SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[<check-mark>] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 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 [<check-mark>] No [ ]
As of May 1, 2000, the Registrant had 7,785,156 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, 2000 (Unaudited) and December 31, 1999 (Audited) 3
Consolidated Statements of Income --
For the Three Months Ended March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Shareholders' Equity --
For the Three Months Ended March 31, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows --
For the Three Months Ended March 31, 2000 and 1999 (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 - 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II.OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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>
2000 1999
(Unaudited) (Audited)
ASSETS
Investments
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost: $657,577 in 2000
and $646,284 in 1999) $ 620,512 $ 606,907
Equity securities, at fair value
(cost: $565 in 2000 and 1999 358 378
Mortgage loans on real estate 8,109 8,131
Policy loans 13,984 14,033
Real estate 4,379 3,233
Other invested assets 426 845
Short-term investments 22,026 14,976
Total investments 669,794 648,503
Cash 5,877 3,659
Accrued investment income 10,651 11,105
Amounts due and recoverable from reinsurers 53,907 58,230
Deferred policy acquisition costs 72,204 67,811
Present value of future profits 30,344 30,688
Goodwill 5,583 5,636
Other assets 4,611 5,372
Assets held in separate accounts 379,973 319,973
Total assets $ 1,232,944 $ 1,150,977
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $ 751,498 $ 727,189
Accounts payable and accrued expenses 7,496 9,076
Notes payable 31,600 34,500
Deferred federal income taxes 423 349
Liabilities related to separate accounts 379,973 319,973
Total liabilities 1,170,990 1,091,087
Series A convertible redeemable preferred stock,
par value $100 per share;
Authorized 130,000; 65,300 issued
and outstanding in 2000 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 9,038,134
shares in 2000 and 1999 62,152 62,152
Treasury stock, at cost, 1,252,978 shares
in 2000 and 1999 (6,802) (6,802)
Accumulated other comprehensive income:
Unrealized gain (loss) on securities
available for sale, net taxes
(benefits) of: ($7,770) in 2000
and ($8,196) in 1999 (15,033) (15,859)
Unrealized gain on other investments,
net taxes of: $10 in 2000 and
$8 in 1999 23 15
Foreign currency translation adjustment (870) (862)
Retained earnings 15,954 14,716
Total shareholders' equity 55,424 53,360
Total liabilities and shareholders' equity $ 1,232,944 $ 1,150,977
</TABLE>
See accompanying notes to consolidated financial statements.
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> <C> <C> <C> <C> <C>
March 31 December 31
2000 1999
Revenues:
Premium income $ 3,178 $ 3,064
Net investment income 11,887 10,346
Net realized investment gains (losses) (336) 33
Policy income 1,907 1,629
Separate account fees 1,227 921
Fees and other income 1,338 1,253
Total revenues 19,201 17,246
Benefits and expenses:
Benefits and claims 4,055 3,244
Interest credited on interest-sensitive
annuities and other financial products 6,333 5,836
Amortization 2,210 1,749
Other operating expenses 3,862 3,919
Interest expense and finance costs 864 882
Total benefits and expenses 17,324 15,630
Income before federal income taxes and
preferred stock dividends 1,877 1,616
Federal income tax expense 512 319
Net income 1,365 1,297
Preferred stock dividends (127) (127)
Earnings available to common shareholders $ 1,238 $ 1,170
Earnings per share - basic:
Net income $ .18 $ .17
Preferred stock dividends (.02) (.02)
Earnings available to common
shareholders $ .16 $ .15
Earnings per share - diluted:
Net income $ .17 $ .16
Preferred stock dividends (.01) (.01)
Earnings available to common
shareholders $ .16 .15
</TABLE>
See accompanying notes to consolidated financial statements.
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> < C> <C> <C>
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 $1,971 (3,721) (3,721)
Change in foreign currency 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
Balance at January 1, 2000 $53,360 $ 62,152 $ (6,802) $(16,706)$ 14,716
Comprehensive income:
Net income 1,365 1,365
Other comprehensive income:
Change in unrealized gain
(loss) on securities,
net taxes of $428 834 834
Change in foreign currency (8) (8)
Other comprehensive income 826
Comprehensive income 2,191
Preferred stock dividends (127) (127)
Balance at March 31, 2000 $55,424 $ 62,152 $ (6,802) $ (15,880) $ 15,954
/TABLE>
See accompanying notes to consolidated financial statements.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
</TABLE>
<TABLE>
<CAPTION> Three Months Ended
<S> <C> <C>
March 31
2000 1999
OPERATING ACTIVITIES
Net income $ 1,365 $ 1,297
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization of deferred policy
acquisition costs 1,427 862
Policy acquisition costs deferred (7,155) (5,857)
Deferred federal income taxes (352) 490
Depreciation and amortization 880 1,202
Insurance policy liabilities 5,279 2,776
Net realized investment gains (losses) 336 (17)
Accured net income 453 473
Other (185) 236
Net cash provided by operating activities 2,048 1,462
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (30,354) (65,760)
Sales 16,608 48,777
Maturities, calls and redemptions 2,425 3,588
Short-term investments, net (7,050) (10,537)
Other investments, net (1,787) (1,029)
Net cash used by investing activities (20,158) (24,961)
FINANCING ACTIVITIES
Repayments on long term debt
and obligations under capital lease (2,900) (341)
Premiums received on interest-sensitive
annuities and other financial
products credited to policyholder
account balances, net of premiums ceded 40,815 35,034
Return of policyholder account balances
on interest-sensitive annuities
and other financial products, net
of premiums ceded (17,460) (18,074)
Reissuance of treasury stock in connection
with exercise of stock options
and warrants -- 524
Purchase of common stock for treasury -- (530)
Dividends on preferred stock (127) (127)
Net cash provided by financing activities 20,328 16,486
Net increase (decrease) in cash 2,218 (7,013)
Cash at beginning of period 3,659 13,591
Cash at end of period $ 5,877 $ 6,578
</TABLE>
See accompanying notes to consolidated financial statements.
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 2000 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.
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, 1999.
NOTE 2 -- NOTES PAYABLE
Notes payable of the Company are as follows (in thousands):
<TABLE>
<CAPTION>
Interest March 31 December 31
Rate 2000 1999
<S> <C> <C> <C> <C>
Borrowings under revolving
credit agreements 9.37%{ (1)} $21,600 $24,500
Senior subordinated
convertible notes 10.00% 10,000 10,000
$31,600 $34,500
</TABLE>
Current weighted average rate at March 31, 2000.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 -- 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
<C> <C>
2000 1999
Fair value of securities available for sale $ 620,870 $ 607,285
Amortized cost of securities available for sale 658,142 646,849
Gross unrealized gain (loss) on securities
available for sale (37,272) (39,564)
Adjustments for:
Deferred policy acquisition costs 9,192 10,527
Present value of future profits 5,277 4,982
Deferred federal income tax liability 7,770 8,196
Net unrealized gain (loss) on securities
available for sale $ (15,033) $ (15,859)
</TABLE>
NOTE 4 -- 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>
March 31
2000 1999
INCOME:
Net income $ 1,365 $ 1,297
Preferred stock dividends (127) (127)
Income available to common shareholders for
basic earnings per share 1,238 1,170
Effect of dilutive securities:
Preferred stock dividends 127 127
Interest on subordinated convertible debt 250 250
Income available to common shareholders for
diluted earnings per share $ 1,615 $ 1,547
SHARES:
Weighted average shares outstanding
for basic earnings per share 7,785,156 7,596,405
Effect of dilutive securities:
Stock options 22,393 168,053
Stock warrants 1,970 131,827
Subordinated convertible debt 1,740,038 1,740,038
Dilutive potential common shares 1,764,401 2,039,918
Weighted average shares outstanding for
diluted earnings per share 9,549,557 9,636,323
</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.
Notes to the consolidated financial statements included in this report and
the notes to the consolidated financial statements included in the 1999
Form 10-K should be read in conjunction with both sets of consolidated
financial statements.
FIRST THREE MONTHS OF 2000 COMPARED WITH THE FIRST THREE MONTHS OF 1999:
The following tables and narratives summarize the results of operations by
operating segment.
<TABLE>
<CAPTION>
Three Months Ended
<C> <C>
March 31
2000 1999
(Dollars in thousands)
Operating income before income taxes:
Domestic operations $ 1,768 $1,312
International operations 445 271
Consolidated operating income before income taxes 2,213 1,583
Applicable income taxes related to operating income 585 308
Consolidated operating income after taxes $ 1,628 $ 1,275
Consolidated realized investment gains
(losses) before income taxes (benefits) (336) 33
Applicable income taxes (benefits)
related to realized investment gains (losses) (73) 11
Consolidated realized investment gains after taxes (263) 22
Net income $ 1,365 $1,297
</TABLE>
CONSOLIDATED RESULTS AND ANALYSIS:
SMC's first three months of 2000 operating earnings were $1.6 million, or 20
cents per diluted share, up 28% and 25%, respectively, over the same three
month period of 1999. Operating earnings include i) increased net spread
revenue from larger inforce business from the sales of recent periods, and ii)
higher separate account fees due to an increase in separate account assets for
the period. These increases were somewhat offset by unfavorable mortality.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
_________________________
DOMESTIC OPERATIONS:
<TABLE>
<CAPTION>
Three Months Ended
March 31
<S> <C> <C>
2000 1999
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 3,166 $ 3,058
Flexible premium deferred annuities ("FPDA's") 20,744 21,800
Equity-indexed annuities 17,150 11,196
Other annuities and deposits 2,599 1,431
Universal and interest-sensitive life 321 607
Subtotal - interest sensitive and
financial products 40,814 35,034
Total premiums and deposits collected $ 43,980 $ 38,092
Premium income $ 3,167 $ 3,058
Policy income 1,907 1,629
Total policy related income 5,074 4,687
Net investment income 11,761 10,213
Fees and other income 1,338 1,253
Total revenues (a) 18,173 16,153
Benefits and claims 4,081 3,302
Interest credited on interest sensitive
annuities and other financial products 6,333 5,836
Amortization 1,833 1,501
Other operating expenses 3,294 3,320
Interest expense and financing costs 864 882
Total benefits and expenses 16,405 14,841
Operating income before income taxes 1,768 1,312
Net realized investment gains (losses) (336) 33
Income before income taxes $ 1,432 $ 1,345
</TABLE>
(a)Revenues exclude net realized investment gains (losses)
<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.
NET PREMIUM DEPOSITS consist of FPDA's, equity-indexed annuities, interest
sensitive annuities and other financial products that do not incorporate
significant mortality features. 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 three months of 2000 net premium deposits increased $5.8 million
or 17%, to $40.8 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 and ii) continued expansion of geographical concentration.
Equity-indexed products contributed 42% of net premium deposits in the first
three months of 2000 compared to 32% in the first three months of 1999.
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 three months of 2000 increased $1.5 million
or 15%, to $11.8 million. The book value of average invested assets increased
by $97.3 million or 16% compared to the first three months of 1999 primarily
due to the growth in insurance liabilities from the sale of annuity premium
deposits. Net investment income was also positively impacted by an increase in
net investment yields for the period.
The net investment yields earned on average invested assets were 7.20% and
7.15% for the first three months of 2000 and 1999, respectively.
POLICY INCOME represents i) mortality charges and administrative fees earned
in universal life products and ii) surrender charges earned as a result of
terminated universal life and annuity policies.
Policy income increased $.3 million or 17%, to $1.9 million in the first three
months 2000. This increase relates to surrender charges received as a result
of lowering crediting rates on certain FPDA products, and mortality charges of
a new universal life product.
BENEFITS AND CLAIMS include i) paid life insurance claims, 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.
Benefits and claims in the first three months of 2000 increased $.8 million, to
$4.1 million and includes higher claim experience and the effects of a larger
inforce block of business.
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 three months of 2000 interest credited increased $.5 million or
9%, to $6.3 million due to the growth in insurance liabilities from premium
deposit sales in recent periods.
The weighted average credited rates for the first three months of 2000 and 1999
were 4.83% and 4.87%, respectively.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
_________________________
AMORTIZATION includes i) amortization related to the present value of polices
purchased from acquired insurance business, ii) amortization of deferred
policy acquisition costs related to capitalized costs of insurance business
sold and iii) amortization of goodwill and organizational costs.
Amortization in the first three months of 2000 increased $.3 million or 22%, to
$1.8 million. This increase relates to additional amortization of the present
value of future profits and deferred policy acquisition costs due to the
recognition of additional profits from purchased insurance business and
increased sales of annuity products in recent periods.
OTHER OPERATING EXPENSES consist of general operating expenses, including
salaries, and commission expenses, net of deferrable amounts.
Other operating expenses remained relatively flat for the period. Operating
efficiencies achieved enabled the company to generate increased revenues
without a proportionate increase in other operating expenses.
INTEREST EXPENSE AND FINANCING COSTS represents interest expense incurred and
the amortization of related debt issuance costs.
Interest expense and financing costs in the first three months of 2000 reflects
a $2.9 million principal payment in March 2000.
______________________________________________________________________________
INTERNATIONAL OPERATIONS:
<TABLE>
<CAPTION>
Three Months Ended
March 31
<S> <C> <C> <C>
2000 1999
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 23 $ 6
Separate account deposit s 26,966 16,269
Total premiums and deposits collected $ 26,989 $ 16,275
Premium income $ 11 $ 6
Net investment income 126 133
Separate account fees 1,227 921
Total revenues 1,364 1,060
Benefits and claims (26) (58)
Amortization 377 248
Other operating expenses 568 599
Total benefits and expenses 919 789
Operating income before income taxes $ 445 $ 271
</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 represents income earned on corporate assets such as
cash, short-term investments and fixed securities. Net investment income
fluctuates with changes in the amount of average invested assets and the yield
earned on such invested assets.
Net investment income was $.1 million for each of the three month periods of
2000 and 1999 on average invested assets of approximately $11.0 million.
The net investment yields earned on average invested assets were 4.18% and
4.71% for the first three months of 2000 and 1999, 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 three months of 2000 increased $.3
million to $1.2 million. This is due to weighted average assets held in
separate accounts increasing by $94.7 million, or 43% for the period. Net
deposits from sales of unit-linked products by SMI increased $10.7 million or
66%, to $27.0 million in the first three months of 2000.
AMORTIZATION includes the amortization of deferred acquisition costs, such as
commissions and other costs, directly related to selling new business.
Amortization increased $.l million or 52% to $.4 million as a result of
additional profits realized from increased unit linked sales of recent periods.
OTHER OPERATING EXPENSES consist of general operating expenses, including
salaries, and commission expenses, net of deferrable amounts.
Operating expenses remained relatively flat for the period. Operating
efficiencies achieved enabled the company to generate increased revenues
without a proportionate increase in other operating expenses.
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 Corporation ("Standard Management") is a life insurance
holding company whose liquidity requirements are met through payments received
from its subsidiaries. These payments include i) surplus debenture interest,
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 $2.0 million for the first three months of 2000. 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 cash flow of $25.4 million for the first three months of 2000. 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.
At April 28, 2000, Standard Management had "parent company only" cash and
short-term investments of $.5 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 $4.8
million and $3.1 million for 1999 and 1998, respectively.
Standard Management anticipates the available cash from its existing working
capital, plus anticipated 2000 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
2000.
SURPLUS DEBENTURE INTEREST: 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
2, $27.0 million was loaned to Standard Life Insurance Company of Indiana
("Standard Life") pursuant to unsecured surplus debenture agreements ("surplus
debentures") 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, 2000 interest rate of 10.75% continues, Standard Management will
receive interest income of $2.9 million from the Surplus Debentures in 2000.
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.
Standard Life paid a dividend of $2.0 million in first quarter 2000 and has the
ability to pay an additional $2.l million in 2000 if necessary.
MANAGEMENT FEES: Pursuant to a management services' agreement, Standard Life
paid Standard Management $.9 million for the first three months of 2000 for
certain management services related to the production of business and
investment of assets. In addition, Dixie National Life Insurance Company
("Dixie Life') paid Standard Life $.3 million in the first three months of 2000
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 $.3 million in
the first three months of 2000 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 statutory surplus
strain 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 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 2000. As of March 31, 2000,
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. SMC does not anticipate dividends from
SMI in 2000.
IMPACT OF YEAR 2000
The Company updated its main operating computer systems in 1995 with Year 2000
ready systems. 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.
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 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 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; (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.
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, 1999, included in the Company's December 31, 1999
Form 10-K. There have been no material changes in 2000 to these risks or the
management of such risks.
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 first quarter of 2000.
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, 2000
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 620,512
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 358
<MORTGAGE> 8,109
<REAL-ESTATE> 4,379
<TOTAL-INVEST> 669,794
<CASH> 5,877
<RECOVER-REINSURE> 53,907
<DEFERRED-ACQUISITION> 102,548<F1>
<TOTAL-ASSETS> 1,232,944
<POLICY-LOSSES> 751,498
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 31,600
6,530
0
<COMMON> 55,350
<OTHER-SE> 74<F2>
<TOTAL-LIABILITY-AND-EQUITY> 1,232,944
3,178
<INVESTMENT-INCOME> 11,887
<INVESTMENT-GAINS> (336)
<OTHER-INCOME> 3,134<F3>
<BENEFITS> 10,388<F4>
<UNDERWRITING-AMORTIZATION> 2,210
<UNDERWRITING-OTHER> 3,862
<INCOME-PRETAX> 1,877
<INCOME-TAX> 512
<INCOME-CONTINUING> 1,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,365
<EPS-BASIC> .18<F5>
<EPS-DILUTED> .17<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 $30,344 of present value of future profits.
<F2>Includes retained earnings of $15,954 and other comprehensive income of
$(15,880).
<F3>Includes policy charges of $1,907 and fees from separate accounts of $1227.
<F4>Includes benefits and claims of $4,055 and interest credited on financial
products of $6,333.
<F5>EPS data does not include reductions for perferred stock dividends.
</FN>
</TABLE>
