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 JUNE 30, 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, Indiana46240
(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 July 24, 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 --
June 30, 2000 (Unaudited) and December 31, 1999 (Audited) 3
Consolidated Statements of Income --
For the Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)4
Consolidated Statements of Shareholders' Equity --
For the Six Months Ended June 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 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 - 17
Item 3.Quantitative and Qualitative Disclosures about Market Risk 18
Part II.OTHER INFORMATION:
Item 6.Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30 December 31
<S> <C> <C>
2000 1999
(Unaudited) (Audited)
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized cost:
$679,834 in 2000
and $646,284 in 1999) $ 638,288 $ 606,907
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>
<ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><ellipsis><
ellipsis><ellipsis><ellipsis><ellipsis><ellipsis>..
Equity securities, at fair value (cost: $565 in 2000 and
1999) 372 378
Mortgage loans on real estate 6,763 8,131
Policy loans 13,907 14,033
Real estate 4,681 3,233
Other invested assets 775 845
Short-term investments 24,277 14,976
Total investments 689,063 648,503
Cash 1,953 3,659
Accrued investment income 11,313 11,105
Amounts due and recoverable from reinsurers 46,234 58,230
Deferred policy acquisition costs 82,477 67,811
Present value of future profits 30,171 30,688
Goodwill. 5,521 5,636
Other assets 6,235 5,372
Assets held in separate accounts 508,473 319,973
Total assets $ 1,381,440 $1,150,977
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $ 773,626 $ 727,189
Accounts payable and accrued expenses 7,414 9,076
Notes payable 31,600 34,500
Deferred federal income taxes -- 349
Liabilities related to separate accounts 508,473 319,973
Total liabilities 1,321,113 1,091,087
Series A convertible redeemable preferred stock,
par value $100 per share;
Authorized 130,000; 65,300 issued and
outstanding in 1999 and 2000 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
in 2000 and 1999 62,438 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 :
($8,697) in 2000 and ($8,196) in 1999 (16,883) (15,859)
Unrealized gain on other investments, net taxes
of: $8 in 2000 and 1999 15 15
Foreign currency translation adjustment (1,808) (862)
Retained earnings 16,837 14,716
Total shareholders' 53,797 53,360
Total liabilities and shareholders' equity $ 1,381,440 $1,150,977
</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)
Three months ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
Revenues:
Premium income $ 4,482 $ 3,119 $ 7,660 $ 6,184
Net investment income 10,124 10,380 22,011 20,725
Net realized investment gains
(losses) (1,819) 7 (2,155) 40
Policy income 2,105 1,885 4,012 3,514
Negative goodwill amortization -- -- -- --
Separate account fees 1,253 1,084 2,480 2,005
Fee and other income 1,472 1,168 2,810 2,421
Total revenues 17,617 17,643 36,818 34,889
Benefits and expenses:
Benefits and claims 5,470 4,009 9,525 7,254
Interest credited on interest-
sensitive annuities and other
financial products 4,836 5,746 11,169 11,582
Amortization related to
operations 3,110 1,808 5,320 3,557
Amortization related to net
realized investment loss (1,100) -- (1,100) --
Other operating expenses 3,384 3,376 7,247 7,296
Interest expense and
financing costs 824 800 1,687 1,681
Total benefits and expenses 16,524 15,739 33,848 31,370
Income before federal income taxes and
preferred stock dividends 1,093 1,904 2,970 3,519
Federal income tax expense 85 502 597 821
Net income 1,008 1,402 2,373 2,698
Preferred stock dividends (127) (127) (253) (253)
Earnings available to common
shareholders $ 881 $1,275 $2,120 $2,445
Earnings per share - basic:
Net income $ .13 $ .19 $ .30 $ .35
Preferred stock dividends (.02) (.02) (.03) (.03)
Earnings available to common
shareholders $ .11 $ .17 $ .27 $ .32
Earnings per share - diluted:
Net income $ .13 $ .17 $ .30 $ .33
Preferred stock dividends (.02) (.01) (.03) (.02)
Earnings available to common
shareholders $ .11 $ .16 $ .27 $ .31
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
Common
stock and Accumulated
additional other
paid-in Treasury comprehensive retained
Total capital stock income earnings
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 ($4,283) (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
Balance at January 1, 2000 $53,360 $62,152 $(6,802) $(16,706) $14,716
Comprehensive income:
Net income 2,373 2,373
Other comprehensive income:
Change in unrealized gain
(loss) on securities, net
taxes (benefits) of ($501) (1,024) (1,024)
Change in foreign currency,
net taxes of $0 (945) (945)
Other comprehensive income (1,969)
Comprehensive income 404
Issuance of common stock
warrants 286 286
Preferred stock dividends (253) (253)
Balance at June 30, 2000 $53,797 62,438 $(6,802) $(18,675) $16,836
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
June 30
2000 1999
OPERATING ACTIVITIES
Net income $ 2,373 $ 2,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred policy acquisition costs 2,632 1,751
Policy Acquistion costs deferred (17,586) (13,215)
Deferred federal income taxes (211) 1,387
Depreciation and amortization 1,940 1,991
Insurance policy liabilities 10,083 8,717
Net realized investment gains 2,155 (40)
Accrued investment income (209) (502)
Other 473 (633)
Net cash provided by operating activities 1,650 2,155
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (79,462) (126,908)
Sales 33,566 78,289
Maturities, calls and redemptions 9,853 11,355
Short-term investments, net (9,723) (9,550)
Other investments, net (3,073) (922)
Net cash used by investing activities (48,839) (47,736)
FINANCING ACTIVITIES
Issuance of common stock, net 286 673
Borrowings -- 300
Repayments on long term debt (2,900) (200)
Premiums received on interest-sensitive annuities
and other financial products credited to
policyholder account balances, net of premiums
ceded 91,846 84,574
Return of policyholder account balances on
interest-sensitive annuities and other
financial products (43,496) (45,007)
Purchase of common stock for treasury -- (548)
Dividends on preferred stock (253) (253)
Net cash provided by financing activities 45,483 39,539
Net decrease in cash (1,706) (6,042)
Cash at beginning of period 3,659 13,591
Cash at end of period $1,953 7,549
See accompanying notes to consolidated financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 acquistion 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):
Interest June 30 December 31
Rate 2000 1999
Borrowings under revolving credit
agreements 10.26%{(1)} $21,600 $24,500
Senior subordinated convertible
notes 10.00% 10,000 10,000
$31,600 $34,500
Current weighted average rate at June 30, 2000.
NOTE 3 -- NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as
follows (in thousands):
June 30 December 31
2000 1999
Fair value of securities available for
sale $ 638,660 $ 607,285
Amortized cost of securities available
for sale 680,399 646,849
Gross unrealized gain (loss) on securities
available for sale (41,739) (39,564)
Adjustments for:
Deferred policy acquisition cost 10,239 10,527
Present value of future profits 5,920 4,982
Deferred federal income tax liability 8,697 8,196
Net unrealized gain (loss) on securities
available for sale $ (16,883) ($15,859)
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):
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
INCOME:
Net income $ 1,008 $ 1,402 $ 2,373 $ 2,699
Preferred stock dividends (127) (127) (253) (253)
Income available to common
shareholders for basic earnings
per share 881 1,275 2,120 2,446
Effect of dilutive securities:
Interest on subordinated
convertible debt -- 250 -- 500
Income available to common
shareholders for diluted earnings
per share 881 1,525 2,120 2,946
SHARES:
Weighted average shares outstanding
for basic earnings per share 7,785,156 7,556,437 7,785,156 7,576,421
Effect of dilutive securities:
Stock options 1,932 153,668 12,163 160,861
Stock warrants -- 121,518 985 126,673
Subordinated convertible debt -- 1,740,038 -- 1,740,038
Dilutive potential common shares 1,932 2,015,224 13,148 2,027,572
Weighted average shares outstanding
for diluted earnings per share 7,787,088 9,571,661 7,798,304 9,603,993
<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 SIX MONTHS OF 2000 COMPARED WITH THE FIRST SIX MONTHS OF 1999:
The following tables and narratives summarize the results of operations
by operating segment:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Dollars in thousands)
Operating income before income taxes:
Domestic operations $ 1,349 $ 1,529 $ 3,117 $ 2,840
International operations 463 368 908 639
Consolidated operating income
before income taxes 1,812 1,897 4,025 3,479
Applicable income taxes related
to operating income 289 500 874 807
Consolidated operating income
after taxes 1,523 1,397 3,151 2,672
Consolidated realized investment
gains (losses) before income taxes (718) 7 (1,055) 40
Applicable income taxes (benefits)
related to realized investment
gains (losses) 203 2 277 14
Consolidated realized investment
gains (losses) after taxes (benefits) (515) 5 (778) 26
Net income $ 1,008 $ 1,402 $ 2,373 $ 2,698
CONSOLIDATED RESULTS AND ANALYSIS
SMC's six month 2000 operating earnings were $3.2 million, or 40 cents
per diluted share, up 18% and 21%, respectively, over the same six month
period of 1999. Operating earnings include i) increased net spread
revenue from larger in force business from the sales of recent periods,
ii) higher separate account fees due to an increase in separate account
assets for the period and iii) a lower marginal tax rate due to the
utiliztion of net operating loss carry forwards. These increases were
somewhat offset by unfavorable mortality.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
DOMESTIC OPERATIONS:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 4,477 $ 3,102 $ 7,643 $ 6,160
Flexible premium deferred
annuities ("FPDA's") 24,564 30,292 45,308 52,091
Equity-indexed annuities 20,777 17,649 37,927 28,845
Other annuities and deposits 5,380 1,437 7,979 2,868
Universal and interest-sensitive
life 319 284 641 891
Subtotal - interest-sensitive and
other financial products 51,040 49,662 91,855 84,695
Total premiums and deposits
collected $ 55,517 $ 52,764 $ 99,498 $ 90,855
Premium income $ 4,477 $ 3,102 $ 7,643 $ 6,160
Policy income 2,105 1,885 4,012 3,514
Total policy related income 6,582 4,987 11,655 9,674
Net investment income 10,005 10,248 21,766 20,461
Fee and other income 1,472 1,168 2,810 2,421
Total revenues (a) 18,059 16,403 36,231 32,556
Benefits and claims 5,496 3,972 9,577 7,275
Interest credited on interest-
sensitive annuities and other
financial products 4,836 5,746 11,169 11,582
Amortizatin related to operations 2,774 1,571 4,607 3,072
Other operating expenses 2,780 2,785 6,074 6,106
Interest expense and financing costs 824 800 1,687 1,681
Total benefits and expenses 16,710 14,874 33,114 29,716
Operating income before income taxes 1,349 1,529 3,117 2,840
Net realized investment gains
(losses) (718) 7 (1,055) 40
Income before income taxes 631 1,536 2,062 2,880
(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.
PREMIUM INCOME consists of premiums earned from i) traditional life
insurance and ii) annuity business that incorporates significant
mortality features.
Life premiums were up $1.5 million or 24% in the first six months of
2000, to $7.6 million which is primarily a result of higher first year
and renewal traditional life premiums.
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 2000 net premium deposits increased $7.2
million or 8%, to $91.9 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. Four new equity-indexed products were
introduced in the 2000 period. Equity-indexed products contributed 41%
of net premium deposits in the first six months of 2000 compared to 34%
in the first six 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 six months of 2000 increased $1.3
million or 6%, to $21.8 million. Average invested assets at book value
increased by $50.0 million or 16% compared to the first six months of
1999 primarily due to the growth in insurance liabilities from the sale
of annuity premium deposits. This increase was somewhat offset by the
$2.4 million impact from equity-indexed products. See discussion on
"Interest credited on interest sensitive annuities and other financial
products".
The net investment yields earned on average invested assets, excluding
the impact of equity-indexed assets, were 7.15% and 7.08% for the first
six months of 2000 and 1999, respectively.
POLICY INCOME represents i) mortality charges and ii) administrative fees
earned on universal life products and surrender income earned as a result
of terminated life and annuity policies.
Policy income increased $.5 million or 14%, to $4.0 million in the first
six months 2000. This increase primarily relates to surrender income
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 2000 fee income increased $.4 million or 16%,
to $2.8 million. This increase relates to commission income from the
Savers Marketing administrative agreement and the marketing efforts
associated with that business.
<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,
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 six months of 2000 increased $2.3
million, to $9.6 million and includes higher claim experience and changes
in future policy reserves for higher traditional life premiums.
INTEREST CREDITED ON INTEREST-SENSITIVE ANNUITIES AND OTHER FINANCIAL
PRODUCTS represents interest credited to the FPDA's, equity-indexed
annuities, interest sensitive and other financial products.
In the first six months of 2000 interest credited declined by $.4 million
or 4%, to $11.2 million due to a $.6 million impact of equity-indexed
products. This expense was also impacted by interest credited on
insurance liabilities from sales in recent periods.
The weighted average credited rates, excluding the impact of equity-indexed
liabilities, for the first six months of 2000 and 1999 were 4.93% and 4.92%,
respectively.
AMORTIZATION includes i) amortization related to the present value of
polices purchased from acquired insurance businesss, ii) amortization
of deferred policy acquisition costs and iii)amortization of goodwill and
organizational costs.
Amortization in the first six months of 2000 increased $1.5 million or
50%, to $4.6 million. The increased amortization was due to i) .7 million
of amortization in connection with production of new business, ii) increased
surrender income that resulted in approximately $.4 million of additional
amortization, and iii) $.3 million of amortization related to purchased
insurance business.
NET REALIZED INVESTMENT GAINS (LOSSES) fluctuate from period to period and
generally arise when securities are sold in response to changes in the
investment environment which provides opportunities to maximize return on the
investment portfolio without adversely affecting the quality and overall
yield. Net realized investment gains (losses) can affect the timing of the
amortization of deferred acquistion costs and the amortization of the present
value of future profits.
Net realized investment losses for the first six months of 2000 were $1.1
million which is reduced by $1.1 million of deferred acquisition cost
amortization. Realized losses primarily resulted from the default status of
debt securities issued by Laidlaw, Inc.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
INTERNATIONAL OPERATIONS:
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
(Dollars in thousands)
Premiums and deposits collected:
Traditional life $ 5 $ 17 $ 17 $ 24
Separate account deposits 65,267 9,152 92,233 25,421
Total premiums and deposits
collected 65,272 9,169 92,250 25,445
Premium income 5 17 17 24
Net investment income 119 132 245 264
Separate account fees 1,253 1,084 2,480 2,005
Total revenues 1,377 1,233 2,742 2,293
Benefits and claims (26) 37 (52) (21)
Amortization related to
operations 336 237 713 485
Other operating expenses 604 591 1,173 1,190
Total benefits and expenses 914 865 1,834 1,654
Operating income before
income taxes 463 368 908 639
<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").
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 2000 and 1999 on average invested assets of approximately $11.0
million.
The net investment yields earned on average invested assets were 4.63%
and 4.85% for the first six 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 six months of 2000 increased
78% to $2.5 million. This is due to weighted average assets held in
separate accounts increasing by $192.6 million, or 92% for the period.
Actual separate account assets increased $290.4 million or 133%, to
$508.5 million for the twelve months ending June 30, 2000. Net deposits
from sales of unit-linked products by SMI increased $66.8 million or
263%, to $92.2 million.
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 $1.7 million for the first six months of 2000. 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 $50.0 million for the first
six 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 July 24, 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 3, $27.0 million was loaned to
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
June 30, 2000 interest rate of 11.5% continues, Standard Management will
receive interest income of $3 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 the first quarter 2000 and has the ability to pay an
additional $2.1 million in 2000 if necessary.
MANAGEMENT FEES. Pursuant to a management services agreement, Standard
Life paid Standard Management $2.4 million for the first six months of
2000 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 $.6 million in the first six 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 its subsidiaries $.6
million in the first six 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 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 2000. 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 needrises 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 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 and 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 and
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
by reference herein.
<PAGE>
STANDARD MANAGEMENT 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, 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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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 2000.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
__________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 1, 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)
<PAGE>
