SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[*] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-20882
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
Indiana No. 35-1773567
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9100 Keystone Crossing, Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [*] No [ ]
As of May 3, 1999, the Registrant had 7,556,070 shares of Common Stock
outstanding.
<PAGE>
STANDARD MANAGEMENT CORPORATION
INDEX
PAGE
NUMBER
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1999 (Unaudited) and December 31, 1998 (Audited) 3
Consolidated Statements of Income --
For the Three Months Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows --
For the Three Months Ended March 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
<S> <C> <C>
1999 1998
(UNAUDITED) (AUDITED)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost: $560,280 in 1999
and $547,115 in 1998) $553,157 $551,312
Equity securities, at fair value (cost: $1,270 in 1999 and $1,498 in 1998) 1,298 1,316
Mortgage loans on real estate 9,504 8,578
Policy loans 14,855 15,019
Real estate 3,441 3,435
Other invested assets 943 837
Short-term investments 22,163 11,626
Total investments 605,361 592,123
Cash 6,578 13,591
Accrued investment income 9,089 9,563
Amounts due and recoverable from reinsurers 77,484 76,897
Costs of policies produced 41,862 32,946
Costs of policies purchased 29,271 28,793
Goodwill 5,824 5,886
Other assets 5,310 6,105
Assets held in separate accounts 222,256 190,246
Total assets $1,003,035 $956,150
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $661,658 $638,435
Accounts payable and accrued expenses 7,812 12,277
Notes payable 35,000 35,000
Deferred federal income taxes 6,283 7,620
Liabilities related to separate accounts 222,256 190,246
Total liabilities 933,009 883,578
Series A convertible redeemable preferred stock, par value $100 per share;
authorized 130,000; 65,300 issued and outstanding in 1998 and 1999 6,530 6,530
Shareholders' Equity:
Preferred stock, no par value:
authorized 870,000 shares; none issued and outstanding -- --
Common stock and additional paid in capital, no par value:
authorized 20,000,000 shares; issued 8,802,313 in 1999 and 8,802,313 in 61,110 60,586
1998
Treasury stock, at cost, 1,243,143 shares in 1999 and 1,160,859 shares in 1998 (6,750) (6,220)
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale, net taxes (benefits) of: (2,204) 1,660
1999 - $(1,135) 1998 - $765
Unrealized gain on other investments, net taxes of: 1999 - $86 1998 - $12 166 23
Foreign currency translation adjustment, net taxes of: 1999 - $20 1998 - 38 4
$2
Retained earnings 11,136 9,989
Total shareholders' equity 63,496 66,042
Total liabilities and shareholders' equity $1,003,035 $956,150
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
<S> <C> <C>
MARCH 31
1999 1998
Revenues:
Life premiums $3,064 $1,980
Net investment income 10,476 7,386
Net realized investment gains 17 21
Policy income 1,629 1,358
Negative goodwill amortization -- 347
Fees from separate accounts 478 292
Other income 1,277 291
Total revenues 16,941 11,675
Benefits and expenses:
Life benefits and claims 3,244 1,610
Interest credited on interest-sensitive annuities and
other financial products 5,836 4,219
Amortization 1,501 1,011
Other operating expenses 3,862 3,032
Interest expense and financing costs 882 657
Total benefits and expenses 15,325 10,529
Income before federal income taxes and preferred stock dividends 1,616 1,146
Federal income tax expense 319 398
Net income 1,297 748
Preferred stock dividends (127) --
Earnings available to common shareholders $1,170 $748
Earnings per share - basic:
Net income $.17 $.14
Preferred stock dividends (.02) --
Earnings available to common shareholders .15 $.14
Earnings per share - diluted:
Net income $.16 $.13
Preferred stock dividends (.01) --
Earnings available to common shareholders $.15 $.13
</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>
Common
stock and Accumulated
additional other
paid-in Treasury comprehensive Retained
Total capital stock income earnings
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $43,313 $40,646 $(4,572) $1,698 $5,541
Comprehensive income:
Net income 748 748
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net taxes (benefits) (54) (54)
of $(29)
Change in foreign currency,
net taxes (benefits) of $(163) (117) (117)
Other comprehensive income (171)
Comprehensive income 577
Issuance of common stock for Savers Life 14,937 14,937
acquisition
Issuance of common stock warrants 30 30
Issuance of common stock in connection with
exercise of stock warrants 28 28
Treasury stock acquired (28) (28)
Conversion of preferred stock into common 4 4
stock
Reissuance of treasury stock in connection
with exercise of stock options 5 5
Balance at March 31, 1998 $58,866 $55,645 $(4,595) $1,527 $6,289
Balance at January 1, 1999 $66,042 $60,586 $(6,220) $1,687 9,989
Comprehensive income:
Net income 1,297 1,297
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net taxes (benefits) of
$(1,917) (3,721) (3,721)
Change in foreign currency, net taxes
of $18 34 34
Other comprehensive income (3,687)
Comprehensive income (2,390)
Issuance of common stock warrants 524 524
Treasury stock acquired (530) (530)
Reissuance of treasury stock in connection
with exercise of stock options (23) (23)
Preferred stock dividends (127) (127)
Balance at March 31, 1999 $63,496 $61,110 $(6,750) $(2,000) $11,136
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C>
March 31
1999 1998
OPERATING ACTIVITIES
Net income $1,297 $748
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 862 586
Policy acquisition costs deferred (5,857) (2,069)
Deferred federal income taxes 490 467
Depreciation and amortization 1,202 252
Insurance policy liabilities 2,776 1,977
Net realized investment gains (17) (21)
Accrued investment income 473 451
Other 109 (1,648)
Net cash provided by operating activities 1,335 743
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (65,760) (61,724)
Sales 48,777 43,737
Maturities, calls and redemptions 3,588 7,548
Short-term investments, net (10,537) 10,142
Other investments, net (1,029) (664)
Purchase of Savers Life Insurance Company, less cash acquired of $518 -- (16,538)
Net cash used by investing activities (24,961) (17,499)
FINANCING ACTIVITIES
Issuance of common stock, net -- 14,937
Borrowings, net of debt issuance costs of $86 in 1998 -- 3,914
Repayments on long term debt and obligations under capital lease (341) (153)
Premiums received on interest-sensitive annuities and other financial
products credited to policyholder account balances, net of premiums ceded 35,034 14,222
Return of policyholder account balances on interest-sensitive annuities
and other financial products, net of premiums ceded (18,074) (9,419)
Reissuance of treasury stock in connection with exercise of stock options 524 57
and warrants
Purchase of common stock for treasury (530) (28)
Net cash provided by financing activities 16,613 23,530
Net increase (decrease) in cash (6,319) 6,774
Cash at beginning of period 13,591 4,165
Cash at end of period $6,578 $10,939
</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 management's opinion, the information contained in this
report reflects all adjustments, of a normal recurring nature, necessary to
fairly present the results of operations for the interim periods. Certain
amounts from prior periods have been reclassified to conform to the 1999
presentation. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods presented.
The nature of the insurance business of Standard Management Corporation
and its consolidated subsidiaries (the "Company" or "SMC") 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. If future experience
differs materially from these estimates and assumptions, the Company's
financial statements could be affected.
The consolidated financial statements in this report, include the assets
and liabilities and results of operations of Savers Life Insurance Company
("Savers Life") and Midwestern National Life Insurance Company of Ohio
("Midwestern Life") from their acquisition dates of March 12, 1998 and October
30, 1998, respectively.
For further information, refer to the consolidated financial statements
and related footnotes included in the Annual Report on Form 10-K for the year
ended December 31, 1998.
NOTE 2 -- ACQUISITIONS
The following are supplemental unaudited pro forma consolidated results
of operations of the Company as if the acquisitions of Savers Life and
Midwestern Life had occurred on January 1, 1998 (in thousands, except per share
amounts). The following 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
amounts are not necessarily indicative of the results of operations had these
transactions occurred on January 1, 1998, or the results of future operations.
Three Months Ended
MARCH 31
1998
Revenues $20,178
Net income 664
Earnings per share - basic 0.09
Earnings per share - diluted 0.08
NOTE 3 -- NOTES PAYABLE
Notes payable of the Company were as follows (in thousands):
<TABLE>
<CAPTION>
Interest March 31 December 31
Rate 1999 1998
<S> <C> <C> <C>
Borrowings under revolving credit 8.36%{ (1)} $25,000 $25,000
agreements
Senior subordinated convertible notes 10.00% 10,000 10,000
due 2004
$35,000 $35,000
</TABLE>
(1) Current weighted average rate at March 31, 1999.
NOTE 4 -- NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain on
securities available for sale" in shareholders' equity are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
<S> <C> <C>
Fair value of securities available for sale $554,455 $552,628
Amortized cost of securities available for sale 561,550 548,613
Gross unrealized gain (loss) on securities available (7,095) 4,015
for sale
Adjustments for:
Deferred policy acquisition costs 2,921 (1,101)
Present value of future profits 835 (489)
Deferred federal income tax liability 1,135 (765)
Net unrealized gain (loss) on securities available $(2,204) $1,660
for sale
</TABLE>
NOTE 5 -- EARNINGS PER SHARE
A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended
<S> <C> <C> <C>
March 31
1999 1998
INCOME:
Net income $1,297 $748
Preferred stock dividends (127) --
Income available to common shareholders for basic earnings 1,170 748
per share
Effect of dilutive securities:
Preferred stock dividends 127 --
Interest on subordinated convertible debt 250 --
Income available to common shareholders for diluted earnings $1,547 $748
per share
SHARES:
Weighted average shares outstanding for basic earnings 7,596,405 5,322,065
per share
Effect of dilutive securities:
Stock options 168,053 269,776
Stock warrants 131,827 285,127
Subordinated convertible debt 1,740,038 -
Dilutive potential common shares 2,039,918 554,903
Weighted average shares outstanding for diluted earnings 9,636,323 5,876,968
per share
</TABLE>
The senior subordinated convertible notes were not included in the 1998
computation of diluted earnings per share because the effect was not dilutive.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion highlights the
material factors affecting the results of operations and the significant
changes in balance sheet items. Changes in 1999 and 1998 balances in the
consolidated financial statements are largely affected by the acquisitions of
Savers Life and Midwestern Life and various financings described in the notes
to the consolidated financial statements included in this report and the notes
to the consolidated financial statements included in the 1998 Form 10-K. This
discussion should be read in conjunction with both sets of consolidated
financial statements.
FIRST THREE MONTHS OF 1999 COMPARED WITH THE FIRST THREE MONTHS OF 1998:
The following tables and narratives summarize the results of operations by
operating segment.
<TABLE>
<CAPTION>
Three months ended
March 31
<S> <C> <C>
1999 1998
(Dollars in thousands)
Operating income before income taxes:
Domestic operations $1,328 $626
International operations 271 499
Consolidated operating income before income taxes 1,599 1,125
Applicable income taxes related to operating income 313 391
Consolidated operating income after taxes 1,286 734
Consolidated realized investment gains before income taxes 17 21
Applicable income taxes related to realized investment gains 6 7
Consolidated realized investment gains after taxes 11 14
Net income $1,297 $748
</TABLE>
CONSOLIDATED RESULTS AND ANALYSIS
SMC's first quarter 1999 operating earnings
were $1.3 million, or 16 cents per diluted share, up 75% and 33%, respectively,
over first quarter 1998. Operating earnings increased due to i) increased net
spread revenue, ii) increased administrative fees and policy income earned and
iii)economies of scale achieved through the acquisitions of Savers Life and
Midwestern Life. These increases were somewhat offset by i)the elimination
of negative goodwill amortization, ii)unfavorable mortality, iii)increased DAC
and PVP amortization and iv) increased interest expense. The percentage
increase in operating earnings was greater than the percentage increase in
operating earnings per diluted share primarily because of the 64% increase in
weighted average diluted common shares or equivalents outstanding during the
period. This increase in weighted average shares outstanding resulted primarily
from shares issued in connection with the acquisitions of Savers Life and
Midwestern Life.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
DOMESTIC OPERATIONS:
<TABLE>
<CAPTION>
Three months ended
March 31
<S> <C> <C>
1999 1998
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $3,058 $1,952
FPDA's 21,800 12,867
Equity-indexed annuities 11,196 --
Other annuities and deposits 1,431 545
Universal and interest-sensitive life 607 810
Subtotal - interest sensitive and 35,034 14,222
financial products
Total premiums and deposits collected $38,092 $16,174
Life premiums $3,058 $1,952
Policy income 1,629 1,358
Total policy related income 4,687 3,310
Net investment income 10,213 7,150
Other income 1,269 176
Total revenues (a) 16,169 10,636
Life benefits and claims 3,302 1,620
Interest credited on interest sensitive annuities and
other financial products 5,836 4,219
Amortization 1,501 1,011
Other operating expenses 3,320 2,503
Interest expense and financing costs 882 657
Total benefits and expenses 14,841 10,010
Operating income before income taxes 1,328 626
Net realized investment gains 17 21
Income before income taxes $1,345 $647
</TABLE>
(a) Revenues exclude net realized investment gains
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
GENERAL: This segment consists of revenues earned and expenses incurred from
United States operations which includes deposits from annuity products
(primarily FPDAs), equity indexed products, universal life products and
traditional life products. The profitability for this segment is primarily a
function of its investment spread earned (i.e. the excess of investment
earnings over interest credited on annuity and universal life deposits),
persistency of the in-force business, mortality experience and operating
expenses. Domestic operations include SMC and its U.S. consolidated
subsidiaries.
PREMIUM INCOME consists of premiums earned from i) traditional life insurance
and ii) annuity business that incorporates significant mortality features.
<circle>Life premiums were up $1.1 million or 57% in first quarter 1999, to
$3.1 million. Traditional life premiums increased primarily due to renewal
premiums from the insurance blocks of Savers Life and Midwestern Life.
NET PREMIUM DEPOSITS consist of FPDA's, equity-indexed annuities, interest
sensitive annuities and other financial products that do not incorporate
significant mortality features. For GAAP these premium deposits are not shown
as premium income in the income statement. Furthermore, a change in premium
deposits in a single period does not directly cause operating income to change,
although continued increases or decreases in premiums may affect the growth
rate of total assets on which investment spreads are earned.
<circle>The first quarter 1999 net premium deposits increased $20.8 million or
146%, to $35.0 million. The increase relates to i) an increase in the
agency base achieved through the recruitment of high volume agents and
larger managing general agencies, ii) continued expansion of geographical
concentration, and iii) the introduction of a new equity-indexed annuity
product in May, 1998 which contributed $11.2 million of premium deposits for
the first quarter of 1999.
NET INVESTMENT INCOME fluctuates with changes in i) the amount of average
invested assets supporting insurance liabilities and ii) the yield earned on
invested assets.
<circle>In the first quarter 1999 net investment income increased $3.1 million
or 43%, to $10.2 million. Average invested assets increased by $175.5
million or 42% compared to first quarter 1998 period due to the growth in
insurance liabilities from the acquisitions of Savers Life and Midwestern
Life. This increase was somewhat offset by a decline in net investment
yields for the period.
<circle>The net investment yields earned on average invested assets were 6.94%
and 7.55% for the first quarter of 1999 and 1998, respectively.
POLICY INCOME represents mortality charges, administrative fees and surrender
charges related to universal life and annuity policies.
<circle>Policy income increased $.3 million or 20% to $1.6 million in the first
quarter 1999. This increase primarily relates to surrender charges received
as a result of lowering crediting rates on certain FPDA products.
OTHER INCOME consists of fee income related to servicing blocks of business for
other insurance companies, experience refunds, and commission income.
<circle>In the first quarter of 1999 other income increased $1.1 million to
$1.3 million. This increase primarily relates to $.8 million of fees
received in connection with a three-year service agreement entered into by
Savers Marketing in October 1998.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
BENEFITS AND CLAIMS include i) paid life insurance, ii) benefits from annuity
policies that incorporate significant mortality features, and iii) changes in
future policy reserves. Throughout the Company's history, it has experienced
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 claim experience tend to offset periods of lower claims experience.
Changes in benefits and claims should be analyzed along with changes in premium
income.
<circle>Benefits and claims increased $1.7 million to $3.3 million due to an
increased block of in-force life insurance business resulting from the
acquisitions of Savers Life and Midwestern Life.
INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL PRODUCTS
represents interest credited to the FPDA's, indexed-annuities, interest
sensitive and other financial products.
<circle>In the first quarter 1999 interest credited increased $1.6 million or
38%, to $5.8 million due to $1.4 million of interest credited on the
insurance liabilities of Savers Life and Midwestern Life. This line was also
impacted by credited interest on insurance liabilities from sales in recent
periods and somewhat offset by a decline in crediting rates.
<circle>The weighted average credited rates for first quarter 1999 and 1998
were 4.82% and 5.56%, respectively.
AMORTIZATION includes i) amortization related to the present value of polices
purchased, ii) amortization of deferred acquisitions costs and iii)
amortization of goodwill and organizational costs.
<circle>First quarter 1999 amortization increased $.5 million or 48%, to $1.5
million. This increase relates to additional amortization of the present
value of future profits and deferred acquisition costs for the first quarter
of 1999 due to the recognition of additional profits for the period.
Additional profits were recognized from i) the realization of profits from
the increased sales of annuity products in recent periods and ii) the
realization of profits from the purchased insurance business from Savers
Life and Midwestern Life.
OTHER OPERATING EXPENSES consist of recurring general operating expenses and
commission expenses, net of deferrable amounts.
<circle>In the first quarter of 1999 other operating expenses increased $ .8
million or 33% , to $3.3 million . The majority of this increase relates to
normal operating expenses in connection with managing the former insurance
operations of Savers Life, Savers Marketing and Midwestern Life.
INTEREST EXPENSE AND FINANCING COSTS represents interest expense incurred and
the amortization of related debt issuance costs.
<circle>The first quarter of 1999 interest expense and financing costs
increased $.2 million primarily due to increased average borrowings for the
period of approximately $7.7 million. This increase was somewhat offset by
a decline in the average interest rate for the period.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
INTERNATIONAL OPERATIONS:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $6 $28
Separate account deposits 16,269 7,686
Total premiums and deposits collected $16,275 $7,714
Premium income $6 $28
Net investment income 263 236
Separate account fees 478 292
Amortization of negative goodwill -- 347
Other income 8 115
Total revenues 755 1,018
Benefits and claims (58) (10)
Other operating expenses 542 529
Total benefits and expenses 484 519
Operating income before income taxes $271 $499
</TABLE>
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
GENERAL: This segment consists of revenues earned and expenses incurred from
abroad, primarily Europe, and includes fees collected on deposits from separate
account (unit-linked) products. The profitability of this segment primarily
depends on the amount of separate account assets under management, the
management fee charged on those assets and operating expenses. International
operations include Standard Management International, S.A. and its non U.S.
consolidated subsidiaries ("SMI").
FEES FROM SEPARATE ACCOUNTS represents the net fees earned on the various unit-
linked products sold and fluctuate in relationship with account assets and the
return earned on such assets. Fees include initiation fees on certain products
and annual recurring fees on virtually all products.
<circle>First quarter 1999 fees from separate accounts increased $.2 million or
64%, to $.5 million. This is primarily due to weighted average assets held
in separate accounts increasing by $49.7 million or 32% for the period.
Actual separate account assets increased $56.9 million or 34.4% to $222.3
million. Net deposits from sales of unit-linked products by SMI increased
$8.6 million or 112%, to $16.3 million.
NET INVESTMENT INCOME fluctuates with changes in i) the amount of average
invested assets and ii) the yield earned on invested assets.
<circle>Net investment income was $.3 million and $.2 million for the first
quarters of 1999 and 1998, respectively, on average invested assets of
approximately $11.0 million.
<circle>The net investment yields earned on average invested assets were 9.25%
and 8.78% for the first quarter of 1999 and 1998, respectively.
AMORTIZATION OF NEGATIVE GOODWILL is the excess cost of assets acquired over
the purchase price paid for SMI in December of 1993 of $6.9 million.
<circle>Negative goodwill was fully amortized at December 31, 1998.
OTHER INCOME consists of various refunds and other miscellaneous income.
<circle>Other income decreased by $.1 million due to the decline of various
refunds received in the first quarter of 1998.
FOREIGN CURRENCY TRANSLATION. International operations are conducted using
foreign currencies, primarily the Luxembourg franc, which are subsequently
converted into U.S. dollars using a conversion rate. Although the net impact
of this translation is deemed immaterial, individual income statement
components from period to period are impacted from the strengthening and
destrengthening of the U.S. dollar.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF STANDARD MANAGEMENT (PARENT COMPANY)
Standard Management is a life insurance holding company whose liquidity
requirements are met through payments received from its subsidiaries. These
payments include i) interest on surplus debenture, ii) dividends, iii)
management fees and iv) rental income, which are subject to restrictions under
applicable insurance laws and are used to pay operating expenses and meet debt
service obligations. These internal sources of liquidity have been
supplemented in the past by external sources such as revolving credit
agreements and long term debt and equity financing in the capital markets.
GENERAL: On a consolidated GAAP basis SMC reported net cash provided by
operations of $1.3 million for the first quarter of 1999. Although deposits
received on SMC's interest-sensitive annuities and other financial products are
not included in cash flow from operations under GAAP, such funds are available
for use by SMC. Cash provided by operations plus net deposits received, less
net account balances returned to policyholders on interest sensitive annuities
and other financial products, resulted in positive cash flow of $18.3 million
for the first quarter of 1999. Cash generated on a consolidated basis is
available to Standard Management only to the extent that it is generated at the
Standard Management level or is available through dividends, interest,
management fees or other payments from subsidiaries.
SMC instituted a program to repurchase its common stock in order to increase
the market value of the stock. At March 31, 1999, Standard Management is
authorized to repurchase 1.0 million additional shares of SMC Common Stock
under this program.
At April 30, 1999, Standard Management had "parent company only" cash and
short-term investments of $.7 million. These funds are available to Standard
Management for general corporate purposes. Standard Management's annual "parent
company only" operating expenses (not including interest expense) were $3.1
million and $3.4 million for 1998 and 1997, respectively. In addition,
Standard Management has available $1.0 million from its revolving credit
agreement.
Standard Management anticipates the available cash from its existing working
capital, plus anticipated 1999 dividends, management fees, rental income and
interest payments on its surplus debentures receivable will be more than
adequate to meet its anticipated "parent company only" cash requirements for
1999.
INTEREST OF SURPLUS DEBENTURE. From the funds borrowed by Standard
Management pursuant to the revolving credit agreements ("credit agreement") and
the senior subordinated note agreement ("debt agreement"), $27.0 million was
loaned to Standard Life pursuant to unsecured surplus debenture agreements
("surplus debenture") which requires Standard Life to make quarterly interest
payments to Standard Management at a variable corporate base rate plus 2%
per annum, and annual principal payments of $1.0 million per year beginning in
2007 and concluding in 2033. The interest and principal payments are subject to
quarterly approval by the Indiana Department of Insurance, depending upon
satisfaction of certain financial tests relating to levels of Standard Life's
capital and surplus and general approval of the Commissioner of the Indiana
Department of Insurance. Standard Management currently anticipates these
quarterly approvals will be granted. Assuming the approvals are granted and
the March 31, 1999 interest rate of 9.75% continues, Standard Management will
receive interest income of $2.6 million from the surplus debenture in 1999.
DIVIDENDS. Dividends from Standard Life to Standard Management are limited
by laws applicable to insurance companies. As an Indiana domiciled insurance
company, Standard Life may pay a dividend or distribution from its surplus
profits, without the prior approval of the Commissioner of the Indiana
Department of Insurance, if the dividend or distribution, together with all
other dividends and distributions paid within the preceding twelve months, does
not exceed the greater of (i) net gain from operations or (ii) 10% of surplus,
in each case as shown in its preceding annual statutory financial statements.
In 1999, Standard Life can pay dividends of approximately $4.4 million without
regulatory approval.
MANAGEMENT FEES. Pursuant to a management services agreement, Standard Life
paid Standard Management $.9 million in the first quarter of 1999 for certain
management services related to the production of business, investment of assets
and evaluation of acquisitions. In addition, Dixie Life paid Standard Life
$.3 million in the first quarter of 1999 for certain management services
provided. 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 Life.
EQUIPMENT RENTAL FEES. Standard Management charged subsidiaries $.3 million
during the first quarter of 1999 for the use of equipment owned by Standard
Management.
LIQUIDITY OF INSURANCE OPERATIONS
U.S. INSURANCE OPERATIONS. The principal liquidity requirements of Standard
Life are its contractual obligations to policyholders, dividend, rent,
management fee and surplus debenture payments to Standard Management and other
operating expenses. The primary source of funding for these obligations has
been cash flow from premium income, net investment income, investment sales and
maturities and sales of FPDAs. These sources of liquidity for Standard Life
significantly exceed scheduled uses. Liquidity is also affected by unscheduled
benefit payments including death benefits and policy withdrawals and
surrenders. The amount of withdrawals and surrenders is affected by a variety
of factors such as renewal interest crediting rates, interest rates for
competing products, general economic conditions, Standard Life's A.M. Best
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 SMC were required to sell investments at reduced
values to meet liquidity demands. SMC manages the asset and liability
portfolios in order to minimize the adverse earnings effect of changing market
interest rates. SMC seeks assets that have duration characteristics similar to
the liabilities that they support. SMC also prepares cash flow projections and
performs cash flow tests under various market interest rate scenarios to assist
in evaluating liquidity needs and adequacy. SMC's U.S. insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the NAIC, as
modified by the Indiana Department of Insurance, or the state in which the
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that:
(i) acquisition costs (primarily commissions and policy issue costs) and
(ii) reserves for future guaranteed principal payments and interest in excess
of statutory rates, be expensed in the year the new business is written. These
items cause a reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. SMC designs its products to minimize such
first-year losses, but certain products continue to cause a statutory loss in
the year written. For each product, SMC controls the amount of net new premiums
written to manage the effect of such surplus strain. SMC's long-term growth
goals contemplate continued growth in its insurance businesses. To achieve
these growth goals, SMC's U.S. insurance subsidiaries will need to increase
statutory surplus. Additional statutory surplus may be secured through various
sources such as internally generated statutory earnings, infusions by Standard
Management with funds generated through debt or equity offerings or mergers
with other life insurance companies. If additional capital is not available
from one or more of these sources, SMC believes that it could reduce surplus
strain through the use of reinsurance or through reduced writing of new
business.
Management believes that the operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 1999. As of March 31, 1999,
Standard Life had statutory capital and surplus for regulatory purposes of
$43.7 million. As the life insurance and annuity business produced by Standard
Life increases, Standard Life expects to continue to satisfy statutory capital
and surplus requirements through statutory profits, through the continued
reinsurance of a portion of its new business and through additional capital
contributions by Standard Management. If the need arises for cash which is
not readily available, additional liquidity could be obtained from the sale of
invested assets.
Effective January 1, 1999 the Company decided to no longer sell new business
through Dixie Life. This decision is not expected to have a material effect on
operations or financial condition of the Company.
INTERNATIONAL OPERATIONS. SMI dividends are limited to its accumulated
earnings without regulatory approval and no dividends are anticipated from
these companies in 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry is
experiencing an increasing number of mergers, acquisitions, consolidations and
sales of certain business lines. These consolidations are largely the result
of the following:
<circle>the need to reduce costs of distribution and overhead;
<circle>the need to maintain business in force;
<circle>increased competition;
<circle>regulatory capital requirements; and
<circle>technology costs.
SMC expects this trend to continue.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
FOREIGN CURRENCY RISK. SMI policyholders invest in assets denominated in
a wide range of currencies. As policyholders are not permitted to invest
directly in options, futures and derivatives, their investment and currency
risk is limited to premiums they have paid. Although policyholders effectively
bear the currency risk, SMI could be exposed to currency fluctuations if
currencies within the conventional investment portfolio or certain actuarial
reserves are mismatched. In order to minimize this risk, SMI continually
matches the assets and liabilities of the portfolio and the reserves. In
addition, Premier Life (Luxembourg) shareholder's equity is denominated in
Luxembourg francs. Premier Life (Luxembourg) does not hedge currency risk
because its shareholder's equity will remain in Luxembourg francs for the
foreseeable future, thus, no significant realized foreign exchange gains or
losses are anticipated. At March 31, 1999, there was an immaterial unrealized
loss from foreign currency.
EURO CURRENCY. Effective January 1, 1999, the eleven participating
European member union countries established fixed conversion rates between
their legal currencies and the euro. The legal currencies in those countries
will continue to be used as legal tender through January 1, 2002. Subsequent
to this date, the legal currencies will be canceled and euro bills and coins
will be used for cash transactions in the participating countries. During this
three year dual-currency environment, conversion rates between the legal
currencies will no longer be computed directly between one another. Instead, a
special "triangulation" procedure must be followed by first converting one
legal currency into its euro equivalent and then converting the euro equivalent
into the other legal currency. Although the Company has not initiated an
analysis plan for the euro conversion, SMC does not expect it to have a
material impact on its operations or financial condition.
POSSIBILITY OF FUTURE DILUTION OF OWNERSHIP AND VOTING POWER. The SMC
Board of Directors has the authority to issue up to .9 million additional
shares of preferred stock and 12.4 million additional shares of common stock.
The board's authority under SMC's charter typically does not require
stockholder approval unless it is otherwise required for a particular
transaction. Although SMC is not currently involved in any life insurance
acquisitions, the Company regularly investigates such opportunities and could
issue additional shares of SMC common or preferred stock in connection with an
acquisition.
UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in SMC's March 31,
1999 financial statements are certain assets that are primarily valued , for
financial statement purposes, on the basis of management assumptions. These
assets include items such as:
<circle>deferred acquisition costs;
<circle>present value of future profits;
<circle>costs in excess of net assets acquired; and
<circle>organization and deferred debt issuance costs.
The value of these assets reflected in the March 31, 1999 balance sheet
total $77.0 million or 7.7% of SMC's assets. SMC has established procedures to
periodically review the assumptions used to value these assets and determine
the need to make adjustments of such values in SMC's consolidated financial
statements. SMC has determined that the assumptions used in the initial
valuation of the assets are consistent with the current operations of SMC as of
March 31, 1999.
REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between companies.
The NAIC is in the process of codifying SAP to promote standardization of
methods utilized throughout the industry. Completion of this project might
result in changes in statutory accounting practices for SMC's insurance
subsidiaries; however, it is not expected that such changes would materially
affect SMC's insurance subsidiaries' statutory capital requirements.
FINANCIAL SERVICES DEREGULATION. The United States Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. Proposals
are extant which would allow banks to own or affiliate with insurers and
securities firms. An increased presence of banks in the life insurance and
annuity businesses may increase competition in these markets. The Company
cannot predict the impact of these proposals on the earnings of the Company.
IMPACT OF YEAR 2000
The Company updated its main operating computer systems in 1995 with Year
2000 ready systems at a cost of $.5 million. Since that time the Company has
completed modifications or conversions of other portions of its software,
hardware and imbedded chip technology so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company believes that with such modifications and conversions, the Year 2000
issue will not pose significant operational problems for its computer systems.
The total cost of the Year 2000 project is $.6 million including the $.5
million previously discussed. These costs are not material to the Company's
financial statements and were funded through operating cash flows.
The Company is currently assessing the risks associated with their
external business relationships, including those with agents and financial
institutions. The Company has been informed by approximately 50% of their
external business partners that they are or will be Year 2000 ready sometime
in 1999. The Company is still accumulating data from the remaining business
partners, which it hopes to have concluded by mid 1999.
The Company also assessed what contingency plans will be needed, if any,
of its critical systems or those of external business relationships that are
not Year 2000 ready after December 31, 1999. The Company does not currently
anticipate such a situation, but the consideration of a contingency plan will
continue to evolve as new information becomes available.
The failure to correct a Year 2000 problem could result in an
interruption, or failure of, a number of normal business activities or
operations. However, management has concluded that the Year 2000 issue will
not materially affect future financial results, or cause reported financial
information to be nonindicative of future operating results or financial
condition.
FORWARD-LOOKING STATEMENTS
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, but are
not limited to: (i) 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; (ii) the Company's ability to achieve
anticipated levels of operational efficiencies at recently acquired companies,
as well as through other cost-saving initiatives;(iii) customer response to new
products, distribution channels and marketing initiatives; (iv) mortality,
morbidity, usage of health care services and other factors which may affect the
profitability of the Company's insurance products; (v) changes in the Federal
income tax laws and regulation which may affect the relative tax advantages of
some of the Company's products; (vi) increasing competition in the sale of the
Company's products;(vii)regulatory changes or actions, including those relating
to regulation of financial services affecting 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; (viii) the availability and terms of
future acquisitions;and (ix) the risk factors or uncertainties listed from time
to time in any document incorporated by reference herein.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company seeks to invest available funds in a manner that will
maximize shareholder value and fund future obligations to policyholders and
debtors, subject to appropriate risk considerations. Many of the Company's
products incorporate surrender charges, market interest rate adjustments or
other features to encourage persistency.
The Company also seeks to maximize the total return on its investments
through active investment management. Accordingly, the Company has determined
that the entire portfolio of fixed maturity securities is available to be sold
in response to: (i) changes in market interest rates; (ii) changes in relative
values of individual securities and asset sectors; (iii) changes in prepayment
risks; (iv) changes in credit quality outlook for certain securities; (v)
liquidity needs; and (vi) other factors.
Profitability of many of the Company's products is significantly affected
by the spreads between interest yields on investments and rates credited on
insurance liabilities. Although substantially all credited rates on annuity
products may be changed annually (subject to minimum guaranteed rates), changes
in competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit the ability to adjust or to maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions.
If interest rates were to increase by 10% (i.e. 7.0% to 7.7%) from their
March 31, 1999 levels , the Company's fixed maturity securities and short-term
investments (net of the corresponding changes in the values of cost of policies
purchased, cost of policies produced and insurance liabilities) would decline
in fair value by approximately $3.5 million.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 27 Financial Data Schedule, which is submitted electronically
pursuant to Regulation S-K to the Securities and Exchange
Commission (the "Commission") for information only and not
filed.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Commission in the first quarter
of 1999.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 1999
STANDARD MANAGEMENT CORPORATION
(Registrant)
By: RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President
and
Chief Executive Officer
(Principal Executive Officer)
By: GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 553,157
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,298
<MORTGAGE> 9,504
<REAL-ESTATE> 3,441
<TOTAL-INVEST> 605,361
<CASH> 6,578
<RECOVER-REINSURE> 77,484
<DEFERRED-ACQUISITION> 71,133<F1>
<TOTAL-ASSETS> 1,003,035
<POLICY-LOSSES> 661,658
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,000
6,530
0
<COMMON> 54,360
<OTHER-SE> 9,136<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,003,035
4,083
<INVESTMENT-INCOME> 10,476
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 2,107<F3>
<BENEFITS> 9,080<F4>
<UNDERWRITING-AMORTIZATION> 1,501
<UNDERWRITING-OTHER> 3,862
<INCOME-PRETAX> 1,616
<INCOME-TAX> 319
<INCOME-CONTINUING> 1,297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,297
<EPS-PRIMARY> .17<F5>
<EPS-DILUTED> .16<F5>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $28,391 of present value of future profits.
<F2>Includes retained earnings of $11,136 and other comprehensive income of
$(2,000).
<F3>Includes policy charges of $1,629 and fees from separate accounts of $478.
<F4>Includes benefits and claims of $3,244 and interest credited on financial
products of $5,836.
<F5>EPS data does not inclukde reductions for preferred stock dividends.
</FN>
</TABLE>
