOWANCE LIMIT: The allowances set out in the sub-section(s) of
Exhibit C will apply to all reinsurances, provided the total of the new
reinsurance amount and the amount already reinsured on the life under
this Agreement, and all other Agreements with the Reinsurer, does not
exceed the amount shown in the table below. Individual consideration
will be given to the allowances for any amounts over the limit shown in
the table below.
Issue Age STD. (100%) - 250%
[S] [C]
20 $500,000
- 64
4. AGE BASIS: Last
5. PREMIUM TAX: There shall be no separate reimbursement of Premium Tax.
6. RATE GUARANTEE: The reinsurance rates set out in the sub-section(s) of
Exhibit C of this Agreement cannot be guaranteed for more than one year.
The Reinsurer reserves the right to increase the reinsurance rates if the
Company has increased its rates.
7. MINIMUM REINSURANCE LIMIT: $10,000 Individual
7,000 Worksite
8. RECAPTURE: Due to Increase in the Company's Retention.
Inforce Period: 10 Years.
Due to Insolvency of the Reinsurer.
Inforce Period: Not Applicable.
EXHIBIT C
Page 2
The Recapture Fee
applicable shall be mutually agreed upon by the Company
and the Reinsurer, its rehabilitator, conservator,
liquidator, or statutory successor.
9. RETURN OF PREMIUMS: If death occurs after the 10th policy year, all
premiums paid will be refunded without interest.
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EXHIBIT C-I
INSTRUCTIONS FOR ADMINISTRATION
1. BASIS OF REINSURANCE: The Company shall pay to the Reinsurer a basic
premium at the same rate of premium as is applicable on the original
policy but not including any policy fee payable on the original policy.
The premium rates set out in Exhibit C-I shall be payable on a cash
basis, with the Company matching the mode of payment of the premiums
under the original insurance. The Company shall continue to pay the
appropriate premium to the Reinsurer as long as the policy is in force.
On all policies the due proportion of any extra premiums payable on
account of additional morbidity risk shall be payable to the Reinsurer.
Premiums remain level to age 100.
Modal factors are as follows:
monthly .09
quarterly .2625
semi-annual .515
Premium bands are as follows:
Individual Worksite
[S] [C] [C]
$15,000 - $49,999 $10,000 - $49,999
$50,000 - $99,999 $50,000 - $99,999
$100,000 - $500,000 $100,000 - $500,000
2. ALLOWANCES:
(a) ON BASIC PLAN(S)
The Reinsurer shall pay to the Company the following
allowances on the premiums payable hereunder:
YEAR 1 YEARS 2 THROUGH 9 THEREAFTER
100% 10% 2%
(b) ON MULTIPLE EXTRA PREMIUMS
The same allowances as those payable on the basic policy.
EXHIBIT C-I
Page 2
DEFINITIONS OF COVERED IMPAIRMENTS
and POLICY CONDITIONS
Covered Impairments:
1. ALZHEIMER'S DISEASE - The diagnosis by a Physician who is a consultant
neurologist resulting in the inability to perform independently three or
more of the following activities of daily living: bathing, dressing,
toileting, transferring (moving in or out of a bed or chair), continence
and feeding. Systemic disorders and other brain diseases which could
account for the loss of independent performance must be specifically
ruled out. "Diagnosis" means clinical diagnosis not dependent on
pathological confirmation, but employing nationally accepted criteria.
2. BLINDNESS - Permanent and uncorrectable loss of sight in both eyes, as
confirmed by Physician who is an ophthalmologist. The corrected visual
acuity must be worse than 20/200 in both eyes or the field of vision must
be less than 20 degrees in both eyes.
3. CANCER (LIFE THREATENING) - An invasive malignancy characterized by the
uncontrolled growth and spread of malignant cells and the invasion of
tissue. Cancers NOT covered by this definition include:
<section> Stage A prostate cancer;
<section> Pre-malignant lesions, benign tumors or polyps;
<section> Carcinoma in situ;
<section> Any skin cancer, except invasive malignant melanoma
into the dermis or deeper.
4. CORONARY ARTERY BYPASS SURGERY - The undergoing of heart surgery to
correct narrowing or blockage of one or more coronary arteries with
bypass grafts. Surgery must have been recommended by a Physician who is
a cardiologist.
5. CORONARY ANGIOPLASTY - The undergoing of balloon angioplasty or laser
embolectomy to correct narrowing or blockage of one or more coronary
arteries. Surgery must have been recommended by a Physician who is a
cardiologist.
6. DEAFNESS - Permanent loss of hearing in both ears, with an auditory
threshold of more than 90 decibels, as confirmed by Physician who is an
otolaryngologist.
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<PAGE>
EXHIBIT C-I
Page 3
7. Heart Attack - (Myocardial Infarction) The death of a portion of the
heart muscle resulting from a blockage of one or more coronary arteries.
The diagnosis is based on an event which consists of all of the
following:
<section> Chest pain;
<section> Associated new electrocardiographic (EKG) changes
consisting of new Q waves and localized T wave Inversions; and
<section> Elevation of cardiac (heart) enzymes.
8. PARALYSIS - Complete and permanent loss of the use of two or more limbs
through paralysis, for a continuous period of 180 days, confirmed by a
Physician.
9. STROKE - Cerebrovascular accident caused by infarction of brain tissue,
hemorrhage or embolism, producing measurable neurological deficit
persisting for at least 30 days following the occurrence of the stroke.
Conditions NOT covered by this definition include, but are not limited
to, transient ischemic attack (TIA).
Policy Conditions:
1. WAITING PERIOD - Coverage commences 30 days after the Policy Issue
Date (or the Policy Reinstatement Date, if applicable). The Waiting
Period would be waived if a covered impairment was caused by an accident
which occurred while the policy was in force.
2. SURVIVAL PERIOD - Benefits are payable provided the insured is living
30 days after the date the clinical or pathological diagnosis of a
covered impairment is made by a physician.
3. CURRENT BENEFIT AMOUNT - The initial Benefit Amount less any amount of
partial benefits paid to date.
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<PAGE>
EXHIBIT C-I
Page 4
SCHEDULE OF BENEFITS PAYABLE
IMPAIRMENT COVERED SHARE OF BENEFIT AMOUNT *
1. Alzheimer's 25%
Disease
2. Blindness 25%
3. Cancer** 100%
(Life Threatening)
4. Coronary Artery 25%
Bypass Surgery
5. Coronary 10%
Angioplasty
6. Deafness 25%
7. Heart Attack 100%
8. Paralysis 100%
9. Stroke 100%
10. Death Return of Premiums***
EXHIBIT C-I
Page 5
* The Benefit Amount after age 65 is equal to 50% of the Current Benefit
Amount. For policies with issue ages 61 - 64, the benefit amount will
remain level for the first five (5) years, then will reduce by 50%.
** If the first diagnosis of breast cancer, testicular cancer or invasive
malignant melanoma occurs after the waiting period and before the policy
has been in force for 151 days, the benefit will be limited to 10% of the
benefit amount. Subsequent cancer claims will be paid only if the
subsequent cancer is determined to be new and unrelated to the previous
cancer.
*** A death benefit, equal to the sum of all premiums paid, without
interest, is payable provided that death occurs after the policy has been
in force for ten (10) years. (A limited death benefit of $500 payable if
death occurs during the first 10 policy years may be applicable in some
states.)
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<PAGE>
EXHIBIT D
THE COMPANY'S RETENTION AND ISSUE LIMITS
FOR CRITICAL ILLNESS
RETENTION LIMIT:
Thirty percent (30%) of each policy issued up to a maximum of $50,000 on any
one life.
ISSUE LIMIT:
$500,000 per life
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<PAGE>
EXHIBIT E
THE REINSURER'S ACCEPTANCE LIMITS
FOR CRITICAL ILLNESS
AUTOMATIC LIMIT:
To be mutually agreed upon at a later date. Initially all policies will be
issued on a facultative basis.
JUMBO LIMIT:
$500,000 inforce and applied for on any one life.
PARTICIPATION LIMIT:
$500,000 per life (maximum total inforce with all companies).
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<PAGE>
EXHIBIT F
REINSURANCE REPORTS
DATA NOTIFICATION: The Company shall send to the Reinsurer reports, in
substantial compliance with the Society of Actuaries Guidelines, at the times
indicated below:
REPORT FREQUENCY DUE DATE EXAMPLE REFERENCE
1. Policy Detail Report Monthly 21st Exhibit F, p. 2
(Reinsurance Ceded)
2. Accounting & Policy Monthly 21st Exhibit F, p. 3
Exhibit (Movement Summary)
3. Valuation Reserve Annually Jan. 10th Exhibit F, p. 4
Certification
4. Quarterly Valuation Quarterly 10 days Exhibit F, p. 4
Reserve after quarter
5. Tax Reserve Certification Annually June 1st Exhibit F, p. 5
NOTIFICATION OF ACCEPTANCE OF FACULTATIVE OFFER: The Company will advise the
Reinsurer of its acceptance of the Reinsurer's underwriting decision pertaining
to facultative business by sending written notice to the Reinsurer. The
Company shall provide the full details of the facultative new business on the
next Policy Detail Report.
ERRORS AND OMISSIONS: Should any items be inadvertently omitted from or
entered in error on a reinsurance report, such omissions or errors shall not
affect the liability of the Reinsurer in regard to any submission and the
mistakes shall be rectified upon discovery. This does not waive any rights
outlined in Article X.
RESERVES:
FIRST THREE QUARTERS' RESERVES: Actual reserve figures are required within
10 days after the close of each of the first 3 quarters. Any estimated figures
provided should be confirmed by actual reserve figures.
YEAR END RESERVES: The Company shall advise the Reinsurer by January 10th of
each year of the amount of reserves calculated on the reinsurance in force
under this Agreement as of December 31st of the preceding year and will also
indicate the valuation method used. These reserves shall be certified by the
Company's valuation actuary.
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<PAGE>
EXHIBIT F
Page 4
VALUATION RESERVE FOR
SELF-ADMINISTERED BUSINESS CEDED TO
THE MERCANTILE AND GENERAL LIFE REASSURANCE COMPANY
OF AMERICA
FROM (NAME OF COMPANY)
Inforce and Reserves at 19xx:
Plan: Type:
SM/NSM/AGGR/TOTAL
Inforce Reinsured Amount: _____________
Inforce Number of Policies: _____________
Valuation Reserve as at 19xx:
RESERVE RESERVE BASIS
TYPE AMOUNT ($) (TABLE, INTEREST
RATE AND METHOD)
Health
Substandard Life
Other (specify)
Total
As the valuation actuary of the above named company I certify that the
information above is correct as shown. *
Name:
Signature:
Actuarial Designation:
Title:
Date:
* Required only for Year End Valuation Reserves.
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<PAGE>
EXHIBIT F
Page 5
TAX RESERVE CERTIFICATION FOR
SELF-ADMINISTERED BUSINESS CEDED TO
THE MERCANTILE AND GENERAL LIFE REASSURANCE COMPANY
OF AMERICA
FROM (NAME OF COMPANY)
Inforce and Reserves at December 31, 19xx:
Plan: Type:
SM/NSM/AGGR/TOTAL
Inforce Reinsured Amount: _____________
Inforce Number of Policies: _____________
Tax Reserve as at December 31, 19xx:
RESERVE RESERVE BASIS
TYPE AMOUNT ($) (TABLE, INTEREST
RATE AND METHOD)
Health
Substandard Life
Other (specify)
Total
As the valuation actuary of the above named company I certify that the
information above is in compliance with the tax code.
Name:
Signature:
Actuarial Designation:
Title:
Date:
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<PAGE>
EXHIBIT G
DAC TAX ELECTION
Method of Exchanging Information
The Reinsurer and the Company agree to the DAC Tax Election and accordingly
will exchange information in the following manner:
1. The Reinsurer will submit a Schedule to the Company by May 1, of each
year, of its calculation of the net consideration (as referred to in
Article XII) for the preceding calendar year.
2. The Company, in turn, will complete the Schedule by indicating
acceptance of the Reinsurer's calculations of the net consideration or by
noting any discrepancies. The Company will return the completed Schedule
to the Reinsurer by June 1, of each year.
3. If there are any discrepancies between the Company's and the
Reinsurer's calculation of the net consideration, the parties will act in
good faith to resolve the discrepancies by July 1, of each year.
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STANDARD MANAGEMENT CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A CONVERTIBLE
REDEEMABLE PREFERRED STOCK
1. DESIGNATION, NUMBER OF SHARES AND STATED VALUE OF THE SERIES A
PREFERRED STOCK. There is hereby authorized and established a class of
preferred stock with the designation ASeries A Convertible Redeemable
Preferred Stock@ (the ASeries A Preferred Stock@). The number of shares
constituting the Series A Preferred Stock shall be 130,000, par value
$100.00 per share. The AStated Value@ of the Series A Preferred Stock
shall be $100.00 per share.
2. DIVIDENDS. The holders of shares of the Series A Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends at an annual rate of $7.75 per share, payable
quarterly, subject to appropriate adjustment in the event of any stock
split, reverse stock split or similar transaction. Dividends shall be
payable quarterly on the last day of each calendar quarter (commencing on
the first such date occurring after the date of issuance of such shares
[the "Issue Date"]). to shareholders of record as provided herein. All
dividend payments shall be made in lawful money of the United States of
America. Dividends payable on any Series A Preferred Stock for any period
less than a full year shall be computed on the basis of the actual number
of days elapsed over a 365-day year.
3. PREFERENCE ON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
before any payment or distribution of the assets of the Corporation
(whether capital or surplus), or proceeds thereof, shall be made to or set
apart for the holders of shares of any Junior Stock (as defined in Section
10), the holders of shares of the Series A Preferred Stock shall be
entitled to receive payment equal to the Stated Value per share held by
them, plus an amount in cash equal to all accumulated and unpaid dividends
thereon to the date of such payment, whether or not declared, subject to
appropriate adjustment in the event of any stock split, reverse stock split
or similar transaction with respect to the Series A Preferred Stock. If,
upon any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation, or proceeds thereof,
available for distribution among the holders of shares of Series A
Preferred Stock and any Parity Stock (as defined in Section 10) shall be
insufficient to pay in full the respective preferential amounts on shares
of the Series A Preferred Stock and such Parity Stock, then such assets, or
the proceeds thereof, shall be distributed among the holders of all such
stock ratably in accordance with the respective amounts which would be
payable on such shares if all amounts which would be payable thereon were
paid in full. After payment of the full amount of the liquidation
preference to which the holders of Series A Preferred Stock are entitled,
such holders will not be entitled to any further participation in any
distribution of assets of the Corporation. For the purposes of this
Section 2, neither the merger nor the consolidation of the Corporation into
or with another corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor the voluntary sale,
conveyance, exchange, transfer or other disposition (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property or assets of the Corporation, shall be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
4. CONVERSION.
(a) Each share of the Series A Preferred Stock shall be convertible
at the option of the holder thereof into fully paid and nonassessable
shares of Common Stock of the Corporation. The number of shares of Common
Stock deliverable upon conversion of a share of the Series A Preferred
Stock, adjusted as hereinafter provided, shall be equal to a fraction, the
numerator of which is the Stated Value of such shares of Series A Preferred
Stock plus all accumulated and unpaid dividends thereon, and the
denominator of which is $8.50, such fraction hereinafter referred to as the
AConversion Rate@. The Conversion Rate shall be subject to adjustment from
time to time pursuant to paragraph (e) of this Section 3.
(b) Conversion of the Series A Preferred Stock may be effected by any
such holder upon the surrender to the Corporation at the principal office
of the Corporation or at the office of any agent or agents of the
Corporation, as may be designated by the Board of Directors of the
Corporation, of the certificate for such shares of the Series A Preferred
Stock to be converted accompanied by a written notice stating that such
holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of this Section 3 and specifying the name in
which such holder wishes the certificate or certificates for shares of
Common Stock to be issued. In case such notice shall specify a name or
names other than that of such holder, such notice shall be accompanied by a
payment of all transfer taxes payable upon the issuance of shares of Common
Stock in such name or names. Other than such taxes, the Corporation shall
pay any and all issue and other taxes (other than taxes based or measured
on income) that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of the Series A Preferred Stock
pursuant hereto. As promptly as practicable, and in any event within five
(5) Business Days (as defined in Section 10) after the surrender of such
certificate or certificates and the receipt of such notice relating thereto
and, if applicable, payment of all transfer taxes (or the demonstration to
the satisfaction of the Corporation that such taxes have been paid) the
Corporation shall deliver or cause to be delivered (i) certificates
representing the number of validly issued, fully paid and nonassessable
full shares of Common Stock to which the holder of the shares of the
Series A Preferred Stock being converted shall be entitled and (ii) if less
than the full number of shares of the Series A Preferred Stock evidenced by
the surrender certificate or certificates is being converted, a new
certificate or certificates, of like tenor, for the number of shares
evidenced by such surrendered certificate or certificates less the number
of shares being converted. Such conversion shall be deemed to have been
made at the close of business on the date of giving of such notice and of
such surrender of the certificate or certificates representing the shares
of the Series A Preferred Stock to be converted so that the rights of the
holder thereof as to the shares being converted shall cease except for the
right to receive shares of Common Stock and cash in lieu of fractional
shares in accordance herewith, and the person entitled to receive the
shares of Common Stock shall be treated for all purposes as having become
the record holder of such shares of Common Stock at such time. The
Corporation shall not be required to convert, and no surrender of shares of
the Series A Preferred Stock shall be effective for that purpose, while the
transfer books of the Corporation for the Common Stock are closed for any
purpose (but not for any period in excess of ten (10) days); PROVIDED,
HOWEVER, that the surrender of shares of the Series A Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books, as
if the conversion had been made on the date such shares of the Series A
Preferred Stock were surrendered.
(c) In connection with the conversion of any shares of Series A
Preferred Stock, no fractional shares of Common Stock shall be issued, but
in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Market Price (as defined in Section 10) per share of
Common Stock on the Trading Day (as defined in Section 10) on which such
shares of the Series A Preferred Stock are deemed to have been converted.
If more than one share of Series A Preferred Stock shall be surrendered for
conversion by the same holder at the same time, the number of full shares
of Common Stock issuable on conversion thereof shall be computed on the
basis of the total number of shares of Series A Preferred Stock so
surrendered.
(d) The Corporation shall at all times reserve, and keep available
for issuance upon the conversion of the Series A Preferred Stock, such
number of its authorized but unissued shares of Common Stock as will from
time to time be sufficient to permit the conversion of all outstanding
shares of the Series A Preferred Stock, and shall take all action required
to increase the authorized number of shares of Common Stock if necessary to
permit the conversion of all outstanding shares of the Series A Preferred
Stock.
<PAGE>
(e) The Conversion Rate shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Issue Date (A) pay a dividend or make a distribution on
the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the
outstanding shares of Common Stock into a smaller number of shares or
(D) issue by reclassification of the shares of Common Stock any shares
of capital stock of the Corporation, then, and in each such case, the
Conversion Rate in effect immediately prior to such event or the
record date therefor, whichever is earlier, shall be adjusted so that
the holder of any shares of the Series A Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number of
shares of Common Stock or other securities of the Corporation that
such holder would have owned or have been entitled to receive after
the happening of any of the events described above, had such shares of
the Series A Preferred Stock been surrendered for conversion
immediately prior to the happening of such event or the record date
therefor, whichever is earlier. An adjustment made pursuant to this
clause (i) shall become effective (A) in the case of any such dividend
or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock
entitled to receive such dividend or distribution, or (B) in the case
of any such subdivision, reclassification or combination, at the close
of business on the day upon which such corporate action becomes
effective.
(ii) In case the Corporation shall at any time or from time to
time after the Issue Date declare, order, pay or make a dividend or
other distribution (including, without limitation, any distribution of
stock or other securities or property or rights or warrants to
subscribe for securities of the Corporation or any of its subsidiaries
by way of dividend or spin-off) on the Common Stock other than (A)
dividends or distributions payable in cash out of retained earnings of
the Corporation or (B) dividends or distributions of shares of Common
Stock that are referred to in clause (i) of this paragraph (e), then,
and in each such case, the Conversion Rate shall be adjusted so that
the holder of each share of Series A Preferred Stock shall be entitled
to receive, upon the conversion thereof, the number of shares of
Common Stock determined by multiplying (A) the applicable Conversion
Rate on the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive said dividend or
distribution by (B) a fraction, the numerator of which shall be the
Market Price per share of Common Stock for the twenty (20) consecutive
Trading Days immediately preceding such record date, and the
denominator of which shall be such Market Price per share of Common
Stock minus the Fair Market Value (as defined in Section 10) per share
of Common Stock of such dividend or distribution as determined in good
faith by the Board of Directors of the Corporation, whose
determination shall be conclusive and described in a statement to be
mailed to each holder of shares of the Series A Preferred Stock. An
adjustment made pursuant to this clause (ii) shall be made upon the
opening of business on the next Business Day following the day on
which any such dividend or distribution is made and shall be effective
retroactively, immediately after the close of business on the record
date fixed for the determination of stockholders entitled to receive
such dividend or distribution.
(iii) In case the Corporation shall issue to all holders of the
Common Stock rights, options or warrants entitling them to subscribe
for or purchase, or issue to such holders securities convertible into,
Common Stock at a price per share less than the Market Price per share
of Common Stock on the record date for the determination of
stockholders entitled to receive such rights, options, warrants or
convertible securities, then, and in each such case, the Conversion
Rate shall be adjusted so that the holder of each share of Series A
Preferred Stock shall be entitled to receive, upon the conversion
thereof, the number of shares of Common Stock determined by
multiplying (A) the applicable Conversion Rate on the day immediately
prior to such record date by (B) a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock
offered for subscription or purchase and the denominator of which
shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock that the
aggregate offering price of the total number of shares of Common Stock
so offered would purchase at such Market Price per share of Common
Stock. An adjustment made pursuant to this clause (iii) shall be made
on the next Business Day following the date on which any such issuance
is made and shall be effective retroactively immediately after the
close of business on such date. Upon the expiration of such rights,
options or warrants, upon such convertible securities ceasing to be
convertible into Common Stock or upon the repurchase or redemption of
any thereof, the adjustment to the Conversion Rate which was made upon
the issuance thereof, any subsequent adjustments based thereon, shall
be recomputed to reflect the issuance of only the number of rights,
options or warrants to subscribe for or purchase only the number of
shares of Common Stock as to which such rights, options or warrants
were actually exercised, or only the number of shares of Common Stock
which were actually issued upon conversion of such convertible
securities, as the case may be. Notwithstanding anything in this
clause (iii) to the contrary, the issuance of any shares of Common
Stock or the granting of any options to acquire any shares of Common
Stock to any employee, officer, director or consultant of the
Corporation under the Corporation's Second Amended and Restated 1992
Stock Option Plan, or such other employee benefit or stock option
plans as may be approved by the Board of Directors of the Corporation,
shall not be deemed to constitute the issuance of rights, options,
warrants or convertible securities by the Corporation to which this
clause (iii) applies.
(iv) In case of any consolidation or merger to which the
Corporation is a party (other than a merger or consolidation in which
the Corporation is the surviving or continuing corporation and in
which the Common Stock outstanding immediately prior to the merger or
consolidation remains unchanged), each share of the Series A Preferred
Stock shall thereafter be convertible into shares of stock or other
securities or property into which a holder of Common Stock immediately
prior to such merger, combination or reclassification would have been
entitled upon such merger, combination or reclassification. In any
such case, appropriate adjustment (as determined by the Board of
Directors in good faith) shall be made in the application of the
provisions herein set forth with respect to the rights and interests
thereafter of the holders of Series A Preferred Stock, such that the
provisions set forth herein shall thereafter be applicable, as nearly
as reasonably may be, in relation to any share of stock or other
property thereafter issuable upon conversion.
(v) No adjustment in the Conversion Rate shall be required unless
such adjustment would require an adjustment of at least one percent
(1%) in such Conversion Rate price; PROVIDED, HOWEVER, that any
adjustment that pursuant to this clause (v) is not required to be made
shall be carried forward and taken into account in any subsequent
adjustment.
(f) Upon any adjustment of the Conversion Rate pursuant to paragraph
(e) of this Section 3, the Corporation, within thirty (30) calendar days
thereafter, shall have on file for inspection by the holders of the
Series A Preferred Stock a certificate of the Board of Directors of the
Corporation setting forth (i) the Conversion Rate after such adjustment,
(ii) the method of calculation and the facts upon which such calculations
are based and (iii) the number of shares of Common Stock purchasable upon
conversion of a share of the Series A Preferred Stock after such adjustment
in the Conversion Rate, which certificate shall be conclusive evidence of
the correctness of the matters set forth therein.
5. REDEMPTION BY THE CORPORATION OF SERIES A PREFERRED STOCK.
(a) OPTIONAL REDEMPTION.
(i) No shares of Series A Preferred Stock shall be
redeemable by the Corporation prior to July 1, 1999 (the AInitial
Redemption Date@),PROVIDED, HOWEVER, that if prior to the Initial
Redemption Date the average of the closing prices of the Common
Stock of the Corporation on NASDAQ as reported in the WALL STREET
JOURNAL for any 10 trading days within a 30 consecutive trading
day period, equals or exceeds $10.29 per share (the ATriggering
Event@), the date on which the Triggering Event occurs shall
become the Initial Redemption Date.
(ii) The Corporation may, at the option of the Board of
Directors of the Corporation, at any time between the Initial
Redemption Date and the Mandatory Redemption Date (the AOptional
Redemption Date@) redeem, from any source of funds legally
available therefor, all shares of the Series A Preferred Stock
outstanding on the Optional Redemption Date at the following
redemption prices (the AOptional Redemption Price@) (expressed as
percentages of the Stated Value per share), if such redemption
occurs during the twelve month period beginning July 1 of the
years indicated below:
YEAR OPTIONAL REDEMPTION PRICE
1999 105%
2000 104%
2001 103%
2002 102%
2003 and thereafter 100%
in each case together with any and all accumulated and unpaid
dividends thereon as of the Optional Redemption Date. Shares of
Series A Preferred Stock redeemed pursuant to this Section 4 (ii)
shall be redeemed in accordance with Section 4 (iii).
(iii) At least twenty (20) days and not more than sixty (60)
days prior to the Optional Redemption Date, written notice (the
AOptional Redemption Notice@) shall be mailed, postage prepaid, to
each holder of record of the Series A Preferred Stock at the post
office address last shown on the records of the Corporation for such
holder. The Optional Redemption Notice shall state:
(1) that all the outstanding shares of
Series A Preferred Stock are to be redeemed;
(2) the Optional Redemption Date and
the Optional Redemption Price; and
(3) that the holder is to surrender to
the Corporation, in the manner and at the place
designated, his certificate or certificate representing
the shares of Series A Preferred Stock to be redeemed.
(i) On or before the Optional Redemption Date,
each holder of Series A Preferred Stock shall surrender to
the Corporation the certificate or certificates representing
the shares of Series A Preferred Stock to be redeemed, in
the manner and at the place designated in the Optional
Redemption notice, and thereupon the Optional Redemption
Price for such shares shall be payable in cash on the
Optional Redemption Date to the person whose name appears on
such certificate or certificates as the owner thereof, and
each surrendered certificate shall be cancelled and retired.
(ii) Unless the Corporation defaults in the
payment in full of the Optional Redemption Price, dividends
on the Series A Preferred Stock called for redemption shall
cease to accumulate on the Optional Redemption Date, and all
rights of the holders of such shares redeemed shall cease
with respect thereto on the Optional Redemption Date, other
than the right to receive the Optional Redemption Price
without interest.
(b) MANDATORY REDEMPTION
(i) The Corporation shall, at the Stated Value per share
redeemed plus an amount equal to the accumulated and unpaid dividends
through the Mandatory Redemption Date (the AMandatory Redemption
Price@), redeem, using any source of funds legally available therefor,
all shares of Series A Preferred Stock outstanding on July 1, 2003
(the AMandatory Redemption Date@). The Mandatory Redemption shall be
carried out pursuant to the procedures for redemption set forth in
Section 4(a) above, except that for purposes of a Mandatory
Redemption, all references to Optional Redemption Date and Optional
Redemption Price shall be deemed to be Mandatory Redemption Date and
Mandatory Redemption Price, respectively. If the Mandatory Redemption
Date is not a Business Day, the shares of Series A Preferred Stock
outstanding on the Redemption Date shall be redeemed on the next
Business Day thereafter.
(ii) If there are insufficient legally available funds for
redemption of all shares of Series A Preferred Stock pursuant to this
Section 5(b), the Corporation shall redeem such lesser number of full
shares of Series A Preferred Stock on a pro rata basis in proportion
to the number of shares of Series A Preferred Stock held by each
holder thereof, to the extent there are funds legally available
therefor, and shall redeem all or part of the remainder of the shares
of Series A Preferred Stock subject to redemption as soon as the
Corporation has sufficient funds which are legally available therefor.
If the redemption is delayed because of insufficient legally available
funds, dividends shall continue to accrue on shares of Series A
Preferred Stock outstanding, and shall be added to and become a part
of the Mandatory Redemption Price of such shares, until the Mandatory
Redemption Price for such shares is paid in full.
(c) DEPOSIT OF FUNDS. The Corporation's obligation to provide
funds upon redemption in accordance with this Section 4 shall be deemed
fulfilled if, on or before the Optional Redemption Date or the Mandatory
Redemption Date, as applicable, the Corporation shall irrevocably deposit,
with a bank or trust company or shall otherwise set aside or make other
reasonable provision for the payment of cash required to be made by the
Corporation pursuant to this Section 4. Upon such a deposit, all
certificates representing shares of Series A Preferred Stock shall be
deemed redeemed. Any interest accrued on such funds shall be paid to the
Corporation from time to time. Any funds unclaimed at the end of one year
from the Optional Redemption Date or the Mandatory Redemption Date, as
applicable, shall be repaid and released to the Corporation, after which
the holder or holders of such shares of Series A Preferred Stock called for
redemption shall look only to the Corporation for delivery of such funds.
6. REPURCHASE UPON CHANGE OF CONTROL. If a Change of Control (as
defined below) occurs, the Corporation shall offer to repurchase all of the
Series A Preferred Stock pursuant to an offer (the AChange of Control
Offer@) at a purchase price equal to the Stated Value of such shares plus
all accumulated and unpaid dividends thereon, if any, to the date of
purchase.
A AChange of Control@ means the occurrence of any of the following
events after the Issue Date (i) any person or group (within the meaning of
Section 13(d) or Section 14(d) of the Securities Exchange Act of 1934, as
amended (the AExchange Act@)), becomes the direct or indirect beneficial
owner of shares of capital stock of the Corporation representing greater
than 50% of the combined voting power of all outstanding shares of capital
stock of the Corporation entitled to vote in the election of directors
under ordinary circumstances; (ii) subject to certain exceptions, the
Corporation consolidates with or merges into any other entity and the
outstanding Common Stock is changed or exchanged as a result; (iii) sale,
transfer or other disposition of a majority of the assets of the
Corporation or of the collective assets of the Corporation and the
subsidiaries; (iv) at any time the Continuing Directors (as defined below)
cease to constitute a majority of the Board of Directors of the Corporation
then in office; or (v) on any day the Corporation makes any distribution of
cash, property or securities (other than regular dividends declared in the
ordinary course, Common Stock, preferred stock which is substantially
equivalent to Common Stock or rights to acquire Common Stock or preferred
stock which is substantially equivalent to Common Stock) to holders of
Common Stock, or the Corporation or any of its subsidiaries purchases or
otherwise acquires Common Stock, and the sum of the Fair Market Value of
such cash, property or securities distributed or Common Stock purchased on
the date the same is made, plus the Fair Market Value, when made, of all
other cash, property or securities so distributed or Common Stock so
purchased which have occurred during the 12 month period ending on the such
date, in each case expressed as a percentage of the aggregate Market Price
of all of the shares of Common Stock outstanding at the close of business
on the last day prior to the day prior to the date of such distribution of
purchase, exceeds 50%. AContinuing Director@ means at any date a member of
the Board of Directors of the Corporation (i) who was a member of such
Board on the Issue Date or (ii) who was nominated or elected by at least
two-thirds of the directors who were Continuing Directors at the time of
such nomination or election or whose election to the Board of Directors of
the Corporation was recommended or endorsed by at least two-thirds of the
directors who were Continuing Directors at the time of such election.
Notwithstanding the foregoing, a Change of Control under clause (ii) above
will not include any transaction or Series of related transactions in which
85% or more of the consideration received by the holders of the Series A
Preferred Stock (assuming conversion of such shares immediately after such
transaction) consists of common stock that is listed on a national
securities exchange or approved for quotation on the NASDAQ National
Market.
Within 30 days after any Change of Control, unless the Corporation has
previously given a notice of optional redemption by the Corporation of all
of the Series A Preferred Stock, the Corporation shall give a notice of the
Change of Control Offer to each holder of the Series A Preferred Stock at
such holder's address as last shown on the records of the Corporation
stating: (i) that a Change of Control has occurred and that the Corporation
is offering to repurchase all of holder's Series A Preferred Stock; (ii) a
brief description of such Change of Control; (iii) the repurchase price
(the AChange of Control Payment@); (iv) the expiration date of the Change
of Control Offer, which shall be no earlier than 30 days nor later than 60
days from the date such notice is mailed; (v) the date such purchase shall
be effected, which shall be no later than 30 days after expiration date of
the Change of Control Offer; (vi) a statement that any shares of Series A
Preferred Stock not accepted for payment pursuant to the Change of Control
Offer shall continue to accrue dividends; (vii) a statement that unless the
Corporation defaults in the payment of the Change of Control Payment, all
shares of Series A Preferred Stock accepted for payment pursuant to the
Change of Control Offer shall cease to accrue dividends after the Change of
Control Payment Date; (viii) the name and address of the paying agent;
(ix) a statement that shares of Series A Preferred Stock must be
surrendered to the paying agent to collect the Change of Control Payment;
and (x) any other information required by applicable law to be included
therein.
In the event that the Corporation is required to make a Change of
Control Offer, the Corporation will comply with any applicable securities
laws and regulations, including, to the extent applicable, Section 14(e) of
and Rule 14e-1 and any other tender offer rules under the Exchange Act.
7. VOTING RIGHTS. The holders of the Series A Preferred Stock,
except as required by law or any provision of the Articles of Incorporation
for the Corporation, shall not be entitled or permitted to vote on any
matter required or permitted to be voted upon by the stockholders of the
Corporation.
8. CERTAIN RESTRICTIONS.
(a) Whenever the Corporation shall fail to redeem in full all
outstanding shares of Series A Preferred Stock on the Mandatory Redemption
Date for the Mandatory Redemption Price thereof as provided in Section 4,
thereafter and until all shares of the Series A Preferred Stock are
redeemed in full for the Mandatory Redemption Price thereof, the
Corporation shall not: (i) declare or pay any dividends, or make any other
distributions on, any shares of Junior Stock (as hereinafter defined),
other than dividends or distributions payable in Junior Stock, (ii) declare
or pay any dividends, or make any other distributions, on any share of
Parity Stock, except dividends or distributions paid ratably on the
Series A Preferred Stock and all Parity Stock on which dividends are
payable or in arrears, in proportion to the total amounts to which the
holders of all shares of the Series A Preferred Stock and such Parity Stock
are then entitled or (iii) redeem, purchase or otherwise acquire for
consideration any shares of Junior Stock or Parity Stock.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of capital stock of the Corporation unless the Corporation could, pursuant
to paragraph (a) of this Section 7, purchase such shares at such time and
in such manner.
9. REGISTRATION RIGHTS.
(a) At any time after July 1, 1999, the holders of 51% or more
of the shares of Series A Preferred Stock may demand registration under the
Securities Act of 1933, as amended (the ASecurities Act@) of all or any
portion of the Common Stock into which the Series A Preferred Stock can be
converted and shares of Common Stock distributed as dividends on or through
the conversion the Series A Preferred Stock (collectively, the "Restricted
Securities"). Upon such demand, the Corporation will prepare and file with
the Securities and Exchange Commission (ASEC@) a registration statement (a
ARegistration Statement@) and use its best efforts to cause the SEC to
declare the Registration Statement effective under the Securities Act. The
Corporation will, in the event a Registration Statement is filed, among
other things, provide to each holder for whom such Registration Statement
was filed, copies of the prospectus which is a part of the Registration
Statement, notify each such holder when the Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of such Restricted Securities. A holder selling such
securities pursuant to the Registration Statement generally would be
required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, and will be subject to certain
of the civil liability provisions under the Securities Act in connection
with such sales. All costs incurred in connection with the filing of the
Registration Statement shall be borne by the Corporation, except that the
underwriting commissions shall be paid by the holders in proportion to any
Restricted Securities to be included on their behalf.
(b) If, but without any obligation to do so, the Corporation
proposes to register any of its Common Stock under the Securities Act in
connection with the public offering of such securities (other than the
registration of securities to be offered pursuant to an employee benefit
plan on Form S-8, a registration made on Form S-4, or on any successor
forms then in effect) the Corporation shall, at such time, promptly give
the holders of shares of Series A Preferred Stock written notice of such
registration. Upon the written request of any such holder given within
twenty (20) days after receipt of such notice, the Corporation shall cause
to be registered under the Securities Act all of the Restricted Securities
that such holder has requested to be registered. Except that the
underwriting commissions shall be paid by the holders in proportion to any
Restricted Securities to be included on their behalf, the Corporation shall
bear and pay all expenses incurred in connection with any registration,
filing or qualification of Restricted Securities with respect to the
registrations pursuant to this Section 8(b).
10. REISSUANCE OF SHARES OF SERIES A PREFERRED STOCK. Any shares of
Series A Preferred Stock that have been issued and have been redeemed,
repurchased or reacquired in any manner by the Corporation shall have the
status of authorized and unissued shares of preferred stock, undesignated
as to class, and may thereafter be reissued as part of a new class, as
permitted by law.
11. DEFINITIONS. For the purposes of this Amendment to the Articles
of Incorporation, the following terms shall have the meanings indicated:
ABusiness Day@ means any day that is not a Saturday or a Sunday or a
day on which banking institutions in the State of Indiana are authorized by
law or executive order to close.
AFair Market Value@ shall mean the amount that a willing buyer would
pay a willing seller in an arm's length transaction.
AJunior Stock@ shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock. Junior Stock shall include the Common
Stock.
AMarket Price@, when used with reference to shares of Common Stock or
other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date or, if such price is
determined over a period, the average of the daily closing prices per share
of Common Stock or such other securities for such period; PROVIDED,
HOWEVER, that in the event that the Market Price is determined during a
period following the ex-dividend date or the record date in connection with
an event triggering an adjustment pursuant to Sections 3 (e) (ii) and (iii)
hereof, then, and in each such case, the Market Price shall be
appropriately adjusted to reflect the ex-dividend Market Price per share
equivalent of the Common Stock. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New
York Stock Exchange or, if the Common Stock or such other securities are
not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which the Common Stock or such other securities are listed or admitted
to trading or, if the Common Stock is not listed or admitted to trading on
any national securities exchange, the last quoted sale price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use,
or, if on any such date the Common Stock or such other securities are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Common Stock or such other securities selected by the Board of Directors of
the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, AMarket Price@ shall mean
the Fair Market Value per share of Common Stock or of such other securities
as determined in good faith by the Board of Directors of the Corporation.
AParity Stock@ shall mean any capital stock of the Corporation ranking
on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock. Parity Stock shall not
include the Common Stock.
ATrading Day@ means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open
for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Business Day.
12. SEVERABILITY OF PROVISIONS. If any right, preference or
limitation of the Series A Preferred Stock set forth herein is deemed
invalid, unlawful or incapable or being enforced by reason of any rule of
law or public policy, such right, preference or limitation shall be
enforced to the maximum extent permitted by law and all other rights,
preferences and limitations set forth herein, which can be given effect
without the invalid, unlawful or unenforceable right, preference or
limitation shall, nevertheless, remain in full force and effect, and no
right, preference or limitation herein set forth shall be deemed dependent
upon any other such right, preference or limitation unless so expressed
herein.
13. REPORTS. So long as any of the Series A Preferred Stock is
outstanding, the Corporation will furnish the holders thereof with any
annual financial statements regularly prepared by or for the Corporation.
14. HEADINGS. The headings of the sections herein are for
convenience of reference only and shall not affect the interpretation of
any of the provisions hereof.
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