Standard Management has filed with the SEC preliminary proxy materials relating to (i) the special meeting of shareholders to be held for the purpose of approving the Agreement and the transactions contemplated thereby and (ii) the solicitation of consents from holders of trust preferred securities of SMAN Capital Trust I to an amendment to the Indenture relating to such securities. Standard Management has set May 18, 2005 as the date for a special meeting of shareholders to vote on the approval of the sale of its subsidiary, Standard Life, to Capital Assurance. Definitive proxy materials will be sent to all shareholders of record (as of April 4, 2005) on or about April 11, 2005.
Estimated fair values for our investments are determined based on estimates from nationally recognized pricing services, broker-dealer market makers, and internally developed methods. Our internally developed methods require us to make judgments about the security’s credit quality, liquidity and market spread.
Financial Services: Net income for 2004 was $2.2 million compared to a net loss of $.2 million for 2003. The 2004 net income was primarily impacted by an increase in net spread income and policy income of $2.1 million net of taxes and net of amortization. The 2003 net loss was negatively impacted by a charge of accelerated amortization of DAC of $5.2 million. Net realized gains after taxes and amortization was $.3 million and $5.4 million during 2004 and 2003, respectively.
• Our net investment yield for 2004, 2003 and 2002 was 4.86%, 5.34% and 6.53%, respectively.
• During 2003, operating expenses increased by $1.3 million or 18%, to $8.4 million. Operating expenses increased as a result of our capitalizing $1.2 million less operating expense during 2003 as a decline in annuity sales from the record levels of $600 million for 2002 to $421 million for 2003 did not result in a corresponding decline in variable costs. In addition, operating expenses in 2003 increased by $.4 million for legal costs, including settlement amounts for the favorable disposition of several non-material claims and proceedings in the normal course of business.
• During 2004, affiliated interest expense and financing costs remained unchanged from 2003 at $1.7 million.
Operating income - affiliated consists primarily of income from the Financial Services segment related to management fees and rental income.
• During 2004, other operating expenses decreased $.3 million or 5% to $6.1 million.
In addition, we anticipate that Standard Life, after the sale, will still lease space from us for at least three years for $480,000 per year. We also anticipate receiving $350,000 of annual dividends under the $5 million of newly issued 7% perpetual -cumulative exchangeable preferred stock we expect to receive as partial consideration in our sale of Standard Life.
• additional $.5 million principal reduction payment to be made upon the sale of Standard Life.
• may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;
The principal capital requirements of Standard Life are its 1) contractual obligations to policyholders, 2) surplus debenture interest, dividends, management fees and rental fees to Standard Management and 3) operating expenses. The primary source of funding for these obligations has been cash flow from premium income, net investment income, investment sales and maturities and sales of annuity products. These sources of liquidity for Standard Life exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits, 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 and events in the industry that affect policyholders’ confidence. In July 2004, Standard Life received a rating from A.M. Best of (“B”), or “fair” with a stable outlook, a one-category reduction from its previous rating of (“B+”), or “very good”.
The principal capital requirements of our Health Services segment are its 1) cost of goods sold, 2) operating expenses, and 3) future acquisitions. The primary source of funding for these obligations has been 1) cash flow from pharmaceutical sales, 2) internal borrowings from Standard Management and external borrowings, and 3) capital contributions from Standard Management. The capital requirements of our Health Services segment have significantly exceeded revenues from pharmaceutical sales.
Our health services segment is subject to substantial regulation at both the state and Federal levels. Our ability to continue operating as a retail, mail order and institutional pharmacy is contingent upon our ability to maintain appropriate licenses in all the states in which they currently conduct business. We are also required to comply with a comprehensive set of regulations under the Federal Health Insurance Portability and Accountability Act (“HIPAA”) with respect to the privacy and security of patient health information and the method in which this information is electronically transmitted to payors and governmental agencies such as the agencies responsible for implementing the Medicare and Medicaid programs. Regulations implementing HIPAA are still being disseminated, revised and actively reviewed as of the time of this writing. It is possible that substantial changes in these regulations, or in the strictness of interpretation of these regulations, may adversely affect our relationships with our clients and materially affect our future operations by increasing the costs of regulatory compliance. As with the insurance laws, we cannot predict the impact of future state or Federal laws or regulations on its health services business.