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, 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 August 3, 1999, the Registrant had 7,581,070 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, 1999 (Unaudited) and December 31,1998 (Audited) 3
Consolidated Statements of Income --
For the Six Months Ended June 30,1999 and 1998 (Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Six Months Ended June 30,1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30,1999 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 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
<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>
1999 1998
(Unaudited) (Audited)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost:$583,025 in 1999 and $547,115 in 1998) $ 562,239 $ 551,312
Equity securities, at fair value
(cost: $847 in 1999 and $1,498 in 1998) 867 1,316
Mortgage loans on real estate 9,426 8,578
Policy loans 14,500 15,019
Real estate 4,005 3,435
Other invested assets 943 837
Short-term investments 21,176 11,626
Total investments 613,156 592,123
Cash 7,549 13,591
Accrued investment income 10,065 9,563
Amounts due and recoverable from reinsurers 74,273 76,897
Costs of policies produced 53,852 32,946
Costs of policies purchased 30,213 28,793
Goodwill 5,761 5,886
Other assets 6,944 6,105
Assets held in separate accounts 218,094 190,246
Total assets $ 1,019,907 $ 956,150
LIABILITIES AND SHAREHOLDERS'EQUITY
Liabilities:
Insurance policy liabilities $ 688,811 $ 638,435
Accounts payable and accrued expenses 7,138 12,277
Notes payable 35,100 35,000
Deferred federal income taxes 4,472 7,620
Liabilities related to separate accounts 218,094 190,246
Total liabilities 953,615 883,578
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 1998 61,260 60,586
Treasury stock, at cost, 1,246,243 shares in 1999
and 1,160,859 shares in 1998 (6,768) (6,220)
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale, net
taxes (benefits) of :1999 - $(3,518) 1998 - $765 (6,420) 1,660
Unrealized gain on other investments,
net taxes of: 1999 - $6 1998 - $12 12 23
Foreign currency translation adjustment,
net taxes of: 1999 - $0 1998 - $0 (733) 4
Retained earnings 12,411 9,989
Total shareholders' equity 59,762 66,042
Total liabilities and shareholders' equity $ 1,019,907 $ 956,150
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>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
<S> <C> <C> <C> <C>
June 30 June 30
1999 1998 1999 1998
Revenues:
Premium Income $ 3,119 $ 7,920 $ 6,184 $ 9,900
Net investment income 10,380 8,333 20,725 15,609
Net realized investment gains 7 24 40 46
Policy income 1,885 1,794 3,514 3,152
Negative goodwill amortization -- 347 -- 694
Separate account fees 782 268 1,390 670
Fee and other income 1,168 1,129 2,429 1,420
Total Revenues 17,341 19,815 34,282 31,491
Benefits and expenses:
Benefits and claims 4,009 6,435 7,254 8,045
Interest credited on interest-sensitive
annuities and other financial products 5,746 4,645 11,582 8,865
Amortization 1,571 1,213 3,072 2,224
Other operating expenses 3,311 4,586 7,173 7,618
Interest expense and financing costs 800 772 1,681 1,429
Total benefits and expenses 15,437 17,651 30,762 28,181
Income before federal income taxes and preferred
stock dividends 1,904 2,164 3,520 3,310
Federal income tax expense 502 871 821 1,269
Net income 1,402 1,293 2,699 2,041
Preferred stock dividends (127) -- (253) --
Earnings available to common shareholders $ 1,275 $ 1,293 $ 2,446 $ 2,041
Earnings per share - basic:
Net income $ .19 $ .18 $ .36 $ .33
Preferred stock dividends (.02) -- (.04) --
Earnings available to common shareholders $ .17 $ .18 $ .32 $ .33
Earnings per share - diluted:
Net income $ .17 $ .16 $ .33 $ .30
Preferred stock dividends (.01) -- (.02) --
Earnings available to common shareholders $ .16 $ .16 $ .31 $ .30
</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>
<S> <C> <C> <C> <C> <C>
Common
stock Accumulated
and other
additional Treasury comprehensive Retained
Total paid-in stock income earnings
capital
Balance at January 1, 1998 $ 43,313 $ 40,646 $ (4,572) $1,698 $ 5,541
Comprehensive income:
Net income 2,041 2,041
Other comprehensive income:
Change in unrealized gain (loss) on
securities, net taxes of $612 1,188 1,188
Change in foreign currency,
net taxes of $0 (356) (356)
Other comprehensive income 832
Comprehensive income 2,873
Issuance of common stock for Savers Life
acquisition 15,024 15,024
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
common stock 4 4
Reissuance of treasury stock in connection
with exercise of stock options 5 51 (46)
Balance at June 30, 1998 $ 61,432 $ 55,938 $ (4,571) $ 2,530 $ 7,535
Balance at January 1, 1999 $ 66,042 $ 60,586 $ (6,220) $ 1,687 $ 9,989
Comprehensive income:
Net income 2,699 2,699
Other comprehensive income:
Change in unrealized gain (loss) on securities,
net taxes(benefits) of $(4,168) (8,091) (8,091)
Change in foreign currency,
net taxes of $0 (737) (737)
Other comprehensive income (8,828)
Comprehensive income (6,129)
Issuance of common stock warrants 674 674
Treasury stock acquired (548) (548)
Reissuance of treasury stock in connection
with exercise of stock options (24) (24)
Preferred stock dividends (253) (253)
Balance at June 30, 1999 $ 59,762 $ 61,260 $ (6,768) $ (7,141) $ 12,411
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
Six Months Ended
<TABLE>
<CAPTION>
<S> <C> <C>
June 30
1999 1998
OPERATING ACTIVITIES
Net income $ 2,699 $ 2,041
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition cost 1,751 1,217
Policy acquisition costs deferred (13,215) (5,169)
Deferred federal income taxes 1,387 1,274
Depreciation and amortization 1,991 603
Insurance policy liabilities 8,717 2,673
Net realized investment gains (40) (46)
Accrued investment income (502) (534)
Other (633) 3,614
Net cash provided by operating activities 2,155 5,673
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (126,908) (138,942)
Sales 78,289 85,105
Maturities, calls and redemptions 11,355 12,230
Short-term investments, net (9,550) 31,326
Other investments, net (922) (1,581)
Purchase of Savers Life Insurance Company, less cash acquired
of $518 -- (18,039)
Net cash used by investing activities (47,736) (29,901)
FINANCING ACTIVITIES
Issuance of common stock,net 673 15,024
Borrowings, net of debt issuance costs of $86 in 1998 300 3,914
Repayments on long term debt and obligations
under capital lease (200) (153)
Premiums received on interest-sensitive annuities and other
financial products credited to policyholder account balances,
net of premiums ceded 84,574 30,082
Return of policyholder account balances on interest-sensitive
annuities and other financial products, net of premiums ceded (45,007) (21,661)
Reissuance of treasury stock in connection with exercise of
stock options and warrants -- 233
Purchase of common stock for treasury (548) (50)
Dividends on preferred stock (253) --
Net cash provided by financing activities 39,539 27,389
Net increase (decrease) in cash (6,042) 3,161
Cash at beginning of period 13,591 4,165
Cash at end of period $ 7,549 $ 7,326
</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 ("DAC"), present value of future profits ("PVP"),
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 that the Company believes are reasonable and do not reflect any
benefit from savings that 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.
Six Months Ended
JUNE 30,1998
Revenues $45,332
Net income 947
Earnings per share - basic 0.13
Earnings per share - diluted 0.13
NOTE 3 -- NOTES PAYABLE
Notes payable of the Company are as follows (in thousands):
<TABLE>
<CAPTION>
Interest June 30 December 31
Rate 1999 1998
<C> <C> <C>
Borrowings under revolving credit agreements 8.33%(1) $25,100 $25,000
Senior subordinated convertible notes(2) 10.00% 10,000 10,000
$35,100 $35,000
(1) Current weighted average rate at June 30, 1999.
(2) $4,372 due December 2003, $5,628 due July 2004.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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>
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
<S> <C> <C>
Fair value of securities available for sale $ 563,106 $ 552,628
Amortized cost of securities available for sale 583,872 548,613
Gross unrealized gain (loss) on securities
available for sale (20,766) 4,015
Adjustments for:
Deferred policy acquisition costs 8,341 (1,101)
Present value of future profits 2,487 (489)
Deferred federal income tax liability 3,518 (765)
Net unrealized gain (loss) on securities
available for sale $ (6,420) $ 1,660
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):
Three Months Ended Six Months Ended
June 30 June 30
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
INCOME:
Net income $ 1,402 $ 1,293 $ 2.699 $ 2,041
Preferred stock dividends (127) -- (253) --
Income available to common shareholders for
basic earnings per share 1,275 1,293 2,446 2,041
Effect of dilutive securities:
Preferred stock dividends 127 -- 253 --
Interest on subordinated convertible debt 250 250 500 500
Income available to common shareholders
for diluted earnings per share $ 1,652 $ 1,543 $ 3,199 $ 2,541
SHARES:
Weighted average shares outstanding
for basic earnings per share 7,556,437 7,338,824 7,576,421 6,229,581
Effect of dilutive securities:
Stock options 153,668 325,391 160,861 297,561
Stock warrants 121,518 219,998 126,673 252,562
Subordinated convertible debt 1,740,038 1,740,038 1,740,038 1,740,038
Dilutive potential common shares 2,015,224 2,285,427 2,027,572 2,290,161
Weighted average shares outstanding
for diluted earnings per share 9,571,661 9,624,251 9,603,993 8,519,742
</TABLE>
<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 financing 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 SIX MONTHS OF 1999 COMPARED WITH THE FIRST SIX MONTHS OF 1998:
The following tables and narratives summarize the results of operations by
operating segment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
<S> <C> <C> <C> <C>
June 30 June 30
1999 1998 1999 1998
(Dollars in thousands)
Operating income before income taxes:
Domestic operations $ 1,529 $ 1,690 $ 2,841 $ 2,315
International operations 368 450 639 949
Consolidated operating income
before income taxes 1,897 2,140 3,480 3,264
Applicable income taxes
related to operating income 500 863 807 1,253
Consolidated operating income after taxes 1,397 1,277 2,673 2,011
Consolidated realized investment gains
before income taxes 7 24 40 46
Applicable income taxes related to realized
investment gains 2 8 14 16
Consolidated realized investment gains
after taxes 5 16 26 30
Net income $ 1,402 $ 1,293 $2,699 $ 2,041
</TABLE>
CONSOLIDATED RESULTS AND ANALYSIS
SMC's six month 1999 operating earnings were $2.7 million, or 31 cents per
diluted share (including a 2 cent reduction for preferred stock dividends), up
33% and 7%, respectively, over the same six month period of 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 ,a non-recurring item, which contributed $.7 million or 8 cents per
diluted share in the 1998 period, ii) unfavorable mortality and
iii) increased DAC and PVP amortization. The percentage increase in operating
earnings was greater than the percentage increase in operating earnings per
diluted share primarily because of a 13% 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 acquisition of Savers Life and Midwestern Life.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
DOMESTIC OPERATIONS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
<S> <C> <C> <C> <C>
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 3,102 $ 1,920 $ 6,160 $ 3,872
Medicare supplement -- 5,992 -- 5,992
Flexible premium deferred annuities("FPDA's") 30,292 11,988 52,091 24,855
Equity-indexed annuities 17,649 2,034 28,845 2,034
Other annuities and deposits 1,437 1,023 2,868 1,568
Universal and interest-sensitive life 284 865 891 1,675
Subtotal - interest sensitive and
financial products 49,662 15,910 84,695 30,132
Total premiums and deposits collected $ 52,764 $23,822 $90,855 $39,996
Premium income $ 3,102 $ 7,912 $ 6,160 $ 9,864
Policy income 1,885 1,794 3,514 3,152
Total policy related income 4,987 9,706 9,674 13,016
Net investment income 10,248 8,204 20,461 15,354
Fee and other income 1,168 908 2,421 1,084
Total revenues (a) 16,403 18,818 32,556 29,454
Benefits and claims 3,972 6,402 7,275 8,021
Interest credited on interest sensitive
annuities and other financial products 5,746 4,645 11,582 8,865
Amortization 1,571 1,213 3,072 2,224
Other operating expenses 2,785 4,096 6,105 6,600
Interest expense and financing costs 800 772 1,681 1,429
Total benefits and expenses 14,874 17,128 29,715 27,139
Operating income before income taxes 1,529 1,690 2,841 2,315
Net realized investment gains 7 24 40 46
Income before income taxes $ 1,536 $ 1,714 $ 2,881 $ 2,361
</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 FPDA's), 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,
ii) annuity business that incorporates significant mortality features and iii)
Medicare supplement premiums in the 1998 period.
Life premiums were up $2.3 million or 59% in the first six months of 1999,
to $6.2 million. The traditional life premiums increase was primarily due
to renewal premiums from the insurance blocks of Savers Life and
Midwestern Life.
Medicare supplement premiums of $6.0 million are included in the first
six months of 1998. This business did not contribute to net income and
was sold in July, 1998.
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.
In the first six months of 1999 net premium deposits increased $54.6 million
or 181%, to $84.7 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 new equity-indexed
annuity products which contributed $28.8 million of premium deposits for the
period.
NET INVESTMENT INCOME includes interest earned on invested assets which
fluctuates with changes in i) the amount of average invested assets supporting
insurance liabilities and ii) the yield earned on invested assets.
Net investment income in the first six months of 1999 increased $5.1 million
or 33%, to $20.7 million. Average invested assets increased by $169.2
million or 39% compared to the first six months of 1998 primarily 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.
The net investment yields earned on average invested assets were 7.08%
and 7.56% for the first six months of 1999 and 1998, respectively.
POLICY INCOME represents mortality charges, administrative fees and surrender
charges related to universal life and annuity policies.
Policy income increased $.3 million or 11%, to $3.5 million in the first
six months 1999. This increase primarily relates to surrender charges
received as a result of lowering crediting rates on certain FPDA products.
FEE AND OTHER INCOME consists of recurring fee income related to servicing
blocks of business for other insurance companies, experience refunds and
commission income.
In the first six months of 1999 fee income increased $1.3 million to
$2.4 million. This increase relates to fee income received in connection
with a three-year service agreement entered into by Savers Marketing
Corporation ("Savers Marketing") in October,1998.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
BENEFITS AND CLAIMS include i) paid life insurance claims, ii) benefits from
annuity policies that incorporate significant mortality features,
iii) Medicare supplement benefits in the 1998 period and iv) 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.
Benefits and claims in the first six months of 1999 decreased $.7 million,
to $7.3 million due to the inclusion of $4.9 million of benefits and claims
in 1998 results related to Medicare supplement business that was sold in
July, 1998. This was somewhat offset by $4.2 million of life claims and
benefits 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.
In the first six months of 1999 interest credited increased $2.7 million
or 31%, to $11.6 million due to $2.1 million of interest credited on
the insurance liabilities of Savers Life and Midwestern Life. This expense
was also impacted by credited interest on insurance liabilities from sales
in recent periods and somewhat offset by a decline in crediting rates.
The weighted average credited rates for the first six months of 1999 and
1998 were 4.92% and 5.45%, 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.
Amortization in the first six months of 1999 increased $.8 million or 38%,
to $3.1 million. This increase relates to additional amortization of
the present value of future profits and deferred acquisition costs for
the first six months of 1999 due to the recognition of additional profits
for the period. Additional profits were recognized from i) the realization
of profits from 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.
In the first six months of 1999 other operating expenses declined $.5 million
or 8%, to $6.1 million. The majority of this decrease relates to
efficiencies achieved through the assimilation of the former insurance
operations of Savers Life, Savers Marketing and Midwestern Life including
the elimination of certain Medicare supplement expenses in connection with
the sale of that business.
INTEREST EXPENSE AND FINANCING COSTS represents interest expense incurred and
the amortization of related debt issuance costs.
In the first six months of 1999 interest expense and financing costs
increased $.3 million or 18%, to $1.7 million primarily due to
increased average borrowings for the period of approximately $6.3 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>
Three Months Ended Six Months Ended
<S> <C> <C> <C> <C>
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 17 $ 8 $ 24 $ 36
Separate account deposits 9,152 12,379 25,420 20,065
Total premiums and deposits collected $ 9,169 $12,387 $25,444 $20,101
Premium income $ 17 $ 8 $ 24 $ 36
Net investment income 132 129 264 255
Separate account fees 782 268 1,390 670
Amortization of negative goodwill -- 347 -- 694
Other income -- 221 8 336
Total revenues 931 973 1,686 1,991
Benefits and claims 37 33 (21) 24
Other operating expenses 526 490 1,068 1,018
Total benefits and expenses 563 523 1,047 1,042
Operating income before income taxes $ 368 $ 450 $ 639 $ 949
<PAGE>
</TABLE>
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").
NET INVESTMENT INCOME fluctuates with changes in i) the amount of average
invested assets and ii) the yield earned on invested assets.
Net investment income was $.3 million for each of the six month periods of
1999 and 1998 on average invested assets of approximately $11.0 million.
The net investment yields earned on average invested assets were 4.85%
and 4.74% for the first six months of 1999 and 1998, respectively.
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 initial set up fees on certain
products and annual recurring fees on virtually all products.
Fees from separate accounts for the first six months of 1999 increased $.7
million to $1.4 million. This is due to i) weighted average assets held
in separate accounts increasing by $45.4 million, or 28% for the period and
changes in deferred acquisition cost methodology, which adversely impacted
the 1998 period . Actual separate account assets increased $37.1 million or
20%, to $218.1 million for the twelve months ending June 30, 1999. Net
deposits from sales of unit-linked products by SMI increased $5.3 million or
26%, to $25.4 million.
AMORTIZATION OF NEGATIVE GOODWILL is the excess cost of assets acquired over
the purchase price paid for SMI in December, 1993 of $6.9 million.
Negative goodwill was fully amortized at December 31, 1998 and does
not contribute to net income in the 1999 period. Negative goodwill
amortization for the first six months of 1998 was $.7 million.
OTHER INCOME consists of various refunds and other miscellaneous income.
Other income for the first six months of 1998 includes i) the recovery of
$.2 million of erroneously paid benefits and ii) $.1 million from the sale
of an asset fund to a reinsurer.
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 may be 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 $2.2 million for the first six months 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 $41.7 million
for the first six months 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 June 30, 1999, Standard Management is
authorized to repurchase 1.0 million additional shares of SMC Common Stock
under this program.
At July 31, 1999, Standard Management had "parent company only" cash and
short-term investments of $.8 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 $.9 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 convertible note agreements ("debt agreement')
described in Note 3, $27.0 million was loaned to Standard Life Insurance
Company of Indiana ("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 June 30, 1999 interest
rate of 9.75% continues, Standard Management will receive interest income of
$2.6 million from the Surplus Debenture in 1999.
DIVIDENDS. Laws applicable to insurance companies limit dividends from
Standard Life to Standard Management. 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 $1.8 million for the first six months of 1999 for
certain management services related to the production of business, investment
of assets and evaluation of acquisitions. In addition, Dixie National Life
Insurance Company ("Dixie Life") paid Standard Life $.4 million in the first
six months 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.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
EQUIPMENT RENTAL FEES. Standard Management charged subsidiaries $.5 million
in the first six months 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 FPDA's. 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 insurance 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 that
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. Standard Management may secure additional statutory surplus
through various sources such as internally generated statutory earnings,
infusions 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 June 30, 1999,
Standard Life had statutory capital and surplus for regulatory purposes of
$42.0 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, the continued reinsurance
of a portion of its new business and additional capital contributions by
Standard Management. If the need arises for cash that 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.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
INTERNATIONAL OPERATIONS. SMI dividends are limited to its accumulated
earnings without regulatory approval and no dividends are anticipated from
these companies in 1999.
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, financial institutions,
reinsurers and providers of mission critical software and systems. The Company
has been informed by over 98% of their significant business partners
that they are either Year 2000 compliant or are in the process of actively
implementing plans for compliance. Throughout the remainder of 1999 the Company
will continue to monitor the progress of significant business partners which
have not provided assurances that their compliance and remediation plans are
complete.
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. In the event of a business
interruption due to a Year 2000 problem, the Company has committed various
resources which will be deployed as necessary. The effectiveness of any
contingency plan, however, is contingent on the nature and source of the
interruption and whether the correction of any problem is within the Company's
control or within the exclusive control of a business partner.
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 MANAGMENT CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks and the way they are managed are summarized in
management's discussion and analysis of financial condition and results of
operations as of December 31, 1998, included in the Company's December 31, 1998
Form 10-K. There have been no material changes in 1999 to these risks or the
management of such risks.
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 second
quarter of 1999.
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 13, 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 and Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 562,239
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 867
<MORTGAGE> 9,426
<REAL-ESTATE> 4,005
<TOTAL-INVEST> 613,156
<CASH> 7,549
<RECOVER-REINSURE> 74,273
<DEFERRED-ACQUISITION> 84,065<F1>
<TOTAL-ASSETS> 1,019,907
<POLICY-LOSSES> 688,811
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,100
6,530
0
<COMMON> 54,492
<OTHER-SE> 5,270<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,019,907
6,184
<INVESTMENT-INCOME> 20,725
<INVESTMENT-GAINS> 40
<OTHER-INCOME> 4,904<F3>
<BENEFITS> 18,836<F4>
<UNDERWRITING-AMORTIZATION> 3,072
<UNDERWRITING-OTHER> 7,173
<INCOME-PRETAX> 3,520
<INCOME-TAX> 821
<INCOME-CONTINUING> 2,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,699
<EPS-BASIC> .36<F5>
<EPS-DILUTED> .33<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 $30,213 of present value of future profits.
<F2>Includes retained earnings of $12,411 and other comprehensive income of
$(7,141).
<F3>Includes policy charges of $3,514 and fees from separate accounts of $1,390.
<F4>Includes benefits and claims of $7,254 and interest credited on financial
products of $11,582.
<F5>EPS data does not include reductions for preferred stock dividends.
</FN>
</TABLE>
