<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STANDARD MANAGEMENT CORPORATION
(Exact Name of Registrant as Specified in Its charter)
<TABLE>
<S> <C> <C>
INDIANA 6719 35-1773567
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
9100 KEYSTONE CROSSING
INDIANAPOLIS, INDIANA 46240
(317) 574-6200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
STEPHEN M. COONS
9100 KEYSTONE CROSSING
INDIANAPOLIS, INDIANA 46240
(317) 574-6200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies To:
JOHN M. O'HARE
SIDLEY & AUSTIN
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
APPROXIMATE DATE COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
effective time of the merger (the "Merger") of Standard Acquisition Corporation,
a wholly owned subsidiary of Standard Management Corporation ("SMC"), with and
into Savers Life Insurance Company ("Savers Life"), pursuant to the Merger
Agreement described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without par value....... (2) (2) $14,740,503 $4,349(3)(4)
================================================================================================================
</TABLE>
(1) Pursuant to Rule 457(f)(2) under the Securities Act, based on the book value
of the outstanding shares of Common Stock, no par value, of Savers Life
("Savers Life Common Stock"), on September 30, 1997, assuming the exercise
of all outstanding options to purchase shares of Savers Life Common Stock.
(2) The amount to be registered and the proposed maximum offering price per
share have been omitted pursuant to Rule 457(o) under the Securities Act.
(3) The registration fee was calculated pursuant to Rule 457(o) under the
Securities Act.
(4) The securities being offered hereby and the associated filing fee are being
carried forward from Registration Statement No. 333-35447 pursuant to Rule
429 under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
PURSUANT TO RULE 429, THE PROSPECTUS CONSTITUTING A PART OF THIS
REGISTRATION STATEMENT ALSO RELATES TO REGISTRATION STATEMENT NO. 333-35447.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
SAVERS LIFE LOGO
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA 27106
(910) 759-3888
Dear Stockholder:
We are pleased to invite you to a Special Meeting of Stockholders of Savers
Life Insurance Company ("Savers Life") to be held on
local time, at the , Winston-Salem,
North Carolina.
Savers Life has entered into an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") dated as of December 9, 1997 among Standard
Management Corporation ("SMC"), Standard Acquisition Corporation, a wholly-owned
subsidiary of SMC ("SAC"), and Savers Life pursuant to which SAC would merge
with and into Savers Life and each share of Common Stock, no par value, of
Savers Life ("Savers Life Common Stock"), outstanding immediately prior to the
Effective Time (as defined in the Merger Agreement) of the Merger would be
converted into 1.2 shares of Common Stock, without par value, of SMC ("SMC
Common Stock") plus $1.50. Each holder of Savers Life Common Stock may elect to
receive the $1.50 per share portion of the merger consideration in the form of
additional shares of SMC Common Stock.
The enclosed Proxy Statement/Prospectus describes the Merger Agreement in
detail. The Merger Agreement replaces the Agreement and Plan of Merger, dated as
of December 19, 1996, as amended, that was the subject of the Special Meeting of
Stockholders previously called for October 22, 1997. The meeting was postponed
indefinitely. Holders of approximately 22% of the Savers Life Common Stock had
filed notice of intent to exercise dissenters' rights, and the Savers Life Board
of Directors postponed the meeting to consider what would be in the best
interests of the Savers Life stockholders. Between October 22, 1997, and
December 9, 1997, management of Savers Life and SMC negotiated changes to the
terms of the proposed transaction, resulting in the Merger Agreement that is now
being presented to stockholders for approval. The SMC Board approved the Merger
Agreement on December 9, 1997. The Savers Life Board approved the Merger
Agreement on December 12, 1997.
After careful consideration, your Board of Directors unanimously approved
the Merger Agreement and the transactions contemplated thereby. The Board
believes that the proposed Merger is fair, equitable and in the best interests
of Savers Life and its stockholders and recommends that you vote FOR the
proposal to approve the Merger Agreement. The accompanying Proxy
Statement/Prospectus provides a detailed description of the proposed
transactions. Please give this material your thoughtful attention.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Savers Life Common Stock.
Accordingly, your vote is very important. To ensure that your shares are
represented, please vote, date, sign and mail the enclosed proxy in the envelope
provided, whether or not you expect to be present at the Special Meeting.
PLEASE NOTICE THAT, IF YOU DESIRE TO ELECT TO RECEIVE SHARES OF SMC COMMON
STOCK IN LIEU OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION, YOU MUST
SUBMIT THE ENCLOSED FORM OF ELECTION, IN ACCORDANCE WITH THE INSTRUCTIONS ON
THAT FORM, NO LATER THAN 5:00 P.M., LOCAL TIME, ON . PLEASE SEND
THE FORM OF ELECTION TO SAVERS LIFE WITH YOUR PROXY.
Sincerely,
Jerry D. Stoltz, Sr.
President
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
SAVERS LIFE INSURANCE COMPANY
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
To the Stockholders of Savers Life Insurance Company:
A Special Meeting of Stockholders of Savers Life Insurance Company ("Savers
Life") will be held at , local time, on , at the
, Winston-Salem, North Carolina, for the following purposes:
1. To consider and vote upon a proposal to approve the Amended and Restated
Agreement and Plan of Merger dated as of December 9, 1997 (the "Merger
Agreement") among Standard Management Corporation ("SMC"), Standard
Acquisition Corporation, a wholly-owned subsidiary of SMC ("SAC"), and
Savers Life.
2. To transact such other business as may be properly brought before the
meeting.
As described more fully in the accompanying Proxy Statement/Prospectus, the
Merger Agreement provides for, among other things:
(i) the merger (the "Merger") of SAC with and into Savers Life; and
(ii) the conversion of each share of Savers Life Common Stock
outstanding immediately prior to the Merger (other than shares held by
Savers' stockholders who properly exercise their dissenters' appraisal
rights under North Carolina law) into (1) 1.2 shares of Common Stock,
without par value, of SMC ("SMC Common Stock") and (2) $1.50 in cash or at
the election of the holder thereof, $1.50 in value of SMC Common Stock.
After careful consideration, your Board of Directors unanimously approved
the Merger Agreement. The Board recommends that you vote FOR the proposal to
approve the Merger Agreement.
Stockholders of record at the close of business on January 23, 1998, are
entitled to notice of and to vote at the meeting.
Under North Carolina law, the affirmative vote of holders of a majority of
the outstanding shares of Savers Life Common Stock is required to approve the
Merger Agreement. It is, therefore, important that your shares be represented at
the Special Meeting regardless of the number of shares you may hold. ANY
STOCKHOLDER SHALL HAVE THE RIGHT TO OBJECT TO THE MERGER AND TO RECEIVE PAYMENT
OF THE FAIR VALUE OF HIS SHARES OF SAVERS LIFE COMMON STOCK UPON COMPLIANCE WITH
SECTION 55-13-01, ET. SEQ., OF THE NORTH CAROLINA BUSINESS CORPORATION ACT. FOR
A DESCRIPTION OF DISSENTERS' APPRAISAL RIGHTS, SEE THE INFORMATION PROVIDED IN
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS UNDER THE CAPTION "DISSENTERS'
RIGHTS." See also Annex B to the accompanying Proxy Statement/Prospectus for the
text of Sections 55-13-01 through 55-13-31 of the North Carolina Business
Corporation Act. Notwithstanding the above, under the Merger Agreement, if the
holders of more than 5% of Savers Life Common Stock exercise dissenters'
appraisal rights, then SMC has the right to terminate the Merger Agreement,
unless it waives such right.
STOCKHOLDERS ARE URGED TO VOTE, SIGN AND MAIL THE ACCOMPANYING PROXY IN THE
ENVELOPE PROVIDED, WHETHER OR NOT THEY EXPECT TO BE PRESENT AT THE SPECIAL
MEETING.
<PAGE> 4
Please check to be certain of the manner in which your shares are
registered -- whether individually, as joint tenants, or in a representative
capacity -- and sign the proxy accordingly. Failure to do so may disqualify your
vote.
Patricia G. Landy
Secretary
Winston-Salem, North Carolina
IMPORTANT
STOCKHOLDERS ARE URGED TO FILL OUT, DATE AND RETURN THE ENCLOSED FORM OF
PROXY IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE AS PROMPTLY AS POSSIBLE, EVEN
THOUGH THEY PLAN TO ATTEND THE MEETING. ANY STOCKHOLDER PRESENT AT THE
MEETING MAY, NEVERTHELESS, VOTE PERSONALLY ON ALL MATTERS.
PLEASE NOTE THAT, IF YOU DESIRE TO ELECT TO RECEIVE SMC COMMON STOCK IN LIEU
OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION, YOU MUST SUBMIT THE
ENCLOSED FORM OF ELECTION, IN ACCORDANCE WITH THE INSTRUCTIONS ON THAT FORM,
NO LATER THAN 5:00 P.M., LOCAL TIME, ON , 1998. PLEASE SEND THE
FORM OF ELECTION TO SAVERS LIFE WITH YOUR PROXY. DO NOT SEND YOUR STOCK
CERTIFICATES.
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
STANDARD MANAGEMENT CORPORATION LOGO
STANDARD MANAGEMENT CORPORATION
9100 KEYSTONE CROSSING
INDIANAPOLIS, INDIANA 46240
To the Stockholders of
STANDARD MANAGEMENT CORPORATION
You are cordially invited to attend the Special Meeting of Stockholders of
Standard Management Corporation ("SMC") to be held at , local time, on
, at the Woodland Country Club, 100 Woodland Lane, Carmel, Indiana.
On December 20, 1996, SMC and Savers Life Insurance Company ("Savers Life")
entered into an Agreement and Plan of Merger (the "1996 Merger Agreement")
providing for, among other things, the merger of a wholly-owned subsidiary of
SMC with and into Savers Life, with Savers Life surviving as a wholly-owned
subsidiary of SMC. Consummation of the transactions contemplated by the 1996
Merger Agreement was subject to the approval of SMC stockholders and Savers Life
stockholders. In addition, SMC reserved the right not to consummate such
transactions if 5% or more of the Savers Life stockholders perfected their
dissenters' rights under the North Carolina Business Corporation Act. The
approval of SMC stockholders was secured at the SMC Annual Meeting of
Stockholders held on October 22, 1997. The meeting of Savers Life stockholders
originally scheduled to be held on October 22, 1997, at which the 1996 Merger
Agreement was to be considered, was postponed indefinitely. Holders of
approximately 22% of the Common Stock, no par value, of Savers Life ("Savers
Life Common Stock") had filed notice of intent to exercise dissenters' rights.
Thereafter, discussions continued to restructure the proposed transaction. The
Merger Agreement referenced below is the product of those discussions.
At the SMC Special Meeting, holders of Common Stock, without par value, of
SMC ("SMC Common Stock") will be asked to consider and act upon a proposal to
approve the issuance (the "Common Stock Issuance") of SMC Common Stock pursuant
to the Amended and Restated Agreement and Plan of Merger dated as of December 9,
1997, (the "Merger Agreement"), among SMC, Standard Acquisition Corporation, a
wholly-owned subsidiary of SMC ("SAC"), and Savers Life. The Merger Agreement
provides for the merger (the "Merger") of SAC with and into Savers Life, with
Savers Life surviving as a wholly-owned subsidiary of SMC. Subject to the terms
and conditions of the Merger Agreement, each share of Savers Life Common Stock
outstanding immediately prior to the Effective Time (as defined in the Merger
Agreement) of the Merger will be converted into 1.2 shares of SMC Common Stock
plus $1.50. Each holder of Savers Life Common Stock may elect to receive the
$1.50 per share portion of the merger consideration in the form of additional
shares of SMC Common Stock.
The SMC Board of Directors (the "SMC Board") has unanimously determined
that the Merger and the issuance of SMC Common Stock in connection therewith are
advisable and fair to and in the best interests of SMC and its stockholders and
has unanimously approved the Merger Agreement and the transactions contemplated
thereby. THE SMC BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF SMC VOTE
IN FAVOR OF APPROVAL OF THE COMMON STOCK ISSUANCE AT THE SMC SPECIAL MEETING.
Regardless of your plans for attending in person, it is important that your
shares be represented at the meeting. Therefore, please complete, sign, date and
return the enclosed proxy card in the enclosed, post-paid envelope. This will
enable you to vote on the business to be transacted whether or not you attend
the meeting.
We look forward to seeing you at the Special Meeting.
Sincerely,
RONALD D. HUNTER
Ronald D. Hunter
Chairman, President and
Chief Executive Officer
<PAGE> 6
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
STANDARD MANAGEMENT CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
To the Stockholders of
STANDARD MANAGEMENT CORPORATION:
A Special Meeting of Stockholders (the "SMC Special Meeting") of Standard
Management Corporation ("SMC") will be held at , local time, on
, 1998 at the Woodland Country Club, 100 Woodland Lane, Carmel,
Indiana, to consider and vote on the issuance of shares of Common Stock, without
par value, of SMC in connection with the acquisition by SMC of Savers Life
Insurance Company (the "Common Stock Issuance").
The Common Stock Issuance is more fully described in the accompanying Proxy
Statement/Prospectus. In addition, the stockholders will transact such other
business as may properly come before the SMC Special Meeting or any adjournment
or postponements thereof. Only stockholders of record at the close of business
on January 23, 1998 are entitled to notice of, and to vote at, the SMC Special
Meeting or any adjournments thereof.
Your attention is directed to the accompanying Proxy Statement/Prospectus
and proxy card. Whether or not you plan to attend the SMC Special Meeting in
person, you are urged to complete, sign, date and return the enclosed proxy card
in the enclosed, post-paid envelope. If you attend the SMC Special Meeting and
wish to vote in person, you may withdraw your proxy and vote your shares
personally.
By order of the Board of Directors
STEPHEN M. COONS
Stephen M. Coons
Executive Vice President and Secretary
Indianapolis, Indiana
<PAGE> 7
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
STANDARD MANAGEMENT CORPORATION
AND
SAVERS LIFE INSURANCE COMPANY
JOINT PROXY STATEMENT
-------------------------
STANDARD MANAGEMENT CORPORATION
PROSPECTUS
-------------------------
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to the holders of Common Stock, without par value ("SMC Common
Stock"), of Standard Management Corporation, an Indiana corporation ("SMC"), in
connection with the solicitation of proxies by the Board of Directors of SMC
(the "SMC Board") for use at its Special Meeting of Stockholders to be held at
the Woodland Country Club, 100 Woodland Lane, Carmel, Indiana, on
, 1998, at , local time, and any adjournments or
postponements thereof (the "SMC Special Meeting").
This Proxy Statement/Prospectus is also being furnished to the holders of
Common Stock, no par value ("Savers Life Common Stock"), of Savers Life
Insurance Company, a North Carolina domestic stock insurance company ("Savers
Life"), in connection with the solicitation of proxies by the Board of Directors
of Savers Life (the "Savers Life Board") for use at its Special Meeting of
Stockholders to be held at , Winston-Salem, North
Carolina, on , 1998, at , local time, and any adjournments
thereof (the "Savers Life Special Meeting").
This Proxy Statement/Prospectus relates to the Amended and Restated
Agreement and Plan of Merger dated as of December 9, 1997 (the "Merger
Agreement"), among SMC, Standard Acquisition Corporation, a North Carolina
corporation and wholly-owned subsidiary of SMC ("SAC"), and Savers Life. The
Merger Agreement provides for the merger (the "Merger") of SAC with and into
Savers Life, with Savers Life surviving as a wholly-owned subsidiary of SMC.
Subject to the terms and conditions of the Merger Agreement, each share of
Savers Life Common Stock held immediately prior to the Effective Time (as
defined in the Merger Agreement) of the Merger will be converted into 1.2 shares
of SMC Common Stock plus $1.50. Each holder of Savers Life Common Stock may
elect to receive the $1.50 per share portion of the merger consideration in the
form of additional shares of SMC Common Stock.
(continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 23 FOR A DESCRIPTION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS OF SAVERS LIFE COMMON STOCK AND SMC
COMMON STOCK BEFORE VOTING ON MATTERS PERTAINING TO THE MERGER.
The consummation of the Merger is subject, among other things, to (i) the
approval of the Merger Agreement by a majority of the votes entitled to be cast
at the Savers Life Special Meeting; (ii) the approval of the issuance of SMC
Common Stock pursuant to the Merger in accordance with the terms of the Merger
Agreement (the "Common Stock Issuance") by a majority of the votes cast on the
proposal to approve the Common Stock Issuance at the SMC Special Meeting; and
(iii) the receipt of certain regulatory approvals.
This Proxy Statement/Prospectus also constitutes the Prospectus of SMC
filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
shares of SMC Common Stock constituting the Common Stock Issuance.
SMC Common Stock trades on Nasdaq under the symbol "SMAN." There is no
established public trading market for Savers Life Common Stock. On December 20,
1996, the last trading day ending prior to the public announcement of the
execution of the 1996 Merger Agreement described in "SUMMARY -- Background," the
last reported sale price of SMC Common Stock, as reported by Nasdaq, was $4.375
per share. On December 12, 1997, the last trading day ending prior to the public
announcement of the execution of the Merger Agreement, the last reported sale
price of SMC Common Stock, as reported by Nasdaq, was $6.875 per share. On
, 1998, the last trading day prior to the date of this Proxy
Statement/Prospectus, the last reported sale price of SMC Common Stock, as
reported by Nasdaq, was $ per share.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to stockholders of SMC and Savers Life on or about
.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
The date of this Proxy Statement/Prospectus is , 1998.
<PAGE> 8
(continued from previous page)
Notwithstanding the foregoing, holders of Savers Life Common Stock have the
right to dissent from the Merger and to receive payment of the fair value of
their stock upon full compliance with Section 55-13-01, et. seq., of the North
Carolina Business Corporation Act (the "NCBCA"). A vote in favor of the Merger
proposal precludes the exercise of dissenters' rights; an abstention, a failure
to vote or a vote against the Merger proposal neither waives the right to
dissent nor constitutes notice of intent to exercise dissenters' rights. See
"DISSENTERS' RIGHTS." If holders of more than 5% of the shares of Savers Life
Common Stock outstanding immediately prior to the Effective Time properly demand
dissenters' rights, SMC will have the right to decline to consummate the Merger.
See "THE MERGER AGREEMENT -- Conditions Precedent to the Merger."
HOLDERS OF SAVERS LIFE COMMON STOCK WHO WISH TO RECEIVE SMC COMMON STOCK IN
LIEU OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION MUST RETURN THE FORM
OF ELECTION THAT ACCOMPANIES THIS PROXY STATEMENT/PROSPECTUS TO SAVERS LIFE BY
5:00 P.M., LOCAL TIME, ON , 1998. HOLDERS OF SAVERS LIFE COMMON
STOCK WHO DO NOT WISH TO RECEIVE SHARES OF SMC COMMON STOCK IN LIEU OF THE $1.50
CASH PORTION OF THE MERGER CONSIDERATION NEED NOT RETURN SUCH FORM OF ELECTION.
HOLDERS OF SMC COMMON STOCK AND HOLDERS OF SAVERS LIFE COMMON STOCK MAY
SUBMIT OR REVOKE PROXIES BY FACSIMILE TRANSMISSION. SEE "SMC SPECIAL MEETING --
PROXIES" AND "SAVERS LIFE SPECIAL MEETING -- PROXIES."
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... 1
INCORPORATION OF DOCUMENTS BY REFERENCE..................... 1
SUMMARY..................................................... 3
Background................................................ 3
SMC Special Meeting....................................... 3
Savers Life Special Meeting............................... 4
Parties to the Merger Agreement........................... 4
The Merger................................................ 5
The Merger Agreement...................................... 7
Comparative Rights of Stockholders; Description of SMC
Common Stock........................................... 9
Dissenters' Rights........................................ 9
SMC Selected Historical Financial Data.................... 10
Savers Life Selected Historical Financial Data............ 12
SMC Selected Unaudited Pro Forma Combined Financial
Data................................................... 13
Comparative Per Share Data of SMC and Savers Life......... 21
Market Prices and Dividends Paid.......................... 22
RISK FACTORS................................................ 23
SMC SPECIAL MEETING......................................... 26
Date, Place and Time...................................... 26
Purpose................................................... 26
Record Date; Voting Rights................................ 26
Quorum.................................................... 26
Proxies................................................... 27
Solicitation of Proxies................................... 27
Required Vote............................................. 27
Dissenters' Rights........................................ 28
SAVERS LIFE SPECIAL MEETING................................. 28
Date, Place and Time...................................... 28
Purpose................................................... 28
Record Date; Voting Rights................................ 28
Quorum.................................................... 28
Proxies................................................... 28
Solicitation of Proxies................................... 29
Required Vote.............................................
Dissenters' Rights........................................ 30
PARTIES TO THE MERGER AGREEMENT............................. 30
SMC....................................................... 30
Savers Life............................................... 30
SAC....................................................... 30
THE MERGER.................................................. 31
General................................................... 31
Background of the Merger.................................. 31
SMC's Reasons for the Merger; Recommendation of its Board
of Directors........................................... 35
Savers Life's Reasons for the Merger; Recommendation of
its Board of Directors................................. 36
Interests of Certain Persons in the Merger................ 37
Material Federal Income Tax Consequences.................. 38
Anticipated Accounting Treatment.......................... 40
Regulatory Approvals...................................... 40
Percentage Ownership Interest of Savers Life Stockholders
After the Merger....................................... 40
</TABLE>
i
<PAGE> 10
Operation of Savers Life After the Effective Time......... 41
Resales of SMC Common Stock............................... 41
THE MERGER AGREEMENT........................................ 41
Conversion of Shares in the Merger........................ 41
No Fractional Shares...................................... 42
Adjustment of Exchange Ratio.............................. 42
Exchange Agent; Procedures for Exchange of Certificates
and Delivery of Cash................................... 42
Stock Options............................................. 43
Representations and Warranties............................ 43
Conduct of Business Pending the Merger.................... 44
Conditions Precedent to the Merger........................ 45
Termination............................................... 46
Fees and Expenses......................................... 47
Amendment and Waiver; Governing Law....................... 48
VOTING AGREEMENTS........................................... 48
DESCRIPTION OF SMC COMMON STOCK............................. 48
COMPARATIVE RIGHTS OF STOCKHOLDERS.......................... 49
Common Stock.............................................. 49
Preferred Stock........................................... 49
Voting.................................................... 50
Directors................................................. 50
Dissenters' Rights........................................ 51
Stockholder Suits......................................... 51
Amendment of Charter and Bylaws........................... 51
Nominations of Directors and Business Presented at Annual
Meetings............................................... 51
Indemnification and Limitation of Liability............... 52
Provisions Applicable to Business Combinations and Changes
in Control............................................. 53
DISSENTERS' RIGHTS.......................................... 53
ADDITIONAL INFORMATION REGARDING SMC........................ 55
Business of SMC........................................... 55
Introduction........................................... 55
Acquisition Strategy................................... 56
Marketing.............................................. 57
Products............................................... 59
Operations............................................. 64
Investments............................................ 64
Separate Accounts...................................... 67
Underwriting........................................... 68
Reserves............................................... 68
Reinsurance............................................ 68
Competition............................................ 71
Federal Income Taxation................................ 72
Inflation.............................................. 72
Foreign Operations and Currency Risk................... 73
Regulatory Factors..................................... 73
Employees.............................................. 77
Properties............................................. 78
Legal Proceedings...................................... 78
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 79
Introduction........................................... 79
ii
<PAGE> 11
Discussion of Changes in the Consolidated Statement of
Operations from Nine Months Ended September 30, 1997
to Nine Months Ended September 30, 1996............... 82
Discussion of Changes in the Consolidated Statement of
Operations from Year Ended December 31, 1996 to Year
Ended December 31, 1995............................... 85
Discussion of Changes in the Consolidated Statement of
Operations from Year Ended December 31, 1995 to Year
Ended December 31, 1994............................... 88
Liquidity and Capital Resources........................ 90
Factors That May Affect Future Results................. 95
Directors and Executive Officers.......................... 96
Directors and Executive Officers....................... 96
Compensation of Directors.............................. 97
Executive Compensation.................................... 98
Summary Compensation Table............................. 98
Option Grants In Last Fiscal Year...................... 99
Aggregated Option Exercises in Last Fiscal Year and
FY-End Option Values.................................. 99
Employment Agreements.................................. 100
Voting Securities and Principal Holders Thereof........... 101
Certain Relationships and Related Transactions............ 102
ADDITIONAL INFORMATION REGARDING SAVERS LIFE................ 103
Description of Business................................... 103
Introduction........................................... 103
Marketing.............................................. 103
Products............................................... 104
Operations............................................. 107
Investments............................................ 108
Underwriting........................................... 110
Reserves............................................... 111
Reinsurance............................................ 111
Competition............................................ 112
Federal Income Taxation................................ 112
Inflation.............................................. 112
Regulatory Factors..................................... 113
Employees.............................................. 115
Properties............................................. 115
Legal Proceedings...................................... 115
Market Price and Dividends on Savers Life Common Stock and
Related Stockholder Matters............................ 115
Voting Securities and Principal Holders Thereof........... 116
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 118
Introduction........................................... 118
Discussion of Changes in the Statement of Operations
from Nine Months Ended September 30, 1997 to Nine
Months Ended September 30, 1996....................... 119
Discussion of Changes in the Statement of Operations
from Year Ended December 31, 1996 to Year Ended
December 31, 1995..................................... 120
Discussion of Changes in the Statement of Operations
from Year Ended December 31, 1995 to Year Ended
December 31, 1994..................................... 122
Liquidity and Capital Resources........................ 123
EXPERTS..................................................... 125
LEGAL OPINIONS.............................................. 125
STOCKHOLDER PROPOSALS....................................... 125
ANNUAL REPORT TO STOCKHOLDERS OF SMC........................ 125
OTHER MATTERS............................................... 125
iii
<PAGE> 12
GLOSSARY.................................................... 126
SMC CONSOLIDATED FINANCIAL STATEMENTS....................... F-1
SAVERS LIFE FINANCIAL STATEMENTS............................ F-49
SMC UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS....... F-76
Annex A Merger Agreement
Annex B Sections 55-13-01 through 55-13-31 of the NCBCA
iv
<PAGE> 13
AVAILABLE INFORMATION
SMC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices
of the SEC: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy statements and other information regarding registrants who file
electronically with the SEC. SMC files electronically with the SEC. Copies of
such materials relating to SMC can also be inspected at the offices of Nasdaq,
1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. Reference is made to the Registration
Statement and the Exhibits thereto for further information. Statements contained
or incorporated by reference herein concerning the provisions of any agreement
or other document filed as an Exhibit to the Registration Statement or otherwise
filed with the SEC are not necessarily complete and reference is hereby made to
the copy thereof so filed for more detailed information, each such statement
being qualified in its entirety by such reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
PREVIOUSLY FILED BY SMC WITH THE SEC THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS THERETO WHICH ARE NOT
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, TO
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF SHARES OF SAVERS LIFE COMMON STOCK
OR SMC COMMON STOCK TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON
WRITTEN OR ORAL REQUEST TO STANDARD MANAGEMENT CORPORATION, 9100 KEYSTONE
CROSSING, INDIANAPOLIS, INDIANA 46240, ATTENTION: KEVIN WEDMORE (TELEPHONE
NUMBER (317) 574-6200). IN ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE
SAVERS LIFE SPECIAL MEETING OR THE SMC SPECIAL MEETING, AS THE CASE MAY BE, ANY
REQUEST THEREFOR SHOULD BE MADE NOT LATER THAN , 1998.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents heretofore filed by SMC with the SEC (file number
0-20882) pursuant to the Exchange Act are incorporated herein by reference:
1. SMC's Annual Report on Form 10-K, as amended by SMC's Annual Reports on
Form 10-K/A No. 1 and Form 10-K/A No. 2 for the year ended December 31, 1996;
2. SMC's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997, as amended by SMC's Quarterly Reports on Form 10-Q/A No.
1 for the quarters ended March 31, 1997 and June 30, 1997, respectively, and
SMC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997;
3. SMC's Current Reports on Form 8-K dated January 22, 1997, January 24,
1997, as amended by SMC's Current Reports on Form 8-K/A filed February 19, 1997,
April 10, 1997, May 20, 1997 and August 29, 1997, SMC's Current Report on Form
8-K dated February 17, 1997, SMC's Current Report on Form 8-K dated October 8,
1997 and SMC's Current Report on Form 8-K dated October 29, 1997.
4. The description of the SMC's Common Stock contained in the Registration
Statement on Form 8-A filed by SMC with the SEC on November 20, 1992, including
any amendments or reports filed for the purpose of updating such description.
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<PAGE> 14
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY EITHER SMC OR SAVERS LIFE. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES, NOR DOES IT CONSTITUTE THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF SMC OR SAVERS LIFE SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
As used herein, unless the context otherwise clearly requires, "SMC" refers
to Standard Management Corporation and its consolidated subsidiaries and
"Standard Management" refers to Standard Management Corporation on an
unconsolidated basis. Definitions of certain terms used herein are set forth in
the Glossary included in this Proxy Statement/Prospectus. Capitalized terms not
defined herein have the respective meanings specified in the Merger Agreement.
All financial information contained herein is presented in accordance with
generally accepted accounting principles ("GAAP") unless otherwise specified.
All information contained herein with respect to SMC Common Stock, including
information presented on a per share basis, has been adjusted to reflect a 5%
stock dividend effected on June 21, 1996 for holders of record on May 17, 1996.
All information contained herein with respect to Savers Life Common Stock,
including information presented on a per share basis, has been adjusted to
reflect a five-for-four stock split paid on January 21, 1994 to holders of
record on December 31, 1993.
------------------------
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT
TO SMC AND SAC HAS BEEN PROVIDED BY SMC. ALL INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO SAVERS LIFE HAS BEEN PROVIDED BY SAVERS
LIFE.
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<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Proxy Statement/Prospectus. Reference is made
to, and this summary is qualified in its entirety by, the more detailed
information contained or incorporated by reference in this Proxy
Statement/Prospectus and the Annexes hereto.
---------------------------
STOCKHOLDERS OF SMC AND SAVERS LIFE ARE URGED TO READ THIS PROXY
STATEMENT/PROSPECTUS AND THE ANNEXES HERETO IN THEIR ENTIRETY AND SHOULD
CONSIDER CAREFULLY THE INFORMATION SET FORTH HEREIN UNDER "RISK FACTORS."
---------------------------
BACKGROUND
On December 20, 1996, SMC and Savers Life entered into an Agreement and
Plan of Merger (the "1996 Merger Agreement") providing for, among other things,
the merger of a wholly-owned subsidiary of SMC with and into Savers Life, with
Savers Life surviving as a wholly-owned subsidiary of SMC. Consummation of the
transactions contemplated by the 1996 Merger Agreement was subject to the
approval of SMC stockholders and Savers Life stockholders. In addition, SMC
reserved the right not to consummate such transactions if 5% or more of the
Savers Life stockholders perfected their dissenters' rights under the NCBCA. The
approval of SMC stockholders was secured at the SMC Annual Meeting of
Stockholders held on October 22, 1997. The meeting of Savers Life stockholders
originally scheduled to be held on October 22, 1997, at which the 1996 Merger
Agreement was to be considered, was postponed indefinitely. Holders of
approximately 22% of the Savers Life Common Stock had filed notice of intent to
exercise dissenters' rights. Thereafter, discussions continued among SMC, Savers
Life and one of the stockholders of Savers Life who had filed notice of intent
to exercise dissenters' rights, to restructure the proposed transaction in a
manner that would be acceptable to each of them. The Merger Agreement is the
product of those discussions. See "THE MERGER -- Background of the Merger."
SMC SPECIAL MEETING
Date, Place and Time. The SMC Special Meeting will be held on __________,
1998 at , local time, at the Woodland Country Club, 100 Woodland Lane,
Carmel, Indiana.
Purpose. To consider and act upon the proposal to approve the Common Stock
Issuance and to transact such other business as may properly come before the SMC
Special Meeting. See "SMC SPECIAL MEETING -- Purpose."
Record Date, Voting Rights. Only holders of record of SMC Common Stock at
the close of business on January 23, 1998 (the "SMC Record Date") are entitled
to receive notice of and to vote at the SMC Special Meeting. At the close of
business on December 1, 1997, there were 4,871,490 shares of SMC Common Stock
outstanding, each of which entitles the registered holder thereof to one vote on
each matter voted upon at the SMC Special Meeting. See "SMC SPECIAL MEETING --
Record Date; Voting Rights."
Quorum. The holders of a majority of shares of SMC Common Stock outstanding
and entitled to vote must be present in person or represented by proxy at the
SMC Special Meeting in order for a quorum to be present. In the event that a
quorum is not present at the SMC Special Meeting, it is expected that such
meeting will be adjourned or postponed to allow for the solicitation of
additional proxies. See "SMC SPECIAL MEETING -- Quorum."
Required Vote. Approval of the Common Stock Issuance, requires the
affirmative vote of a majority of the votes cast thereon at the SMC Special
Meeting. See "SMC SPECIAL MEETING -- Required Vote."
Share Ownership of Management. At the close of business on December 1,
1997, directors and executive officers of SMC and their affiliates were the
beneficial owners of an aggregate of 1,164,208 (approximately
3
<PAGE> 16
23.9%) of the shares of SMC Common Stock then outstanding. SMC expects that all
such shares will be voted in favor of the Common Stock Issuance, See "SMC
SPECIAL MEETING -- Required Vote."
SAVERS LIFE SPECIAL MEETING
Date, Place and Time. The Savers Life Special Meeting will be held on
, 1998 at a.m., local time, at ,
Winston-Salem, North Carolina.
Purpose. To consider and vote upon a proposal to approve the Merger
Agreement and to transact such other business as may properly come before the
Savers Life Special Meeting. See "SAVERS LIFE SPECIAL MEETING -- Purpose."
Record Date; Voting Rights. Only holders of record of Savers Life Common
Stock at the close of business on January 23, 1998 (the "Savers Life Record
Date") are entitled to receive notice of and to vote at the Savers Life Special
Meeting. At the close of business on December 1, 1997, there were 1,779,908
shares of Savers Life Common Stock outstanding, each of which entitles the
registered holder thereof to one vote on each matter voted upon at the Savers
Life Special Meeting. See "SAVERS LIFE SPECIAL MEETING -- Record Date; Voting
Rights."
Quorum. The holders of a majority of shares of Savers Life Common Stock
outstanding and entitled to vote must be present in person or represented by
proxy at the Savers Life Special Meeting in order for a quorum to be present. In
the event that a quorum is not present at the Savers Life Special Meeting, it is
expected that such meeting will be adjourned or postponed to allow for the
solicitation of additional proxies. See "Savers Life Special Meeting -- Quorum."
Required Vote. Approval of the Merger Agreement will require the
affirmative vote of the holders of a majority of the shares of Savers Life
Common Stock outstanding on the Savers Life Record Date. See "SAVERS LIFE
SPECIAL MEETING -- Required Vote."
Voting Agreements. Persons who have the power to vote 543,206 shares of
Savers Life Common Stock outstanding at the close of business on December 1,
1997 (approximately 30.5%) of the shares of Savers Life Common Stock then
outstanding have signed agreements obligating them to vote in favor of approval
of the Merger Agreement and against certain other actions. See "VOTING
AGREEMENTS."
Share Ownership of Management. At the close of business on December 1,
1997, directors and officers of Savers Life and their affiliates were the
beneficial owners of an aggregate of 551,706 (approximately 31.0%) of the shares
of Savers Life Common Stock then outstanding. Such shares include the shares
subject to the voting agreements described above. Savers Life expects that all
such shares will be voted in favor of approval of the Merger Agreement. See
"SAVERS LIFE SPECIAL MEETING -- Required Vote" and "ADDITIONAL INFORMATION
REGARDING SAVERS LIFE -- Voting Securities and Principal Holders Thereof."
PARTIES TO THE MERGER AGREEMENT
SMC. SMC is an insurance holding company, which directly and through its
subsidiaries acquires and manages in force life insurance and annuity business
and distributes life insurance and annuity products issued by its subsidiaries
and a select group of unaffiliated insurers. SMC is an Indiana corporation, its
principal executive offices are located at 9100 Keystone Crossing, Indianapolis,
Indiana 46240, and its telephone number is (317) 574-6200. SMC's active
subsidiaries include: (i) Standard Life Insurance Company of Indiana ("Standard
Life") and its subsidiary, Dixie National Life Insurance Company ("Dixie
National Life"), (ii) Standard Management International S.A. ("Standard
Management International") and its subsidiaries, Premier Life (Luxembourg) S.A.
("Premier Life (Luxembourg)") and Premier Life (Bermuda) Ltd. ("Premier Life
(Bermuda)"), and (iii) Standard Marketing Corporation ("Standard Marketing").
For further information concerning SMC, see "-- SMC Selected Consolidated
Financial Data," "PARTIES TO THE MERGER AGREEMENT -- SMC," "ADDITIONAL
INFORMATION REGARDING SMC,"
4
<PAGE> 17
"SMC CONSOLIDATED FINANCIAL STATEMENTS," "AVAILABLE INFORMATION" and
"INCORPORATION OF DOCUMENTS BY REFERENCE."
Savers Life. Savers Life is a North Carolina domestic stock insurance
company licensed to write life and accident and health insurance. Savers Life's
principal products are annuities and Medicare supplement insurance. Savers Life
also sells term life insurance, whole life insurance, annuities issued by
another company and sells and administers group health plan products for an HMO.
Savers Life's principal executive offices are located at 8064 North Point
Boulevard, Winston-Salem, North Carolina 27106, and its telephone number is
(910) 759-3888. For further information concerning Savers Life, see "-- Savers
Life Selected Financial Data," "PARTIES TO THE MERGER AGREEMENT -- Savers Life,"
"ADDITIONAL INFORMATION REGARDING SAVERS LIFE" and "SAVERS LIFE FINANCIAL
STATEMENTS."
SAC. SAC was incorporated in North Carolina on December 12, 1996 solely for
the purpose of consummating a merger with Savers Life. SAC has minimal assets
and no business and has carried on no activities which are not directly related
to its formation and its execution of the Merger Agreement. Its principal
executive offices are located at 9100 Keystone Crossing, Indianapolis, Indiana
46240, and its telephone number is (317) 574-6200. For further information
concerning SAC, see "PARTIES TO THE MERGER AGREEMENT -- SAC."
THE MERGER
Recommendation of the SMC Board. The SMC Board has unanimously determined
that the Merger and the Common Stock Issuance are advisable and fair to and in
the best interests of SMC and its stockholders and has unanimously approved the
Merger Agreement and the transactions contemplated thereby. THE SMC BOARD
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF SMC VOTE IN FAVOR OF APPROVAL OF
THE COMMON STOCK ISSUANCE AT THE SMC SPECIAL MEETING. See "THE MERGER -- SMC's
Reasons for the Merger; Recommendation of its Board of Directors."
Recommendation of the Savers Life Board. The Savers Life Board has
unanimously determined that the Merger is fair, equitable and in the best
interests of Savers Life and its stockholders and has unanimously approved the
Merger Agreement. THE SAVERS LIFE BOARD UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF SAVERS LIFE VOTE IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT AT
THE SAVERS LIFE SPECIAL MEETING. See "THE MERGER -- Savers Life's Reasons for
the Merger; Recommendation of its Board of Directors."
Interests of Certain Persons in the Merger. No directors or executive
officers of Savers Life, other than Mr. Jerry D. Stoltz, Sr. and Mr. Jerry E.
Francis, have interests in the Merger in addition to their interests as holders
of Common Stock and options to purchase Common Stock of Savers Life. It is a
condition to SMC's obligations under the Merger Agreement that it enter into a
consulting and non-competition agreement (the "Stoltz Consulting and
Non-Competition Agreement") with Mr. Stoltz. Mr. Stoltz is a member of the
Savers Life Board and an executive officer of Savers Life. In addition, pursuant
to the terms of the Merger Agreement, Mr. Francis will be appointed to the SMC
Board immediately following the Effective Time. Mr. Francis and David A.
Roberson, Patricia G. Landy and Debra P. Berg, also executive officers of Savers
Life, have agreements regarding their employment with Savers Life, which
agreements will not change as a result of the Merger. Holders of options to
purchase Savers Life Common Stock, including, among others, the executive
officers of Savers Life, two of whom are also directors of Savers Life, will
receive, subject to the terms and conditions of the Merger Agreement, cash in
exchange therefor. See "THE MERGER -- Interests of Certain Persons in the
Merger" and "THE MERGER AGREEMENT -- Stock Options."
Material Federal Income Tax Consequences. Under present federal income tax
law, assuming that at least eighty percent (80%) of the merger consideration is
paid in SMC Common Stock to the holders of Savers Life Common Stock, the Merger
will constitute a "tax-free reorganization" under the Code. Qualification as
such a reorganization is a condition precedent to the Merger. Accordingly, no
gain or loss will be recognized by SMC, Savers Life or SAC as a result of the
Merger. See "THE MERGER -- Conditions Precedent to the Merger."
In general, a Savers Life stockholder (i) will recognize no gain or loss
upon the receipt of SMC Common Stock in exchange for his or her Savers Life
Common Stock, (ii) will likely recognize gain (but not loss)
5
<PAGE> 18
should such stockholder receive cash in exchange for a portion of his or her
Savers Life Common Stock, (iii) will have a tax basis in the SMC Common Stock
that he or she receives equal to the tax basis that he or she had in the Savers
Life Common Stock that he or she surrendered therefor, increased by the amount
of gain recognized and decreased by the amount of cash received and (iv) will
have a holding period in the SMC Common Stock received in the Merger which
includes the holding period of the Savers Life Common Stock surrendered in
exchange therefor.
Savers Life has received the opinion of Womble Carlyle Sandridge & Rice,
PLLC, counsel to Savers Life, to the effect set forth in paragraphs (i)-(iii),
above. See "THE MERGER -- Material Federal Income Tax Consequences."
Receipt of cash by a Savers Life stockholder who perfects dissenters'
rights will be a taxable transaction. Such holders should consult their own tax
advisors.
THE FOREGOING SUMMARY IS GENERAL IN NATURE AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. IN
ADDITION, THE SUMMARY DOES NOT ADDRESS ALL OF THE TAX CONSEQUENCES THAT MAY BE
RELEVANT TO PARTICULAR TAXPAYERS IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES OR TO
TAXPAYERS SUBJECT TO SPECIAL TREATMENT UNDER THE CODE (FOR EXAMPLE, INSURANCE
COMPANIES, FINANCIAL INSTITUTIONS, DEALERS IN SECURITIES, TAX-EXEMPT
ORGANIZATIONS, FOREIGN CORPORATIONS, FOREIGN PARTNERSHIPS OR OTHER FOREIGN
ENTITIES AND INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES).
NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF
ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
THE FOREGOING SUMMARY IS BASED UPON THE PROVISIONS OF THE CODE, APPLICABLE
TREASURY REGULATIONS THEREUNDER, INTERNAL REVENUE SERVICE RULINGS AND JUDICIAL
DECISIONS, AS IN EFFECT AS OF THE DATE HEREOF. THERE CAN BE NO ASSURANCE THAT
FUTURE LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL CHANGES OR INTERPRETATIONS WILL
NOT AFFECT THE ACCURACY OF THE STATEMENTS OR CONCLUSIONS SET FORTH HEREIN. ANY
SUCH CHANGE COULD APPLY RETROACTIVELY AND COULD AFFECT THE ACCURACY OF SUCH
SUMMARY. NO RULINGS HAVE BEEN OR WILL BE SOUGHT FROM THE INTERNAL REVENUE
SERVICE CONCERNING THE TAX CONSEQUENCES OF THE MERGER.
For a more detailed description of the federal income tax consequences of
the Merger, see "THE MERGER -- Material Federal Income Tax Consequences." Savers
Life stockholders are urged to consult with their own tax advisors with respect
to the potential tax effects of the proposed Merger on such stockholders. EACH
HOLDER OF AN OPTION TO PURCHASE SHARES OF SAVERS LIFE COMMON STOCK IS ALSO URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES
REGARDING THE CONVERSION OF ANY SUCH OPTION INTO THE RIGHT TO RECEIVE CASH FROM
SAVERS LIFE.
Anticipated Accounting Treatment. The Merger will be accounted for as a
"purchase" for accounting and financial reporting purposes in accordance with
Accounting Principles Board Opinion No. 16 ("APB No. 16"). For purposes of
preparing SMC's consolidated financial statements, SMC will establish a new
accounting basis for Savers Life's assets and liabilities based upon the fair
values thereof and SMC's purchase price, including the direct costs of the
acquisition. A final determination of required purchase accounting adjustments
and of the fair value of the assets and liabilities of Savers Life has not yet
been made. Accordingly, the purchase accounting adjustments made in connection
with the development of the pro forma financial information appearing elsewhere
in this Proxy Statement/Prospectus are preliminary and are subject to
adjustment. After the Merger, SMC will undertake a study to determine the fair
value of Savers Life's assets and liabilities and will make appropriate purchase
accounting adjustments upon completion of such study. For financial reporting
purposes, SMC will consolidate the results of Savers Life's operations with
those of SMC's operations, beginning with the consummation of the Merger, but
SMC's financial statements for prior periods will not be restated as a result of
the Merger. See "THE MERGER -- Anticipated Accounting Treatment."
Regulatory Approvals. The consummation of the Merger is conditioned upon
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Under the HSR Act and the regulations promulgated thereunder by the
Federal Trade Commission (the "FTC"), the Merger may not be consummated until
notifications have been given
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<PAGE> 19
and certain information has been furnished to the FTC and the Antitrust Division
of the Department of Justice (the "Antitrust Division") and the applicable
waiting period has expired or been terminated. Report forms relating to the
Merger have been filed on behalf of SMC and Savers Life under the HSR Act with
the FTC and the Antitrust Division. The consummation of the Merger is also
conditioned upon the approval of the Commissioner of Insurance of the State of
North Carolina (the "North Carolina Commissioner"). An application is pending to
obtain the approval of the Merger from the North Carolina Commissioner. See
"RISK FACTORS -- Insurance Regulation," "THE MERGER -- Regulatory Approvals" and
"-- Conditions Precedent to the Merger."
Percentage Ownership Interest of Savers Life Stockholders After the
Merger. The percentage ownership interest of Savers Life stockholders after the
Merger will vary depending upon the price of SMC Common Stock and the extent to
which stockholders of Savers Life elect to receive SMC Common Stock in lieu of
cash for the $1.50 portion of the merger consideration. Holders of Savers Life
Common Stock will receive a minimum of 2,135,889 newly issued shares of SMC
Common Stock in connection with the Merger. Such newly issued shares will
constitute 30.5% of the shares of SMC Common Stock outstanding immediately after
the Effective Time (18.6% on a fully diluted basis), based on the number of
shares of SMC Common Stock outstanding at the close of business on December 1,
1997. The number of shares issuable will increase in relation to the price of
SMC Common Stock. Assuming a price of SMC Common Stock of $7.00 (the closing
price on December 5, 1997) or $4.00 per share, holders of Savers Life Common
Stock could receive up to 381,408 or 667,465 shares of SMC Common Stock,
respectively, depending upon the extent to which such holders elect to receive
shares of SMC Common Stock in lieu of the $1.50 per share cash consideration
they would otherwise be entitled to receive. Such newly issued shares would
constitute up to 5.2% or 8.7%, respectively, of the shares of SMC Common Stock
outstanding immediately after the Effective Time (3.2% or 5.5% on a fully
diluted basis), based on the number of shares of SMC Common Stock outstanding at
the close of business on December 1, 1997. See "THE MERGER AGREEMENT --
Percentage Ownership Interests of Savers Life Stockholders After the Merger."
THE MERGER AGREEMENT
Conversion of Shares in the Merger. At the Effective Time of the Merger,
SAC will be merged with and into Savers Life, with Savers Life continuing as the
surviving corporation (the "Surviving Corporation") and a wholly-owned
subsidiary of SMC. As a result of the Merger, the separate corporate existence
of SAC will cease, and Savers Life will succeed to all the rights and be
responsible for all the obligations of SAC in accordance with the NCBCA. Subject
to the terms and conditions of the Merger Agreement, each share of Savers Life
Common Stock outstanding immediately prior to the Effective Time of the Merger
will be converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of
Savers Life Common Stock may elect to receive the $1.50 per share portion of the
merger consideration in the form of additional shares of SMC Common Stock. Cash
will be paid in lieu of any fractional share of SMC Common Stock.
Notwithstanding the foregoing, holders of Savers Life Common Stock have the
right to dissent from the Merger and to receive payment of the fair value of
their stock upon full compliance with Section 55-13-01, et seq., of the NCBCA.
If holders of more than 5% of the shares of Savers Life Common Stock outstanding
immediately prior to the Effective Time properly exercise dissenters' rights,
SMC will have the right to decline to consummate the Merger. See "THE MERGER
AGREEMENT -- Conversion of Shares in the Merger," "-- No Fractional Shares," "--
Adjustment of Conversion Number," " -- Conditions Precedent to the Merger" and
"DISSENTERS' RIGHTS."
Exchange Agent. ChaseMellon Shareholder Services has been selected to act
as Exchange Agent under the Merger Agreement. As soon as practicable after the
Effective Time, (i) SMC will deposit with the Exchange Agent, in trust for the
holders of certificates ("Savers Life Certificates") which immediately prior to
the Effective Time represented shares of Savers Life Common Stock converted in
the Merger, certificates ("SMC Certificates") representing the shares of SMC
Common Stock issuable pursuant to the Merger in accordance with the Merger
Agreement, and (ii) SMC will make available to the Surviving Corporation, which
in turn will deposit with the Exchange Agent in trust for the holders of Savers
Life Certificates, the cash into which the outstanding shares of Savers Life
Common Stock have been converted. The Exchange Agent
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<PAGE> 20
will deliver the SMC Certificates and cash upon the surrender for exchange of
the Savers Life Certificates and a duly executed letter of transmittal. See "THE
MERGER AGREEMENT -- Exchange Agent; Procedure for Exchange of Certificates."
Procedures for Exchange of Certificates and Delivery of Cash. As soon as
practicable after the Effective Time, the Exchange Agent will mail to each
record holder of a Savers Life Certificate a letter of transmittal. Upon
surrender for exchange to the Exchange Agent of all Savers Life Certificates
held by any record holder, together with such letter of transmittal duly
executed, such record holder will be entitled to receive in exchange therefore:
(i) an SMC Certificate representing the number of whole shares of SMC Common
Stock into which the shares of Savers Life Common Stock represented by the
surrendered Savers Life Certificates have been converted at the Effective Time,
(ii) $1.50 cash per share of Savers Life Common Stock represented by the
surrendered Savers Life Certificates, provided that, if a holder of Savers Life
Common Stock has elected to receive SMC Common Stock instead of such cash,
additional shares of SMC Common Stock will be delivered in lieu of cash, (iii)
cash in lieu of any fractional share of SMC Common Stock and (iv) certain
dividends and other distributions. See "THE MERGER AGREEMENT -- Exchange Agent;
Procedure for Exchange of Certificates."
HOLDERS OF SAVERS LIFE COMMON STOCK WHO WISH TO RECEIVE SMC COMMON STOCK IN
LIEU OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION MUST RETURN THE FORM
OF ELECTION THAT ACCOMPANIES THIS PROXY STATEMENT/PROSPECTUS TO SAVERS LIFE BY
5:00 P.M., LOCAL TIME, ON , 1998. HOLDERS OF SAVERS LIFE COMMON
STOCK WHO DO NOT WISH TO RECEIVE SHARES OF SMC COMMON STOCK IN LIEU OF THE $1.50
CASH PORTION OF THE MERGER CONSIDERATION NEED NOT RETURN SUCH FORM OF ELECTION.
HOLDERS OF SAVERS LIFE COMMON STOCK SHOULD NOT FORWARD THEIR SAVERS LIFE
CERTIFICATES WITH THE ENCLOSED PROXY CARD, NOR SHOULD THEY RETURN THEIR SAVERS
LIFE CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED A TRANSMITTAL
LETTER.
Stock Options. Each option to purchase Savers Life Common Stock (a "Savers
Life Stock Option") granted by Savers Life that is outstanding immediately prior
to the Effective Time will be converted into the right to receive cash, per
share, in an amount equal to the difference between 1.2 times the Average
Trading Price (as hereinafter defined) of SMC Common Stock plus $1.50 and the
exercise price for such Savers Life Stock Option.
Termination. The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of
Savers Life of the Merger Agreement or the approval by the stockholders of SMC
of the Common Stock Issuance: (i) by mutual written consent of SMC and Savers
Life; (ii) by either SMC or Savers Life if the other (or SAC if Savers Life is
the terminating party) has failed to comply in any material respect with any of
its covenants or agreements contained in the Merger Agreement required to be
complied with prior to the date of such termination or materially breaches any
representation or warranty that is not qualified as to materiality or breaches
any representation or warranty that is so qualified (in each case after a five
business day cure period following notice of such breach) or if the requisite
stockholder approval is not obtained; (iii) by either SMC or Savers Life if (A)
the Merger has not been effected on or prior to the close of business on April
30, 1998, subject to certain limitations, or (B) any court or other governmental
entity having jurisdiction has permanently enjoined, restrained or otherwise
prohibited the transactions contemplated by the Merger Agreement by final and
nonappealable order or other action; or (iv) by SMC, if the Savers Life Board
has not recommended, or has resolved not to recommend, or has modified or
withdrawn its recommendation of the Merger or has recommended, or resolved to
recommend, to the stockholders of Savers Life any takeover proposal or offer of
any other person. See "THE MERGER AGREEMENT -- Termination."
Fees and Expenses. The Merger Agreement provides for the payment of certain
fees following a termination of the Merger Agreement under certain
circumstances. Subject to the preceding sentence, the Merger Agreement also
provides that SMC and Savers Life will each pay their own respective costs and
expenses incidental to the preparation of the Merger Agreement, the performance
of and compliance with all agreements and conditions contained in the Merger
Agreement and the consummation of the transactions contemplated thereby. See
"THE MERGER AGREEMENT -- Fees and Expenses."
8
<PAGE> 21
COMPARATIVE RIGHTS OF STOCKHOLDERS; DESCRIPTION OF SMC COMMON STOCK
The rights of stockholders of Savers Life currently are governed by the
NCBCA and Savers Life's Articles of Incorporation (the "Savers Life Charter")
and Bylaws. Upon consummation of the Merger, stockholders of Savers Life will
become stockholders of SMC, which is an Indiana corporation, and their rights as
stockholders of SMC will be governed by the Indiana Business Corporation Law
(the "IBCL"), and SMC's Charter and Bylaws. See "COMPARATIVE RIGHTS OF
STOCKHOLDERS" for a discussion of the material differences between the rights of
holders of Savers Life Common Stock and the rights of holders of SMC Common
Stock. See "DESCRIPTION OF SMC COMMON STOCK" for a description of SMC Common
Stock.
DISSENTERS' RIGHTS
Holders of Savers Life Common Stock have the right to dissent from the
Merger and to receive payment of the fair value of their shares upon full
compliance with Sections 55-13-01 through 55-13-31 of the NCBCA. A copy of those
Sections of the NCBCA is attached hereto as Annex B. Holders of SMC Common Stock
do not have dissenters' rights with respect to the Merger, the Common Stock
Issuance or any other matter to be presented at the SMC Special Meeting. If
holders of more than 5% of the shares of Savers Life Common Stock outstanding
immediately prior to the Effective Time properly exercise dissenters' rights,
SMC will have the right to decline to consummate the Merger. A vote in favor of
the Merger proposal precludes the exercise of dissenters' rights; an abstention,
a failure to vote or a vote against the Merger proposal neither waives the right
to dissent nor constitutes notice of intent to exercise dissenters' rights. See
"DISSENTERS' RIGHTS" and "THE MERGER AGREEMENT -- Conditions Precedent to the
Merger."
9
<PAGE> 22
SMC SELECTED HISTORICAL FINANCIAL DATA (A)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected historical financial data of SMC set forth below at and for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were derived from
audited consolidated financial statements of SMC. The unaudited information at
and for the nine months ended September 30, 1997 and 1996 was derived from the
accounting records of SMC and reflects, in the opinion of management of SMC, all
adjustments, consisting only of normal recurring items, which are necessary for
a fair presentation of financial position and results of operations on a basis
consistent with that of the audited financial information. The selected
historical financial data should be read in conjunction with "ADDITIONAL
INFORMATION REGARDING SMC -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the SMC Consolidated Financial
Statements and related notes thereto, each included elsewhere herein. See "SMC
CONSOLIDATED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Premium income.............. $ 5,277 $ 8,418(d) $10,468(d) $ 5,504 $ 4,565 $ 5,511 $ 4,140
Investment Activity:
Net investment income..... 21,926 15,007 20,871 18,517 16,057 12,171 9,406
Net realized investment
gains................... 287 677 1,302 688 558 6,980 1,726
Total revenues.............. 34,910 29,490 40,307 30,238 26,518 26,542 15,873
Class action litigation and
settlement costs
(credit).................. -- -- -- (314) 4,018 47 --
Interest expense and
financing costs........... 1,724 430 805 118 47 519 1,628
Total benefits and
expenses.................. 32,216 27,306(d) 36,772(d) 28,682 30,032 22,099 17,228
Income (loss) before income
taxes, extraordinary gain
(charge) and cumulative
effect of change in
accounting principle...... 2,694 2,184 3,535 1,556 (3,514) 4,443(h) (1,354)(i)(j)
Income (loss) before
extraordinary gain
(charge) and cumulative
effect of change in
accounting principle...... 1,915(e) 3,074(e) 4,265(e) 1,313 (3,436) 2,984(h) (1,289)(i)(j)
Net income (loss)........... 1,915(f) 3,574(f) 4,767(f) 1,313 (3,436) 2,132 (1,400)(i)
PER SHARE DATA: (b)
Income (loss) per share
before extraordinary gain
(charge) and cumulative
effect of change in
accounting principle...... $0.36 $0.61 $0.84 $0.25 $(0.62) $0.74(h) $(0.74)(i)(j)
Net income (loss)........... $0.36 $0.70 $0.93 $0.25 $(0.62) $0.53 $(0.80)(i)
Weighted average number of
common and common
equivalent shares
outstanding............... 5,334,494 5,299,499 5,250,094 5,345,937 5,504,039 4,013,893 1,756,894
Book value per common share
outstanding at period
end....................... $8.74 $7.95 $7.73 $4.27 $7.82 $3.22
Book value per common share
outstanding at period end,
excluding unrealized gain
(loss) on securities
available for sale........ $8.32(g) $8.09(g) $7.23(g) $6.81(g) $7.82 $3.22
Common shares outstanding at
period end................ 4,870,240 5,024,270 5,205,425 5,291,455 4,954,676 1,565,801
BALANCE SHEET DATA (AT
PERIOD END):
Invested assets............. $395,442 $370,138 $280,597 $224,926 $199,413 $153,106
Assets held in separate
accounts.................. 145,574 128,546 122,705 94,301 107,173 --
Total assets................ 669,396 628,413 479,598 373,524 354,431 197,860
Long-term debt, notes
payable and capital lease
obligations............... 26,294 20,697 4,191 695 -- 20,750
Class S Cumulative
Convertible Redeemable
Preferred Stock........... -- 1,757 -- -- -- --
Shareholders' equity........ 42,583 39,919 40,242 22,610 36,914 4,807
Ratio of debt to total
capitalization(c)......... 38% 36% 9% 3% -- 81%
</TABLE>
10
<PAGE> 23
NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Comparison of consolidated financial information is significantly affected
by the acquisitions of First International at June 30, 1992, Standard
Management International effective December 31, 1993, Dixie National Life on
October 2, 1995 and Shelby Life effective November 1, 1996. Refer to the
notes to the consolidated financial statements included in this Proxy
Statement/Prospectus for a description of business combinations.
(b) All applicable share and per share amounts have been restated to reflect the
May 17, 1996 5% stock dividend.
(c) Total capitalization is the sum of SMC's debt (long term debt, notes
payable, capital lease obligations and redeemable preferred stock) and
shareholders' equity.
(d) Includes recapture of premiums ceded and an increase in benefits due to an
increase in reserves of $4,234 due to the termination and recapture of a
reinsurance agreement with National Mutual Life Insurance Company. See
"ADDITIONAL INFORMATION REGARDING SMC -- Business of SMC -- Reinsurance."
(e) Does not reflect extraordinary gain of $--, $500 ($.09 per share) and $502
($.10 per share) for the nine months ended September 30, 1997 and 1996 and
the year ended December 31, 1996, respectively, on early redemption of Class
S Cumulative Convertible Redeemable Preferred Stock ("Class S Preferred
Stock").
(f) Does not reflect preferred stock dividends of $97 ($.02 per share), $163
($.02 per share) and $208 ($.03 per share) for the nine months ended
September 30, 1997 and 1996 and the year ended December 31, 1996,
respectively, on Class S Preferred Stock.
(g) Excludes the effect of reporting securities available for sale at fair value
and recording the unrealized gain or loss on such securities as a component
of stockholders' equity, net of tax and other adjustments, which SMC began
to do in 1994. Such adjustments are in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities", as described in the notes to the
consolidated financial statements included in SMC's Consolidated Financial
Statements, included elsewhere herein.
(h) Before deduction of extraordinary charge of $1,301 ($.32 per share) on early
extinguishment of long-term debt and cumulative effect of change in
accounting principle of $449 ($.11 per share) from applying the new method
of accounting for income taxes.
(i) Includes a $1,325 allowance for losses ($1,221 after taxes) to reflect the
fair value of property collateralizing a $3,200 mortgage loan which was
subsequently foreclosed.
(j) Before deduction of extraordinary charge of $110 ($.06 per share) to write
off unamortized deferred debt issuance costs in connection with retirement
of previously outstanding debt.
11
<PAGE> 24
SAVERS LIFE SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected historical financial data of Savers Life set forth below at
and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were
derived from audited financial statements of Savers Life. The unaudited
information at and for the nine months ended September 30, 1997 and 1996 was
derived from the accounting records of Savers Life and reflects, in the opinion
of the management of Savers Life, all adjustments, consisting only of normal
recurring items, which are necessary for a fair presentation of financial
position and results of operations on a basis consistent with that of the
audited financial information. The results for the nine months ended September
30, 1997 are not necessarily indicative of results to be expected for the full
year. The selected historical financial data should be read in conjunction with
"ADDITIONAL INFORMATION REGARDING SAVERS LIFE -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Savers Life
Financial Statements and related notes thereto, each included elsewhere herein.
See "SAVERS LIFE FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Premium income............ $29,649 $36,408 $47,855 $49,946 $45,543 $31,250 $16,075
Investment Activity:
Net investment income... 3,366 3,419 4,569 4,852 4,121 3,187 4,063
Net realized investment
gains................. 76 189 170 387 111 1,624 1,109
Total revenues............ 34,329 41,024 53,910 57,144 51,515 37,890 23,436
Benefits and expenses..... 37,210 41,888 56,768 56,067 47,188 35,694 21,135
Income (loss) before
income taxes............ (2,881) (864) (2,858) 1,077 4,327 2,196 2,301
Net income (loss)......... (1,896)(b) (408)(a) (1,692)(a) 961 3,241 1,891 2,013
PER SHARE DATA:
Net income (loss)......... $(1.06)(b) $(0.23)(a) $(0.94)(a) $0.53 $1.79 $1.04 $1.05
Weighted average number of
shares outstanding...... 1,790,379 1,793,248 1,792,530 1,797,436 1,813,370 1,822,085 1,912,845
Book value per share
outstanding............. $7.86 $8.75 $9.60 $8.70 $6.96 $5.68
Shares outstanding at
period end.............. 1,779,908 1,779,908 1,775,903 1,785,800 1,771,334 1,852,140
BALANCE SHEET DATA (AT
PERIOD END):
Invested assets........... $62,142 $67,987 $60,603 $73,930 $42,119 $66,791
Total assets.............. 73,379 81,229 83,700 84,431 77,909 72,642
Total liabilities......... 59,392 65,651 66,450 68,650 65,221 61,778
Stockholders' equity...... 13,987 15,578 17,250 15,781 12,689 10,864
</TABLE>
- -------------------------
(a) The net loss was generated from the health product lines. Savers Life
entered into an agreement for the transfer of the major medical product line
to World Insurance Company. See "ADDITIONAL INFORMATION REGARDING SAVERS
LIFE -- Description of Business -- Products."
(b) The results include a $1,752 write-off of deferred acquisition costs
resulting from the transfer of the major medical product line to World
Insurance Company. See "ADDITIONAL INFORMATION REGARDING SAVERS LIFE --
Description of Business -- Products."
12
<PAGE> 25
SMC SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected unaudited pro forma combined statements of
operations financial data for the nine months ended September 30, 1997 and the
year ended December 31, 1996, are presented as if (i) the acquisition of Shelby
Life from Delta Life and Annuity ("DLAC") and its merger into Standard Life,
(ii) the transfer of the major medical product line from Savers Life to World
Insurance Company ("World") through a coinsurance agreement under which World
assumed, through coinsurance effective July 1, 1997, 100% of the product line
and (iii) the acquisition of Savers Life by SMC had occurred as of January 1,
1996. The following selected unaudited pro forma combined balance sheet
financial data as of September 30, 1997, gives effect to the the acquisition of
Savers Life by SMC as if it had occurred as of the balance sheet date.
The unaudited pro forma combined financial data does not purport to
represent what SMC's balance sheet or results of operations actually would have
been had the merger of Shelby Life into Standard Life, the transfer of the major
medical product line from Savers Life to World through a coinsurance agreement
whereby World assumed, through coinsurance effective July 1, 1997, 100% of the
product line and the acquisition of Savers Life by SMC in fact occurred on the
dates indicated, or to project SMC's balance sheet or results of operations for
any future date or period. The unaudited pro forma combined financial data
should be read in conjunction with the accompanying notes thereto and the
separate historical consolidated financial statements of SMC and Savers Life as
of and for the nine months ended September 30, 1997 and as of and for the year
ended December 31, 1996 which are contained elsewhere in this Proxy
Statement/Prospectus.
The pro forma adjustments and combined amounts are provided for
informational purposes only, and if the acquisition of Savers Life by SMC is
consummated, SMC's consolidated financial statements will reflect the effects of
the acquisition of Savers Life by SMC only from the date such transaction
occurs. The acquisition and merger of Shelby Life into Standard Life occurred on
November 8, 1996, with an effective date of November 1, 1996. Savers Life
transferred the major medical product line to World through a coinsurance
agreement, under which World assumed, through coinsurance effective July 1,
1997, 100% of the product line. Savers Life ceased writing any new business in
this product line on June 30, 1997. In October 1997, all of the policies in this
product line were transferred to World as direct insurance policies of World.
The pro forma adjustments are applied to the historical consolidated financial
statements of SMC, Shelby Life and Savers Life to account for the merger of
Shelby Life into Standard Life and the acquisition of Savers Life by SMC under
the purchase method of accounting in accordance with APB No. 16. Under this
method of accounting, the total purchase cost will be allocated to Shelby Life's
and Savers Life's assets and liabilities based on their relative fair values.
These allocations are subject to valuations as of the date of the Merger based
on appraisals and other studies, which are not yet completed. Accordingly, the
final allocations will be different from the amounts reflected herein. Any
purchase price adjustments will be made within one year from the acquisition
date and are not expected to be material to the selected unaudited pro forma
combined financial data. The selected unaudited pro forma combined financial
data, however, reflect management's best estimate based on currently available
information.
13
<PAGE> 26
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------
HISTORICAL FINANCIAL
STATEMENTS
----------------------
10 MONTHS
YEAR ENDED ENDED PRO FORMA PRO FORMA
DEC. 31, OCT. 31, ADJUSTMENTS PRO FORMA ADJUSTMENTS
1996 1996 RELATING SMC RELATED TO
---------- --------- TO THE BEFORE THE HISTORICAL TRANSFER OF
STANDARD SHELBY SHELBY LIFE SAVERS LIFE SAVERS MAJOR MEDICAL
MANAGEMENT LIFE ACQUISITION ACQUISITION LIFE PRODUCT LINE(5)
---------- ------ ----------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income...................... $10,468 $1,288 $ -- $11,756 $47,855 $(18,910)
Investment Activity:
Net investment income.............. 20,871 6,008 (556)(1) 26,323 4,569 (407)
Net realized investment gains...... 1,302 147 -- 1,449 170 (15)
Total revenues...................... 40,307 9,593 (556) 49,344 53,910 (19,332)
Interest expense and financing
costs.............................. 805 -- 1,238(2) 2,043 -- --
Total benefits and expenses......... 36,772 7,281 1,650(3) 45,703 56,768 (21,719)
Income (loss) before income taxes
and extraordinary gain............. 3,535 2,312 (2,206) 3,641 (2,858) 2,387
Income (loss) before extraordinary
gain on early redemption of
redeemable preferred stock and
preferred stock dividends.......... $ 4,265 $1,433 $(1,456) $ 4,242 $(1,692) $ 1,413
PER SHARE DATA:
Income per share before
extraordinary gain on early
redemption of redeemable preferred
stock and preferred stock
dividends.......................... $.84 $.80
========= =========
Weighted average number of common
and common equivalent shares
outstanding........................ 5,250,094 230,000(4) 5,480,094
========= ======= =========
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
SAVERS LIFE PRO FORMA
AFTER ADJUSTMENTS
TRANSFER OF RELATING
MAJOR TO THE PRO
MEDICAL SAVERS LIFE FORMA
PRODUCT LINE ACQUISITION COMBINED
------------ ----------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income...................... $28,945 $ -- $40,701
Investment Activity:
Net investment income.............. 4,162 24(6) 30,509
Net realized investment gains...... 155 -- 1,604
Total revenues...................... 34,578 24 83,946
Interest expense and financing
costs.............................. -- 371(7) 2,414
Total benefits and expenses......... 35,049 24(8) 80,776
Income (loss) before income taxes
and extraordinary gain............. (471) -- 3,170
Income (loss) before extraordinary
gain on early redemption of
redeemable preferred stock and
preferred stock dividends.......... $ (279) $-- $ 3,963
PER SHARE DATA:
Income per share before
extraordinary gain on early
redemption of redeemable preferred
stock and preferred stock
=========
Weighted average number of common
and common equivalent shares
outstanding........................ 2,135,889(9) 7,615,983
========= =========
</TABLE>
14
<PAGE> 27
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS SAVERS LIFE ADJUSTMENTS
FINANCIAL STATEMENTS RELATED TO AFTER RELATING
------------------------ TRANSFER OF TRANSFER OF TO THE
STANDARD MAJOR MEDICAL MAJOR MEDICAL SAVERS LIFE PRO FORMA
MANAGEMENT SAVERS LIFE PRODUCT LINE(5) PRODUCT LINE ACQUISITION COMBINED
---------- ----------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Premium income................... $ 5,277 $29,649 $ (8,039) $21,610 $ -- $ 26,887
Investment Activity:
Net investment income.......... 21,926 3,366 (300) 3,066 18(6) 25,010
Net realized investment
gains........................ 287 76 (7) 69 -- 356
Total revenues................... 34,910 34,329 (8,972) 25,357 18 60,285
Interest expense and financing
costs.......................... 1,724 -- -- -- 279(7) 2,003
Total benefits and expenses...... 32,216 37,210 (13,041) 24,169 606(8) 56,991
Income (loss) before income
taxes.......................... 2,694 (2,881) 4,069 1,188 (588) 3,294
Net income....................... $ 1,915 $(1,896) $ 2,686 $ 790 $ (422) $ 2,283
PER SHARE DATA:
Net income....................... $.36 $.31
========= =========
Weighted average number of common
and common equivalent shares
outstanding.................... 5,334,494 2,135,889(9) 7,470,383
========= ========= =========
Book value per common share
outstanding at period end...... $8.74 $8.22
Book value per common share
outstanding at period end,
excluding unrealized gain
(loss) on securities available
for sale....................... $8.32 $7.92
Common shares outstanding at
period end..................... 4,870,240 2,135,889 7,006,129
========= ========= =========
BALANCE SHEET DATA (AT PERIOD
END):
Invested assets.................. $395,442 $62,142 $(2,199)(10) $ 455,385
Assets held in separate
accounts....................... 145,574 -- -- 145,574
Total assets..................... 669,396 73,379 5,132 747,907
Notes payable and capital lease
obligations.................... 26,294 -- 4,000(11) 30,294
Shareholders' equity............. $ 42,583 $13,987 $994(12) $ 57,564
</TABLE>
15
<PAGE> 28
STANDARD MANAGEMENT CORPORATION
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE SHELBY LIFE MERGER
The purchase price for Shelby Life was approximately $14,650, including
$13,000 in cash, 250,000 shares of restricted SMC Common Stock (valued at
$1,250) and acquisition costs of $400 associated with the purchase of Shelby
Life. Financing for the Shelby Merger was provided by senior debt of $10,000 and
$4,000 in subordinated convertible debt.
The costs to acquire Shelby Life are allocated as follows:
<TABLE>
<S> <C>
Book value of net assets acquired based on the date of the
purchase (October 31, 1996)............................... $ 16,709
Dividend paid to former parent of Shelby Life on November 8,
1996 (DLAC)............................................... (3,000)
--------
Adjusted book value of net assets acquired................ 13,709
Increase (decrease) in Shelby Life net asset value to
reflect estimated fair value and asset reclassifications
at the date of Shelby Life acquisition:
Fixed maturity securities available for sale.............. 58,609
Fixed maturity securities held to maturity................ (60,026)
Present value of future profits (related to
acquisition)........................................... 9,372
Present value of future profits and deferred policy
acquisition costs (historical)......................... (5,335)
Goodwill (related to acquisition)......................... 9
Deferred federal income taxes............................. (1,688)
--------
Total estimated fair value adjustments................. 941
--------
Total cost to acquire Shelby Life................. $ 14,650
========
</TABLE>
Adjustments to the selected pro forma combined statement of operations
financial data to give effect to the purchase of Shelby Life as of January 1,
1996 are summarized below.
(1) Amortization of present value of future profits recorded by Shelby
Life prior to the purchase has been eliminated and replaced with the
amortization of the present value of the future profits as a result of the
transaction. The portion of present value of future profits recorded by
Shelby Life prior to the purchase that related to the purchase accounting
adjustments for investments was included in net investment income.
(2) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and the
subordinated convertible debt and amortization of deferred debt issuance
costs associated with the Amended Credit Agreement.
The Amended Credit Agreement provides for SMC to borrow up to $16,000
in the form of a seven year reducing revolving loan arrangement. Interest
on the borrowings under the Amended Credit Agreement is determined, at the
option of SMC, to be: (i) a fluctuating rate of interest based on the
corporate base rate announced by the bank from time to time plus 1% per
annum, or (ii) a rate at LIBOR plus 3.25%. Annual principal repayments of
$2,667 begin in November 1998 and conclude in November 2003. At December
31, 1996, SMC had borrowed $16,000 under the Amended Credit Agreement at a
weighted average interest rate of 8.793% for the acquisition of Shelby
Life.
In connection with the acquisition of Shelby Life, SMC borrowed an
additional $4,000 from an insurance company pursuant to a subordinated
convertible debt agreement which is due in December 2003 and requires
interest payments in cash at 12% per annum, or, if SMC chooses, in non-cash
additional subordinated convertible debt notes at 14% per annum until
December 31, 2000. The subordinated convertible notes are convertible into
SMC Common Stock at the rate of $6.00 per share
16
<PAGE> 29
STANDARD MANAGEMENT CORPORATION
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (CONTINUED)
through November 1997, and $5.75 per share thereafter. SMC is currently
making interest payments in the form of subordinated convertible debt notes
for which the assumed interest rate is the non-cash interest rate is 14%
per annum.
The interest expense on the borrowings for the Shelby Life acquisition for
the ten months ended October 31, 1996 is calculated as follows:
<TABLE>
<CAPTION>
10 MONTHS ENDED
OCTOBER 31, 1996
----------------
<S> <C>
Borrowings:
Amended Credit Agreement.................................. $10,100
=======
Subordinated convertible debt............................. $ 4,000
=======
Interest expense:
Amended Credit Agreement borrowings (LIBOR + 3.25%,
8.793%)................................................ 737
Subordinated convertible debt borrowings (PIK at 14.0%)... 465
-------
Total interest expense on Borrowings................. 1,202
-------
Deferred debt issuance costs:
Amended Credit Agreement borrowings....................... 24
Subordinated convertible debt borrowings.................. 12
-------
Total deferred debt issuance costs................... 36
-------
Total interest expense and financing costs........... $ 1,238
=======
</TABLE>
(3) Amortization of deferred acquisition costs and present value of
future profits recorded by Shelby Life prior to the purchase has been
eliminated and replaced with the amortization of the present value of the
future profits as a result of the transaction. The amount of present value
of future profits resulting from the transaction is being amortized on a
constant yield basis over the estimated life of insurance in force at the
date of acquisition in proportion to the emergence of profits over a period
of 20 years, with interest equal to the interest rate credited to the
underlying policies. Amortization of goodwill acquired in the transaction
is recognized over a 20-year period on a straight-line basis.
The 15 percent discount rate used to determine the present value of
future profits is the rate of return required by SMC to invest in the
business being acquired. In determining such rate of return, the following
factors were considered:
-- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
-- Cost of capital available to fund the acquisition.
-- The perceived likelihood of changes in insurance regulations and
tax laws.
-- Complexity of the acquired company.
-- Prices paid (i.e., discount rates used in determining valuations)
on similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly this allocation may be adjusted upon
final determination of such value. Expected gross amortization of such
value using current assumptions and accretion of interest based on an
interest rate equal to the
17
<PAGE> 30
STANDARD MANAGEMENT CORPORATION
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (CONTINUED)
liability rate (such rate averages 6 percent) for each of the years in the
five-year period ending December 31, 2001, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING BEGINNING NET ENDING
DECEMBER 31, BALANCE AMORTIZATION BALANCE
------------ --------- ------------ -------
<S> <C> <C> <C>
1997 ....................................... $9,601 $783 $8,818
1998 ....................................... 8,818 629 8,189
1999 ....................................... 8,189 601 7,588
2000 ....................................... 7,588 579 7,009
2001 ....................................... 7,009 596 6,413
</TABLE>
(4) Weighted average common and common equivalent shares outstanding
are increased to reflect the restricted SMC Common Stock shares issued to
DLAC, the repurchase of SMC Common Stock warrants previously issued to an
unaffiliated insurer and the issuance of SMC Common Stock warrants in
connection with the Amended Credit Agreement as part of the debt issuance
costs for the subordinated convertible debt agreement.
TRANSACTIONS RELATING TO THE TRANSFER OF THE MAJOR MEDICAL PRODUCT LINE OF
SAVERS LIFE
Savers Life and World agreed to the transfer of the major medical product
line of Savers Life to World through a coinsurance agreement, under which World
assumed through coinsurance effective July 1, 1997, 100% of the product line.
Savers Life ceased writing any new business in this product line on June 30,
1997. This coinsurance agreement was in effect from July 1, 1997 until September
30, 1997 to allow World the time needed to develop a system to administer this
block of business on a direct basis. For the period from July 1, 1997 to
September 30, 1997, the premiums, claims, commissions and premium taxes were
direct business of Savers Life and subsequently were ceded 100% to World. Savers
Life was paid $50 per month to administer this block of business between July 1,
1997 and September 30, 1997. In October 1997, all of the policies in this
product line were transferred to World as direct insurance policies of World.
Savers Life agreed to share in the claims experience of this product line for
the period from July 1, 1997 through the end of 1997 to the extent that the loss
ratio for such period does not equal 75%. The loss ratio is calculated by
dividing incurred claims by earned premiums. If the loss ratio for the period is
greater than 75%, Savers Life will be required to reimburse World in cash for
50% of the amount by which the actual loss ratio exceeds 75%. If the loss ratio
for the period is less than 75%, World will be required to reimburse Savers Life
in cash for 50% of the amount by which the actual loss ratio is less than 75%.
There can be no assurance that the actual losses from the major medical product
line will not exceed 75% during this period. The actual loss ratio for this
product line for 1996 was 80%. For the six months ended June 30, 1997, the loss
ratio was 95%. As a result of the agreement with World, Savers Life wrote off
all remaining deferred acquisition costs associated with the major medical
product line, resulting in a $1,752 charge against income in the second quarter
of 1997. In September 1997, Savers Life transferred assets of $4,850 and
liabilities of $4,928 to World.
(5) The selected pro forma combined statement of operations financial
data is adjusted to eliminate the results of operations for the major
medical product line to give effect to the transfer of the major medical
product line as of January 1, 1996.
TRANSACTIONS RELATING TO THE SAVERS LIFE ACQUISITION
In the acquisition of Savers Life, each share of Savers Life Common Stock
held immediately prior to the Effective Time of the Merger will be converted
into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life
Common Stock may elect to receive the $1.50 per share portion of the merger
consideration in the form of additional shares of SMC Common Stock.
18
<PAGE> 31
STANDARD MANAGEMENT CORPORATION
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (CONTINUED)
Assuming holders of Savers Life Common Stock receive $1.50 per share cash
consideration in lieu of electing to receive shares of SMC Common Stock, based
on the number of shares of Savers Life Common Stock outstanding at the close of
business on December 1, 1997, SMC will pay approximately $2,670 in cash and
issue 2,135,889 shares of SMC Common Stock with a value of approximately $14,951
(assuming a $7.00 per share value) to acquire the Savers Life Common Stock.
In addition, SMC is expected to incur costs relating to the acquisition of
Savers Life (including legal, accounting and other fees) of approximately $900.
The cost to acquire Savers Life will be allocated as follows:
<TABLE>
<S> <C>
Book value of net assets acquired based on an assumed
Effective Time of September 30, 1997...................... $ 13,987
Costs to be incurred by Savers Life prior to the closing.... (679)
--------
13,308
Increase (decrease) in Savers Life net asset value to
reflect estimated fair value and asset reclassifications
at the assumed Effective Time:
Fixed maturity securities available for sale.............. 14,238
Fixed maturity securities held to maturity................ (16,437)
Present value of future profits (related to
acquisition)........................................... 7,400
Deferred policy acquisition costs (historical)............ (1,360)
Goodwill (related to acquisition)......................... 2,662
Deferred federal income taxes............................. (1,290)
--------
Total estimated fair value adjustments................. 5,213
--------
Total cost to acquire Savers Life................. $ 18,521
========
</TABLE>
Adjustments to the selected pro forma combined statement of operations
financial data to give effect to acquisition of Savers Life as of January 1,
1996 are summarized below.
(6) Net investment income is increased for the investment income
earned on the amount of borrowings under the Amended Credit Agreement that
exceed the cash payment to Savers Life stockholders.
(7) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and amortization
of deferred debt issuance costs associated with the purchase of Savers
Life.
(8) Amortization of deferred acquisition costs recorded by Savers Life
prior to the purchase has been eliminated and replaced with the
amortization of the present value of the future profits as a result of the
transaction. The amount of present value of future profits resulting from
the transaction is being amortized on a constant yield basis over the
estimated life of insurance in force at the date of acquisition in
proportion to the emergence of profits over a period of 20 years, except
for the Medicare supplement product line which is being amortized over a
period of 10 years, with interest equal to the interest rate credited to
the underlying policies. No future value has been assigned to the major
medical product line. Amortization of goodwill acquired in the transaction
is recognized over a 20-year period on a straight-line basis.
(9) Weighted average common and common equivalent shares outstanding
are increased to reflect the SMC Common Stock shares issued in the
acquisition of Savers Life and the issuance of SMC Common Stock warrants in
connection with the Amended Credit Agreement.
19
<PAGE> 32
STANDARD MANAGEMENT CORPORATION
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (CONTINUED)
Adjustments to the selected pro forma combined balance sheet financial data
to give effect to the purchase of Savers Life as of September 30, 1997 are
summarized below.
(10) Held to maturity securities have been reclassified as available for
sale securities at the purchase consistent with the intention of new
management. Savers Life's fixed maturity securities held to maturity are
restated to estimated fair value.
(11) Notes payable are increased to reflect the increased borrowings
under the Amended Credit Agreement. The Amended Credit Agreement provides
for SMC to borrow up to $16,000 in the form of a seven-year reducing
revolving loan arrangement. Interest on the borrowings under the Amended
Credit Agreement is determined, at the option of SMC, to be: (i) a
fluctuating rate of interest to the corporate base rate announced by the
bank from time to time plus 1% per annum, or (ii) a rate at LIBOR plus
3.25%. Annual principal repayments of $2,667 begin in November 1998 and
conclude in November 2003. At December 31, 1996, SMC had borrowed $16,000
under the Amended Credit Agreement at a weighted average interest rate of
8.793%. SMC anticipates increasing borrowings by $4,000 for the acquisition
of Savers Life at an interest rate of 9%.
(12) The Savers Life historical shareholders' equity and related average
common shares outstanding is eliminated under purchase accounting.
Shareholders' equity has been increased to reflect the issuance of the SMC
Common Stock in the acquisition of Savers Life and the issuance of SMC
Common Stock warrants to Fleet Bank in connection with the Amended Credit
Agreement.
20
<PAGE> 33
COMPARATIVE PER SHARE DATA OF SMC AND SAVERS LIFE
The following table sets forth certain selected per share data for SMC and
Savers Life on historical and pro forma combined bases. The pro forma financial
data assumes that the Merger had been consummated at the beginning of the
earliest period presented and gives effect to the Merger as a "purchase" under
GAAP. Book value data for all pro forma presentations is based upon the number
of outstanding shares of SMC Common Stock adjusted to include the shares of SMC
Common Stock issued in the Shelby acquisition and the conversion of Savers Life
Common Stock into 1.2 shares of SMC Common Stock in the Merger, and assuming
holders of Savers Life Common Stock receive $1.50 per share cash consideration
in lieu of electing to receive shares of SMC Common Stock. Based on these
assumptions and the number of shares of Savers Life Common Stock outstanding at
the close of business on December 1, 1997, holders of Savers Life Common Stock
would receive an aggregate of 2,135,889 newly issued shares of SMC Common Stock
upon consummation of the Merger. The information set forth below should be read
in conjunction with the historical Consolidated Financial Statements of SMC and
the Financial Statements of Savers Life, including the notes thereto, appearing
elsewhere herein. See "SMC CONSOLIDATED FINANCIAL STATEMENTS" and "SAVERS LIFE
FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- -------------
<S> <C> <C>
SMC Historical:
Income per common share before extraordinary gain and
after preferred stock dividends........................ $ .36 $ .84
Cash dividends declared per common share.................. -- --
Book value per common share............................... $ 8.74 $7.95
Savers Life Historical:
Net income (loss) per common share........................ $(1.06) $(.94)
Cash dividends declared per common share.................. -- --
Book value per common share............................... $ 7.86 $8.75
SMC Unaudited Pro Forma:
Income per common share................................... $ .31(1) $ .52(1)
Cash dividends declared per common share.................. -- --
Book value per common share............................... $ 8.22(1)
Savers Life Equivalent:
Income per common share................................... $ .37(1) $ .62(1)
Cash dividends declared per common share.................. -- --
Book value per common share............................... $ 9.86(1)
</TABLE>
21
<PAGE> 34
MARKET PRICES AND DIVIDENDS PAID
SMC Common Stock trades on Nasdaq under the symbol "SMAN." There is no
established public trading market for Savers Life Common Stock. The following
table sets forth, for the periods indicated, the range of the high and low sales
prices of SMC Common Stock as reported by Nasdaq. SMC has never paid dividends
on its Common Stock. Savers Life has not paid dividends on its Common Stock
since 1993. At the close of business on December 1, 1997, there were 2,500
holders of record of the outstanding shares of SMC Common Stock. At the close of
business on December 1, 1997, there were 584 holders of record of the
outstanding shares of Savers Life Common Stock.
<TABLE>
<CAPTION>
SMC
COMMON STOCK
-------------------
HIGH LOW
---- ---
<S> <C> <C>
1995
Quarter ended March 31, 1995............................. $4.881 $2.857
Quarter ended June 30, 1995.............................. 4.881 3.571
Quarter ended September 30, 1995......................... 6.071 4.286
Quarter ended December 31, 1995.......................... 4.881 4.167
1996
Quarter ended March 31, 1996............................. 4.524 3.571
Quarter ended June 30, 1996.............................. 5.250 3.690
Quarter ended September 30, 1996......................... 5.500 4.000
Quarter ended December 31, 1996.......................... 5.375 4.000
1997
Quarter ended March 31, 1997............................. 6.250 4.875
Quarter ended June 30, 1997.............................. 6.000 4.625
Quarter ended September 30, 1997......................... 7.875 5.688
Quarter ending December 31, 1997 (through December ,
1997).................................................
</TABLE>
Set forth below are: (i) the last reported per share sale price of SMC
Common Stock, as reported by Nasdaq, on December 12, 1997, the last trading day
ending prior to the public announcement of the execution of the Merger
Agreement, and December 20, 1996, the last trading day ending prior to the
public announcement of the execution of the 1996 Merger Agreement and (ii) the
applicable equivalent pro forma sale price of Savers Life Common Stock:
<TABLE>
<CAPTION>
DECEMBER 12, 1997 DECEMBER 20, 1996
----------------- -----------------
<S> <C> <C>
SMC Common Stock.............................. $6.875 $4.375
Savers Life Equivalent........................ $9.750 $6.750(1)
</TABLE>
- -------------------------
(1) Based upon the calculation of the merger consideration contemplated by the
1996 Merger Agreement, the Savers Life Equivalent for December 20, 1996
would have been $8.000.
On , 1998, the last trading day prior to the date of this
Proxy Statement/Prospectus, the last reported sale price of SMC Common Stock, as
reported by Nasdaq, was $ per share. Stockholders are urged to obtain
current market quotations for SMC Common Stock. No assurance can be given as to
the future prices of or markets for SMC Common Stock or Savers Life Common
Stock.
22
<PAGE> 35
RISK FACTORS
In addition to the other information contained in this Proxy
Statement/Prospectus, SMC and Savers Life stockholders should consider the
following factors before voting on matters pertaining to the Merger.
INSURANCE REGULATION
SMC's insurance subsidiaries and Savers Life are subject to substantial
governmental regulation in each of the jurisdictions in which they conduct
business. Such regulation is vested in governmental agencies having broad
administrative power with respect to all aspects of SMC's and Savers Life's
insurance business, including premium rates, policy forms, dividend payments,
capital adequacy and the amount and type of investments SMC and Savers Life may
have. Such regulations are primarily intended to protect policyholders rather
than stockholders. SMC is also regulated in various states as an insurance
holding company system. Generally, under insurance company statutes, a state
insurance authority must approve in advance the direct or indirect acquisition
of 10% or more of the voting securities of an insurance company domiciled in its
state, such as is contemplated by the Merger, along with certain other
transactions. Appropriate filings with the North Carolina Insurance Department
have been made with respect to the Merger. There can be no assurance that the
required approvals of the North Carolina Insurance Department will be obtained.
See "THE MERGER -- Regulatory Approvals."
In recent years, the National Association of Insurance Commissioners (the
"NAIC") and state insurance regulators have reexamined existing laws and
regulations and their application to insurance companies. This reexamination has
focused on insurance company investment and solvency issues, risk-based capital
guidelines, assumption reinsurance, interpretations of existing laws, the
development of new laws, the interpretation of nonstatutory guidelines, the
standardization of statutory accounting rules and the circumstances under which
dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws
on specific topics such as holding company regulations and the definition of
extraordinary dividends. It is not possible to predict the future impact of
changing state regulation on the operations of SMC or Savers Life.
The NAIC, as well as Indiana, Mississippi and North Carolina, has adopted
Risk-Based Capital ("RBC") requirements for life/health insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks such as asset quality, mortality and morbidity, asset and
liability matching, benefit and loss reserve adequacy, and other business
factors. The RBC formula is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. The RBC
guidelines are intended to be a regulatory tool only and are not intended as a
means to rank insurers generally. In addition, the formula defines minimum
capital standards that supplement the previously existing system of low fixed
minimum capital and surplus requirements on a state-by-state basis. Regulatory
compliance is determined by a ratio of the enterprise's regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level RBC,
as defined by the NAIC. Enterprises below specific trigger points or ratios are
classified within certain levels, each of which requires specific corrective
action. If a company's RBC ratio is in the Company Action Level range defined as
an RBC ratio of 1.5-2, the company must submit a plan to improve its RBC ratio.
The Regulatory Action Level range defined as an RBC ratio of 1-1.5 provides that
regulators will order corrective actions. At the Authorized Control Level range
defined as an RBC ratio of 0.7-1, regulators are authorized to take control of
the company. Finally, at the Mandatory Control Level defined as ratios below
0.7, regulators must take over the company. The ratios of Total Adjusted Capital
to Authorized Control Level RBC for SMC's insurance subsidiaries were all in
excess of 4 at December 31, 1996 and 1995. However, should the insurance
subsidiaries' RBC position decline in the future, the insurance subsidiaries'
continued ability to pay dividends and the degree of regulatory supervision or
control to which they are subjected could be affected.
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON PAYMENTS TO PARENT COMPANIES
As a holding company, Standard Management's ability to pay operating
expenses and meet debt service obligations if any, depends on the receipt of
sufficient funds, primarily through management fees, rental income, dividends
from its subsidiaries and interest payments on its Surplus Debentures. Subject
to the
23
<PAGE> 36
restrictions described below, Standard Management may receive dividends from its
direct subsidiaries, Standard Life, Standard Management International and
Standard Marketing. Dixie National Life is a subsidiary of Standard Life.
Accordingly, any dividends paid by Dixie National Life to Standard Life may be
paid to Standard Management only if Standard Life is entitled to pay dividends
to Standard Management.
Under Indiana insurance law, Standard Life may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including Standard Management,
unless Standard Life has notified the Indiana Department of Insurance of its
intention to enter into such transactions and the Indiana Department of
Insurance has not disapproved of them within the period specified by Indiana
law. Among other things, such transactions are subject to the requirement that
their terms be fair and reasonable and that the charges or fees for services
performed be reasonable.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $166,667 (annual fee of
$2,000,000) during 1997 for certain management services related to the
production of business, investment of assets and evaluation of acquisitions.
Pursuant to the management services agreement with Standard Life, Dixie National
Life paid a monthly payment of $83,333 (annual fee of $1,000,000) to Standard
Life in 1997.
Dividends by Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Indiana Commissioner 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. Also, regulatory approval is
required when dividends to be paid exceed unassigned surplus. For the year ended
December 31, 1996, Standard Life reported statutory net gain from operations of
$1,427,000 and statutory surplus of $20,279,000. At December 31, 1996,
unassigned surplus was $1,140,000. Standard Life paid dividends of $1,600,000 in
1997. For the nine months ended September 30, 1997, Standard Life reported
statutory net gain from operations of $1,417,000 and statutory surplus of
$25,923,000. Standard Life anticipates paying the maximum allowable dividends in
1998.
From the funds borrowed by Standard Management pursuant to the Amended
Credit Agreement and the subordinated convertible debt agreement, $13,000,000
was loaned to Standard Life pursuant to an Unsecured Surplus Debenture Agreement
("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 $1,000,000 per year beginning in 2007
and concluding in 2019. 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
September 30, 1997 interest rate of 10.50% continues for the remainder of 1998,
Standard Management will receive interest income of $1,365,000 from the Surplus
Debenture for 1998.
The Indiana insurance laws and regulations require that the statutory
surplus of Standard Life following any dividend or distribution be reasonable in
relation to its outstanding liabilities and adequate to its financial needs. The
Indiana Department of Insurance may bring an action to enjoin or rescind the
payment of a dividend or distribution by Standard Life that would cause its
statutory surplus to be unreasonable or inadequate under this standard.
NO ASSURANCE BUSINESSES CAN BE COMBINED SUCCESSFULLY
SMC's immediate plan for the operation of Savers Life after the Merger is
to reduce Savers Life's marketing and operational expenses by consolidating
services and administration. Such consolidation is expected to result in nominal
cost savings. Notwithstanding the present intention of SMC to integrate certain
aspects of the Savers Life business with SMC operations, SMC intends to continue
to market the existing life insurance and annuity product lines of SMC and
Savers Life through their respective distribution channels. The process of
consolidating services and administration could cause the interruption of, or a
loss of
24
<PAGE> 37
momentum in, the activities of either or both of the companies' businesses,
which could have a materially adverse effect on their combined operations, at
least in the near term. The transition necessary to effect such consolidation
will require significant attention from management. The diversion of management
attention and any difficulties encountered in the transition process could have
a materially adverse impact on the revenues and operating results of the
combined company. If the Merger is not consummated, SMC's net income in 1997 is
expected to be impacted due to costs associated with the Merger, including an
estimated $700,000 to $900,000 in legal and accounting fees, printing and
mailing costs and filing fees, which costs will be incurred even if the Merger
is not consummated.
DILUTION OF SMC BOOK VALUE
The issuance of SMC Common Stock in the Merger would decrease the book
value of SMC Common Stock from $8.74 per share at September 30, 1997 to $8.22
per share assuming that 1,779,908 shares of Savers Life Common Stock are
outstanding at the Effective Time, and assuming holders of Savers Life Common
Stock receive $1.50 per share cash consideration in lieu of electing to receive
shares of SMC Common Stock.
POSSIBILITY OF FUTURE DILUTION OF OWNERSHIP AND VOTING POWER
The SMC Board has the authority, without stockholder approval except where
otherwise required for a particular transaction, to issue up to 1,000,000
additional shares of preferred stock, without par value ("SMC Preferred Stock"),
of SMC and 15,128,510 additional shares of SMC Common Stock, less any shares
issued in connection with the Merger, which if issued would dilute the ownership
percentage and the voting power of the currently outstanding shares of SMC
Common Stock. SMC regularly investigates acquisition opportunities in the life
insurance industry and could issue additional shares of SMC Common Stock or SMC
Preferred Stock in connection with such an acquisition. At the present time, SMC
has no arrangements or understandings with respect to any such acquisition other
than the Merger. The existence of authorized but unissued capital stock may also
have the effect of making more difficult or discouraging an acquisition of SMC
deemed undesirable by the SMC Board, as additional shares of capital stock could
be issued to dilute the stock ownership and voting power, or increase the cost
to, a party seeking to acquire SMC.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of Indiana law and the Articles of Incorporation and
Bylaws of SMC may delay, deter or prevent a change in control of SMC. Under
Indiana law, directors may, in considering the best interests of a corporation,
consider the effects of any action on stockholders, employees, suppliers and
customers of the corporation and communities in which offices or other
facilities of the corporation are located, and any other factors the directors
consider pertinent. In addition, Indiana law prohibits business combinations
involving SMC and any holder of 10% or more of its voting stock unless such a
combination is (i) approved by the SMC Board or (ii) (a) five years have passed
since the acquisition of the shares, (b) all requirements of the Articles of
Incorporation relating to business combinations are satisfied and (c) either (1)
holders of a majority of shares of SMC Common Stock approve the business
combination or (2) all stockholders are paid fair value for their stock.
Finally, Indiana law provides that when a business such as SMC that is
incorporated in Indiana and has its principal office in Indiana has 20%
ownership by Indiana residents any acquisition which gives the acquiror at least
20% of the corporation's voting stock triggers a stockholder approval mechanism.
Without stockholder approval, the acquiror of such shares will not have voting
rights.
In addition to the anti-takeover provisions of Indiana law there are other
factors that may delay, deter or prevent a change in control of SMC. The
insurance laws and regulations of the jurisdictions within which SMC's insurance
subsidiaries do business may impede or delay a business combination involving
SMC as such a transaction may have to be approved by the appropriate regulatory
agency of one or more such states. Also, the SMC Board has the power to amend
the Bylaws of SMC and to determine the number of directors. These powers, in
addition to the existence of authorized but unissued capital stock as described
above under "Possibility of Future Dilution of Ownership and Voting Power" and a
classified Board of Directors, may have the effect, either alone or in
combination with each other, of making more difficult or discouraging an
acquisition of SMC deemed undesirable by the SMC Board.
25
<PAGE> 38
FUTURE SALES AND PRICE OF SMC COMMON STOCK
No prediction can be made as to the effect, if any, that future sales of
SMC Common Stock, or the availability of shares for future sale, will have on
the market price of the SMC Common Stock prevailing from time to time. Sales of
substantial amounts of SMC Common Stock (including shares issued upon the
exercise of stock options or warrants), or the perception that such sales may
occur, could adversely affect prevailing market prices for the SMC Common Stock.
Since the initial public offering of SMC Common Stock in February, 1993, there
has been significant volatility in the market for SMC Common Stock. Such
volatility may continue or increase from time to time following the Merger.
PRICE OF SMC COMMON STOCK MAY VARY
The price of SMC Common Stock at the Effective Time can be expected to vary
from the price as of the date of this Proxy Statement/Prospectus and the dates
of the SMC Special Meeting and the Savers Life Special Meeting due to changes in
the business, operations or prospects of SMC, market assessments of the
likelihood that the Merger will be consummated and the time thereof, general
market and economic considerations and other factors.
SMC SPECIAL MEETING
DATE, PLACE AND TIME
The SMC Special Meeting will be held on , 1998 at ,
local time, at the Woodland Country Club, 100 Woodland Lane, Carmel, Indiana.
PURPOSE
At the SMC Special Meeting, holders of SMC Common Stock will be asked to
consider and act upon a proposal to approve the Common Stock Issuance and to
transact such other business as may properly come before the SMC Special
Meeting.
The SMC Board has unanimously determined that the Merger and the Common
Stock Issuance are advisable and fair to and in the best interests of SMC and
its stockholders and has unanimously approved the Merger Agreement and the
transactions contemplated thereby. THE SMC BOARD UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF SMC VOTE IN FAVOR OF APPROVAL OF THE COMMON STOCK ISSUANCE AT
THE SMC SPECIAL MEETING. See "THE MERGER -- SMC's Reasons for the Merger;
Recommendation of its Board of Directors."
RECORD DATE; VOTING RIGHTS
Only holders of record of SMC Common Stock at the close of business on the
SMC Record Date, January 23, 1998, are entitled to receive notice of and to vote
at the SMC Special Meeting. At the close of business on December 1, 1997, there
were 4,871,490 shares of SMC Common Stock outstanding, each of which entitles
the registered holder thereof to one vote on each matter voted upon at the SMC
Special Meeting.
QUORUM
The holders of a majority of shares of SMC Common Stock outstanding and
entitled to vote must be present in person or represented by proxy at the SMC
Special Meeting in order for a quorum to be present.
Shares of SMC Common Stock represented by proxies which are marked
"abstain" as to one or more particular matters will be counted as shares present
for purposes of determining the presence of a quorum on all matters, as will
shares that are represented by proxies that are executed by any broker,
fiduciary or other nominee on behalf of the beneficial owner(s) thereof
regardless of whether authority to vote is withheld by such broker, fiduciary or
nominee on one or more matters.
26
<PAGE> 39
In the event that a quorum is not present at the SMC Special Meeting, it is
expected that such meeting will be adjourned or postponed to allow for the
solicitation of additional proxies.
PROXIES
All shares of SMC Common Stock which are represented by properly executed
proxies received by SMC prior to or at the SMC Special Meeting and not revoked
will be voted at the SMC Special Meeting in accordance with the instructions
indicated in such proxies. If no instructions are indicated, such shares will be
voted FOR the Common Stock Issuance. The SMC Board does not know of any other
matters which are to be brought before the SMC Special Meeting. If any other
matters are properly presented at the SMC Special Meeting for action, the
persons named in the enclosed form of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
An SMC stockholder who has given a proxy may revoke it at any time prior to
its exercise by filing a written notice of such revocation with the Secretary of
SMC at or prior to the SMC Special Meeting, by delivering to SMC a duly executed
later dated proxy, or by attending the SMC Special Meeting and voting in person
(although attendance at the SMC Special Meeting will not in and of itself
constitute a revocation of a proxy). All written notices of revocation and other
communications with respect to revocation of proxies in connection with the SMC
Special Meeting should be addressed to Standard Management Corporation, 9100
Keystone Crossing, Indianapolis, Indiana 46240, Attention: Stephen M. Coons,
Secretary.
A registered holder of SMC Common Stock may submit a proxy or revoke a
proxy by facsimile transmission sent to (201) 296-4142. In order to be
effective, each proxy or revocation submitted by facsimile transmission must
clearly indicate the date of the proxy or revocation, voting instructions, the
number of shares covered by such proxy or revocation and the printed or typed
name of the registered holder of the shares of SMC Common Stock to which such
proxy or revocation relates. Such proxy or revocation must also be duly executed
by the registered holder of the shares of SMC Common Stock to which such proxy
or revocation relates. Any proxy or revocation submitted by facsimile
transmission not containing such information may be invalidated if it does not
match the stock records of SMC. If an SMC stockholder's shares are registered in
the name of a broker, bank, nominee or other institution, only such broker,
bank, nominee or other institution is entitled to vote such shares. Such SMC
stockholders should contact their account representative and ask him or her to
vote such shares.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the SMC Board. All expenses
incurred in connection with the solicitation of proxies by and on behalf of the
SMC Board will be borne by SMC. In addition to the use of the mails, proxies may
be solicited personally or by telephone by directors, officers and employees of
SMC who will not be additionally compensated therefor, but may be reimbursed for
their out-of-pocket expenses incurred in connection with such solicitation.
Further, SMC may contract with outside solicitors. SMC will also arrange with
brokerage houses and other custodians, nominees and fiduciaries for forwarding
solicitation materials to the beneficial owners of shares held of record by such
persons. SMC will reimburse such persons for their reasonable out-of-pocket
expenses incurred in connection therewith.
REQUIRED VOTE
Approval of the Common Stock Issuance requires the affirmative vote of a
majority of the votes cast thereon at the SMC Special Meeting.
Abstentions and votes which are not cast because the nominee-broker either
lacks or fails to exercise discretionary authority with respect to the Common
Stock Issuance will be excluded when determining the number of votes cast
thereon.
At the close of business on December 1, 1997, Directors and executive
officers of SMC and their affiliates were the beneficial owners of an aggregate
of 1,167,208 (approximately 24.0%) of the shares of SMC
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Common Stock then outstanding. SMC expects that all such shares will be voted in
favor of the Common Stock Issuance.
DISSENTERS' RIGHTS
Holders of SMC Common Stock do not have dissenters' rights with respect to
the Merger, the Common Stock Issuance or any other matter to be presented at the
SMC Special Meeting.
SAVERS LIFE SPECIAL MEETING
DATE, PLACE AND TIME
The Savers Life Special Meeting will be held on ,
1998 at , local time, at the
,
Winston-Salem, North Carolina.
PURPOSE
At the Savers Life Special Meeting, holders of Savers Life Common Stock
will consider and vote upon a proposal to approve the Merger Agreement and to
transact such other business as may properly come before the Savers Life Special
Meeting.
The Savers Life Board has unanimously determined that the Merger is fair,
equitable and in the best interests of Savers Life and its stockholders and has
unanimously approved the Merger Agreement. THE SAVERS LIFE BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF SAVERS LIFE VOTE IN FAVOR OF APPROVAL OF THE
MERGER AGREEMENT AT THE SAVERS LIFE SPECIAL MEETING. See "THE MERGER -- Savers
Life's Reasons for the Merger; Recommendation of its Board of Directors."
RECORD DATE; VOTING RIGHTS
Only holders of record of Savers Life Common Stock at the close of business
on the Savers Life Record Date, January 23, 1998, are entitled to receive notice
of and to vote at the Savers Life Special Meeting. At the close of business on
December 1, 1997, there were 1,779,908 shares of Savers Life Common Stock
outstanding, each of which entitles the registered holder thereof to one vote on
each matter voted upon at the Savers Life Special Meeting.
QUORUM
The holders of a majority of shares of Savers Life Common Stock outstanding
and entitled to vote must be present in person or represented by proxy at the
Savers Life Special Meeting in order for a quorum to be present.
Shares of Savers Life Common Stock represented by proxies which are marked
"abstain" will be counted as shares present for purposes of determining the
presence of a quorum on all matters, as will shares that are represented by
proxies that are executed by any broker, fiduciary or other nominee on behalf of
the beneficial owner(s) thereof regardless of whether authority to vote is
withheld by such broker, fiduciary or nominee on one or more matters.
In the event that a quorum is not present at the Savers Life Special
Meeting, it is expected that such meeting will be adjourned or postponed to
allow for the solicitation of additional proxies.
PROXIES
All shares of Savers Life Common Stock which are represented by properly
executed proxies received by Savers Life prior to or at the Savers Life Special
Meeting and not revoked will be voted at the Savers Life Special Meeting in
accordance with the instructions indicated in such proxies. If no instructions
are indicated such shares will be voted FOR approval of the Merger Agreement.
The Savers Life Board does not know of any other matters to be brought before
the Savers Life Special Meeting. If any other matters are properly
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<PAGE> 41
presented at the Savers Life Special Meeting for action, the persons named in
the enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
A Savers Life stockholder who has given a proxy may revoke it at any time
prior to its exercise by filing a written notice of such revocation with the
Secretary of Savers Life at or prior to the Savers Life Special Meeting, by
delivering to Savers Life a duly executed later dated proxy or by attending the
Savers Life Special Meeting and voting in person (although attendance at the
Savers Life Special Meeting will not in and of itself constitute a revocation of
a proxy). All written notices of revocation and other communications with
respect to revocation of proxies in connection with the Savers Life Special
Meeting should be addressed to Savers Life Insurance Company, 8064 North Point
Boulevard, Winston-Salem, North Carolina 27106, Attention: Patricia G. Landy,
Secretary.
A registered holder of Savers Life Common Stock may submit a proxy or
revoke a proxy by facsimile transmission sent to (910) 759-3999. In order to be
effective, each proxy or revocation submitted by facsimile transmission must
clearly indicate the date of the proxy or revocation, voting instructions, the
number of shares covered by such proxy or revocation and the printed or typed
name of the registered holder of the shares of Savers Life Common Stock to which
such proxy or revocation relates. Such proxy or revocation must also be duly
executed by the registered holder of the shares of Savers Life Common Stock to
which such proxy or revocation relates. Any proxy or revocation submitted by
facsimile transmission not containing such information may be invalidated if it
does not match the stock records of Savers Life. If a Savers Life stockholder's
shares are registered in the name of a broker, bank, nominee or other
institution, only such broker, bank, nominee or other institution is entitled to
vote such shares. Such Savers Life stockholders should contact their account
representative and ask him or her to vote such shares.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Savers Life Board. All
expenses incurred in connection with the solicitation of proxies by and on
behalf of the Savers Life Board will be borne by Savers Life. In addition to the
use of the mails, proxies may be solicited personally or by telephone by
directors, officers and employees of Savers Life who will not be additionally
compensated therefor, but may be reimbursed for their out-of-pocket expenses
incurred in connection with such solicitation. Further, Savers Life may contract
with outside solicitors. Savers Life will also arrange with brokerage houses and
other custodians, nominees and fiduciaries for forwarding solicitation materials
to the beneficial owners of shares held of record by such persons. Savers Life
will reimburse such persons for their reasonable out-of-pocket expenses incurred
in connection therewith.
REQUIRED VOTE
Approval of the Merger Agreement will require the affirmative vote of the
holders of a majority of the shares of Savers Life Common Stock outstanding on
the Savers Life Record Date.
Abstentions and votes which are not cast because the nominee-broker either
lacks or fails to exercise discretionary authority with respect to the proposal
to approve the Merger Agreement will have the effect of votes against such
proposal.
Persons who have the power to vote 543,206 shares of Savers Life Common
Stock outstanding at the close of business on December 1, 1997 (approximately
30.5% of the shares of Savers Life Common Stock then outstanding) have signed
agreements obligating them to vote in favor of the Merger Agreement and against
certain other action. See "VOTING AGREEMENTS."
At the close of business on December 1, 1997, Directors and executive
officers of Savers Life and their affiliates were the beneficial owners of an
aggregate of 551,706 (approximately 31.0%) of the shares of Savers Life Common
Stock then outstanding. Such shares include the shares subject to the voting
agreements described above. Savers Life expects that all such shares will be
voted in favor of approval of the Merger Agreement.
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<PAGE> 42
DISSENTERS' RIGHTS
Holders of Savers Life Common Stock have the right to dissent from the
Merger and to receive payment of the fair value of their shares upon full
compliance with Sections 55-13-01 through 55-13-31 of the NCBCA. A copy of those
Sections of the NCBCA is attached hereto as Annex B. If holders of more than 5%
of the shares of Savers Life Common Stock outstanding immediately prior to the
Effective Time properly exercise dissenters' rights, SMC will have the right to
decline to consummate the Merger. A vote in favor of the Merger proposal
precludes the exercise of dissenters' rights; an abstention, a failure to vote
or a vote against the Merger proposal neither waives the right to dissent nor
constitutes notice of intent to exercise dissenters' rights. See "DISSENTERS'
RIGHTS" and "THE MERGER AGREEMENT -- Conditions Precedent to the Merger."
PARTIES TO THE MERGER AGREEMENT
SMC
SMC is an insurance holding company, which directly and through its
subsidiaries acquires and manages in force life insurance and annuity business
and distributes life insurance and annuity products issued by its subsidiaries
and a select group of unaffiliated insurers. SMC is an Indiana corporation, its
principal executive offices are located at 9100 Keystone Crossing, Indianapolis,
Indiana 46240, and its telephone number is (317) 574-6200. SMC's active
subsidiaries include: (i) Standard Life and its subsidiary, Dixie National Life,
(ii) Standard Management International and its subsidiaries, Premier Life
(Luxembourg) and Premier Life (Bermuda), and (iii) Standard Marketing. For
further information concerning SMC, see "ADDITIONAL INFORMATION REGARDING SMC,"
"SMC CONSOLIDATED FINANCIAL STATEMENTS," "AVAILABLE INFORMATION" and
"INCORPORATION OF DOCUMENTS BY REFERENCE."
SAVERS LIFE
Savers Life is a North Carolina domestic stock insurance company licensed
to write life and accident and health insurance. Savers Life's principal
products are annuities and Medicare supplement insurance. Savers Life also sells
term life insurance, whole life insurance, annuities issued by another company
and sells and administers group health plan products for an HMO. Savers Life's
principal executive offices are located at 8064 North Point Boulevard,
Winston-Salem, North Carolina 27106, and its telephone number is (910) 759-3888.
For further information concerning Savers Life, see "ADDITIONAL INFORMATION
REGARDING SAVERS LIFE" and "SAVERS LIFE FINANCIAL STATEMENTS."
SAC
SAC was incorporated in North Carolina on December 12, 1996 solely for the
purpose of consummating a merger with Savers Life. SAC has minimal assets and no
business and has carried on no activities which are not directly related to its
formation and its execution of the Merger Agreement. Its principal executive
offices are located at 9100 Keystone Crossing, Indianapolis, Indiana 46240, and
its telephone number is (317) 574-6200.
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<PAGE> 43
THE MERGER
The description of the Merger and the Merger Agreement contained in this
Proxy Statement/Prospectus does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, a conformed copy of which is
attached hereto as Annex A and incorporated herein by reference.
GENERAL
At the Effective Time of the Merger, SAC will be merged with and into
Savers Life, with Savers Life continuing as the Surviving Corporation and a
wholly-owned subsidiary of SMC. As a result of the Merger, the separate
corporate existence of SAC will cease, and Savers Life will succeed to all the
rights and be responsible for all the obligations of SAC in accordance with the
NCBCA.
Subject to the terms and conditions of the Merger Agreement, each share of
Savers Life Common Stock held immediately prior to the Effective Time of the
Merger will be converted into 1.2 shares of SMC Common Stock plus $1.50. Each
holder of Savers Life Common Stock may elect to receive the $1.50 per share
portion of the merger consideration in the form of additional shares of SMC
Common Stock. Cash will be paid in lieu of any fractional share of SMC Common
Stock.
HOLDERS OF SAVERS LIFE COMMON STOCK WHO WISH TO RECEIVE SMC COMMON STOCK IN
LIEU OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION MUST RETURN THE FORM
OF ELECTION THAT ACCOMPANIES THIS PROXY STATEMENT/PROSPECTUS TO SAVERS LIFE BY
5:00 P.M., LOCAL TIME, ON , 1998. HOLDERS OF SAVERS LIFE COMMON STOCK
WHO DO NOT WISH TO RECEIVE SHARES OF SMC COMMON STOCK IN LIEU OF THE $1.50 CASH
PORTION OF THE MERGER CONSIDERATION NEED NOT RETURN SUCH FORM OF ELECTION.
Notwithstanding the foregoing, holders of Savers Life Common Stock have the
right to dissent from the Merger and to receive payment of the fair value of
their stock upon full compliance with Sections 55-13-01 through 55-13-31 of the
NCBCA. If holders of more than 5% of the shares of Savers Life Common Stock
outstanding immediately prior to the Effective Time properly exercise
dissenters' rights, SMC will have the right to decline to consummate the Merger.
A vote in favor of the Merger proposal precludes the exercise of dissenters'
rights; an abstention, a failure to vote or a vote against the Merger proposal
neither waives the right to dissent nor constitutes notice of intent to exercise
dissenters' rights. See "THE MERGER AGREEMENT -- Conversion of Shares in the
Merger," "-- No Fractional Shares," "-- Adjustment of Conversion Number," "--
Conditions Precedent to the Merger" and "DISSENTERS' RIGHTS."
The Merger will become effective on the date of filing of Articles of
Merger, or such later date, not to be more than 90 days after the date the
Articles of Merger are filed, as may be specified in the Articles of Merger,
with the Secretary of State of the State of North Carolina, which is anticipated
to occur promptly after the approval of the Merger Agreement by the stockholders
of SMC and of Savers Life and following the satisfaction or waiver of the
conditions to the obligations of each of the parties to the Merger Agreement.
See "THE MERGER AGREEMENT -- Conditions Precedent to the Merger."
BACKGROUND OF THE MERGER
In 1994, Savers Life began to realize the need for additional capital to
support the additional business it was writing. Capital requirements applied to
Savers Life by the insurance regulators in Florida began to restrict the amount
of new Medicare supplement business that Savers Life could write in that state.
Statutes in Florida require premium writings to capital and surplus ratios to be
no greater than four to one (4:1). In 1994, Savers Life's ratio was 6.12:1 and
at December 31, 1996 it was 7.78:1. Savers Life was in compliance with capital
and surplus requirements in the other states in which it does business at
December 31, 1996.
The Savers Life Board considered the alternatives of merging Savers Life
with another corporation, selling one or more lines of Savers Life's business,
raising additional capital through the sale of preferred stock or debt or
selling additional shares of Savers Life Common Stock to institutional
investors. In November of 1994, Savers Life entered into an agreement (the
"Daiwa Agreement") with Daiwa Securities America, Inc. ("Daiwa"), to seek
$10,000,000 additional capital for Savers Life or to find a merger partner. The
contract with Daiwa provided for a fee to Daiwa if Savers Life should enter into
a merger agreement with a third party
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<PAGE> 44
not identified by Daiwa during the term of the Daiwa Agreement. The fee was to
be based upon the value of the transaction. The merger contemplated by the 1996
Merger Agreement would have required a fee of $750,000. Savers Life and Daiwa
have negotiated a reduction in that fee. Accordingly, although Daiwa did not
play a role in the identification of SMC as a potential merger candidate or the
negotiation of the 1996 Merger Agreement or the Merger Agreement, it will
receive a fee of $256,500 upon consummation of the Merger. Savers Life sought
out several opportunities for a merger of Savers Life with other parties, but
none proceeded to a definitive agreement.
At the August 16, 1996, meeting of the Savers Life Board, management
reported that there were some preliminary expressions of interest in acquiring
the stock of Savers Life. The board also discussed the possibility of selling
the major medical block of business to raise capital and to alleviate the
pressure on the risk-to-capital ratio requirements of the states in which Savers
Life does business. The board authorized management to pursue the possibilities.
The initial contact between Savers Life and SMC occurred through a
telephone call from Robert Neal, former President of Dixie National Life, to
Jerry D. Stoltz, Sr., President of Savers Life, in July of 1996. Mr. Neal then
visited with Mr. Stoltz and Jerry Francis, Senior Vice-President of Savers Life,
in Winston-Salem, North Carolina, on August 14, 1996. Mr. Stoltz and Mr. Francis
gave Mr. Neal a brief history of Savers Life. Mr. Neal did the same regarding
Dixie National Life and its parent, SMC. A brief discussion followed regarding
Savers Life's product lines and the geographic distribution of the marketing
force. Mr. Neal was advised that there were other interested parties and that
there would be interest in discussing the possibilities between the two
companies. Mr. Neal said that he would speak with Mr. Hunter and discuss future
interest.
After several telephone conversations with Ronald D. Hunter, CEO of SMC,
Mr. Stoltz traveled to Indianapolis on September 5, 1996, and met with Mr.
Hunter and Mr. Edward T. Stahl that night and Mr. Hunter, Mr. Stahl, Raymond J.
Ohlson, John J. Quinn and Gerald R. Hochgesang the following day. There ensued a
number of telephone conversations between Mr. Stoltz and Mr. Hunter regarding
SMC's possible interest in Savers Life, and the two exchanged general
information regarding the business and financial performance of the respective
companies. Discussions also included potential marketing synergies between SMC
and Savers Life. SMC indicated an interest in acquiring Savers Life and
presented its preliminary thoughts on a proposal in time for a meeting of the
Savers Life Board on September 18, 1996. Although there was no formal proposal,
the concept that SMC put forth was $2.00 cash per share of Savers Life Common
Stock and 2,000,000 shares of SMC Common Stock (the equivalent of $7.00 per
share based upon there being 1,800,000 shares of Savers Life Common Stock
outstanding and an assumed price of SMC Common Stock of $5.00 per share).
At a special meeting of the Savers Life Board held on September 18, 1996,
management presented outlines of preliminary proposals from three interested
parties, including SMC, none of whom were identified to Savers Life by Daiwa.
The preliminary proposals were not in definitive form, and the board sought more
information before proceeding further. At the meeting, the board appointed a
special committee (the "Special Committee"), comprised of three nonemployee
directors, Theo H. Pitt, Jr., William G. White, Jr., and H. Joe King, Jr., to
review any proposals that might be presented and to advise the Savers Life Board
on its recommendations.
The Special Committee met following adjournment of the September 18, 1996
Savers Life Board meeting, and determined that all parties that had expressed
interest in Savers Life be notified of the appointment of the Special Committee
and be further notified that, if they desired to present a proposal, they should
do so promptly. Savers Life notified the parties that had shown interest and
requested written proposals to be submitted by the close of business on October
4, 1996. At the October 4, 1996, date, Savers Life was discussing possible
proposals with several parties, including SMC, but not all of them had submitted
proposals that the Special Committee could consider and evaluate. The
information received from parties expressing interest ranged from telephone
calls promising a proposal to a written proposal, subject to due diligence and
adjustments.
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<PAGE> 45
SMC submitted a written proposal, dated October 1, 1996, offering
$3,600,000 in cash and 2,000,000 shares of SMC Common Stock for the Savers Life
Common Stock, based upon there being 1,800,000 shares of Savers Life Common
Stock issued and outstanding. The offer included a performance premium based
upon earnings for 1997 and 1998. The offer provided that existing stock options
would be converted into options to purchase not more than 100,000 shares of SMC
Common Stock, except for the options held by an individual, which options would
be purchased for cash. In addition to other terms, the proposal included a
topping fee of $500,000 payable by Savers Life should it accept a higher bid
from another party and a walk-away fee of the same amount payable by Savers Life
should the transaction not close for any reason other than lack of regulatory
approval. This proposal provided that it would expire on October 14, 1996, if
not accepted by that date. Mr. Stoltz continued telephone discussions with Mr.
Hunter between the time of receipt of the October 1 proposal and October 15,
1996, with such discussions focusing primarily on price issues.
The Special Committee met again on October 15, 1996, to review the
information and the three proposals that had been received. The Special
Committee determined that the proposal made by Pioneer Financial Services, Inc.
to acquire Savers Life for cash, $9,000,000 at closing on December 31, 1996, and
$9,000,000 at December 31, 1997, subject to adjustment downward, was not
adequate, because Pioneer Financial Services, Inc. would have the right to
determine reserve levels. The Special Committee determined that the proposal
made by American Holding Corporation to acquire all outstanding stock and stock
options issued by Savers Life for cash of between $17,500,000 and $19,000,000
(transaction costs to be deducted from the purchase price) was too indefinite,
and the Special Committee instructed management to request additional
information regarding the proposing company and its principals, including
evidence of its ability to produce the cash informally proposed. Despite
repeated requests for it, the additional information was never provided. The SMC
proposal of October 1 for a combination of $2.00 in cash and shares of SMC
Common Stock to be exchanged for each share of Savers Life Common Stock remained
informally open for discussion. The Special Committee instructed management to
continue negotiations.
Following the October 15, 1996, meeting of the Special Committee, Savers
Life invited the parties expressing interest in acquiring Savers Life, including
SMC, to visit the offices of Savers Life to conduct such due diligence as they
might wish in order to permit them to make a proposal to the Savers Life Board
for consideration. Several interested parties, including SMC, sought additional
information. Following the exchange of pertinent financial and marketing
information, representatives of SMC visited the Savers Life offices in
Winston-Salem on October 22, 1996, and Stephen M. Coons, SMC's General Counsel,
visited the Savers Life offices on October 24, 1996.
Between October 16, 1996 and November 11, 1996, management of Savers Life
continued discussions and negotiations with SMC management. These discussions
included the minimum statutory capital and surplus to be required of Savers Life
at the effective time of a merger, the method to determine the value of SMC
Common Stock for purposes of calculating the number of shares of SMC Common
Stock to be received by Savers Life Stockholders, the form of lock-up agreements
to be executed by certain holders of Savers Life Common Stock and its directors,
and the maximum percentage of holders of Savers Life Common Stock demanding
dissenters' rights. Further discussions were held between the management of
Savers Life and SMC on almost a daily basis to complete the due diligence review
of Savers Life. Several draft proposals were circulated between the management
of Savers Life and SMC resulting in a formal proposal dated November 11, 1996,
by SMC to acquire Savers Life.
SMC regularly investigates acquisition opportunities that complement or are
otherwise strategically consistent with its existing business. After conducting
due diligence with respect to Savers Life and talking with representatives of
Savers Life, SMC determined that the acquisition of Savers Life was consistent
with the marketing goals of SMC in that it would give SMC the opportunity to
expand financial institutional marketing of annuities through the existing
distribution system of Savers Life. SMC also concluded that Savers Life's
product in the Medicare supplement market would afford SMC the opportunity to
expand its marketing of products to the growing retirement market. SMC's
management believed that the acquisition of Savers Life would assist SMC's
expansion of its marketing in North Carolina, one of the faster growing retiree
markets in the United States, as well as in South Carolina and Virginia. The
management of SMC determined that these factors made it desirable to make a
formal proposal to acquire Savers Life.
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<PAGE> 46
In considering whether to make a formal proposal, SMC had to take into
account the terms of its outstanding debt. In accordance with its Amended Credit
Agreement with Fleet Bank and a subordinated convertible debt agreement with
Great American Reserve Insurance Company, SMC may not acquire another company by
merger or purchase of substantially all of such company's assets without the
prior written consent of Fleet Bank and Great American Reserve Insurance
Company. SMC received the written consent of Great American Reserve Insurance
Company on May 12, 1997. SMC received a commitment letter from Fleet Bank on
April 7, 1997, for an increase in its line of credit from $16,000,000 to
$20,000,000 for the purchase of Savers Life and indicated Fleet Bank's consent
to the merger.
The Savers Life Board met on November 13, 1996. The only active proposal
received by that date was the November 11, 1996, SMC proposal. The SMC proposal
was for the price of $14,240,000, consisting of a combination of $3,551,806 in
cash (based upon $2.00 per issued and outstanding share of Savers Life Common
Stock) and $10,688,194 in value of shares of SMC Common Stock (the equivalent of
$6.00 per issued and outstanding share of Savers Life Common Stock), plus a
performance premium that would depend upon profitability of Savers Life after
the transaction in 1997 and 1998 (the "Performance Premium"). The Special
Committee determined that the proposal from SMC had merit, subject to further
negotiations regarding the value of the transaction, the ability of a Savers
Life stockholder to elect to take all SMC Common Stock and the manner in which
outstanding stock options would be treated, and subject to the condition that
the transaction be tax-free with respect to the shares of SMC Common Stock to be
received by the Savers Life stockholders. The Savers Life Board authorized
management to continue discussions with SMC management, seeking to reach an
agreement in principle.
Following adjournment of the November 13, 1996, meeting of the Savers Life
Board, Savers Life and SMC continued discussions regarding an agreement in
principle. On November 15, 1996, the parties executed and delivered an agreement
in principle providing for and resulting in the transactions contemplated by the
1996 Merger Agreement. Pursuant to the agreement in principle, Savers Life and
SMC negotiated the terms and conditions of the definitive 1996 Merger Agreement.
As a result of negotiations between November 15 and December 20 regarding
the terms of the 1996 Merger Agreement, the 1996 Merger Agreement differed from
the November 11 proposal and the agreement in principle in some respects.
Specifically, the price was expressed on a per share basis as opposed to an
aggregate basis. Cash was to be paid for all stock options that were not
exercised by the effective time of the merger. The topping fee provision was
unchanged, but the walk-away fee, reduced in amount to be no more than $150,000,
would be payable by either Savers Life or SMC if the other party failed to
proceed in good faith to close the transaction for reasons other than failure to
obtain either stockholder or regulatory approval.
On December 18, 1996, the SMC Board approved the proposed 1996 Merger
Agreement. On December 20, 1996, the Savers Life Board reviewed the proposed
1996 Merger Agreement. Upon considering the terms and conditions of the
proposal, the Savers Life Board concluded that the proposal was fair, equitable
and in the best interests of Savers Life and all of its stockholders.
Accordingly, the Savers Life Board unanimously approved the 1996 Merger
Agreement, subject to such final changes and revisions as counsel to Savers Life
might approve, and recommended approval of the 1996 Merger Agreement to the
stockholders of Savers Life. Savers Life and SMC signed the 1996 Merger
Agreement on December 20, 1996.
The 1996 Merger Agreement was amended on February 17, 1997, in order to
meet requirements of the Code for a tax-free reorganization and to limit the
maximum aggregate Performance Premium payments. The cash amount to be paid for
each share of Savers Life Common Stock was reduced from $2.00 per share to $1.50
per share and the value to be paid in SMC Common Stock was increased from $6.00
per share to $6.50 per share. The form of the Performance Premium, which had
previously been solely in the discretion of SMC, was revised to be in shares of
SMC Common Stock and cash (as interest due on the amount of the Performance
Premium and the value of any fractional share). The amendment also provided that
the maximum aggregate Performance Premium payable would be $6,000,000. SMC was
obligated to exert its best efforts to assure that any Performance Premium that
it pays in the form of shares of SMC Common Stock will be tax-free.
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<PAGE> 47
The 1996 Merger Agreement was further amended on May 7, 1997 to: (i) revise
the method by which it would be determined if the Performance Premium payments
were to be made, (ii) extend the date by which either SMC or Savers Life could
terminate the 1996 Merger Agreement from May 30, 1997 to June 30, 1997, subject
to certain limitations contained in the 1996 Merger Agreement, and (iii) make
certain other technical revisions. A third amendment, dated June 27, 1997,
extended the date by which either SMC or Savers Life could terminate the 1996
Merger Agreement from June 30, 1997, to September 10, 1997. A fourth amendment,
dated July 31, 1997, further extended that date to November 5, 1997, and added a
further provision terminating the 1996 Merger Agreement automatically if the
effective time of the merger contemplated by the 1996 Merger Agreement did not
occur at or before 11:59 PM, Eastern Time, on November 5, 1997.
Consummation of the transactions contemplated by the 1996 Merger Agreement
was subject to the approval of SMC stockholders and Savers Life stockholders. In
addition, SMC reserved the right not to consummate such transactions if 5% or
more of the Savers Life stockholders perfected their dissenters' rights under
the NCBCA. The approval of SMC stockholders was secured at the SMC Annual
Meeting of Stockholders held on October 22, 1997. The meeting of Savers Life
stockholders originally scheduled to be held on October 22, 1997, at which the
1996 Merger Agreement was to be considered, was postponed indefinitely. Holders
of approximately 22% of the Savers Life Common Stock had filed notice of intent
to exercise dissenters' rights. Thereafter, discussions continued among SMC,
Savers Life and one of the stockholders of Savers Life who had filed notice of
intent to exercise dissenters' rights, to restructure the proposed transaction
in a manner that would be acceptable to each of them. The Merger Agreement is
the product of those discussions.
The discussions among Savers Life, the dissenting stockholder and SMC
focused on (i) a fixed exchange ratio, (ii) elimination of the Performance
Premium, (iii) a tax-free reorganization being a condition to closing and (iv)
notice to Savers Life of material adverse changes at SMC prior to the closing of
the Merger. On November 19, 1997, Savers Life submitted a revised proposal to
SMC to amend and restate the 1996 Merger Agreement. SMC and Savers Life
continued their discussions and negotiations from November 19 through November
25, 1997, including a conference call on November 24, 1997 with the stockholder
of Savers Life referenced in the preceding paragraph. On November 25, 1997, SMC
and Savers Life tentatively agreed to amend and restate the 1996 Merger
Agreement to provide for (i) a fixed exchange ratio of 1.2 shares of SMC Common
Stock and $1.50 in cash, (ii) elimination of the Performance Premium, (iii) a
condition to closing that the Merger be deemed a tax-free reorganization, and
(iv) a covenant that SMC advise Savers Life of material adverse changes with
respect to SMC prior to the closing.
On December 2 and 3, 1997, representatives of SMC conducted on site due
diligence at Savers Life to review third quarter operating results and the
business and financial condition of Savers Life. As a result of such review and
discussions with management of Savers Life, SMC and Savers Life negotiated the
terms of the Merger Agreement from December 3 through December 8, 1997, and on
December 9, 1997, the SMC Board approved such Merger Agreement. On December 12,
1997, the Savers Life Board approved the Merger Agreement.
SMC'S REASONS FOR THE MERGER; RECOMMENDATION OF ITS BOARD OF DIRECTORS
On December 9, 1997, the SMC Board convened to consider the Merger in
detail. After deliberating with respect to the Merger, considering, among other
things, the matters discussed below, the SMC Board unanimously determined that
the Merger, for the combined consideration of 1.2 shares of SMC Common Stock
plus $1.50 per share, and the Common Stock Issuance are advisable and fair to
and in the best interests of SMC and its stockholders and unanimously approved
the Merger Agreement and the transactions contemplated thereby.
In making its determination, the SMC Board concluded that the Merger would
further SMC's strategy of growth through the acquisition of blocks of in force
life insurance and annuities and companies that have blocks of such business. In
reaching this conclusion, the SMC Board considered a number of factors,
including (i) the opportunities to expand financial institutional marketing
through Savers Life, (ii) the opportunity of
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<PAGE> 48
cross selling SMC products to Savers Life's policy holders, (iii) the
availability of Savers Life's distribution system to complement Standard
Marketing, (iv) the potential increase in investment yields through
restructuring of the Savers Life investment portfolio and (v) the possibility
for expense savings through the integration of selected portions of Savers
Life's insurance operations with those of SMC.
In particular, when considering the Merger Agreement, the SMC Board also
considered the following factors: (i) the transaction with World; (ii) the
improvement in the Savers Life bond portfolio; (iii) the elimination of the
uncertainty of the Performance Premium; and (iv) the inability to consummate the
transactions contemplated by the 1996 Merger Agreement and the discussions with
the dissenting stockholder referred to in "-- Background of the Merger."
In making its determination, the SMC Board also considered, among other
things, the following factors: (i) its knowledge of the business, operations,
assets, financial condition, results of operations and prospects of SMC and
Savers Life, (ii) the terms of the Merger Agreement, (iii) the structure and
accounting treatment of the transaction and (iv) the availability of Messrs.
Stoltz and Francis, to continue to be affiliated with the merged company.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the SMC Board did not find it practicable to and did
not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
After determining that the acquisition of Savers Life met the strategic
goals of SMC, the SMC Board considered whether the Merger was in the best
interests of its stockholders in light of the terms of the Merger Agreement. The
value of 1.2 shares of SMC Common Stock plus $1.50 per share of Savers Life
Common Stock was considered by the SMC Board to be a fair price to pay for
Savers Life as it currently existed. This belief was based in part upon SMC's
knowledge of other recent transactions in the insurance industry, its evaluation
of the future prospects of Savers Life in certain of its product lines and in
specific geographic areas and the recommendations of SMC's management, who spent
considerable amounts of time investigating the business of Savers Life. The SMC
Board also considered negative factors related to the acquisition of Savers
Life, including the lack of an A.M. Best rating for Savers Life and the recent
historical financial losses sustained by Savers Life, but concluded that the
positive factors discussed above outweighed these negative factors. The SMC
Board did not consider seeking, and did not seek, the opinion of an outside
advisor with regard to the fairness of the consideration to be paid by SMC in
the Merger.
THE SMC BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF SMC VOTE IN
FAVOR OF APPROVAL OF THE COMMON STOCK ISSUANCE AT THE SMC SPECIAL MEETING.
SAVERS LIFE'S REASONS FOR THE MERGER; RECOMMENDATION OF ITS BOARD OF DIRECTORS
The Savers Life Board has unanimously determined that the Merger is fair,
equitable and in the best interests of Savers Life and its stockholders and has
unanimously approved the Merger Agreement. In reaching its conclusion to approve
the Merger Agreement, the Savers Life Board considered a number of factors.
The Savers Life Board believes that the businesses of Savers Life and SMC
will complement each other. The addition of SMC's insurance products to be
marketed through Savers Life's brokers as a result of the Merger will provide
opportunities for both Savers Life and SMC.
As a part of an insurance holding company system, Savers Life may be able
to gain entry into other states, thus broadening its marketing territory,
enhancing the opportunity for increased revenues and profitability. The Savers
Life Board believes that there is an ample market for its products.
Savers Life has had a need for additional capital in order to support any
significant additional business that it might add to its books. Capital
requirements applied to Savers Life by certain insurance regulators have in the
past restricted the amount of Savers Life new business. The Savers Life Board
considered the possibility that SMC could be a source of additional capital,
although there is no assurance that SMC would have access to additional capital
or, if additional capital were available, would decide to make it available to
Savers Life.
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<PAGE> 49
The Savers Life Board further believes that the opportunity to merge with
SMC in a tax-free transaction may provide the Savers Life stockholders the
opportunity to recognize the financial success of their investment in Savers
Life and receive a readily marketable security in exchange for their Savers Life
Common Stock without the adverse tax consequences that a taxable transaction
would present to them. Many Savers Life stockholders have owned their shares
since 1980, when Savers Life raised its initial capital. The absence of an
active trading market in the Savers Life Common Stock has made that investment
illiquid. As a result of the Merger, Savers Life stockholders will have an
opportunity to receive both cash and stock in a public company in exchange for
the illiquid Savers Life investment. The Savers Life Board believes that the
merger consideration of 1.2 shares of SMC Common Stock plus $1.50 per share of
Savers Life Common Stock is an appropriate value. The ability to receive the SMC
Common Stock in a tax-deferred transaction permits the Savers Life stockholders
to have control over when the accumulated gain in their investment is recognized
for tax purposes. For that reason, the SMC proposal was preferable to one that
would have paid only cash for the Savers Life Common Stock, all of which cash
would have been taxable to the Savers Life stockholders.
The Savers Life Board considered the foregoing factors in the context of
their desire to provide for future growth of the business of Savers Life while
at the same time providing continuity of employment for Savers Life employees
and providing an attractive investment option for holders of Savers Life Common
Stock. The Savers Life Board did not assign any particular weighting to the
factors described. The value of 1.2 shares of SMC Common Stock plus $1.50 per
share of Savers Life Common Stock was perceived as being fair in light of the
prices at which the Savers Life Common Stock was known to have been traded, most
recently at the time only $6.50 per share. The Savers Life Board viewed the
opportunity to receive the merger consideration in a tax-free exchange as being
particularly favorable, because many holders of Savers Life Common Stock have
held their shares since the founding of Savers Life, and they might not receive
a taxable transaction favorably.
The Savers Life Board did not seek advice from outside parties regarding
the value of the transaction, because the value offered by the proposed
transaction with SMC accomplished the objectives outlined above in a manner and
at a price that appeared to them to be within the range of other transactions in
the insurance industry of which they had knowledge or information, and,
accordingly, the value appeared to be acceptable.
Having sought opportunities for increasing Savers Life's capital base for
three years without success, upon being presented with the SMC proposal, and
after considering the terms and conditions of the proposal, the Savers Life
Board concluded that the proposal was fair, equitable and in the best interests
of Savers Life and all of its stockholders. Accordingly, the Savers Life Board
unanimously approved the Merger Agreement on December 12, 1997 and unanimously
recommends approval of the Merger Agreement to the stockholders of Savers Life.
THE SAVERS LIFE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF
SAVERS LIFE VOTE IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT AT THE SAVERS LIFE
SPECIAL MEETING.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Savers Life Board with respect to
approval of the Merger Agreement, Savers Life stockholders should be aware that,
except for the right to receive cash for unexercised stock options, the only
members of the Savers Life Board and executive officers of Savers Life who have
an interest in the Merger in addition to an interest as a stockholder of Savers
Life, are Jerry D. Stoltz, Sr., President of Savers Life, and Jerry E. Francis,
Senior Vice President of Savers Life. Mr. Francis and David A. Roberson,
Patricia G. Landy and Debra P. Berg, also executive officers of Savers Life,
have agreements regarding their employment with Savers Life, which agreements
will not change as a result of the Merger.
Pursuant to the Merger Agreement, SMC has agreed to appoint Mr. Francis to
the SMC Board effective immediately following the Effective Time. Upon the
appointment of Mr. Francis, the SMC Board will consist of ten directors, nine of
whom were directors of SMC as of the date of the Merger Agreement.
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<PAGE> 50
In connection with the consummation of the Merger, it is contemplated that
Mr. Stoltz will enter into the Stoltz Consulting and Non-Competition Agreement
with Savers Life effective as of the Effective Time. Mr. Stoltz will be paid a
fee of $150,000 per year. The term of the Stoltz Consulting and Non-Competition
Agreement will be three years, but Mr. Stoltz's obligation to provide consulting
services may be terminated at the option of either Mr. Stoltz or Savers Life
after the expiration of one year. The Stoltz Consulting and Non-Competition
Agreement will provide that, commencing with the termination of an obligation to
provide consulting services, Mr. Stoltz will not communicate with any customer
of Savers Life regarding any business matter or engage in any activity that
would involve competing with any business or activity engaged in by Savers Life
for a period of three years.
The executive officers of Savers Life, two of whom are also directors of
Savers Life, hold options to purchase shares of Savers Life Common Stock. As a
result of the Merger, each option to purchase Savers Life Common Stock
outstanding immediately prior to the Effective Time of the Merger will be
converted into the right to receive cash from Savers Life in an amount equal to
the difference between 1.2 times the Average Trading Price plus $1.50 per option
share and the exercise price of such outstanding option. See "THE MERGER
AGREEMENT -- Stock Options." All outstanding options are currently exercisable,
and some or all of them may be exercised prior to the Effective Time. Assuming
that none of the outstanding options are exercised prior to the Effective Time
and a price of SMC Common Stock of $7.00, the following executive officers would
receive cash for their option shares as follows:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE SHARES SUBJECT TO OPTION CASH TO BE RECEIVED
----------------- ------------------------ -------------------
<S> <C> <C>
Jerry D. Stoltz, Sr...................... 8,500 $40,350.75
Jerry E. Francis......................... 15,000 69,200.08
David A. Roberson........................ 5,200 22,225.00
Patricia G. Landy........................ 7,550 33,145.01
Debra P. Berg............................ 2,000 6,100.00
</TABLE>
Certain of the Savers Life Stock Options would have expired on August 18,
1997, unless sooner exercised. The Savers Life Board has amended those options,
extending their expiration dates to March 31, 1998. The options so extended
include options listed in the table above held by Jerry D. Stoltz, Sr. (2,250
shares), Jerry E. Francis (2,250 shares) and Patricia G. Landy (300 shares).
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain federal income tax consequences of
the Merger assuming that at least eighty percent (80%) of the merger
consideration is paid in SMC Common Stock to holders of Savers Life Common Stock
who are citizens or residents of the United States.
Under present federal income tax law:
(i) The Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code.
(ii) No gain or loss will be recognized by SMC, Savers Life or SAC due
to consummation of the Merger by the exchange of SMC Common Stock and cash
for Savers Life Common Stock upon the merger of SAC into Savers Life.
(iii) No gain or loss will be recognized by the stockholders of Savers
Life upon the receipt of SMC Common Stock solely in exchange for their
shares of Savers Life Common Stock.
(iv) The aggregate adjusted basis of the SMC Common Stock to be
received by the stockholders of Savers Life who elect to receive no cash
(other than cash in lieu of fractional shares) will be the same as the
aggregate adjusted basis of the Savers Life Common Stock surrendered in
exchange therefor.
(v) The gain, if any, realized by Savers Life stockholders who
received SMC Common Stock and cash (other than cash in lieu of a fractional
share) in exchange for their Savers Life Common Stock, will be recognized
by each such stockholder, but in an amount not in excess of the amount of
cash received.
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<PAGE> 51
See Section 356(a)(1) of the Code. The income will be recognized in the
taxable year of receipt of the cash. The gain will be capital gain if the
Savers Life Common Stock was held by the stockholder as a capital asset and
if the exchange does not have the effect of the distribution of a dividend
(determined with the application of section 318(a)). If the cash
distribution is treated as a dividend, then the amount of the gain
recognized that is not in excess of each such stockholder's taxable share
of the undistributed earnings and profits shall be treated as a dividend.
See Section 356(a)(2) of the Code. The determination of whether the
exchange has the effect of a distribution of a dividend will be made on
stockholder-by-stockholder basis in accordance with the principles set
forth in Comm'r v. Clark, 109 S. Ct. 1455 (1989). No loss shall be
recognized by a Savers Life stockholder on the exchange, pursuant to
section 356(c) of the Code.
(vi) The basis of the SMC Common Stock (including fractional share
interests) received by Savers Life stockholders who receive both cash and
shares of SMC Common Stock in exchange for their shares of Savers Life
Common Stock will be the same as the basis of the Savers Life Common Stock
surrendered in exchange therefor, decreased by the amount of cash received
and increased by the amount, if any, that was treated as a dividend and the
amount of gain recognized to each Savers Life stockholder (not including
any portion of such gain that was treated as a dividend). See Section
358(a)(1) of the Code.
(vii) The holding period of the SMC Common Stock (including any
fractional share interest to which they may be entitled) to be received by
the stockholders of Savers Life in the Merger will include the holding
period of the Savers Life Common Stock surrendered in exchange therefor,
provided the Savers Life Common Stock was held as a capital asset by the
stockholders of Savers Life on the date of the exchange.
(viii) The payment of cash to Savers Life stockholders in lieu of
fractional share interests of SMC Common Stock will be treated for federal
income tax purposes as if the fractional shares were distributed as part of
the exchange and then were redeemed by SMC. These cash payments will be
treated as distributions in full payment in exchange for the stock redeemed
as provided in section 302(a) of the Code.
Receipt of cash by a Savers Life stockholder who perfects his dissenters'
rights will be a taxable transaction. Such holders should consult their own tax
advisors.
Savers Life has received the opinion of Womble Carlyle Sandridge & Rice,
PLLC, counsel to Savers Life, to the effect set forth in paragraphs (i)-(iii),
above. Paragraphs (iv)-(viii), above, either (a) result from the Merger
constituting a "reorganization" within the meaning of Section 368(a) of the Code
or (b) represent tax consequences that may apply to some holders and not to
other holders. Accordingly, no opinion is being rendered as to the matters
discussed in paragraphs (iv)-(viii), above.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. IN
ADDITION, THE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSEQUENCES THAT MAY
BE RELEVANT TO PARTICULAR TAXPAYERS IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES OR
TO TAXPAYERS SUBJECT TO SPECIAL TREATMENT UNDER THE CODE (FOR EXAMPLE, INSURANCE
COMPANIES, FINANCIAL INSTITUTIONS, DEALERS IN SECURITIES, TAX-EXEMPT
ORGANIZATIONS, FOREIGN CORPORATIONS, FOREIGN PARTNERSHIPS OR OTHER FOREIGN
ENTITIES AND INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES).
NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF
ANY, OF THE MERGER UNDER APPLICABLE FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
THE FOREGOING DISCUSSION IS BASED UPON THE PROVISIONS OF THE CODE, APPLICABLE
TREASURY REGULATIONS THEREUNDER, INTERNAL REVENUE SERVICE RULINGS AND JUDICIAL
DECISIONS, AS IN EFFECT AS OF THE DATE HEREOF. THERE CAN BE NO ASSURANCE THAT
FUTURE LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL CHANGES OR INTERPRETATIONS WILL
NOT AFFECT THE ACCURACY OF THE STATEMENTS OR CONCLUSIONS SET FORTH HEREIN. ANY
SUCH CHANGE COULD APPLY RETROACTIVELY AND COULD AFFECT THE ACCURACY OF SUCH
DISCUSSION. NO RULINGS HAVE BEEN OR WILL BE SOUGHT FROM THE INTERNAL REVENUE
SERVICE CONCERNING THE TAX CONSEQUENCES OF THE MERGER.
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<PAGE> 52
EACH SAVERS LIFE STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS. EACH
HOLDER OF AN OPTION TO PURCHASE SHARES OF SAVERS LIFE COMMON STOCK IS ALSO URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES
REGARDING THE CONVERSION OF ANY SUCH OPTION INTO THE RIGHT TO RECEIVE CASH FROM
SAVERS LIFE.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" for accounting and
financial reporting purposes in accordance with APB No. 16. For purposes of
preparing SMC's consolidated financial statements, SMC will establish a new
accounting basis for Savers Life's assets and liabilities based upon the fair
values thereof and SMC's purchase price, including the direct costs of the
acquisition. A final determination of required purchase accounting adjustments
and of the fair value of the assets and liabilities of Savers Life has not yet
been made. Accordingly, the purchase accounting adjustments made in connection
with the development of the pro forma financial information appearing elsewhere
in this Proxy Statement/Prospectus are preliminary and are subject to
adjustment. After the Merger, SMC will undertake a study to determine the fair
value of Savers Life's assets and liabilities and will make appropriate purchase
accounting adjustments upon completion of such study. For financial reporting
purposes, SMC will consolidate the results of Savers Life's operations with
those of SMC's operations, beginning with the consummation of the Merger, but
SMC's financial statements for prior periods will not be restated as a result of
the Merger.
REGULATORY APPROVALS
The consummation of the Merger is conditioned upon the expiration or
termination of the applicable waiting period under the HSR Act. Under the HSR
Act and the regulations promulgated thereunder by the FTC, the Merger may not be
consummated until notifications have been given and certain information has been
furnished to the FTC and the Antitrust Division and the applicable waiting
period has expired or been terminated. Report forms relating to the Merger have
been filed on behalf of SMC and Savers Life under the HSR Act with the FTC and
the Antitrust Division. The consummation of the Merger is also conditioned upon
the approval of the North Carolina Commissioner. An application is pending to
obtain the approval of the Merger from the North Carolina Commissioner. See
"RISK FACTORS -- Insurance Regulation" and "THE MERGER -- Conditions Precedent
to the Merger."
PERCENTAGE OWNERSHIP INTEREST OF SAVERS LIFE STOCKHOLDERS AFTER THE MERGER
The percentage ownership interest of Savers Life stockholders after the
Merger will vary depending upon the price of SMC Common Stock and the extent to
which stockholders of Savers Life elect to receive SMC Common Stock in lieu of
cash for the $1.50 portion of the merger consideration. Holders of Savers Life
Common Stock will receive a minimum of 2,135,889 newly issued shares of SMC
Common Stock in connection with the Merger. Such newly issued shares will
constitute 30.5% of the shares of SMC Common Stock outstanding immediately after
the Effective Time (18.6% on a fully diluted basis), based on the number of
shares of SMC Common Stock outstanding at the close of business on December 1,
1997. The number of shares issuable will increase in relation to the price of
SMC Common Stock. Assuming a price of SMC Common Stock of $7.00 (the closing
price on December 5, 1997) or $4.00 per share, holders of Savers Life Common
Stock could receive up to 381,408 or 667,465 shares of SMC Common Stock,
respectively, depending upon the extent to which such holders elect to receive
shares of SMC Common Stock in lieu of the $1.50 per share cash consideration
they would otherwise be entitled to receive. Such newly issued shares would
constitute up to 5.2% or 8.7%, respectively, of the shares of SMC Common Stock
outstanding immediately after the Effective Time (3.2% or 5.5% on a fully
diluted basis), based on the number of shares of SMC Common Stock outstanding at
the close of business on December 1, 1997. See "THE MERGER AGREEMENT --
Percentage Ownership Interests of Savers Life Stockholders After the Merger."
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<PAGE> 53
OPERATION OF SAVERS LIFE AFTER THE EFFECTIVE TIME
SMC's immediate plan for the operation of Savers Life after the Merger is
to reduce Savers Life's marketing and operational expenses by consolidating
services and administration. The primary savings are expected to be realized
through the elimination of redundant staff positions, utilization of a single
operating system and expansion of the distribution of products through SMC's
affiliate marketing corporation, Standard Marketing. Such savings are expected
to be nominal.
After the Effective Time, the Savers Life Board will be reconstituted, and
SMC will elect several new directors to the Savers Life Board. Employment
agreements of certain members of Savers Life management will remain in effect.
RESALES OF SMC COMMON STOCK
The shares of SMC Common Stock issued in the Merger will be freely
transferrable, except that shares received by any person who may be deemed to be
an "affiliate" (as used in paragraphs (c) and (d) of Rule 145, under the
Securities Act, including, without limitation, directors and certain executive
officers) of Savers Life for purposes of such Rule 145, may not be resold except
in transactions permitted by such Rule 145 or as otherwise permitted under the
Securities Act.
THE MERGER AGREEMENT
CONVERSION OF SHARES IN THE MERGER
At the Effective Time, by virtue of the Merger and without any further
action on the part of any stockholder of Savers Life or SAC:
(i) each share of Savers Life Common Stock held in the treasury of
Savers Life and each share of Savers Life Common Stock owned by SMC, SAC or
any other wholly-owned subsidiary of SMC will be canceled and no capital
stock of SMC or other consideration will be delivered in exchange therefor;
(ii) each issued and outstanding share of capital stock of SAC will be
converted into one share of Common Stock, no par value, of the Surviving
Corporation;
(iii) each share of Savers Life Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be canceled
as described in subparagraph (i) above) will be converted into (a) $1.50 in
cash, which the holder of such share of Savers Life Common Stock may elect
to receive in shares of SMC Common Stock, rounded to the nearest hundredth
of a share, determined by dividing $1.50 by the average of the closing
prices as reported by Nasdaq (the "Average Trading Price") of SMC Common
Stock for the ten consecutive trading days ending on the fifth day prior to
the Savers Life Special Meeting, plus (b) 1.2 shares of SMC Common Stock,
the number of such shares to be rounded to the nearest hundredth of a
share. Cash will be paid in lieu of any fractional shares of SMC Common
Stock. See "-- No Fractional Shares." The number of shares of SMC Common
Stock to be received by Savers Life stockholders making the election
described in (a) of the preceding sentence is subject to adjustment under
certain circumstances. See "-- Adjustment of Exchange Ratio."
Shares of Savers Life Common Stock converted as provided in subparagraph
(iii) of the preceding paragraph will no longer be outstanding and will
automatically be canceled and retired; and each holder of a Savers Life
Certificate representing immediately prior to the Effective Time any such shares
of Savers Life Common Stock will cease to have any rights with respect thereto,
except the right to receive, as hereinafter described: (i) certificates
representing the number of whole shares of SMC Common Stock into which such
shares of Savers Life Common Stock have been converted, (ii) the $1.50 cash
payment per share of Savers Life Common Stock represented by such Savers Life
Certificate, (iii) certain dividends and other distributions and (iv) cash,
without interest, in lieu of any fractional share of SMC Common Stock. See "--
Exchange Agent; Procedures for Exchange of Certificates."
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<PAGE> 54
HOLDERS OF SAVERS LIFE COMMON STOCK WHO WISH TO RECEIVE SMC COMMON STOCK IN
LIEU OF THE $1.50 CASH PORTION OF THE MERGER CONSIDERATION MUST RETURN THE FORM
OF ELECTION THAT ACCOMPANIES THIS PROXY STATEMENT/PROSPECTUS TO SAVERS LIFE BY
5:00 P.M., LOCAL TIME, ON , 1998. HOLDERS OF SAVERS LIFE COMMON STOCK
WHO DO NOT WISH TO RECEIVE SHARES OF SMC COMMON STOCK IN LIEU OF THE $1.50 CASH
PORTION OF THE MERGER CONSIDERATION NEED NOT RETURN SUCH FORM OF ELECTION.
Notwithstanding the foregoing, shares of Savers Life Common Stock that are
outstanding immediately prior to the Effective Time and which are held by Savers
Life stockholders who do not vote in favor of the proposal to approve the Merger
Agreement and who demand properly in writing the fair value for such shares in
accordance with Sections 55-13-01 through 55-13-31 of the NCBCA (collectively,
the "Dissenting Shares") will not be converted into or represent the right to
receive the consideration described above. Such Savers Life stockholders will be
entitled to receive payment of the fair value of such shares of Savers Life
Common Stock held by them in accordance with the provisions of the NCBCA, except
that all Dissenting Shares held by Savers Life stockholders who fail to perfect
or who effectively withdraw or lose their rights to the fair value of such
shares of Savers Life Common Stock under the NCBCA will be deemed to have been
converted into and to have become exchangeable for, as of the Effective Time,
the right to receive the SMC Common Stock and cash as described above, without
any interest thereon, upon surrender of the certificate or certificates that
formerly evidenced such shares of Savers Life Common Stock in the manner
described above. See "DISSENTERS' RIGHTS."
NO FRACTIONAL SHARES
No certificates or scrip representing a fractional share of SMC Common
Stock will be issued upon the surrender of Savers Life Certificates for
exchange; no SMC dividend or other distribution or stock split will relate to
any such fractional share; and no such fractional share will entitle the record
or beneficial owner thereof to any voting or other rights of a stockholder of
SMC. In lieu of any such fractional share, each holder of shares of Savers Life
Common Stock who would otherwise have been entitled thereto upon the surrender
of Savers Life Certificates for exchange will be paid, in addition to other cash
payments to which such holder is otherwise entitled, an amount in cash (without
interest), equal to such holder's proportionate interest in the net proceeds
from the sale or sales in the open market by the Exchange Agent, on behalf of
all such holders, of the aggregate fractional shares of SMC Common Stock issued
at the Effective Time pursuant to the Merger Agreement.
ADJUSTMENT OF EXCHANGE RATIO
Appropriate and proportionate adjustments, if any, will be made to the
exchange ratio used to determine the number of shares of SMC Common Stock to
which each holder of Savers Life Common Stock will be entitled upon conversion
of his or her shares of Savers Life Common Stock in the event of any
reclassification, stock split or stock dividend with respect to SMC Common Stock
(or if a record date with respect to any of the foregoing should occur) prior to
the Effective Time and after the date of the Merger Agreement.
EXCHANGE AGENT; PROCEDURES FOR EXCHANGE OF CERTIFICATES AND DELIVERY OF CASH
ChaseMellon Shareholder Services has been selected to act as Exchange Agent
under the Merger Agreement. As soon as practicable after the Effective Time, (i)
SMC will deposit with the Exchange Agent, in trust for the holders of Savers
Life Certificates which immediately prior to the Effective Time represented
shares of Savers Life Common Stock converted in the Merger, SMC Certificates
representing the shares of SMC Common Stock issuable pursuant to the Merger in
accordance with the Merger Agreement, and (ii) SMC will make available to the
Surviving Corporation, which in turn will deposit with the Exchange Agent in
trust for the holders of Savers Life Certificates, the cash into which the
outstanding shares of Savers Life Common Stock have been converted. The Exchange
Agent will deliver the SMC Certificates and cash upon the surrender for exchange
of the Savers Life Certificates and a duly executed letter of transmittal.
As soon as practicable after the Effective Time, the Exchange Agent will
mail to each record holder of a Savers Life Certificate a letter of transmittal
(which will specify that delivery will be effected, and risk of loss
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and title to the Savers Life Certificates will pass, only upon actual
delivery thereof to the Exchange Agent, and will contain instructions for
effecting the surrender of Savers Life Certificates in exchange for the
property described in the next sentence). Upon surrender for cancellation to
the Exchange Agent of all Savers Life Certificate(s) held by any record holder,
together with such letter of transmittal duly executed, such holder will be
entitled to receive in exchange therefor: (i) an SMC Certificate representing
the number of whole shares of SMC Common Stock into which the shares of Savers
Life Common Stock represented by the surrendered Savers Life Certificate(s)
have been converted at the Effective Time, (ii) any cash which such holder has
the right to receive under the provisions of the Merger Agreement described
above under "-- Conversion of Shares" and (iii) the dividends and other
distributions described in the following paragraph. All Savers Life
Certificates so surrendered will be canceled. All SMC Certificates and cash
delivered upon the surrender for exchange of any Savers Life Certificate in
accordance with the terms of the Merger Agreement (including the cash paid in
respect of any such fractional share or of any such dividends or distributions)
will be deemed to have been delivered (and paid) in full satisfaction of all
rights pertaining to the shares of Savers Life Common Stock represented by such
surrendered Savers Life Certificate.
No dividends or other distributions that are declared on or after the
Effective Time on SMC Common Stock, or are payable to the holders of record
thereof on or after the Effective Time, and no cash payment will be paid to any
person entitled by reason of the Merger to receive SMC Certificates and cash
until the Savers Life Certificate(s) of such person have been surrendered as
described above. Subject to applicable law, there will be paid to each person
receiving an SMC Certificate: (i) at the time of such surrender or as promptly
as practicable thereafter, the amount of any dividends or other distributions
with respect to the shares of SMC Common Stock represented by such SMC
Certificate having a record date on or after the Effective Time and a payment
date prior to such surrender and (ii) at the appropriate payment date or as
promptly as practicable thereafter, the amount of any dividends or other
distributions payable with respect to such shares of SMC Common Stock having a
record date on or after the Effective Time but prior to such surrender and a
payment date on or after such surrender. In no event will the person entitled to
receive such dividends or other distributions be entitled to receive interest
thereon. If any SMC Certificate is to be registered in a name other than that of
the registered holder of a surrendered Savers Life Certificate, or if any cash
is to be paid to a person who is not such registered holder, it will be a
condition of the exchange that the Savers Life Certificate(s) so surrendered be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of such SMC Certificate or such cash payment
or establish to the satisfaction of the Exchange Agent that such taxes have been
paid or are not applicable.
STOCK OPTIONS
Each Savers Life Stock Option outstanding immediately prior to the
Effective Time will be converted into the right to receive cash in an amount
equal to the number of shares of Savers Life Common Stock subject to such Savers
Life Stock Option times the difference between 1.2 times the Average Trading
Price plus $1.50 per option and the exercise price for such Savers Life Stock
Option.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Savers Life, SMC and SAC relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) the due organization, power and standing of, and
similar corporate matters with respect to each of Savers Life, SMC and SAC; (ii)
the authorization, execution, delivery, performance and enforceability of the
Merger Agreement by Savers Life, SMC and SAC and of the transactions
contemplated thereby; (iii) the absence of any conflict with each of Savers
Life's, SMC's or SAC's articles of incorporation, bylaws and certain other
agreements and documents and compliance with applicable laws; (iv) the absence
of any governmental or regulatory authorization, consent or approval required to
consummate the Merger; (v) each of Savers Life's, SMC's and SAC's
capitalization; (vi) the possession by Savers Life of all licenses,
registrations, approvals and authorizations relating to the conduct of its
business; (vii) the accuracy and completeness of Savers Life's financial
statements; (viii) the absence of
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any litigation that would have a material adverse effect on the financial
condition, business or results of operations of Savers Life or SMC; (ix) the
timely filing of all regulatory reports and other documents filed with the
regulatory authorities by Savers Life; (x) the absence of certain changes or
events relating to the financial condition, business or results of operations of
Savers Life; (xi) the absence of any untrue statements of material fact or
omission to state a material fact in the Merger Agreement, any disclosure
schedule, or any certificate or document furnished pursuant to the terms of the
Merger Agreement; and (xii) the existence of material contracts and commitments
of Savers Life and the existence of no breach or default under any such
contracts.
CONDUCT OF BUSINESS PENDING THE MERGER
Savers Life has agreed that, during the period from the date of the Merger
Agreement through the Effective Time, except to the extent that SMC may
otherwise consent in writing or to the extent otherwise required or permitted by
the Merger Agreement, it will conduct its business only in the ordinary course
and consistent with past practices. Savers Life has agreed to notify SMC
promptly in writing of, and to use all commercially reasonable efforts to cure
before the Effective Time, any event, transaction or circumstance occurring
after the date of the Merger Agreement that causes or will cause any covenant or
Agreement of Savers Life under the Merger Agreement to be breached or that
renders or will render untrue any representation or warranty of Savers Life
contained in the Merger Agreement as if the same were made on or as of the date
of such event, transaction or circumstance. Savers Life has also agreed to use
all commercially reasonable efforts to cure, before the Effective Time, any
violation or breach of any representation, warranty, covenant or Agreement made
by it in the Merger Agreement. In addition to the preceding, Savers Life has
agreed to invest its future cash flow, any cash from matured and maturing
investments, any cash proceeds from the sale of its assets and properties and
any cash held by Savers Life as of the date of the Merger Agreement exclusively
in certain permissible investments.
Without limiting the generality of the foregoing, Savers Life has agreed
that it will not: (i) permit a material change in any underwriting, investment,
actuarial, financial reporting, or accounting practices or policies or in any
assumption underlying such practices or policies, or in any method of
calculating any bad debt, contingency or other reserve for financial reporting
purposes or for other accounting purposes; (ii) except as may be required by law
or as disclosed in the Merger Agreement, or except for such representations,
promises, changes, alterations or amendments that do not and will not result in
any liability to Savers Life or SMC, (A) make any representation or promise,
oral or written, to any officer, director, employee, agent, consultant or other
similar representative of Savers Life concerning any employee benefit plan, (B)
subject to certain exceptions, make any change to, or amend in any way, the
contracts, salaries, wages or other compensation of any officer, director,
employee, agent, consultant or other similar representative of Savers Life whose
annual compensation exceeds $25,000, (C) adopt, enter into, amend, alter or
terminate, partially or completely, any employee benefit plan, (D) adopt, enter
into, amend, alter or terminate, partially or completely, any employment,
agency, consultation or representation contract, (E) approve any general or
company-wide pay increase for officers, directors, employees, agents,
consultants or other similar representatives of Saver Life or (F) enter into an
contract with any officer, director, employee, agent, consultant or other
similar representative of Savers Life that is not terminable by Savers Life,
without penalty or other liability, upon not more than sixty calendar days'
notice; (iii) amend its Articles of Incorporation or Bylaws or take any action
with respect to any such amendment; (iv) except upon the exercise of stock
option outstanding at the date of the Merger Agreement, authorize or issue any
shares of capital stock or other equity securities or enter into any contract or
grant any option, warrant or right calling for the authorization or issuance of
any such shares or other equity securities, or creating or issuing any
securities directly or indirectly convertible into or exchangeable for any such
shares or other equity securities, or issuance of any options, warrants or
rights to purchase any such convertible securities; (v) declare, set aside, or
pay any dividend or other distribution in respect of capital stock of Savers
Life or directly or indirectly redeem, purchase or otherwise acquire any capital
stock or any interest in or right to acquire any capital stock of Savers Life;
(vi) (A) dispose of any of its assets and properties or permit any of its assets
or properties to be subjected to any liens, (B) sell any part of its insurance
products, operations or business to any third party, (C) enter into any
contracts obligating Savers Life to administer the insurance operation of any
person other than any affiliate, (D) enter into any contracts permitting any
person other than any affiliate to administer Savers Life's insurance operations
or
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(E) enter into or assume any contract, if doing so could involve a loss, cost,
expense or commitment in excess of $10,000; (vii) violate or breach, or fail to
take any action that would constitute a violation, breach or default in any way
under any term or provision of any contract to which it is a party or by which
any of its assets and properties is or may be bound; (viii) create, incur,
assume, guarantee, or otherwise become liable for, and will not cancel, pay,
agree to cancel or pay, or otherwise provide for a complete or partial discharge
in advance of a scheduled payment date with respect to, any liability, and will
not waive any right to receive any direct or indirect payment or other benefit
under any liability owing to it; (ix) (A) merge, consolidate or otherwise
combine or agree to merge, consolidate or otherwise combine with any other
person, (B) acquire or agree to acquire blocks of business of, or all or
substantially all the assets and properties or capital stock or other equity
securities of, any other person or (C) otherwise acquire or agree to acquire
control or ownership of any other person; or (x) (A) make, file or enter into
certain elections, consents or agreements with respect to the Internal Revenue
Code of 1986, as amended (the "Code") or (B) amend or cancel any reinsurance or
coinsurance contract.
CONDITIONS PRECEDENT TO THE MERGER
The respective obligations of SMC, SAC and Savers Life to effect the Merger
are subject, among other things, to the fulfillment to their reasonable
satisfaction, prior to the Effective Time, of the following conditions (which
conditions are subject, in certain cases, to specific exceptions): (i) the
approval of the Merger Agreement by the requisite vote of the holders of Savers
Life Common Stock and the approval of the Common Stock Issuance by the requisite
vote of the holders of SMC Common Stock; (ii) the authorization for listing on
Nasdaq, upon official notice of issuance, of the SMC Common Stock issuable in
the Merger; (iii) the expiration or earlier termination of the applicable
waiting period under the HSR Act; and (iv) the effectiveness of the Registration
Statement in accordance with the provisions of the Securities Act, no issuance
of a stop order suspending the effectiveness of the Registration Statement by
the SEC, which stop order remains in effect, and the receipt of all necessary
state securities law authorizations.
SMC's and SAC's obligations to consummate the Merger are subject to the
fulfillment to SMC's and SAC's reasonable satisfaction, prior to the Effective
Time, of the following conditions: (i) all representations and warranties of or
concerning Savers Life contained in the Merger Agreement shall have been and
continue to be true and correct in all material respects; (ii) Savers Life shall
have performed and complied with all agreements, covenants and conditions
required by the Merger Agreement to be performed and complied with by it prior
to the Effective Time; (iii) Savers Life shall have delivered to SMC a
certificate, dated as of the Effective Time, executed by the chief executive
officer and the chief financial officer of Savers Life, to the effect that the
conditions set forth in (i) and (ii) above have been satisfied and a certificate
executed by the secretary or any assistant secretary of Savers Life with respect
to the authorization, execution and delivery of the Merger Agreement; (iv)
Savers Life shall have delivered to SMC such other documents and information
concerning Savers Life as SMC shall have reasonably requested; (v) there shall
not be in effect any writ, judgment, injunction, decree or similar order of any
court or similar person restraining, enjoining or otherwise preventing
consummation of any of the transactions contemplated by the Merger Agreement;
(vi) there shall not be pending or threatened any litigation which, if adversely
determined to Savers Life, could have a material adverse effect on Savers Life
or which seeks to prevent the Merger; (vii) all orders, consents, permits,
authorizations, approvals and waivers necessary to permit SMC to perform its
obligations under the Merger Agreement and to consummate the transactions
contemplated thereby shall have been obtained and shall be in full force and
effect; (viii) there shall not have occurred between December 31, 1996, and the
Effective Time any circumstance or event which has or could have a material
adverse effect on Savers Life or its subsidiaries; (ix) SMC shall have received
an opinion, dated as of the Effective Time, from Womble Carlyle Sandridge &
Rice, PLLC, counsel to Savers Life, regarding the Merger; (x) Fleet National
Bank of Connecticut and Conseco, Inc. shall have consented to the consummation
of the transactions contemplated under the Merger Agreement and one or both of
them shall have agreed to loan SMC the sum of $4,000,000 upon terms and
conditions satisfactory to SMC; (xi) the Stoltz Consulting and Non-Competition
Agreement shall have been executed and delivered; (xii) each of the officers of
Savers Life and holders of more than 5% of the Savers Life Common Stock shall
have executed and delivered contracts with SMC pursuant to which each such
person shall have agreed, among other things, not to dispose of any shares of
SMC Common Stock
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for a period of one year following the Effective Time without the prior written
consent of SMC, such restriction being subject to certain exceptions; (xiii)
holders of not more than five percent of Savers Life's Common Stock shall have
given notice of intent to exercise dissenters' rights; (xiv) the stockholders of
SMC shall have approved the Merger Agreement; (xv) the adjusted capital and
surplus of the Surviving Corporation shall not be less than $7,390,000
immediately after the Effective Time; and (xvi) the stockholders of Savers Life
shall have approved the Merger Agreement.
The obligations of Savers Life under the terms of the Merger Agreement are
subject to the fulfillment to Savers Life's reasonable satisfaction, prior to
the Effective Time, of the following conditions: (i) all representations and
warranties of or concerning SMC or its subsidiaries in the Merger Agreement
shall have been and continue to be true and correct in all material respects;
(ii) SMC shall have performed and complied with all agreements, covenants and
conditions required by the Merger Agreement to be performed or complied with by
it prior to the Effective Time; (iii) SMC shall have delivered to Savers Life a
certificate, dated as of the Effective Time, executed by the chief executive
officer and the chief financial officer of SMC to the effect that the conditions
set forth in (i) and (ii) above have been satisfied and a certificate executed
by the secretary or any assistant secretary of SMC with respect to the
authorization, execution and delivery of the Merger Agreement; (iv) SMC shall
have delivered to Savers Life such other documents and information as Savers
Life shall have reasonably requested; (v) there shall not be in effect any writ,
judgment, injunction, decree or similar order of any court or similar person
restraining, enjoining or otherwise preventing consummation of any of the
transactions contemplated by the Merger Agreement; (vi) there shall not be
pending or threatened any litigation which, if adversely determined to SMC or
its subsidiaries, could have a material adverse effect on SMC or its
subsidiaries, or which seeks to prevent the Merger; (vii) all orders, consents,
permits, authorizations, approvals and waivers necessary to permit Savers Life
to perform its obligations under the Merger Agreement and to consummate the
transactions contemplated thereby shall have been obtained and shall be in full
force and effect; (viii) Savers Life shall have received an opinion, dated as of
the closing, from Stephen M. Coons, counsel to SMC, regarding the Merger; and
(ix) the Merger shall qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Code, in the opinion of Womble Carlyle Sandridge & Rice,
counsel to Savers Life.
In the event that a condition precedent to the Merger is waived, SMC and
Savers Life will evaluate whether such waiver has a material effect on the terms
of the Merger or any other matters described herein and will amend or supplement
the Proxy Statement/Prospectus and/or resolicit votes if such amendment or
resolicitation is appropriate.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the approval by the stockholders of Savers Life of
the Merger Agreement or the approval by the stockholders of SMC of the Common
Stock Issuance, as authorized by the respective boards of directors of SMC, SAC
and Savers Life, as applicable:
(i) by mutual written consent of SMC and Savers Life;
(ii) by either SMC or Savers Life if (A) the other (or SAC if Savers
Life is the terminating party) has failed to comply in any material respect
with any of its covenants or agreements contained in the Merger Agreement
required to be complied with prior to the date of such termination or
materially breaches any representation or warranty that is not qualified as
to materiality or breaches any representation or warranty that is so
qualified (in each case after a five business day cure period following
notice of such breach) or (B) the stockholders of SMC have failed to
approve the Common Stock Issuance or the stockholders of Savers Life have
failed to approve the Merger at the Savers Life Special Meeting; provided
that at the time of such termination the terminating party has not breached
any of its covenants set forth in the Merger Agreement;
(iii) by either SMC or Savers Life if (A) the Merger has not been
effected on or prior to the close of business on April 30, 1998; provided,
however, that the right to terminate the Merger Agreement pursuant to this
clause is not available to any party whose failure to fulfill any
obligations of the Merger
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Agreement has been the cause of, or resulted in the failure of, the Merger
to have occurred on or prior to the aforesaid date or (B) any court of
competent jurisdiction or any governmental, administrative or regulatory
authority, agency or body has issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action has become final and nonappealable;
or
(iv) by SMC, if the Savers Life Board (A) has not recommended, or has
resolved not to recommend, or has modified or withdrawn its recommendation
of the Merger or declaration that the Merger is advisable or (B) has
recommended, or resolved to recommend, to the stockholders of Savers Life
any takeover proposal or offer of any other person.
If the Merger Agreement is terminated pursuant to its terms, such
termination will be without liability of any party, or any stockholder,
director, officer, employee, agent, consultant or representative of such party,
to any other party to the Merger Agreement; provided, that if such termination
results from the breach by a party of the representations, warranties or
covenants of such party contained in the Merger Agreement, such party will be
fully liable for any and all damages, costs and expenses (including reasonable
counsel fees) sustained or incurred by the other party to the Merger Agreement.
FEES AND EXPENSES
The Merger Agreement provides that SMC and Savers Life will each pay their
own respective costs and expenses incidental to the preparation of the Merger
Agreement, the performance of and compliance with all agreements and conditions
contained in the Merger Agreement and the consummation of the transactions
contemplated thereby. The Merger Agreement also provides for the payment of the
following amounts:
(i) If the Merger Agreement is terminated by either SMC or Savers Life
for any of the reasons set forth in clause (ii)(A) under "-- Termination"
above on the grounds that the other party has failed to proceed in good
faith, the party terminating the Merger Agreement will be entitled to
reimbursement from the other party upon demand for all out-of-pocket fees
and expenses incurred or paid by or on behalf of the terminating party or
any of its affiliates in connection with the Merger Agreement or the
consummation of the Merger; provided, however, that the party obligated to
make payments upon such a termination will not be obligated to make any
such payments in excess of $800,000 in the aggregate.
(ii) If (A) the Savers Life Board fails to make a favorable
recommendation or withdraws, amends or modifies its favorable
recommendation to its stockholders of the Merger Agreement and the Merger
and (B) on or prior to twelve months after the event described in clause
(A) above, a Third Party Acquisition Event (as defined below) occurs,
Savers Life will promptly, but in no event later than the second Business
Day following the later to occur of the events referred to in clauses (A)
and (B), pay to SMC a fee of $500,000 in cash (inclusive of expenses).
A "Third Party Acquisition Event" means any of the following events: (i)
any person or group of persons, other than SMC or its affiliates, acquires or
becomes the beneficial owner of 25% or more of the outstanding shares of Savers
Common Stock; (ii) any new group is formed which beneficially owns 25% or more
of the outstanding shares of Savers Life Common Stock (other than a group which
includes or may reasonably be deemed to include SMC or any of its affiliates);
(iii) any person or group of persons, other than SMC or its affiliates, has
commenced a tender or exchange offer for 25% or more of the then outstanding
shares of Savers Life Common Stock or publicly proposed any bona fide merger,
consolidation or acquisition of all or substantially all the assets of Savers
Life, or other similar business combination involving Savers Life; (iv) Savers
Life enters into, or announces that it proposes to enter into, an agreement,
including, without limitation, an agreement in principle, providing for a merger
or other business combination involving Savers Life or the acquisition of a
substantial interest in, or a substantial portion of the assets, business or
operations of Savers Life (other than the transactions contemplated by the
Merger Agreement); (v) any person or group of persons, other than SMC or its
affiliates, is granted any option or right, conditional or otherwise, to acquire
or otherwise become the beneficial owner of shares of Savers Life Common Stock,
which together with all shares of Savers Life Common Stock beneficially owned by
such person or group of persons, results or would result in such person or group
of persons being the beneficial owner of 25% or more of the outstanding shares
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of Savers Life Common Stock; or (vi) there is a public announcement with respect
to a plan or intention by Savers Life or any person or group of persons, other
than SMC or its affiliates, to effect any of the foregoing transactions.
AMENDMENT AND WAIVER; GOVERNING LAW
The Merger Agreement may be changed, discharged or, except as stated above,
terminated only by an instrument in writing signed by the party or parties
against which enforcement of such change, discharge or termination is sought.
The conditions precedent to the Merger summarized in the second and third
paragraphs under "THE MERGER AGREEMENT -- Conditions Precedent to the Merger"
may be waived by SMC and SAC and Savers Life, respectively.
The Merger Agreement shall be construed in accordance with and governed by
the laws of the State of North Carolina.
VOTING AGREEMENTS
Persons who have the power to vote 543,206 shares of Savers Life Common
Stock outstanding at the close of business on December 1, 1997 (approximately
30.5%) of the shares of Savers Life Common Stock then outstanding have signed
agreements obligating them to vote in favor of approval of the Merger Agreement
and against (i) any action or agreement that would result in a breach of any
covenant, representation or warranty, or any other obligation or agreement, of
Savers Life under the Merger Agreement and (ii) any action that is intended, or
that could be reasonably expected, to impede, interfere with, delay, postpone or
discourage, or adversely affect the contemplated economic benefits to SMC of the
Merger and the actions or transactions contemplated by the Merger Agreement. The
Savers Life stockholder referenced in "SUMMARY -- Background" and "THE
MERGER -- Background of the Merger" has expressed his intention to vote for the
proposal to approve the Merger Agreement subject to the absence of adverse
material corporate transactions involving SMC.
DESCRIPTION OF SMC COMMON STOCK
The current authorized capital stock of SMC consists of 20,000,000 shares
of SMC Common Stock, and 1,000,000 shares of SMC Preferred Stock. At the close
of business on December 1, 1997, 4,871,490 shares of SMC Common Stock were
issued and outstanding, 2,758,728 shares of SMC Common Stock were reserved for
issuance upon exercise of warrants and stock options and 881,009 shares were
held as treasury stock.
The holders of SMC Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and do not have cumulative voting
rights. The holders of a majority of the outstanding shares of SMC Common Stock
represented at a meeting at which a quorum is present may elect all directors to
be elected at the meeting. Under Indiana law, holders of SMC Common Stock may
take action without a meeting of stockholders if a consent in writing setting
forth such action is signed by the holders of all outstanding shares of SMC
Common Stock.
The holders of the SMC Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of legally available funds. In the event of the liquidation,
dissolution or winding up of SMC, the holders of SMC Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities. There are
no preemptive rights, redemption or sinking fund provisions applicable to the
SMC Common Stock. All outstanding shares of SMC Common Stock are fully paid and
nonassessable, and the shares of SMC Common Stock issuable in the Merger will be
fully paid and nonassessable. The dividends and liquidation rights of holders of
SMC Common Stock are subject to the rights and preferences of the holders of
shares of any series of SMC Preferred Stock which SMC may issue in the future.
The transfer agent and registrar for the SMC Common Stock is ChaseMellon
Shareholder Services, Leonis, New Jersey.
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Upon consummation of the Merger and assuming the issuance of 2,135,889
shares in connection therewith, there will be 12,992,621 shares of SMC Common
Stock available for future issuances, of which 1,740,038 shares of SMC Common
Stock will be reserved for issuance upon conversion of subordinated convertible
debt, 752,358 shares will be reserved for issuance upon the exercise of
outstanding warrants, 2,006,370 shares will be reserved for issuance upon the
exercise of outstanding options, and 483,616 shares will be available for future
option grants under the Stock Option Plan. Unissued shares of SMC Common Stock
may be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital or to facilitate corporate acquisitions.
SMC does not currently have any plans to issue additional shares of SMC Common
Stock or SMC Preferred Stock (other than shares of SMC Common Stock which may be
issued in the Merger or upon the exercise of warrants or pursuant to options
granted under the Stock Option Plan).
The SMC Board is authorized, without any further action by the
stockholders, to designate series of SMC Preferred Stock and determine the
rights, preferences, privileges and restrictions of each series. The SMC Board
may issue SMC Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of SMC Common Stock and which
could, among other things, have the effect of delaying, deterring or preventing
a change in control of SMC.
One of the effects of the existence of unissued and unreserved SMC Common
Stock may be to enable SMC to issue shares to persons friendly to current
management which could render more difficult or discourage an attempt to obtain
control of SMC by means of a merger, tender offer, proxy contest or otherwise
and thereby protect the continuity of SMC's management and possibly deprive the
stockholders of opportunities to sell their shares of SMC Common Stock at prices
higher than prevailing market prices. Such additional shares could also be used
to dilute the stock ownership of persons seeking to obtain control of SMC.
COMPARATIVE RIGHTS OF STOCKHOLDERS
As a result of the Merger, stockholders of Savers Life, whose rights are
now governed primarily by the NCBCA and, to a lesser extent, certain insurance
company laws and regulations applicable to Savers Life, will become stockholders
of SMC, an Indiana corporation, and as such their rights will be governed by the
IBCL and, to a lesser extent, certain insurance holding company laws and
regulations applicable to SMC. Certain differences arise from the change in
governing law as well as from distinctions between the Savers Life Charter and
Bylaws and SMC's Articles of Incorporation (the "SMC Charter") and Bylaws. Some
of the significant differences in the rights of stockholders of Savers Life and
SMC are discussed below. The following comparison of certain provisions of the
IBCL and Indiana insurance law and the SMC Charter and Bylaws, on the one hand,
the NCBCA and North Carolina insurance law and the Savers Life Charter and
Bylaws, on the other, does not purport to be a complete statement of the
differences which may affect the rights of stockholders.
COMMON STOCK
All voting rights in SMC and Savers Life are presently vested in the
holders of SMC Common Stock and Savers Life Common Stock, respectively. The
voting rights vested in holders of SMC Common Stock are subject to the authority
granted in the SMC Charter to the SMC Board to issue preferred stock with voting
rights. The issuance of preferred stock with voting rights could affect the
voting rights of the holders of SMC Common Stock. The Savers Life Charter does
not authorize the issuance of any preferred stock. See "-- Preferred Stock."
PREFERRED STOCK
Under the SMC Charter, the SMC Board is authorized to issue preferred stock
in series and to fix the powers, designations, preferences or other rights of
the shares and the qualifications, limitations and restrictions of such shares.
Preferred stock issued by SMC would normally rank prior to SMC Common Stock as
to dividend rights, liquidation preferences, or both, may have full or limited
voting rights (including multiple voting rights and voting rights as a class)
and may be convertible into shares of SMC Common Stock. SMC has no present plans
or understandings for the issuance of any additional preferred stock.
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However, any such issuance in the future could adversely affect the rights of
holders of SMC Common Stock particularly if the preferred stock is given
preferential dividend, liquidation or voting rights.
The Savers Life Charter does not authorize the Savers Life Board to issue
preferred stock.
VOTING
Each share of SMC Common Stock and each share of Savers Life Common Stock
is entitled to one vote on all matters presented to the stockholders. The
holders of Savers Life Common Stock have cumulative voting rights in the
election of directors. Thus, each holder of Savers Life Common Stock is entitled
to the number of votes equaling the number of shares of Savers Life Common Stock
he or she holds multiplied by the number of directors to be elected, and he or
she may cast all of such votes for a single director or may distribute them
among the number of directors to be voted for, or for any two or more of them.
The holders of SMC Common Stock do not have cumulative voting rights in the
election of directors.
Under Indiana law, with certain exceptions, any merger, share exchange or
sale of substantially all of a corporation's assets other than in the ordinary
course of business must be approved by the board of directors (which may
condition its approval of the transaction on any basis) and the holders of a
majority of shares entitled to be cast by each voting group entitled to vote
separately on the transaction, unless the IBCL, the articles of incorporation or
the board of directors require a greater vote. Separate voting by voting groups
is required (i) on a plan of merger if such plan contains a provision that, if
contained in a proposed amendment to articles of incorporation, would require
action by one or more voting groups affecting the rights of shares, and (ii) on
a plan of share exchange by each class or series of shares included in the
exchange, with each class or series constituting a separate voting group.
Neither the SMC Charter nor Bylaws contain additional requirements with respect
to extraordinary corporate transactions.
Under North Carolina law, the voting provisions regarding extraordinary
corporate transactions under the NCBCA are similar to those applicable to
Indiana corporations. Neither the Savers Life Charter nor its Bylaws contain
additional provisions regarding such transactions. Further, since Savers Life
has only one class of stock authorized, each outstanding share has an equal vote
in all matters considered by stockholders, and provisions regarding voting by
voting groups have no effect.
DIRECTORS
Number. The SMC Charter provides that the number of directors constituting
the SMC Board will be fixed by the Bylaws. The SMC Bylaws provide that the
number of directors may not be less than five nor more than ten. The SMC Board
currently consists of nine members. The SMC Board recently amended the SMC
Bylaws to increase the maximum number of directors to ten in order to be able to
appoint Mr. Francis as a director.
The Savers Life Bylaws provide that the number of directors will not be
less than seven nor more than fifteen.
Classification of Board of Directors. The SMC Bylaws provide for the SMC
Board to be divided into three classes, each serving a term of three years, with
the term of one class expiring each year. Because the division of the SMC Board
into three classes could delay a holder or holders of shares representing a
majority of the voting power from obtaining control of the SMC Board, such
holder or holders may not be able to replace a majority of the directors prior
to at least the second annual meeting of stockholders after it or they acquired
a majority position.
The Savers Life Board is not divided into classes, and all directors of
Savers Life are elected annually.
Removal of Directors. The SMC Bylaws provide that directors may be removed
from office with or without cause only by the affirmative vote of not less than
a majority of the outstanding shares entitled to vote at a duly constituted
meeting of stockholders called expressly for such purpose.
The Savers Life Bylaws provide that directors may be removed from office
without cause by a vote of stockholders holding a majority of the shares
entitled to vote at an election of directors; provided, however,
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that a director may not be removed if the number of votes sufficient to elect
directors under cumulative voting is voted against removal.
DISSENTERS' RIGHTS
Under Indiana law, a stockholder of a corporation participating in certain
mergers, reorganizations or other transactions may be entitled to receive cash
in an amount equal to the fair value of his or her shares (as determined by a
court) in lieu of the consideration such holder would otherwise receive in the
transaction. Such appraisal rights are not available, however, to stockholders
of a corporation whose shares are listed on Nasdaq or a similar market. Since
the SMC Common Stock is listed on Nasdaq, SMC stockholders do not have
dissenters' rights.
Dissenters' rights under North Carolina law are described herein under
"DISSENTERS' RIGHTS."
STOCKHOLDER SUITS
Under Indiana law, upon compliance with certain procedures, a stockholder
may institute a lawsuit on behalf of a corporation if he or she was a
stockholder of the corporation when the transaction complained of occurred or
unless he or she became a stockholder by operation of law from one who was a
stockholder at that time. An individual stockholder also may commence a class
action suit on behalf of himself or other similarly situated stockholders where
the requirements for maintaining a class action under Indiana law have been met.
Under the NCBCA, a stockholder of a North Carolina corporation may
institute a lawsuit in the name of the corporation upon meeting certain
requirements, including the requirement of making a written demand upon the
corporation to take appropriate action and refraining from filing a lawsuit with
respect to such demand until 90 days expires following such demand, unless the
corporation notifies the stockholder that it rejected the demand or irreparable
injury would result to the corporation by waiting for the 90 days to expire.
AMENDMENT OF CHARTER AND BYLAWS
Under Indiana law, unless its articles of incorporation provide otherwise,
a corporation's board of directors may adopt certain administrative amendments
to the corporation's articles of incorporation without stockholder action. In
all other circumstances, unless the IBCL, the articles of incorporation or the
board of directors require a greater vote or a vote by voting groups, an
amendment must be approved by (i) a majority of the votes entitled to be cast on
such amendment by any voting group with respect to which the amendment would
create dissenters' rights; and (ii) a majority of the votes cast thereon by each
voting group entitled to vote on the amendment. Pursuant to the IBCL, unless its
articles of incorporation provide otherwise, only a corporation's board of
directors may amend or repeal the corporation's bylaws. A corporation's articles
of incorporation may provide that the stockholders may adopt or amend a bylaw
that fixes a greater quorum or voting requirement for stockholders than is
required by the IBCL. The SMC Charter does not contain such a provision.
The provisions of the NCBCA relating to amending the articles of
incorporation are similar to the provisions of the IBCL. Under the NCBCA,
stockholders can amend or repeal a corporation's bylaws, even though the bylaws
can be amended by the board of directors. In the absence of a provision in the
articles of incorporation or the bylaws requiring stockholder action to amend
the bylaws, the board of directors is authorized to amend them without
stockholder approval, except that the board of directors may not adopt, repeal
or amend a bylaw adopted, repealed or amended by the stockholders, unless the
articles of incorporation or a bylaw adopted by the stockholders authorizes the
board of directors to adopt, amend or repeal that particular bylaw or the bylaws
generally.
NOMINATIONS OF DIRECTORS AND BUSINESS PRESENTED AT ANNUAL MEETINGS
The SMC Bylaws provide that advance notice of nominations for the SMC
Board, other than nominations by the SMC Board or a committee thereof, shall be
given to SMC in the manner provided in the Bylaws. The Bylaws require, in
general, that such nominations must be received by SMC, together with
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certain other information, not less than 60 nor more than 90 days prior to the
meeting at which such directors are to be elected. In the event that less than
75 days' notice or public disclosure of the date of the meeting is given, notice
by the stockholders must be received by SMC not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made, whichever first occurs.
The SMC Bylaws also provide that advance notice of any business proposed to
be brought before an annual meeting of stockholders other than by or at the
direction of the SMC Board or a committee thereof, shall be given to SMC in the
manner provided in the Bylaws. The Bylaws require, in general, that such
proposals must be received by SMC, together with certain other information, not
less than 60 nor more than 90 days prior to the meeting at which such proposal
is to be introduced. In the event less than 75 days' notice or prior public
disclosure of the date of the meeting is given, notice by the stockholder must
be received by SMC not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever first occurs.
Neither the Savers Life Charter nor its Bylaws contains provisions similar
to those described in the two preceding paragraphs.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Under Indiana law, a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any action, by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement. Such indemnification is available to such persons
only if they acted in good faith and in a manner they reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. No indemnification (unless awarded by a court) can be made
until a majority of a quorum of disinterested directors, a committee thereof,
independent legal counsel or the stockholders determine that the person seeking
indemnification has met the applicable standard of conduct. Additionally,
Indiana law provides that where such persons have been successful on the merits
or otherwise in defense of such an action, the corporation shall be required to
indemnify them against expenses incurred in connection therewith.
The IBCL was amended in 1986 to provide that an Indiana corporation may
amend its articles of incorporation to relieve directors of monetary liability
for breach of their fiduciary duties including acts constituting gross
negligence, except under certain circumstances, including breach of the
director's duty of loyalty, acts or omissions not in good faith or involving
intentional misconduct and a knowing violation of law or any transaction from
which the director derived an improper personal benefit. The SMC Charter
provides that directors are not liable to SMC or its stockholders for monetary
damages for breach of their fiduciary duties, subject to the exceptions
specified by Indiana law.
The Savers Life Charter and Bylaws provide protection to its officers and
directors against monetary liability for actions taken by them in the
performance of their duties as such officers and directors and exonerate
directors from monetary liability for such actions. The exoneration from
monetary liability does not apply to actions taken by a director who knew at the
time of the act or omission that the action was clearly in conflict with the
best interests of Savers Life, to liability for unlawful distributions approved
by a director or to any transaction from which the director received an improper
benefit. The bylaws, as well as the statutory law of North Carolina, afford
broad protection from liability and indemnification from expense. Essentially,
an officer or director who is wholly successful in defending a claim is entitled
to full indemnification for expenses incurred in the defense. One who is
partially successful may be entitled to indemnification for the amount of any
judgment as well as payment of expenses, provided that the individual did not
violate his or her statutory duty to Savers Life. In any event, the court
hearing a matter has authority to determine whether the person accused is
entitled to indemnification. Savers Life has purchased a directors and officers
liability insurance policy that provides coverage to Savers Life and to its
officers and directors for actions taken by them in the ordinary course of their
duties.
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PROVISIONS APPLICABLE TO BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Certain provisions of Indiana law and the SMC Charter and Bylaws may delay,
deter or prevent a change in control of SMC.
Under Indiana law, a director may, in considering the best interests of a
corporation, consider the effects of any action on stockholders, employees,
suppliers and customers of the corporation, and communities in which offices or
other facilities of the corporation are located, and any other factors the
director considers pertinent.
Under Indiana law, no business combination (defined to include mergers,
sales of assets, sales of 5% or more of outstanding stock, loans,
recapitalization or liquidations or dissolutions) involving SMC and an
interested stockholder (defined to include any holder of 10% or more of its
voting stock) may be entered into unless (a) within five years of the share
acquisition date the business combination or the purchase of shares is approved
by the SMC Board before the stockholder became an interested stockholder; (b)
all requirements of the SMC Charter relating to business combinations are
satisfied and either (i) the business combination is approved by the SMC Board;
(ii) the business combination is approved by a majority of the stockholders of
SMC (excluding the interested stockholder and five years have expired since the
acquisition of shares by the interested stockholder) or (iii) all stockholders
are paid fair value (as defined in the IBCL) for their stock.
When a corporation (such as SMC), incorporated in Indiana and having its
principal place of business, principal office, or substantial assets in Indiana,
has a 20% ownership by Indiana residents, which is now and will be the case
after the Merger, any acquisition which, along with previous holdings, gives the
acquiror at least 20% of the corporation's voting stock triggers a stockholder
approval mechanism. If the acquiror files a statutorily required disclosure
statement, requests a special meeting of stockholders at which all disinterested
stockholders (those not affiliated with the acquiror or any officer or inside
director of the corporation) consider and vote upon whether the acquiror shall
have voting rights with respect to the shares of such corporation held by it,
and agrees to pay all costs incurred in connection with such meeting, then the
corporation's management must call such a meeting within 10 days and hold such
meeting within 50 days of such request. Without stockholder approval, the shares
acquired by the acquiror have no voting rights. If the acquiror fails to file
the statutorily required disclosure statement, the corporation can redeem the
acquiror's shares at a price to be determined according to procedures devised by
the corporation.
Similar provisions of the NCBCA do not apply to Savers Life because it is
not a "public corporation" within the meaning of the NCBCA and because Savers
Life Common Stock is not registered under the Exchange Act.
DISSENTERS' RIGHTS
The following is a summary of Article 13 of the NCBCA and the procedures
for Savers Life stockholders dissenting from the Merger Agreement and exercising
dissenters' rights. This summary is qualified in its entirety by reference to
Article 13 of the NCBCA, a copy of which is attached hereto as Annex B. Annex B
should be reviewed carefully by any stockholder who wishes to exercise statutory
dissenters' rights or who wishes to preserve the right to do so. FAILURE
STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH IN ARTICLE 13 OF THE NCBCA WILL
RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Section 55-13-01, et seq., of the NCBCA gives any stockholder of Savers
Life who objects to the Merger Agreement and who complies with the provisions of
Section 55-13-01, et seq., the right to receive a cash payment from Savers Life
for the "fair value" of his Savers Life Common Stock as of the date on which the
Merger becomes effective, subject only to the surrender by him of his
certificates representing his shares. Any such payment may be higher or lower
than the per share consideration paid in the Merger.
To exercise the right to object to the Merger, a stockholder must give to
Savers Life, prior to or at the Savers Life Special Meeting, a written objection
to the Merger Agreement. A stockholder who wishes to object to the Merger
Agreement must not vote any shares in favor of the Merger Agreement. If the
Merger
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Agreement is approved at the Special Meeting, Savers Life must notify all
objecting stockholders who did not vote in favor of the Merger Agreement of the
time within which they must make a demand for payment of the fair value of their
shares. Each stockholder receiving the notice must then make demand upon Savers
Life for payment of the fair value of his shares. As soon as the Merger is
consummated, or within 30 days after receipt of a payment demand, Savers Life
must pay the amount that Savers Life estimates to be the fair value of his
shares, plus interest accrued to the date of payment, to each dissenter who
shall have complied with the payment demand requirement. Savers Life must
include with the payment certain financial information, an explanation of how it
estimated the fair value, an explanation of how it calculated the interest
amount and a statement of the dissenter's right to demand further payment if the
shareholder is dissatisfied with the amount paid. A dissenting shareholder may
notify Savers Life of his own estimate of the fair value and amount of interest
due and demand payment of the excess over the amount already paid to him if (i)
he believes that the amount paid is less than fair value or has been incorrectly
calculated, (ii) Savers Life fails to make its payment to him or (iii) Savers
Life, having failed to consummate the Merger, shall not have returned deposited
certificates within 60 days after the date set for demanding payment. A
dissenter waives his right to demand payment under (i) by not making the demand
within 30 days after Savers Life makes its payment and under (ii) and (iii) by
not making his demand within 30 days after Savers Life shall have failed to
perform timely. Failure to make the demand under (i) shall constitute withdrawal
of the dissent and demand for payment. If the demand for payment remains
unsettled, the dissenter has 60 days from the earlier of (i) the date of Savers
Life's payment or (ii) the dissenter's demand for further payment to commence an
appraisal proceeding by filing an action in the Superior Court of Forsyth
County, North Carolina, where Savers Life has its principal place of business.
After the Effective Time of the Merger, no stockholder shall have any rights as
a stockholder of Savers Life including, without limitation, any right to vote or
to receive dividends or liquidating distributions. NEITHER A VOTE AGAINST THE
MERGER AGREEMENT NOR THE FAILURE TO VOTE WILL CONSTITUTE A PROPER WRITTEN
OBJECTION. If proper and timely written objection to the Merger Agreement is
given by a stockholder, a failure to vote against the Merger Agreement will not
constitute a waiver of his right to dissent and demand the fair value of his
shares. A vote by a stockholder to approve the Merger Agreement terminates his
right to object under the statute.
Any objections to the Merger Agreement or demands for payment should be
mailed to Patricia G. Landy, Secretary, Savers Life Insurance Company, 8064
North Point Boulevard, Winston-Salem, North Carolina 27106. All proper
objections or demands must be received by Savers Life on or prior to the date on
which they are required to be delivered.
Except as may be required by law or ordered by the Court, Savers Life will
not pay fees of counsel or other expenses incurred by objecting stockholders.
THE ABOVE IS MERELY A SUMMARY OF SECTIONS 55-13-01 THROUGH 55-13-31 OF THE
NCBCA. THIS SUMMARY IS QUALIFIED BY REFERENCE TO THOSE SECTIONS, WHICH ARE SET
FORTH IN THEIR ENTIRETY AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS. SAVERS
LIFE STOCKHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS SHOULD REFER TO THE
FULL TEXT OF ANNEX B AND SHOULD CONSULT COUNSEL SINCE FAILURE TO COMPLY STRICTLY
WITH THE PROVISIONS OF THE STATUTE WILL RESULT IN THE LOSS OF DISSENTERS'
RIGHTS.
If holders of more than 5% of the shares of Savers Life Common Stock
outstanding immediately prior to the Effective Time properly exercise
dissenters' rights, SMC will have the right to decline to consummate the Merger.
See "THE MERGER AGREEMENT -- Conditions Precedent to the Merger."
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ADDITIONAL INFORMATION REGARDING SMC
BUSINESS OF SMC
INTRODUCTION
SMC is an insurance holding company which directly and through
subsidiaries, acquires and manages in force life insurance and annuity business
and distributes life insurance and annuity products issued by SMC's insurance
subsidiaries and a select group of unaffiliated insurers. SMC's active
subsidiaries include: (i) Standard Life and its subsidiary, Dixie National Life,
(ii) Standard Management International and its subsidiaries, Premier Life
(Luxembourg) and Premier Life (Bermuda), and (iii) Standard Marketing.
Standard Life, SMC's principal insurance subsidiary, was organized in 1934
as an Indiana-domiciled life insurer. It is licensed to write new business or
service existing business in the District of Columbia and all states except New
York and New Jersey. Standard Life offers flexible premium deferred annuities
("FPDAs") and whole and universal life insurance. Standard Life also generates
cash flow and income from closed blocks of in force life insurance and
annuities. At September 30, 1997, Standard Life's statutory assets were
$363,125,000 and the aggregate of its statutory capital and surplus, asset
valuation reserve ("AVR") and interest maintenance reserve ("IMR") (its
"adjusted statutory capital") was $37,837,000. The ratio of Standard Life's
adjusted statutory capital to its total statutory assets was 10.4% at September
30, 1997. Standard Life has a rating of "B+" ("Very Good, Secure") by A.M. Best
Company, Inc. ("A.M. Best"), a rating agency.
Standard Management International is a holding company organized under
Luxembourg law with its registered office in Luxembourg. At September 30, 1997,
Standard Management International and its subsidiaries had $157,277,000 in
assets with policies in force in over 93 countries. The majority of its business
is "unit-linked" products with a range of policyholder directed investment
choices coupled with a small death benefit, sold through its subsidiaries:
Premier Life (Luxembourg) and Premier Life (Bermuda). At September 30, 1997,
Premier Life (Luxembourg) had statutory capital and surplus of $8,350,000 and
its minimum capital and surplus was $3,295,000 and Premier Life (Bermuda) had
statutory capital and surplus of $1,558,000 and its minimum capital and surplus
was $250,000.
Standard Life owns 99.4% of Dixie National Life. At September 30, 1997,
Dixie National Life's statutory assets were $34,987,000, the adjusted statutory
capital was $4,088,000 and the ratio of its adjusted statutory capital to its
statutory assets was 11.7%. Dixie National Life has a rating of B ("Adequate")
by A.M. Best. Dixie National Life markets a variety of life insurance products
throughout the Mid-South offering primarily "burial expense" policies.
Standard Marketing is a wholesale distributor of life insurance and annuity
products. Through its network of master general agents and independent agents,
Standard Marketing distributes life insurance and annuity products for Standard
Life and Dixie National Life and for a select group of unaffiliated insurance
companies. Standard Marketing earns override commission income from the sale of
these products.
On November 8, 1996, Standard Life acquired through merger Shelby Life from
DLAC, a life insurance company located in Memphis, Tennessee (the "Shelby
Merger"). The purchase price was approximately $14,650,000, including
$13,000,000 in cash, 250,000 shares of restricted SMC Common Stock (valued at
$1,250,000) and acquisition costs of $400,000 associated with the purchase of
Shelby Life. Financing for the Shelby Merger was provided by senior debt of
$10,000,000 and $4,000,000 in subordinated convertible debt. SMC's intent at the
time it purchased Shelby Life was to cease writing new business as the new
business premium volume did not justify the costs of marketing support, and to
continue to earn profits from the existing business. Consistent with that
intent, Shelby Life ceased writing new business effective November 1, 1996, thus
eliminating marketing and sales costs and thereby reducing statutory surplus
strain. Statutory accounting practices require that acquisition costs associated
with new business (primarily commissions and policy issue costs) be fully
expensed in the year the new business is written. Surplus strain is created when
acquisition costs incurred in connection with new business reduces statutory
surplus. Many states impose minimum levels of surplus as a condition to writing
new business. See "-- Regulation."
The acquisition of Shelby Life was accounted for using the purchase method
of accounting and SMC's consolidated financial statements include the results of
Shelby Life from November 1, 1996, the effective date
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of acquisition. Under purchase accounting, Standard Life allocated the total
purchase price of Shelby Life to the assets and liabilities acquired, based on a
preliminary determination of their fair values and recorded the excess of
acquisition cost over net assets acquired as goodwill. Standard Life recorded
goodwill of $9,000 which will be amortized on a straight-line basis over 20
years. Standard Life may adjust this allocation when a final determination of
such values is made.
On March 18, 1996, Standard Life completed the sale of a duplicate charter
associated with First International to Guardian Insurance and Annuity Co., Inc.
("GIAC"), a subsidiary of The Guardian Group, New York, New York. Standard Life
received proceeds of approximately $10,393,000, including $1,500,000 for the
charter and licenses associated with First International. Standard Life realized
a net pretax gain of $1,041,692 and a tax benefit of $1,420,000 on this sale or
$2,461,692 ($.47 per share). In addition, First International, Standard Life and
GIAC have entered into a series of other agreements that include provisions for
Standard Life to retain the economic interest in certain First International
policies and administer First International policies in force at the date of
sale. See "Business of SMC -- Reinsurance."
In an unrelated matter, SMC decided in February 1996 to terminate the
reinsurance agreement between Standard Reinsurance of North America Ltd.
("Standard Reinsurance") and Salamandra Joint-Stock Insurance Company in Ukraine
("Salamandra"), and not to renew the Barbados license of Standard Reinsurance
due to an insignificant amount of reinsurance premium volume (less than
$100,000). This resulted in the termination of Standard Reinsurance operations
and the write-off of SMC's investment in Standard Reinsurance and certain
intangible assets of Standard Reinsurance amounting to $155,856 ($.03 per
share).
The combined effect of the gain on sale of First International and related
contracts, and the Standard Reinsurance write-offs, was an increase in revenues
of $885,836 and a tax benefit of $1,420,000, for net income effect of
approximately $2,305,836 or $.44 per share for the year ended December 31, 1996.
In June 1988, Standard Life ceded a block of business to National Mutual
Life Insurance Company ("National Mutual"). Effective May 31, 1996, Standard
Life terminated by recapture the reinsurance agreement with National Mutual. As
a result of this recapture, Standard Life received assets of $4,826,000 and
liabilities of $4,826,000, primarily ordinary life policies. In connection with
this transaction, Standard Life agreed to pay National Mutual a recapture fee of
$1,200,000, and Standard Life collected administration fees of $375,000 related
to services provided in prior years that had not been recorded previously due to
the uncertainty as to its collection. The net proceeds of $825,000 were recorded
as the present value of the future profits on this block of business, which is
being amortized in proportion to the emergence of profits over 20 years. The
premium income, and corresponding increase in reserves, of $4,234,000, recorded
in connection with the recapture of the reinsurance agreement with National
Mutual will not recur in the future.
ACQUISITION STRATEGY
A principal component of SMC's strategy is to grow through the acquisition
of life insurance companies and blocks of in force life insurance and annuities.
SMC regularly investigates acquisition opportunities in the life insurance
industry that complement or are otherwise strategically consistent with its
existing business. Any decision to acquire a block of business or an insurance
company will depend on a favorable evaluation of various factors. SMC believes
that availability of blocks of business in the marketplace will continue in
response to ongoing industry consolidation and risk-based capital requirements
as well as other regulatory and rating agency concerns. In addition, SMC plans
to market annuity and life insurance products directly as it has done in the
past. SMC currently has no plans or commitments to acquire any specific
insurance business or other material assets besides Savers Life. No assurance
can be given that SMC will be successful in consummating any future acquisition.
SMC has the information systems and administrative capabilities necessary
to add additional blocks of business without a proportional increase in
operating expenses. In addition, SMC has developed management techniques for
reducing or eliminating the expenses of the companies it acquires through the
consolidation of their operations with those of SMC, and for increasing
investment yields. Such techniques include reduction or elimination of overhead,
including the acquired company's management, staff and home office, elimination
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of marketing expenses and, where appropriate, the substitution of Standard
Marketing's network for the acquired company's current distribution system, and
the conversion of the acquired company's data processing operations to SMC's
system.
SMC may effect its acquisitions through the purchase or exchange of shares,
if the acquisition candidate is an insurance company, or an assumption
reinsurance transaction, if the proposed acquisition concerns a block of
business. SMC's acquisitions may be subject to certain regulatory approvals,
policyholder consents and stockholder approval, if applicable.
MARKETING
Domestic Marketing. Standard Marketing was organized as a wholesale
distribution system to provide a lower cost alternative to the traditional
captive agency force. Standard Marketing has established a network of
approximately 4,000 independent general agents. These agents distribute a full
line of life insurance and annuity products issued by Standard Life and Dixie
National Life and a select group of unaffiliated insurance carriers that
Standard Marketing represents. As part of its normal recruiting, Standard
Marketing selectively recruits new agents from those formerly associated with
companies acquired by SMC. SMC does not market its annuity products through
stockbrokers.
Crediting rates, commissions, the perceived quality of the issuer, product
features and services are generally the principal factors influencing an agent's
willingness and ability to sell particular life and annuity products. SMC
believes that both agents and policy owners value the service provided by SMC.
Standard Marketing assists its agents in submitting and processing policy
applications and helps ensure that issuing insurers pay commissions on a timely
basis. Standard Life issues an annuity and pays the Standard Marketing agent's
commission within 24 hours after the submission of the policy application.
Standard Marketing also assists its agents with licensing applications and
provides other administrative support. Standard Marketing provides marketing
support for its agents, including sales seminars and other continuing education
programs, point of sale materials, illustrated proposal services, toll-free
access for sales inquiries and access to senior executives. In addition,
Standard Marketing can introduce agents to lead services who will provide such
services at discounted rates that Standard Marketing has negotiated.
Standard Marketing agents offer a full portfolio of life insurance and
annuity products that Standard Marketing has selected on the basis of their
competitive position and likely consumer acceptance. Such portfolio includes
FPDAs and whole and universal life insurance issued by Standard Life and Dixie
National Life, for which Standard Marketing is the exclusive distributor, and
deferred annuities, whole life, term and universal life insurance, and pension
and payroll deduction products issued primarily by the following unaffiliated
insurers: American National Life Insurance Company, United Presidential Life
Insurance Company, U.S. Financial Life Insurance Company and others. Each of
these unaffiliated insurers is rated "A-" to "A++" by A.M. Best. Standard
Marketing's relationships with these companies are non-exclusive and are
terminable by either party upon 30 days' notice. Standard Marketing regularly
evaluates the products its agents offer to determine whether products or
insurers should be added to, or deleted from, the Standard Marketing portfolio.
SMC does not insure any of the policies and contracts Standard Marketing's
agents sell for unaffiliated insurers.
Each general agent operates his own agency and is responsible for all
expenses of the agency. The general agents are compensated directly by the
issuing insurance companies, which perform all policy issuance, underwriting and
accounting functions. SMC is not dependent on any one agent or agency for any
substantial amount of its business. No single agent accounted for more than 4%
of Standard Life's sales for the nine months ended September 30, 1997, and the
top twenty individual agents accounted for approximately 41.6% of Standard
Life's volume for the nine months ended September 30, 1997. At September 30,
1997, approximately 40% of Standard Marketing's independent agents were located
in Indiana, Florida, Ohio, Georgia and Illinois, with the balance distributed
across the country. SMC is attempting to increase the number and geographic
diversity of its agents. In 1996, SMC began writing significant amounts of
business in California and Michigan due to Standard Marketing's expansion
efforts.
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<PAGE> 70
SMC does not have exclusive agency agreements with its agents and
management believes most of these agents sell products similar to those sold by
SMC for other insurance companies. This could result in a sales decline if SMC's
products were to become relatively less competitive. Standard Life's 1996 FPDA
sales increased partially due to an aggressive marketing campaign implemented by
Standard Life with increased crediting rates. First year interest crediting
rates were increased approximately 1% on certain FPDAs sold after April 15,
1996. Also contributing to the increase in premiums was the continued
development of Standard Life's distribution system through marketing support
from Standard Marketing and an increase in the agency base achieved primarily
through the recruitment of larger managing general agencies and expanding
geographical concentration into the Mid-South and California.
Standard Marketing receives, directly from the insurance companies it
serves, override commissions on sales by its agents, which are in addition to
the commissions paid to Standard Marketing's independent agents. The
availability of override commissions provides an economic incentive to Standard
Marketing to recruit agents who produce business. The following table shows for
the periods indicated the aggregate override commissions and service fees
received by Standard Marketing:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED ----------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Standard Life and Dixie National
Life(1).......................... $842 $ 988 $ 829 $867
Unaffiliated insurance
companies(2)..................... 153 397 252 55
------ ------ ------ ----
Total......................... $995 $1,385 $1,081 $922
====== ====== ====== ====
</TABLE>
- -------------------------
(1) These amounts are eliminated in SMC's consolidated financial statements.
(2) Unaffiliated commission income as a percentage of revenues is .4%, 1.0%, .8%
and .2% for the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively.
International Marketing. The subsidiaries of Standard Management
International, Premier Life (Luxembourg) and Premier Life (Bermuda), produced
aggregate new premium deposits of approximately $10,751,000, $17,000,000,
$32,000,000 and $1,700,000 during the nine months ended September 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively. The decrease in
1996 is primarily due to a decrease in marketing costs and to changes in tax
planning laws in certain countries in Western Europe, which made Standard
Management International products less attractive. The countries within the
European Union have been the main contributor to these sales. Although SMC
expects this to be the case in the future, it plans to increase marketing
efforts in other parts of the world as well.
Although Standard Management International anticipates as part of its long
term plan to grow significantly through internal sales, acquisitions of other
European insurance companies may be considered. It has designed and launched new
single and regular premium products in recent years. It is also in discussions
with a number of companies to form alliances to produce tailored products for
their markets. It is expected that these alliances will be consummated in early
1998. It is currently the intention that Premier Life (Luxembourg) will write
business within the European Union and Premier Life (Bermuda) will write
international business elsewhere in the world. The market for Standard
Management International's products is considered to be medium to high net worth
individuals who typically have in excess of $75,000 to invest in a single
premium policy and medium to high earners who have in excess of $3,000 per annum
to invest in a regular premium savings product. The above individuals would come
from a combination of expatriates, residents of European Union countries and
from other targeted areas. The expatriate and European insurance markets are
well established and highly competitive with a large number of domestic and
international groups operating in, or going into, the same markets as Standard
Management International.
Standard Management International's products are distributed via
independent agents who have established connections with these targeted
individuals. Standard Management International is striving to develop into an
entrepreneurial intermediary oriented organization committed to building long
term relationships with high quality distributors, thereby creating a niche
position. Standard Management International
58
<PAGE> 71
places the same emphasis as SMC's U.S. insurance companies on a high level of
service to intermediaries and policyholders while striving to achieve low
overhead costs.
PRODUCTS
SMC primarily markets FPDAs, whole life and universal and
interest-sensitive life insurance policies and unit-linked policies. SMC also
generates cash flow and income from its closed blocks of in force life insurance
and annuities. Closed blocks are blocks of in force life insurance and annuities
that are not currently being marketed by SMC. The closed block designation is
for internal purposes only, it does not have any legal or regulatory
significance and there are no restrictions on the assets or future profits of
closed blocks. The following table sets forth the amounts and percentages of net
premiums received by SMC from currently marketed products and closed block
products for the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively. Because GAAP generally excludes
annuity deposits, and premiums from universal and interest-sensitive life
insurance and unit-linked products from premium income, and thus does not fully
reflect SMC's cash flow from new business, the premium information contained in
the following table is reported using statutory accounting principles, which
include deposits on annuities and unit-linked policies and premiums from
universal and interest-sensitive life insurance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Currently marketed products
FPDAs...................... $31,831 59.4 $37,322 45.4 $12,417 23.0 $50,421 85.7
Universal and
interest-sensitive
life.................... 2,145 4.0 5,384 6.5 2,044 3.8 279 0.4
Single premium immediate
annuity................. 2,187 4.1 1,423 1.7 1,257 2.3 -- --
Whole life................. 1,482 2.8 2,546 3.1 668 1.2 86 0.2
Unit-linked products....... 10,751 20.1 16,902 20.5 31,793 58.8 1,715 2.9
------- ----- ------- ----- ------- ----- ------- -----
48,396 90.4 63,577 77.2 48,179 89.1 52,501 89.2
Closed blocks
Annuities and life......... 5,141 9.6 9,230 11.2 5,906 10.9 6,364 10.8
Net effect of financial
reinsurance............. -- -- 5,182 6.3 -- -- -- --
Recapture of National
Mutual.................. -- -- 4,373 5.3 -- -- -- --
------- ----- ------- ----- ------- ----- ------- -----
5,141 9.6 18,785 22.8 5,906 10.9 6,364 10.8
------- ----- ------- ----- ------- ----- ------- -----
$53,537 100.0 $82,362 100.0 $54,085 100.0 $58,865 100.0
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
FPDA sales declined in 1995 reflecting competitive pressures due to
Standard Life not matching other insurer's higher interest crediting and
commission rates. Additionally, in order to reduce surplus strain Standard Life
began ceding a portion of its new annuity business to an unaffiliated reinsurer
effective January 1, 1995, which further reduced FPDA sales revenues by
$20,089,762 in 1995. Deposits from unit-linked products increased in 1995 as a
result of the resumption by Standard Management International of the sale of new
policies in 1994.
FPDA sales increased in 1996 partially due to an aggressive marketing
campaign implemented by Standard Life with increased interest crediting rates.
First year interest crediting rates were increased approximately 1% on certain
FPDAs sold after April 15, 1996. Standard Life also decreased the quota-share
portion of business ceded pursuant to a reinsurance agreement, under which 70%
of a portion of Standard Life's annuity business pursuant to the terms of the
agreement produced after December 31, 1994 was ceded, to 50% at September 1,
1995, which was further decreased to 25% effective April 1, 1996. This reduction
was possible since the surplus strain experienced by Standard Life was not as
great as originally anticipated as a
59
<PAGE> 72
result of lower than expected sales in 1995 and the additional surplus resulting
from the sale of First International. Premium deposits ceded pursuant to this
reinsurance agreement reduced net premium by $8,907,460 in the year ended
December 31, 1996.
FPDA sales increased in 1997 primarily due to the introduction of new
products and an increase in the agency base achieved through the recruitment of
larger managing general agencies and expansion of geographical concentration
into California.
The increase in universal and interest-sensitive life products in 1996 is
primarily due to the increase in interest-sensitive life products issued by
Dixie National Life, which is included in results after October 2, 1995, the
effective date of the acquisition.
The increase in closed blocks annuities and life products in 1996 is
primarily due to reinsurance premium assumed from GIAC (net reinsurance premium
assumed of approximately $4,700,000) and the acquisition of Shelby Life,
effective November 1, 1996.
The following table shows, on a GAAP basis, certain information for SMC as
of the dates set forth below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
AT SEPTEMBER 30, 1997 1996 1995 1994
--------------------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of annuity contracts in
force............................... 14,089 13,221(1) 8,637 7,480
Interest-sensitive annuity and other
financial product reserves, net of
reinsurance ceded................... $ 350,503 $ 333,633(1) $212,500 $173,334
---------- ---------- -------- --------
Number of life policies in force...... 70,681 73,106(2) 63,038(3) 40,317
Life insurance in force, net of
reinsurance ceded................... $1,221,599 $1,367,675(2) $826,296(3) $787,414
---------- ---------- -------- --------
Number of separate contracts
(primarily unit-linked products).... 2,389 2,484 2,951 3,131
Total liabilities related to separate
accounts (primarily unit-linked
products)........................... $ 145,574(4) $ 128,546 $122,705 $ 94,301
</TABLE>
- -------------------------
(1) The number of annuity contracts in force and interest-sensitive annuity and
other financial product reserves increased in 1996 primarily due to the
increase in FPDA sales in 1996 and the Shelby merger.
(2) The number of life policies and insurance in force increased in 1996, as a
result of the Shelby merger. Shelby Life had 16,603 life policies and
$617,688,000 insurance in force as of November 1, 1996. The decrease in 1997
relates to normal run-off of the closed block.
(3) The number of life policies and insurance in force increased 26,522 and
$219,663,000, respectively in 1995 as a result of Standard Life's
acquisition of Dixie National Life.
(4) The liabilities related to separate accounts increased in 1997 due to
increased new premium deposits and higher investment returns earned by the
policyholder on the separate accounts due to improved fund performance.
CURRENTLY MARKETED PRODUCTS
The individual annuity business is a growing segment of the savings and
retirement industry, which increased in sales from $1 billion in 1970 to more
than $54 billion in 1990. The individual annuity market, which is SMC's primary
target, comprises 42% of those sales. As the 76 million baby boomers born from
1946 through 1964 grow older, demand for insurance products is expected to grow.
SMC believes that those seeking adequate retirement incomes will depend less and
less on Social Security and their employers' retirement programs and more and
more upon their own financial resources. Annuities currently enjoy an advantage
over certain other saving mechanisms because the annuity buyer receives a
tax-deferred accrual of interest on his investment during the accumulation
period.
Standard Life, Dixie National Life and Standard Management International
all currently issue new policies. Standard Life emphasizes the issuance of
FPDAs. Dixie National Life primarily sells "burial expense" life insurance
policies. Standard Management International markets unit-linked products. Over
27%
60
<PAGE> 73
of all net premiums and deposits collected in 1996 by SMC from its currently
marketed products arise from the sale of unit-linked products by Standard
Management International. The balance is represented by the sales of whole life
and universal and interest-sensitive life insurance products by Standard Life
and Dixie National Life and Standard Life's FPDAs. The portfolio of products is
continuously reviewed by management, and product features and terms are adjusted
in response to market conditions in an effort to remain competitive.
SMC's gross sales percentage by U.S. geographical region are summarized as
follows:
<TABLE>
<CAPTION>
STATE 1997(1) 1996 1995 1994
----- ------- ---- ---- ----
<S> <C> <C> <C> <C>
Indiana......................................... 21% 18% 24% 30%
Ohio............................................ 11 16 22 18
Florida......................................... 11 14 11 19
California...................................... 11 11 3 2
Texas........................................... 4 4 2 2
Louisiana....................................... 4 2 2 --
Virginia........................................ 4 2 -- 1
Colorado........................................ 4 1 -- --
Michigan........................................ 2 6 4 5
All other states................................ 28(2) 26(2) 32 23
--- --- --- ---
Total........................................... 100% 100% 100% 100%
=== === === ===
</TABLE>
- -------------------------
(1) First nine months.
(2) No other state had gross sales greater than 4% for the first nine months of
1997 and the year ended December 31, 1996.
Standard Management International's products are sold primarily in Western
Europe.
STANDARD LIFE PRODUCTS
Flexible Premium Deferred Annuities. FPDAs provide for an initial deposit
by an annuitant and optional additional deposits, the time and amount of which
are at the discretion of the annuitant. Standard Life credits the account of the
annuitant with earnings at interest rates that are revised periodically by
Standard Life until the maturity date. This accumulated value is tax deferred.
Revisions to interest rates on FPDAs are restricted by an initial crediting rate
guaranteed for a specific period of time and a minimum crediting rate guaranteed
for the term of the FPDA. At maturity, the annuitant can elect a lump sum cash
payment of the accumulated value or one of the various payout options available.
Standard Life's FPDAs also provide for penalty-free partial withdrawals of up to
10% annually of the accumulation value after the annuitant has held the FPDA for
more than 12 months. In addition, the annuitant may surrender the FPDA at any
time before the maturity date and receive the accumulated value, less any
surrender charge then in effect for that contract. To protect holders of FPDAs
from a sharp reduction in the credited interest rate after a FPDA is issued,
Standard Life permits the FPDA holder of certain annuities to surrender the
annuity during a specified period without incurring a surrender charge if the
renewal crediting rate is below a stated level. This stated level of interest is
referred to as the "bail-out rate" and is typically below the original crediting
rate, but above the minimum guaranteed crediting rate.
As of December 1, 1997, the crediting rates available on Standard Life's
currently marketed FPDAs ranged from 6.80% to 12% (5% + 7% first year bonus),
with new issues having an interest rate with a one year guarantee period. After
the initial period, the crediting rate may be changed periodically, subject to
minimum guaranteed rates from 3% to 4%. As of December 1, 1997, interest
crediting rates after the initial guarantee period ranged from 5% to 6.60%. The
surrender charge is initially 13% or 15% of the contract value depending on the
product and decreases over the applicable penalty period of nine, ten or
thirteen years. As of December 1, 1997, the bail out rate for Standard Life's
FPDAs was 4.5%; most currently marketed products carry a bail out rate for only
the first two years after issue. As of September 30, 1997, Standard Life had
8,720 currently marketed FPDA contracts in force.
61
<PAGE> 74
Whole Life Insurance. Standard Life offers two types of non-participating
whole life policies: one in face amounts up to $10,000 (which is issued only
upon conversion of other policies) and the other in face amounts up to $50,000.
Whole life insurance products involve fixed premium payments made over time,
with the stated death benefit paid in full upon the death of the insured. The
whole life policy combines the death benefit with a forced savings plan.
Premiums remain level over the life of the policy, with the policyholder
prefunding during the early years of coverage when risk of death is low. Over
time, whole life policies begin to accrue a cash value which can be made
available to the policyholder net of taxes and withdrawal penalties. As of
September 30, 1997, Standard Life had 457 currently marketed whole life policies
in force.
Single Premium Immediate Annuities. Standard Life offers a single premium
immediate annuity ("SPIA"), whereby an annuitant purchases an immediate annuity
with a one-time premium deposit at the time of issuance. Standard Life begins a
payout stream shortly after the time of issuance consisting of principal value
plus accumulated interest credited to such annuity. This product credits
interest based on an investment portfolio earned rate assumption. As of
September 30, 1997, Standard Life had 711 SPIA contracts in force.
Universal Life. SPULs provide for an initial deposit (flexible premium
universal life ("FPUL") for periodic deposits), credit interest to account
values and charge the account values for mortality and administrative costs. As
of December 1, 1997, the current interest rate on new sales of SPULs and FPULs
was 6.75% with a guaranteed interest rate of 3.4%. As of September 30, 1997,
Standard Life had 88 and 280 SPUL and FPULs policies in force, respectively.
DIXIE NATIONAL LIFE PRODUCTS
Life insurance policies sold by Dixie National Life in the final expense,
or burial, market include fixed premium interest sensitive policies that provide
for increasing death benefits, as well as traditional whole life policies. These
policies are designed to cover expenses such as funeral, last illness, monument
and cemetery lot. The policies provide for a death benefit, generally not in
excess of $20,000, and a level premium payment. The products include a cash
value which may be borrowed by the policyholder. Dixie National Life's policies
sold in other markets include interest-sensitive and traditional whole life
policies and forms of term policies. The interest-sensitive whole life policies
have a guaranteed interest rate of 5.50% on products marketed at December 31,
1996. The interest-sensitive and whole life policies include cash values, which
may be borrowed by the policyholder. Dixie National Life issues polices on both
a participating and non-participating basis. As of September 30, 1997, Dixie
National Life had 781 and 26,273 individual annuities and life policies in
force, respectively.
STANDARD MANAGEMENT INTERNATIONAL PRODUCTS
Unit-linked Policies. Standard Management International currently writes
unit-linked life products, which are similar to U.S. produced variable life
products. Separate account assets and liabilities are maintained primarily for
the exclusive benefits of universal life contracts and investment contracts of
which the majority represents unit-linked business where benefits on surrender
and maturity are not guaranteed. They generally represent funds held in accounts
to meet specific investment objectives of policyholders who bear the investment
risk. Investment income and investment gains and losses within the separate
accounts accrue directly to such policyholders. The fees received by Standard
Management International for administrative and contract holder maintenance
services performed for these separate accounts are included in SMC's statements
of operations.
In the past, Standard Management International also wrote investment
contracts and universal life policies and to a lesser extent, traditional life
policies. The investment contracts are mainly short-term single premium
endowments or temporary annuities under which fixed benefits are paid to the
policyholder. The terms of these contracts are such that SMC has relatively
small morbidity or mortality risk. The universal life contracts are mainly
regular premium and single premium endowment contracts. The benefits payable to
the policyholders are directly linked to the investment performance of the
underlying assets.
62
<PAGE> 75
CLOSED BLOCKS
The premiums received on the closed blocks were primarily from the ordinary
and universal life business. This decline in premium income is expected as a
result of policy lapses, surrenders and expiries from closed blocks of business.
Annuities. SMC's closed blocks of deferred annuities consist primarily of
FPDAs and a small amount of single premium deferred annuities ("SPDAs") which,
unlike FPDAs, do not provide for additional deposits. At December 1, 1997, these
deferred annuities had crediting rates ranging from 5% to 5.5% and guaranteed
minimum crediting rates ranging from 3% to 5.5%. The crediting rate may be
changed periodically. The contract owner is permitted to withdraw all or part of
the accumulation value. SMC's closed blocks of annuities include payout
annuities. Payout annuities consist of those annuities the benefits of which are
being paid out over a specified time period. Payout annuities cannot be
terminated by surrender or withdrawal. SMC's crediting rates on payout annuities
range from 5.5% to 6.5% and cannot be changed. As of September 30, 1997, SMC had
3,832 annuity contracts in force for closed blocks.
Ordinary Life. The ordinary life policies included in SMC's closed blocks
are composed primarily of fixed premium, cash value whole life products. In
addition, they include annually renewable term policies as well as five, ten and
fifteen-year level premium term policies. As of September 30, 1997, SMC had
36,652 ordinary life policies in force for closed blocks.
Universal Life. Certain closed blocks include universal life business. For
this business, SMC credits deposits and interest to account values and charges
the account values for mortality and administrative costs. As of September 30,
1997, SMC had 6,625 universal life policies for the closed Shelby Life block of
business.
Financial Reinsurance and Recapture of National Mutual. In connection with
financial reinsurance, Dixie National Life terminated a reinsurance agreement
with Crown Life Insurance Company and received recaptured premium income of
$18,186,377, entered into a financial reinsurance agreement with Cologne Life
Reinsurance Company and ceded $13,091,290 of premium income in 1996.
The policies subject to the recapture of the reinsurance agreement with
National Mutual were primarily ordinary life policies. See "Business of SMC --
Reinsurance."
PRODUCT PROFITABILITY
The profitability of the life insurance and annuity products depends to a
significant degree on the maintenance of profit margins between investment
results from invested assets and interest credited on insurance and annuity
products. During 1997, such margins continued to be positive as a result of
reductions in crediting rates in spite of a fluctuating interest rate
environment.
The long-term profitability of insurance products depends on the accuracy
of the actuarial assumptions that underlie the pricing of such products.
Actuarial calculations for such insurance products, and the ultimate
profitability of such products, are based on four major factors: (i)
persistency, (ii) mortality (iii) return on cash invested by the insurer during
the life of the policy and (iv) expenses of acquiring and administering the
policies.
The average expected remaining life of Standard Life and Dixie National
Life's ordinary life business in force at December 31, 1996 is 9.0 and 10.75
years, respectively. These calculations were determined based upon SMC's
actuarial models and assumptions as to expected persistency and mortality.
Persistency is the extent to which insurance policies sold are maintained by the
insured. The persistency of life insurance and annuity products is a critical
element of their profitability. However, a surrender charge often applies in the
early contract years and declines to zero over time.
Policyholders sometimes do not pay premiums, thus causing their policies to
lapse. For the years 1996, 1995 and 1994, Standard Life experienced total policy
lapses of 6.3%, 5.1% and 6.3% of total policies in force at December 31 of each
year, respectively. The American Council of Life Insurance 1996 Fact Book
reported industry life insurance voluntary termination rates in 1996 of 17.1%
for policies in force less than two years, 5.4% for policies in force for two
years or more and 7.2% for all policies in force.
63
<PAGE> 76
OPERATIONS
SMC emphasizes a high level of service to agents and policyholders and
strives to achieve low overhead costs. SMC's principal administrative
departments are its financial, policyholder services and management information
services ("MIS") departments. The financial department provides accounting,
budgeting, tax, investment, financial reporting and actuarial services and
establishes cost control systems for SMC. The policyholder services department
reviews policy applications, issues and administers policies and authorizes
disbursements related to claims and surrenders. The MIS department oversees and
administers SMC's information processing systems.
SMC's administrative departments in the United States use a common
integrated system that permits SMC to function more efficiently, control costs
and maintain low overhead. SMC's MIS system is now servicing approximately
150,000 active and inactive policies. SMC is continually improving its MIS
systems to provide for continued growth from acquisitions and sales. SMC's 1997
capital budget for systems improvements is $250,000. Also, SMC anticipates
minimal expenditures to be required in the update of the MIS system for the year
2000.
Standard Management International's administrative and MIS departments in
Luxembourg are an autonomous unit from the systems in the United States. SMC is
in the process of improving the MIS systems of Standard Management International
and integrating them with the U.S. systems.
INVESTMENTS
Investment activities are an integral part of SMC's business; investment
income of SMC's insurance subsidiaries is an important part of its total
revenues. Profitability is significantly affected by spreads between rates
credited on insurance liabilities and interest yields on invested assets.
Substantially all credited rates on FPDAs may be changed at least annually. As
of September 30, 1997 and 1996, the weighted average interest rate credited on
SMC's interest-sensitive liability portfolio, excluding liabilities related to
separate accounts, was approximately 5.61% and 5.40% per annum, and the weighted
average net yield of SMC's investment portfolio for the nine months ended
September 30, 1997 and was 7.66% and 7.28% for an average interest spread of 205
basis points for the nine months ended September 30, 1997 compared to 188 basis
points in the first nine months of 1996. The increase in the average interest
spread in 1997 is primarily attributable to the increase in investment portfolio
yields, which offsets the effects of sales of FPDAs in 1996 and 1997 with higher
and more competitive interest crediting rates. Increases or decreases in
interest rates could increase or decrease the average interest rate spread
between investment yields and interest rates credited on insurance liabilities,
which in turn could have a beneficial or adverse effect on the future
profitability of SMC. Sales of fixed maturity securities that result in
investment gains may also tend to decrease future average interest rate spreads.
State insurance laws and regulations prescribe the types of permitted
investments and limit their concentration in certain classes of investments.
The following table shows SMC's pre-tax investment performance for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average invested assets(1).................. $381,786 $285,186 $253,055 $221,138
Net investment income....................... 21,926 20,871 18,517 18,517
Weighted average annual yield(2)............ 7.66% 7.32% 7.32% 7.26%
Net realized investment gains............... $ 287 $ 1,302 $ 688 $ 558
</TABLE>
- -------------------------
(1) Average invested assets are computed by dividing the total of the amortized
cost of investments at the beginning of the period plus the individual
quarter-end balances by the number of quarterly periods plus one. The
increase in average invested assets in 1997 is primarily due to the
acquisition of Shelby Life.
64
<PAGE> 77
(2) The weighted average annual yield on SMC's investment portfolio for each
period is computed by dividing net investment income (exclusive of realized
and unrealized gains and losses) by average invested assets for such period.
The following table shows the amortized cost, gross unrealized gain (loss)
and estimated fair value of SMC's investment securities all of which are
available for sale:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
United States Treasury securities and obligations
of United States government agencies........... $ 15,260 $ 30 $ 194 $ 15,096
Obligations of states and political
subdivisions................................... 3,989 158 37 4,110
Foreign government securities..................... 51,256 1,100 413 51,943
Mortgage-backed securities........................ 67,006 637 241 67,402
Utilities......................................... 21,757 292 359 21,690
Corporate bonds................................... 200,513 4,813 823 204,503
Redeemable preferred stock........................ 3,818 96 -- 3,914
-------- ------ ------- --------
Total fixed maturity securities................ 363,599 7,126 2,067 368,658
Equity securities................................... 54 -- 2 52
-------- ------ ------- --------
Total.......................................... $363,653 $7,126 $ 2,069 $368,710
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
United States Treasury securities and obligations
of United States government agencies........... $ 20,753 $ 51 $ 420 $ 20,384
Obligations of states and political
subdivisions................................... 3,588 106 -- 3,694
Foreign government securities..................... 10,042 51 166 9,927
Mortgage-backed securities........................ 72,264 247 919 71,592
Utilities......................................... 31,000 295 675 30,620
Corporate bonds................................... 210,977 3,086 3,539 210,524
Redeemable preferred stock........................ 527 42 -- 569
-------- ------ ------ --------
Total fixed maturity securities................ 349,151 3,878 $5,719 347,310
Equity securities................................... 58 4 -- 62
-------- ------ ------ --------
Total.......................................... $349,209 $3,882 $5,719 $347,372
======== ====== ====== ========
</TABLE>
The fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services or
by discounting expected future cash flows using a current market rate applicable
to the coupon rate, credit and maturity of the investments.
SMC balances the duration of its invested assets with the expected duration
of benefit payments arising from insurance liabilities. The "duration" of a
security is the time-weighted present value of the security's cash flows and is
used to measure a security's price sensitivity to changes in market interest
rates. At December 31, 1996, the adjusted modified duration of fixed maturities
and short-term investments for its U.S. insurance subsidiaries was 5.5 years
compared to 5.4 years at December 31, 1995.
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The amortized cost and estimated fair value of fixed maturity securities at
September 30, 1997 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because most mortgage-backed securities provide for periodic payments throughout
their lives.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................. $ 5,354 $ 5,344
Due after one year through five years.................... 20,083 20,450
Due after five years through ten years................... 122,604 123,822
Due after ten years...................................... 144,734 147,725
-------- --------
Subtotal............................................ 292,775 297,341
Redeemable preferred stock............................... 3,818 3,915
-------- --------
Mortgage-backed securities............................... 67,006 67,402
-------- --------
Total fixed maturity securities..................... $363,599 $368,658
======== ========
</TABLE>
SMC's investment strategy is guided by strategic objectives established by
the Investment Committee of the Board of Directors of Standard Life. SMC's major
investment objectives are: (i) to ensure adequate safety of investments and to
protect and enhance capital; (ii) to maximize after-tax return on investments;
(iii) to match the anticipated duration of investments with the anticipated
duration of policy liabilities; and (iv) to provide sufficient liquidity to meet
cash requirements with minimum sacrifice of investment yield. Consistent with
its strategy, SMC invests primarily in securities of the U.S. government and its
agencies, investment grade utility and corporate debt securities and
collateralized mortgage obligations ("CMOs"). From time to time when
opportunities arise, however, below investment grade securities may be
purchased. Protection against default risk is a primary consideration. SMC has
determined it will not invest more than 7% of its bond portfolio in below
investment grade securities.
The following table sets forth the quality of SMC's fixed maturity
securities as of September 30, 1997, classified in accordance with the ratings
assigned by the National Association of Insurance Commissioners ("NAIC"):
<TABLE>
<CAPTION>
PERCENT OF FIXED
NAIC RATING (1) MATURITY SECURITIES
--------------- -------------------
<S> <C>
1........................................................... 48%
2........................................................... 47
---
Investment Grade.......................................... 95
---
3-4......................................................... 4
5-6......................................................... 1
---
Below Investment Grade.................................... 5
---
Total fixed maturity securities........................ 100%
===
</TABLE>
- -------------------------
(1) The NAIC assigns securities quality ratings and uniform book values called
"NAIC Designations," which are used by insurers when preparing their annual
statements. The NAIC assigns ratings to publicly traded as well as
privately-placed securities. The ratings assigned by the NAIC range from
Class 1 to Class 6, with a rating in Class 1 being of the highest quality.
SMC engages Conseco Capital Management Inc. ("CCM"), a wholly owned
subsidiary of Conseco, Inc., to manage SMC's invested assets (other than
mortgage loans, policy loans, real estate and other invested assets), subject to
the direction of SMC's Investment Committee. A quarterly fee equal to .035% of
the total market value of the assets under management as of the end of each
quarter is paid to CCM for its investment advisory services.
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Approximately 20% of SMC's fixed maturities available for sale at September
30, 1997 is comprised of mortgage-backed securities. Investments in
mortgage-backed securities include CMOs and mortgage-backed pass-through
securities. Approximately 74% of the book value of the mortgage-backed
securities in SMC's portfolio is backed by an agency of the U.S. government
(although generally not by the full faith and credit of the U.S. government) as
to the full amount of both principal and interest. Approximately 7% of the book
value of mortgage-backed securities in SMC's portfolios is backed by the full
faith and credit of the U.S. government as to the full amount of both principal
and interest. SMC closely monitors the market value of all investments within
its mortgage-backed portfolio.
The following table summarizes SMC's mortgage-backed securities at
September 30, 1997:
<TABLE>
<CAPTION>
ESTIMATED
% OF % OF AVG. LIFE AVG. TERM
AMORTIZED FIXED FAIR FIXED OF TO FINAL
COST MATURITIES VALUE MATURITIES INVESTMENT MATURITY
--------- ---------- ----- ---------- ---------- ---------
(DOLLARS IN THOUSANDS) (IN YEARS) (IN YEARS)
<S> <C> <C> <C> <C> <C> <C>
Agency CMOs:
Planned and target amortization
classes........................ $23,280 6.4 $23,343 6.3 7.3 24.5
Sequential and support classes.... 245 .1 268 .1 4.7 20.7
------- ---- ------- ----
Total.......................... 23,525 6.5 23,611 6.4 7.3 24.5
Non-agency CMOs:
Planned amortization classes...... 1,491 .4 1,479 .4 5.7 26.3
Sequential classes................ 15,839 4.4 15,653 4.2 7.4 20.1
------- ---- ------- ----
Total.......................... 17,330 4.8 17,132 4.6 7.3 17.5
------- ---- ------- ----
Total CMOs.......................... 40,855 11.3 40,743 11.0 7.3 21.4
Agency mortgage-backed pass-through
securities........................ 26,151 7.2 26,659 7.2 5.0 16.2
------- ---- ------- ----
Total mortgage-backed
securities................... $67,006 18.5 $67,402 18.3 6.4 19.4
======= ==== ======= ====
</TABLE>
The market values for SMC's mortgage-backed securities were determined from
broker-dealer market makers, internally developed methods and nationally
recognized statistical rating organizations.
Certain mortgage-backed securities are subject to significant prepayment
risk, since, in periods of declining interest rates, mortgages may be repaid
more rapidly than scheduled as individuals refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investment
which cannot be reinvested at an interest rate comparable to the rate on the
prepaying mortgages. SMC has reduced this risk of prepayment risk by investing
37% of its mortgage-backed investment portfolio in planned and target
amortization classes. These investments are designed to amortize in a more
predictable manner by shifting the primary risk of prepayment of the underlying
collateral to investors in other tranches ("support classes"). Mortgage-backed
pass-through securities, "sequential" and support class CMOs, which comprised
approximately 63% of the book value of SMC's mortgage-backed securities at
September 30, 1997, are more sensitive to this prepayment risk.
SEPARATE ACCOUNTS
Separate account assets and liabilities are maintained primarily for
universal life contracts of which the majority represents unit-linked business
where benefits on surrender and maturity are not guaranteed. They generally
represent funds held in accounts to meet specific investment objectives of
policyholders who bear the investment risk. Investment income and investment
gains and losses accrue directly to such policyholders.
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<PAGE> 80
UNDERWRITING
Premiums charged on insurance products are based in part on assumptions
about the incidence and timing of insurance claims. SMC has adopted and follows
underwriting procedures for both its whole life and universal life insurance
policies. To implement these procedures, SMC employs a professional underwriting
staff. All underwriting decisions are made in SMC's home office. To the extent
that an applicant does not meet SMC's underwriting standards for issuance of a
policy at the standard risk classifications, SMC may rate or decline the
application. Underwriting with respect to FPDAs is minimal. No underwriting
procedures are applied to Standard Life's $10,000 conversion policy or Standard
Management International's unit-linked business.
Traditional underwriting procedures are not applied to policies acquired in
blocks. In these cases, SMC reviews the mortality experience for recent years
and compares actual experience to that assumed in the actuarial projections for
the acquired policies.
RESERVES
In accordance with applicable insurance laws, SMC's insurance subsidiaries
have established and carry as liabilities in their statutory financial
statements actuarially determined reserves to satisfy their respective annuity
contract and life insurance policy obligations. Reserves, together with premiums
to be received on outstanding policies and interest thereon at certain assumed
rates, are calculated to be sufficient to satisfy policy and contract
obligations. The actuarial factors used in determining such reserves are based
on statutorily prescribed mortality tables and interest rates.
The reserves recorded in the consolidated financial statements included
elsewhere herein are calculated based on GAAP and differ from those specified by
the laws of the various states and recorded in the statutory financial
statements of SMC's insurance subsidiaries. These differences arise from the use
of different mortality tables and interest rate assumptions, the introduction of
lapse assumptions into the reserve calculation and the use of the net level
premium reserve method on all insurance business. See Note 1 of the Notes to the
Consolidated Financial Statements for certain additional information regarding
reserve assumptions under GAAP.
To determine policy benefit reserves for its life insurance and annuity
products, SMC performs periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
calculating the reserves. Differences are reflected currently in earnings for
each period. SMC historically has not experienced significant adverse deviations
from its assumptions.
REINSURANCE
Consistent with the general practice of the life insurance industry, SMC
has reinsured portions of the coverage provided by its insurance products with
other insurance companies under agreements of indemnity reinsurance. Prior to
January 1, 1995, reinsurance was not maintained with respect to SMC's currently
marketed annuity products. The policy risk retention limit on the life of any
one individual does not exceed $150,000.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured, but it is the practice of insurers for
statutory accounting purposes (subject to certain limitations of state insurance
statutes) to account for risks which have been reinsured with other approved
companies, to the extent of the reinsurance, as though they are not risks for
which the original insurer is liable. However, under SFAS 113 these amounts are
added back to policy reserves and recorded as amounts due from reinsurers.
Reinsurance ceded on life insurance policies to unaffiliated companies by
SMC in 1996, 1995 and 1994 represented 32.7%, 68.8% and 75.4%, respectively, of
gross combined individual life insurance in force at the end of such years.
Reinsurance assumed in the normal course from unaffiliated companies by SMC in
1996, 1995 and 1994 represented .02%, .04% and .05%, respectively, of net
combined individual life insurance in
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<PAGE> 81
force, excluding reinsurance with GIAC described below. SMC cedes reinsurance to
numerous reinsurers. At December 31, 1996, approximately $477,980,000 of the
face value of life policies and reinsurance recoverable of $2,944,000 had been
ceded to The Lincoln National Life Insurance Company ("Lincoln National"),
$203,097,000 of the face value of life policies and reinsurance recoverable of
$1,288,000 had been ceded to Security Life of Denver Insurance Company
("Security Life") and $191,813,000 of the face value of life policies and
reinsurance recoverable of $1,007,000 had been ceded to The Mercantile and
General Reinsurance Company ("Mercantile"). Lincoln National is the lead
reinsurer with a total of 29.3% of total reinsurance ceded with Security Life
and Mercantile each accounting for 12.4% and 11.7%, respectively, of total
reinsurance ceded by SMC's life insurance subsidiaries at December 31, 1996. The
amount of life insurance business ceded to any other reinsurer is not material.
Of SMC's total life insurance in force at December 31, 1996 that is reinsured,
100.0% is ceded to insurers rated "A" or better by A.M. Best. SMC historically
has not experienced any material losses in collection of reinsurance
receivables.
Commencing January 1, 1995, SMC began to reinsure a portion of its annuity
business. The primary purposes of the reinsurance agreement were to limit the
net loss arising from large risks, maintain SMC's exposure to loss within
capital resources, and provide additional capacity for future growth.
Furthermore, these reinsurance agreements have allowed SMC to write volumes of
business that it would not otherwise have been able to write due to restrictions
based on its ratio of surplus to liabilities as determined by regulatory
authorities in the State of Florida. By reinsuring a portion of the annuity
business, the liability growth is slowed, thereby avoiding the erosion of
surplus that can occur in periods of increasing sales. If SMC's ratio of surplus
to liabilities falls below 4%, the State of Florida could prohibit SMC from
writing new business in Florida. SMC's largest annuity reinsurer at December 31,
1996, Winterthur Life Re Insurance Company ("Winterthur"), represented
$26,138,000, or 38% of total reinsurance recoverable, $8,907,000 of premium
deposits ceded in 1996 and is rated "A" ("Excellent") by A.M. Best. From January
1, 1995 to August 31, 1995 approximately 70% of certain of Standard Life's
annuity business produced was ceded. SMC decreased the quota-share portion of
business ceded to 50% at September 1, 1995 and further reduced it to 25%
effective April 1, 1996. This reduction was possible since the surplus strain
experienced by Standard Life was not as great as originally anticipated as a
result of lower than expected sales in 1995 and the increase in surplus
resulting from the sale of First International. Winterthur limits dividends and
other transfers by Standard Life to SMC or affiliated companies if adjusted
surplus is less than 5.5% of admitted assets, $19,970,000 at September 30, 1997.
On March 18, 1996, Standard Life completed the sale of First International
to GIAC. Standard Life received sale proceeds of approximately $10,393,000
including $1,500,000 for the charter and licenses associated with First
International. Standard Life realized a net pretax gain of $1,041,692 and a tax
benefit of $1,420,000 on the sale. First International, Standard Life and GIAC
have entered into a series of reinsurance and other agreements that include
provisions for Standard Life to administer First International policies in force
at the date of sale, and for Standard Life to continue to receive the profit
stream from the majority of First International's in force business effective
January 1, 1996.
All the in force business of First International effective January 1, 1996
was ceded to GIAC through a coinsurance indemnity reinsurance agreement. Under
the terms of the agreement, approximately $18,841,000 of First International's
reserves and assets of $18,841,000 were ceded to GIAC as of January 1, 1996. The
assets transferred included cash of $17,046,000, policy loans of $1,371,000, and
net due and deferred premiums of $424,000. The in force business related to this
automatic coinsurance indemnity reinsurance agreement is comprised of the
following two blocks: ("Block I") -- ordinary life policies (issued in New York
and New Jersey), universal life, immediate and deferred annuities (issued in New
York, New Jersey and Vermont), supplemental contracts and group waivers, and
("Block II") -- ordinary life policies (not issued in New York and New Jersey)
issued prior to 1989, and term life policies (issued in New York, New Jersey and
Vermont) issued after 1988.
Effective January 1, 1996, GIAC entered into a modified coinsurance
indemnity reinsurance agreement with Standard Life with respect to Blocks I and
II. Pursuant to this agreement, Standard Life administers the policies in both
Block I and Block II. Under the terms of the agreement, Standard Life assumed
approximately $18,841,000 of reserves for Block I and Block II from GIAC as of
January 1, 1996. During 1996, Standard Life incurred and paid experience rating
refunds to GIAC on Block I for profits earned in
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<PAGE> 82
excess of specified amounts. These refunds were calculated and paid on a
quarterly basis. As a result, the economic risks and benefits associated with
Block I remained with GIAC. Effective January 1, 1997, GIAC and Standard Life
executed Amendment I to the modified coinsurance indemnity reinsurance
agreement. Under the terms of Amendment I, GIAC and Standard Life agreed to
terminate effective January 1, 1997 the modified coinsurance indemnity
reinsurance agreement with regard to Block I, and Block I reverted completely to
GIAC. In accordance with the provisions of SFAS 60, SFAS 97, and SFAS 113 for a
reinsurance assuming enterprise, in accordance with deposit accounting, Standard
Life has not recorded revenue or expense during 1996 for the Block I
reinsurance. A ceding commission of $1,100,000 received by First International
in connection with the sale was deferred by First International in accordance
with FAS 113. When First International was sold, the amount was paid to SMC by
GIAC as part of First International's statutory capital and surplus. There is no
experience rating refund on Block II and, accordingly, the economic risks and
benefits associated with Block II remain with Standard Life. Under the terms of
the reinsurance agreement, Standard Life is permitted to appoint an investment
advisor subject to approval from GIAC for the Block II assets. Standard Life has
appointed Gibraltar Investments as such investment advisor for Block II assets.
Investment advisory fees are paid from the Block II assets and reduce Block II
profits. The Block II contract was determined to be a risk transfer assumption
reinsurance contract by Standard Life under SFAS 60, SFAS 97, and SFAS 113. In
accordance with these pronouncements, Standard Life has recorded premium income
of $1,119,000 and net benefits and expenses of $682,000 in its 1996 income
statement for the Block II business. In addition, on its balance sheet at
December 31, 1996, Standard Life has recorded the policy reserves of $8,265,000
and the related due from reinsurers of $8,265,000 for the assets held in a GIAC
trust account.
As part of the acquisition of First International by SMC in 1992, Standard
Life entered into an indemnity reinsurance agreement with First International
effective July 1, 1992. This business was subsequently assumed by Standard Life
effective January 1, 1993. At the date of the sale of First International to
GIAC, Standard Life ceded this block of business with policy reserves of
$12,514,000 and related assets to GIAC. Consideration of $700,000 paid in
connection with the purchase agreement represented additional sales proceeds.
All risks and rewards related to the $700,000 have occurred and have therefore
been recognized. This block of business ("Block III") consisted of term life
policies (not issued in New York, New Jersey or Vermont) issued after 1988 and
immediate and deferred annuities (not issued in New York, New Jersey and
Vermont) and lottery annuities. Standard Life will continue to receive profits
from Block III through experience rating refunds from GIAC on Block III. These
experience rating refund calculations are prepared and paid on a quarterly basis
for profits in excess of specified amounts. The experience rating refund
payments will continue so long as any of the underlying policies remain in
force. Under the terms of the reinsurance agreement, Standard Life is permitted
to appoint an investment advisor subject to approval from GIAC for the Block III
assets. Standard Life has appointed Gibraltar Investments as such investment
advisor for Block III assets. Investment advisory fees are paid from the Block
III assets and reduce the experience rating refunds. For GAAP accounting
purposes, Standard Life concluded that this contract did not involve the
transfer of risk to GIAC in accordance with SFAS 113. Standard Life has recorded
premiums of $1,033,000 and net investment income of $932,000 and benefits and
expenses of $1,946,000 in its 1996 income statement for the Block III contract.
In addition, on its December 31, 1996 balance sheet, Standard Life has recorded
the policy reserves of $12,766,000 and the related due from reinsurers for the
assets of $12,675,000 held in a GIAC trust account.
Standard Life received an administration fee of $316,000 for the year ended
December 31, 1996 from First International for the administration of the Block I
and Block II policies that were in force at the time of the sale of First
International.
SMC decided in February 1996 to terminate the reinsurance agreement between
Standard Reinsurance and Salamandra, and not to renew the Barbados license of
Standard Reinsurance. This resulted in the termination of Standard Reinsurance's
operations and the write-off of SMC's investment in Standard Reinsurance and
certain intangible assets of Standard Reinsurance amounting to $155,856.
Standard Life terminated by recapture in May 1996 the reinsurance agreement
with National Mutual. Standard Life received assets of $4,826,000 and
liabilities of $4,826,000, primarily ordinary life policies. In
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<PAGE> 83
connection with this transaction, Standard Life agreed to pay National Mutual a
recapture fee of $1,200,000 and Standard Life collected administration fees of
$375,000 related to services provided in prior years that had not been recorded
previously due to the uncertainty as to its collection. The net proceeds of
$825,000 were recorded as the present value of the future profits on this block
of business, which is being amortized in proportion to the emergence of profits
over 20 years. The premium income, and corresponding increase in reserves of
$4,234,000, recorded in connection with the recapture of the reinsurance
agreement with National Mutual will not recur in the future.
In order to write an increasing amount of new business while continuing to
meet the statutory requirements of the states in which it conducts its insurance
operations, it has been necessary for Dixie National Life to utilize various
forms of surplus relief. The principal source of surplus relief since 1989 has
been financial reinsurance agreements, which for GAAP purposes are treated as
financing arrangements, but for statutory accounting purposes provide reserve
credits that, in equal amount, increase statutory surplus. Dixie National Life
has a financial reinsurance agreement that entitles it to a credit to its
statutory reserves of $1,500,000 at December 31, 1996, with the amount of the
credit decreasing each quarter by the amount of profit generated to Dixie
National Life by the underlying block of business.
COMPETITION
The life insurance industry is highly competitive and consists of a large
number of both stock and mutual insurance companies, many of which have
substantially greater financial resources, broader and more diversified product
lines and larger staffs than those possessed by SMC. There are approximately
2,000 life insurance companies in the United States which may offer insurance
products similar to those marketed by SMC. Competition within the life insurance
industry occurs on the basis of, among other things, product features such as
price and interest rates, perceived financial stability of the insurer,
policyholder service, name recognition and ratings assigned by insurance rating
organizations. Additionally, when SMC bids on companies it wishes to acquire, it
typically is in competition with other entities.
SMC must also compete with other insurers to attract and retain the
allegiance of agents. SMC believes it has been successful in attracting and
retaining agents because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy issuance
and responsive policyholder service. Because most annuity business written by
life companies is through agents, management believes that competition centers
more on the strength of the agent relationship rather than on the identity of
the insurer.
Competition also is encountered from the expanding number of banks,
securities brokerage firms and other financial intermediaries which are
marketing insurance products and which offer competing products such as savings
accounts and securities. In the case of banks, these insurance products are sold
for non-affiliate insurance companies in return for a sales fee. A change in
legislation may increase interest on the part of banks to begin selling
annuities or to expand their existing efforts to sell annuities. The decision
could result in a partial shift in the distribution of annuities from insurance
agents to national banks, which, in turn, could result in a decrease in sales
for SMC, or it could result in an increase in the number of annuities sold
because of distribution through national banks (or securities firms), which
could result in new distribution opportunities for SMC. SMC has not been
involved in distribution of annuities through national banks but anticipates
expansion into financial institutions with the pending acquisition of Savers
Life.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the ratings of an insurer as one
factor in determining which insurer's annuity to market or purchase. Standard
Life and Dixie National Life have a rating of "B+" and "B", respectively by A.M.
Best. A rating of "B+" is assigned by A.M. Best to companies which, in their
opinion, have achieved very good overall performance when compared to the
standards established by A.M. Best, and have a good ability to meet their
obligations to policyholders over a long period of time. A rating of "B" is
assigned by A.M. Best to companies which, in their opinion, have achieved good
overall performance when compared to the standards established by A.M. Best.
According to A.M. Best, these companies generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions. In
evaluating a company's financial and operating performance, A.M. Best reviews
the
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<PAGE> 84
company's profitability, leverage and liquidity as well as the company's book of
business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its reserves and the
experience and competence of its management. A.M. Best's ratings are based upon
factors relevant to policyholders, agents, insurance brokers and intermediaries
and are not directed to the protection of investors. Generally, rating agencies
base their ratings on information furnished to them by the issuer and on
investigations, studies and assumptions by the rating agencies. There is no
assurance that any particular rating will continue for any given period of time
or that it will not be changed or withdrawn entirely if, in the judgment of the
rating agency, circumstances so warrant. Although a higher rating by A.M. Best
or another insurance rating organization could have a favorable effect on
Standard Life and Dixie National Life's business, management believes that
Standard Life and Dixie National Life are able to compete on the basis of their
competitive crediting rates, asset quality, strong relations with their
independent agents and the quality of service to their policyholders.
FEDERAL INCOME TAXATION
The life insurance and annuity products marketed and issued by Standard
Life and Dixie National Life generally provide the policyholder with an income
tax advantage, as compared to other saving investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until receipt by the policyholder. With other savings
investments, the increase in value is taxed as earned. Life insurance benefits
which accrue prior to the death of the policyholder and annuity benefits are
generally not taxable until paid and life insurance death benefits are generally
exempt from income tax. The tax advantage for life insurance and annuity
products is provided in the Internal Revenue Code ("IRC"), and is generally
followed in all states and other United States taxing jurisdictions.
Accordingly, it is subject to change by Congress and the legislatures of the
respective taxing jurisdictions.
SMC, Standard Marketing and other U.S. non-insurance subsidiaries file a
consolidated return for federal income tax purposes. Standard Life and Dixie
National Life, as life insurance companies, file separate federal income tax
returns. As of December 31, 1996, SMC, Standard Marketing and other U.S. non-
insurance subsidiaries had consolidated net operating loss carryforwards of
approximately $8,600,000 for tax return purposes which expire from 2005 to 2011.
At December 31, 1996, Standard Life had tax return net operating loss
carryforwards of approximately $1,400,000, which expire in 2004 and 2005. As a
result of changes in ownership of SMC and Standard Life, use of the loss
carryforwards of Standard Life are subject to annual limitations. The change in
ownership of Savers Life will not result in additional limitations on the use of
the loss carryforwards available to Standard Life. The maximum tax return
operating loss carry forwards available for use by Standard Life in any one year
are approximately $300,000.
At December 31, 1996, Dixie National Life had tax return net operating loss
carryforwards of approximately $5,800,000, which expire in 2010 and 2011.
Standard Management International is a Luxembourg holding company which is
currently exempt from Luxembourg income tax. Premier Life (Bermuda) is exempt
from income tax until March 2016 pursuant to a decree from the Minister of
Finance. Premier Life (Luxembourg) is subject to Luxembourg income taxation
(statutory corporate rate of 39.39%) and a capital tax of approximately 1% of
its net equity. At December 31, 1996, Premier Life (Luxembourg) had accumulated
corporate income tax loss carryforwards of approximately $5,900,000, all of
which may be carried forward indefinitely. To the extent that such income is
taxable under U.S. law, such income will be included in SMC's consolidated
return.
INFLATION
The primary direct effect on SMC of inflation is the increase in operating
expenses. A large portion of SMC's operating expenses consists of salaries which
are subject to wage increases at least partly affected by the rate of inflation.
SMC attempts to minimize the impact of inflation on operating expenses through
programs to improve productivity.
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<PAGE> 85
The rate of inflation also has an indirect effect on SMC. To the extent
that the government's economic policy to control the level of inflation results
in changes in interest rates, SMC's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also have
an effect on interest spreads, as investment earnings are reinvested.
FOREIGN OPERATIONS AND CURRENCY RISK
SMC's foreign operations represent the Standard Management International
group, which consists of a Luxembourg holding company and two life insurance
subsidiaries: Premier Life (Luxembourg) and Premier Life (Bermuda). Standard
Management International policyholders invest in assets denominated in a broad
range of currencies. Policyholders effectively bear the currency risk, if any,
as these investments are matched by policyholder separate account liabilities.
Therefore, their investment and currency risk is limited to premiums they have
paid. Policyholders are not permitted to invest directly into options, futures
and derivatives.
Standard Management International could be exposed to currency fluctuations
if currencies within the conventional investment portfolio or certain actuarial
reserves are mismatched. The assets and liabilities of this portfolio and the
reserves are continually matched by the company and at regular intervals by the
independent actuary. In addition, Premier Life (Luxembourg)'s stockholders'
equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not
hedge its translation risk because its stockholders' equity will remain in
Luxembourg francs for the foreseeable future and no significant realized foreign
exchange gains or losses are anticipated.
Due to the nature of unit-linked products issued by Standard Management
International, which represent over 91% of the Standard Management International
portfolio, the investment risk rests with the policyholder. Investment risk for
Standard Management International exists where Standard Management International
makes investment decisions with respect to the remaining traditional business
and for the assets backing certain actuarial and regulatory reserves. The
investments underlying these liabilities mostly represent short-term investments
and fixed maturity securities. These short-term investments and fixed maturity
securities are normally bought and/or disposed of only on the advice of
independent consulting actuaries who perform an annual exercise comparing
anticipated cash flows on the insurance portfolio with the cash flows from the
fixed maturity securities. Any resulting material foreign currency mismatches
are then covered by buying and/or selling the securities as appropriate.
REGULATORY FACTORS
SMC's insurance subsidiaries are subject to regulation by the insurance
regulatory authorities in the jurisdictions in which they are domiciled and the
insurance regulatory bodies in the other jurisdictions in which they are
licensed to sell insurance. The purpose of such regulation is primarily to
ensure the financial stability of insurance companies and to provide safeguards
for policyholders rather than to protect the interest of stockholders. The
insurance laws of various jurisdictions establish regulatory agencies with broad
administrative powers relating to the licensing of insurers and their agents,
the regulation of trade practices, management agreements, the types of permitted
investments and maximum concentration, deposits of securities, the form and
content of financial statements, rates charged by insurance companies, sales
literature and insurance policies, accounting practices and the maintenance of
specified reserves, capital and surplus. Each of SMC's insurance subsidiaries is
required to file detailed periodic financial reports with supervisory agencies
in certain of the jurisdictions in which it does business.
Most states have enacted legislation regulating insurance holding
companies. The insurance holding company laws and regulations vary by state, but
generally require an insurance holding company and its insurance company
subsidiaries licensed to do business in the state to register and file certain
reports with the regulatory authorities, including information concerning
capital structure, ownership, financial condition, certain intercompany
transactions and general business operations. State holding company laws also
require prior notice or regulatory agency approval of certain material
intercompany transfers of assets within the holding company structure.
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As a holding company, Standard Management's ability to pay operating
expenses and meet debt service obligations, if any, depends on the receipt of
sufficient funds, primarily through management fees, rental income, dividends
and interest payments on its Surplus Debentures from its subsidiaries. Subject
to the restrictions described below, Standard Management may receive dividends
from its direct subsidiaries, Standard Life, Standard Management International
and Standard Marketing. Dixie National Life is a subsidiary of Standard Life.
Accordingly, any dividends paid by Dixie National Life to Standard Life may be
paid to Standard Management only if Standard Life is entitled to pay dividends
to Standard Management.
Under Indiana insurance law, Standard Life may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including Standard Management,
unless Standard Life has notified the Indiana Department of Insurance of its
intention to enter into such transactions and the Indiana Department of
Insurance has not disapproved of them within the period specified by Indiana
law. Among other things, such transactions are subject to the requirement that
their terms be fair and reasonable and that the charges or fees for services
performed be reasonable.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $166,667 (annual fee of
$2,000,000) during 1997 for certain management services related to the
production of business, investment of assets and evaluation of acquisitions.
Pursuant to the management services agreement with Standard Life, Dixie National
Life paid a monthly payment of $83,333 (annual fee of $1,000,000) to Standard
Life in 1997. 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 National Life.
Dividends from Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Commissioner of the Indiana Department of
Insurance, if the dividend or distribution, together with all other dividends
and distributions paid within the preceding twelve months, does not exceed the
greater of (i) net gain from operations or (ii) 10% of surplus, in each case as
shown in its preceding annual statutory financial statements. Also, regulatory
approval is required when dividends to be paid exceed unassigned surplus. For
the year ended December 31, 1996, Standard Life reported statutory net gain from
operations of $1,427,000 and statutory surplus of $22,970,000 and unassigned
surplus of $1,140,000. Standard Life paid dividends of $1,600,000 in 1997. For
the nine months ended September 30, 1997, Standard Life reported a statutory net
gain from operations of $1,417,000 and statutory surplus of $25,923,000.
Standard Life anticipates paying the maximum allowable dividends in 1998.
The Indiana insurance laws and regulations require that the statutory
surplus of Standard Life following any dividend or distribution be reasonable in
relation to its outstanding liabilities and adequate to its financial needs. The
Indiana Department of Insurance may bring an action to enjoin or rescind the
payment of a dividend or distribution by Standard Life that would cause its
statutory surplus to be unreasonable or inadequate under this standard.
Under Luxembourg law, Standard Management International dividends are
limited to its accumulated earnings without regulatory approval. Standard
Management International and Premier Life (Luxembourg) were not permitted to pay
dividends in 1997 and 1996 due to accumulated losses, and none are anticipated
in 1998. Premier Life (Bermuda) did not pay dividends in 1997 and 1996. Pursuant
to the management services agreement with Standard Management, Premier Life
(Luxembourg) paid Standard Management a management fee of $100,000 per year
during 1997 and 1996 for certain management and administrative services. The
agreement provides that it may be modified or terminated by either Standard
Management or Premier Life (Luxembourg).
Most states, including Indiana, require administrative approval of the
acquisition of 10% or more of the outstanding shares of an insurance company
incorporated in the state or the acquisition of 10% or more of the outstanding
shares of an insurance holding company whose insurance subsidiary is
incorporated in the state. The request for approval must be accompanied by
detailed information concerning the acquiring parties and the plan of
acquisition. The acquisition of 10% of such shares is generally deemed to be the
acquisition of "control" for the purpose of the holding company statutes.
However, in many states the insurance authorities
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<PAGE> 87
may find that "control" in fact does or does not exist in circumstances in which
a person owns or controls either a lesser or a greater amount of securities.
In some instances many state regulatory authorities require deposits of
assets for the protection of policyholders either in those states or for all
policyholders. At December 31, 1996, securities representing approximately 4% of
the book value of SMC's U.S. insurance subsidiaries' invested assets were on
deposit with various state treasurers or custodians. Such deposits must consist
of securities that comply with the standards that the particular state has
established. Assets of Standard Management International of $7,750,000 at
December 31, 1996 were held by a custodian bank approved by the Luxembourg
regulatory authorities to comply with local insurance laws.
In recent years, the NAIC and state insurance regulators have reexamined
existing laws and regulations and their application to insurance companies. This
reexamination has focused on insurance company investment and solvency issues,
risk-based capital guidelines, assumption reinsurance, interpretations of
existing laws, the development of new laws, the interpretation of nonstatutory
guidelines, the standardization of statutory accounting rules and the
circumstances under which dividends may be paid. The NAIC has encouraged states
to adopt model NAIC laws on specific topics such as holding company regulations
and the definition of extraordinary dividends. It is not possible to predict the
future impact of changing state regulation on the operations of SMC.
The NAIC, as well as Indiana and Mississippi, has adopted RBC requirements
for U.S. life/health insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching, benefit and loss
reserve adequacy, and other business factors. The RBC formula is used by state
insurance regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that potentially are
inadequately capitalized. The RBC guidelines are intended to be a regulatory
tool only, and are not intended as a means to rank insurers generally. In
addition, the formula defines minimum capital standards that supplement the
previously existing system of low fixed minimum capital and surplus requirements
on a state-by-state basis. Regulatory compliance is determined by a ratio of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Enterprises below specific
trigger points or ratios are classified within certain levels, each of which
requires specific corrective action. If a company's RBC ratio is in the Company
Action Level range defined as an RBC ratio of 1.5-2, the company must submit a
plan to improve its RBC ratio. The Regulatory Action Level range defined as an
RBC ratio of 1-1.5 provides that regulators will order corrective actions. At
the Authorized Control Level range defined as an RBC ratio of 0.7-1, regulators
are authorized to take control of the company. Finally, at the Mandatory Control
Level defined as ratios below 0.7, regulators must take over the company. The
RBC ratios of SMC's insurance subsidiaries are all in excess of 4 at December
31, 1996. However, should the insurance subsidiaries' RBC position decline in
the future, the insurance subsidiaries' continued ability to pay dividends and
the degree of regulatory supervision or control to which they are subjected
could be affected.
The NAIC calculates twelve financial ratios based on statutory financial
statements ("IRIS ratios") to assist state regulators in monitoring the
financial condition of insurance companies. A "usual range" of results for each
ratio is used as a benchmark for analysis, and a company's variation from this
range may be either favorable or unfavorable. State insurance departments may
make inquiries of SMC when at least four IRIS ratios are outside the usual
range. These inquiries could lead to restrictions on the amount of business that
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<PAGE> 88
may be written in an individual state. The following table presents the IRIS
ratios as determined by the NAIC for SMC's insurance subsidiaries which varied
from the "usual range" for 1996.
<TABLE>
<CAPTION>
REPORTED
COMPANY RATIO NAME USUAL RANGE VALUE
------- ---------- ----------- --------
<S> <C> <C> <C>
Standard Life..................... Change in Capital and Surplus 50 to -10 78
Change in Premium 50 to -10 218
Change in Product Mix 5.0 to - 5.4
Dixie National Life............... Change in Capital and Surplus 50 to -10 -38
Net Income to Total Income -to 0 -16
Surplus Relief 10 to -10 15
Change in Premium 50 to -10 115
Change in Reserving Ratio 20 to -20 -25
</TABLE>
Explanation of Ratios:
Change in Capital and Surplus. These ratios, calculated on a gross and net
basis, are a measure of improvement or deterioration in the company's financial
position during the year. The negative value for Dixie National Life is
primarily due to losses from operations incurred by Dixie National Life for the
year ended December 31, 1996.
Change in Premium. This ratio represents the percentage change in premium
from prior to current years.
Change in Product Mix. This ratio represents the average change in the
percentage of total premium from each product line during the year.
Net Income to Total Income. This ratio is a measure of the company's
profitability. The negative value for Dixie National Life is primarily due to
the losses from operations incurred by Dixie National Life for the year ended
December 31, 1996.
Surplus Relief. The positive ratio for Dixie National Life results from a
financial reinsurance agreement at December 31, 1996. See "-- Reinsurance."
Change in Reserving Ratio. The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years.
SMC attempts to manage its assets and liabilities so that income and
principal payments received from investments are adequate to meet the cash flow
requirements of its policyholder liabilities. The cash flows of SMC's
liabilities are affected by actual maturities, surrender experience and credited
interest rates. SMC periodically performs cash flow studies under various
interest rate scenarios to evaluate the adequacy of expected cash flows from its
assets to meet the expected cash requirements of its liabilities. SMC utilizes
these studies to determine if it is necessary to lengthen or shorten the average
life and duration of its investment portfolio. Because of the significant
uncertainties involved in the estimation of asset and liability cash flows,
there can be no assurance that SMC will be able to effectively manage the
relationship between its asset and liability cash flows.
In December 1995, the NAIC passed a model law for disclosure in life
insurance policy illustrations which became effective on January 1, 1997. This
law is not anticipated to have a significant effect on SMC. New rules adopted by
the NAIC are effective only to the extent adopted by the states in which SMC
operates, and it is not possible to predict the future impact of changing state
and federal regulation on the operations of SMC.
The statutory filings of SMC's insurance subsidiaries require
classifications of investments and the establishment of an AVR, an account
designed to stabilize a company's statutory surplus against fluctuations in the
market value of stocks and bonds, according to regulations prescribed by the
NAIC. The AVR account consists of two main components: a "default component" to
provide for future credit-related losses on fixed income investments and an
"equity component" to provide for losses on all types of equity investments,
including real estate. The NAIC requires an additional reserve, called the IMR
which consists of the portion
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of realized capital gains and losses from the sale of fixed income securities
attributable to changes in interest rates. The IMR is required to be amortized
against earnings on a basis reflecting the remaining period to maturity of the
fixed income securities sold. These regulations affect the ability of SMC's
insurance subsidiaries to reflect future investment gains and losses in current
period statutory earnings and surplus.
The amounts related to AVR and IMR for the insurance subsidiaries at
September 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
MAXIMUM
AVR AVR IMR
--- ------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Standard Life......................................... 3,498 6,963 8,416
Dixie National Life................................... 261 536 141
</TABLE>
The annual addition to the AVR for 1997 will be 20% of the maximum reserve
over the accumulated balance. If the calculated reserve with current year
additions exceeds the maximum reserve amount, the reserve is reduced to the
maximum amount. For the nine months ended September 30, 1997 and the year ended
December 31, 1996, SMC's U.S. subsidiaries each made the required contribution
to the AVR.
Most jurisdictions require insurance companies to participate in guaranty
funds designed to cover claims against insolvent insurers. Insurers authorized
to transact business in these jurisdictions are generally subject to assessments
based on annual direct premiums written in that jurisdiction to pay such claims,
if any. These assessments may be deferred or forgiven under most guaranty laws
if they would threaten an insurer's financial strength and, in certain
instances, may be offset against future state premium taxes. The incurrence and
amount of such assessments have increased in recent years and may increase
further in future years. Standard Life and Dixie National Life were assessed,
and paid, $144,000 and $63,000 for the year ended December 31, 1996,
respectively. The likelihood and amount of all future assessments cannot be
reasonably estimated and are beyond the control of SMC.
As part of their routine regulatory oversight process, approximately once
every three to five years, state insurance departments conduct periodic detailed
examinations ("Examinations") of the books, records and accounts of insurance
companies domiciled in their states. Standard Life underwent an Examination
during 1996 for the five-year period ended December 31, 1995. The final report
on such examination has been issued by the Indiana Department of Insurance and
did not raise any significant issues. The Mississippi Department of Insurance
concluded the Report of Examination of Dixie National Life for the period of
January 1, 1991 through December 31, 1994 on October 18, 1995 and did not raise
any significant issues.
Although the federal government generally does not directly regulate the
insurance industry, federal initiatives often have an impact on the business.
Congress and certain federal agencies are investigating the current condition of
the insurance industry (encompassing both life and health and property and
casualty insurance) in the United States in order to decide whether some form of
federal role in the regulation of insurance companies would be appropriate.
Congress is currently conducting a variety of hearings relating in general to
insurers. It is not possible to predict the outcome of any such congressional
activity nor the potential effects thereof on SMC.
Congressional initiatives have been introduced which are directed at repeal
of the McCarran-Ferguson Act (which exempts the "business of insurance" from
most federal laws to the extent it is subject to state regulation), and judicial
decisions have been issued which narrow the definition of "business of
insurance" for McCarran-Ferguson Act purposes. Current and proposed federal
measures which may also significantly affect the insurance industry include
removal of barriers preventing banks from engaging in the insurance business.
EMPLOYEES
As of December 1, 1997, SMC had 97 employees: Standard Life had 61
employees, Standard Management International had 16 employees (8 of whom are
covered by a collective bargaining agreement), Standard Marketing had 11
employees, and Standard Management had 9 employees. Dixie National Life has no
current direct employees. SMC believes that its future success will depend, in
part, on its ability to continue
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to attract and retain highly-skilled technical, marketing, support and
management personnel. Management believes that it has excellent relations with
its employees.
PROPERTIES
SMC leases approximately 31,000 square feet in an office building located
at 9100 Keystone Crossing, Indianapolis, Indiana, under the terms of a lease
which expires on June 1, 2001. SMC entered into a lease on March 31, 1997, for
approximately 16,000 square feet in a warehouse located at 2525 North Shadeland,
Indianapolis, Indiana, under the terms of a lease which expires on September 30,
1999.
Standard Management International entered into a lease on November 17, 1997
for approximately 4,500 square feet in an office building located at 13A, rue de
Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg, under the terms of a
lease which expires on November 16, 2003.
Dixie National Life leases approximately 1,000 square feet in an office
complex located at 855 South Pear Orchard Road, Suite 305, Ridgeland,
Mississippi, under the terms of a lease which expires on December 31, 1998.
LEGAL PROCEEDINGS
SMC is involved in various legal proceedings in the normal course of
business. In most cases, such proceedings involve claims under insurance
policies or other contracts of SMC. The outcomes of these legal proceedings are
not expected to have a material adverse effect on the consolidated financial
position, liquidity, or future results of operations of SMC based on SMC's
current understanding of the relevant facts and law.
John J. Quinn, a former officer and director of SMC, was appointed as the
Indiana Commissioner of Insurance in February 1997. In connection with that
appointment he resigned as an officer and director of SMC effective as of April
15, 1997. He subsequently declined such appointment. On June 19, 1997, Mr. Quinn
commenced an action in the Superior Court of Marion County, Indiana, against SMC
claiming that his employment agreement contained a provision to the effect that,
following a termination of his employment with SMC under certain circumstances,
Mr. Quinn would be entitled to receive a lump sum payment equal to the amount
determined by multiplying the number of shares of SMC Common Stock subject to
unexercised stock options previously granted by SMC to Mr. Quinn on the date of
termination, whether or not such options were then exercisable, by the highest
per share fair market value of the SMC Common Stock on any day during the
six-month period ending on the date of termination. Upon payment of such amount,
such unexercised stock options would be deemed to have been surrendered and
canceled. Mr. Quinn further claims that his employment agreement contained an
additional provision that he would be entitled to receive a lump sum payment
equal to two years of annual salary, following termination of employment. Mr.
Quinn has asserted to SMC that he is entitled to a lump sum termination payment
of $1,654,000, and liquidated damages not exceeding $3,308,000, by virtue of his
voluntarily leaving SMC's employment.
SMC disputes Mr. Quinn's claims. SMC filed its Answer and Counterclaim
against Mr. Quinn on September 11, 1997. SMC's outside litigation counsel's
investigation since the action was filed revealed a basis for the termination of
Mr. Quinn's employment for cause relative to after-acquired evidence. On October
14, 1997, the Board of Directors of SMC terminated Mr. Quinn for cause effective
as of March 15, 1997. Such termination will be argued by SMC as a complete
defense to all claims asserted by Mr. Quinn. The ultimate outcome of the action
cannot presently be determined. Accordingly, no provision for any liability that
may result has been made in the financial statements. Management believes that
the conclusion of such litigation will not have a material adverse effect on
SMC's consolidated financial condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights the principal factors affecting the
results of operations and the significant changes in balance sheet items of SMC
on a consolidated basis for the periods listed as well as SMC's liquidity and
capital resources. This discussion should be read in conjunction with the SMC
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.
INTRODUCTION
SMC acquired First International on July 10, 1992, Standard Management
International on December 15, 1993, Dixie National Life on October 2, 1995 and
Shelby Life on November 8, 1996. These acquisitions are accounted for using the
purchase method of accounting (effective June 30, 1992 for the First
International acquisition, December 31, 1993 for the Standard Management
International acquisition, October 2, 1995 for the Dixie National Life
acquisition and November 1, 1996 for the Shelby Life acquisition). Therefore,
these subsidiaries are included in the SMC Consolidated Financial Statements
commencing with their respective acquisition effective dates. SMC acquired a
block of insurance liabilities and assets from The Midwest Life Insurance
Company in Liquidation (the "Midwest Block") effective June 30, 1992, and it is
included in the SMC Consolidated Financial Statements commencing with that date.
SMC disposed of First International on March 18, 1996 (effective March 1, 1996)
and terminated the operations of Standard Reinsurance on March 1, 1996.
Product Profitability. Margins on life insurance and annuity products are
affected by interest rate fluctuations. Rising interest rates would result in a
decline in the market value of assets. However, as there are positive cash flows
from renewal premiums, investment income and maturities of existing assets, the
need for early disposition of investment assets to meet operating cash flow
requirements would be unlikely. Rising interest rates would also result in
available cash flows from maturities being invested at higher interest rates,
which would help support a gradual increase in new business and renewal interest
rates on interest-sensitive products. A sharp, sudden rise in the interest rate
environment without a concurrent increase in crediting rates could result in
higher surrenders, particularly for annuities. The effect of surrenders would be
to reduce earnings modestly over the long term. Earnings in the period of the
surrender could increase or decrease depending on whether surrender charges were
applicable and whether such changes differed from the write-off of related
deferred acquisition costs or present value of future profits.
When interest rates fall, SMC generally attempts to adjust the credited
interest rates subject to competitive pressures. Although SMC believes that such
strategies will continue to permit it to achieve a positive spread, a
significant decline in the yield on SMC's investments could adversely affect the
results of operations and financial condition of SMC.
Purchased Insurance Business. In accordance with industry practice, when
SMC purchased First International, the Midwest Block, Dixie National Life and
Shelby Life, and recaptured a block of insurance from National Mutual on July
31, 1996, effective as of May 1, 1996 (the "National Mutual Block"), it assigned
a portion of the purchase price, called the present value of future profits, to
the right to receive future cash flows arising from existing insurance policies.
This asset was recorded when the business was purchased at the value of
projected future cash flows on existing policies, less a discount to present
value. As future cash flows emerge, they are treated as a recovery of this
asset. Therefore, if cash flows emerging from the purchased business during a
period exactly equal the projections, they are offset by that period's
amortization of the cost of the policies purchased. In that event, the only
income statement effect from the purchased business is the realization of the
discount that was initially deducted from the asset to reflect its present
value. Changes in the future annual amortization of this asset are not expected
to have a significant effect on the results of operations, because the amount of
amortization is expected to be equal to the profits emerging from the purchased
policies, net of interest on the unrecovered present value of future profits
balance. This asset is amortized over the expected life of the related policies
purchased. Present value of future profits is increased for the estimated effect
of realizing unrealized investment losses and decreased for the estimated effect
of realizing unrealized investment gains.
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In selecting the interest rate to calculate the discounted present value of
the projected future profits, SMC used the risk rate of return it needs to earn
in order to invest in the business being acquired or recaptured.
In determining this required rate of return, SMC considers the following
factors:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows (as described
above).
- The cost of the capital required to fund the acquisition or recapture.
- The likelihood of changes in projected future cash flows that might occur
if there are changes in insurance regulations and tax laws.
- The acquired company's compatibility with other SMC activities that may
favorably affect future cash flows.
- The complexity of the acquired company or recaptured business.
- Recent prices (i.e., discount rates used in determining valuations) paid
by others to acquire or recapture similar blocks or business.
The discount rate used to determine the present value of the projected
future profits is used to determine the subsequent amortization of the cost of
the purchased policies for acquisitions prior to November 19, 1992. For
acquisitions subsequent to November 19, 1992, the discount rate used to amortize
the unamortized balance of the present value of future profits is the crediting
rate of the underlying policies.
The discount rate selected may affect subsequent earnings in those
instances where the purchase price of the policies exceeds the value of net
assets acquired (including the value of future profits discounted at the
selected interest rate). Selection of a lower (or higher) discount rate will
increase (or decrease) the portion of the purchase price assigned to the present
value of future cash flows and will result in an offsetting decrease (or
increase) in the amount of the purchase price assigned to goodwill. The impact
on subsequent earnings caused by this variation in purchase price allocation
will depend on the characteristics of the policies purchased. For products where
the profits emerge at relatively constant levels over an extended period of time
(for example, most of SMC's immediate and deferred annuities), use of a lower
rate may result in an increase in reported earnings in the early years after an
acquisition followed by a decrease in earnings in later years. For products
where profits emerge over a shorter period of time or in amounts that decrease
over the life of the product (for example, ordinary and term life products),
selection of a lower rate will generally result in a decrease in reported
earnings in the early years after an acquisition followed by an increase in
reported earnings in later years. For SMC, the majority of the cost of policies
purchased relates to ordinary life products and the balance to deferred annuity
products.
The activity related to the present value of future profits of the business
acquired or recaptured for SMC is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ----------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $23,806 $15,246 $ 8,299 $9,144
Additions during the period from acquisitions and
recaptures..................................... -- 10,348 7,901 --
Deletions during the period from disposal of
subsidiaries................................... -- (733) -- --
Net amortization during the period................ (1,421) (1,249) (780) (845)
Adjustments relating to net unrealized (gains)
losses on securities available for sale........ (143) 194 (174) --
------- ------- ------- ------
Balance at end of period............................ $22,242 $23,806 $15,246 $8,299
======= ======= ======= ======
</TABLE>
The percentage of future expected net amortization of the present value of
future profits before the effect of net unrealized gains and losses, based on
the present value of future profits at December 31, 1996 and current assumptions
as to future events on all policies in force, will be between 6% and 8% in each
of the years 1997 through 2001.
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The discount rate used to calculate the present value of future profits for
business acquired prior to November 19, 1992, reflected in SMC's September 30,
1997 consolidated balance sheet ranged from 7.5% to 18%. SMC used a 15% discount
rate to calculate the present value of future profits on the business of the
Dixie National Life acquisition, which is being amortized over 30 years as the
majority of the present value of future profits related primarily to the
ordinary life business. SMC used a 15% discount rate to calculate the present
value of future profits on the business of the Shelby Life acquisition, which is
being amortized over 20 years based on the mix of annuity and life business in
Shelby Life.
Acquisition of Blocks of Business. SMC's growth strategy includes the
acquisition of in force blocks of business through assumption reinsurance
agreements. SMC has not used assumption reinsurance for the purpose of acquiring
any third-party business other than in connection with the acquisition of the
Midwest Block in 1992. The accounting recognition given these acquisitions is
dependent upon the type of business acquired. FPDAs and payout annuities are
recorded at full account value. Funds received are recorded as invested assets.
The excess of the liabilities assumed over assets received is recorded as the
present value of future profits and amortized in relation to expected gross
profits.
Produced Insurance Business. Insurance products generate two types of
profit streams: (i) from the excess of investment income earned over that
credited to the policyholder and (ii) from the excess of premiums received over
costs incurred for policy issuance, administration and mortality. Costs incurred
in issuing new policies are deferred and recorded as deferred acquisition costs
("DAC"), which is amortized using present value techniques so that profits are
realized in proportion to premium revenue for certain products and estimated
gross profits for certain other products. Profits from all of these elements are
recognized over the lives of the policies; no profits are recorded at the time
the policies are issued.
Amortization of DAC was $1,039,000 for the nine months ended September 30,
1997 and $1,221,000, $1,142,000 and $262,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The increase in current year amortization
expense resulted primarily from increased amortization of DAC as gross profits
from business sold in recent years began to emerge. DAC of $18,078,000 at
December 31, 1996 and additions to policy acquisition costs of $5,323,000 for
business produced during the nine months ended September 30, 1997 are generally
being amortized over the expected lives of the policies, a period of
approximately 20 years, in a constant relationship to the present value of
estimated future gross profits. Interest is being accreted at 7% during year one
and 6% thereafter, the projected crediting rate on the policies. DAC is
increased for the estimated effect of realizing unrealized investment losses and
decreased for the estimated effect of realizing unrealized investment gains. The
offset to these amounts is recorded directly to shareholders' equity, net of
taxes. Future expected amortization of DAC for the next five years before the
effect of net realized and unrealized gains and losses, based on DAC at
September 30, 1997 and current assumptions, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross amortization................ $ 2,368 $2,620 $2,853 $2,844 $2,663
Interest accreted................. (1,076) (994) (833) (678) (550)
------- ------ ------ ------ ------
Net amortization.................. $ 1,292 $1,626 $2,020 $2,166 $2,113
======= ====== ====== ====== ======
</TABLE>
The amounts included in the foregoing table do not include any amortization
of DAC resulting from the sale of new products after September 30, 1997. Any
changes in future annual amortization of this asset are not expected to have a
significant effect on results of operations because the amount of amortization
is expected to be proportionate to the profits from the produced policies, net
of interest on DAC.
Variances Between Actual and Expected Profits. Actual experience on
purchased and produced insurance may vary from projections due to differences in
renewal premiums collected, investment spreads, mortality costs, surrender
benefits, persistency, administrative costs and other factors. Variances from
original projections, whether positive or negative, are included in net income
as they occur. To the extent that these variances indicate that future
experience will differ from the estimated profits reflected in the
capitalization and amortization of the cost of policies purchased or the cost of
policies produced, current and future amortization rates may be adjusted.
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Accounting for Annuities and Universal and Interest-Sensitive Life
Products. The Company primarily accounts for its annuity and universal and
interest-sensitive life policy deposits in accordance with Statement of
Financial Accounting Standards No. 97 ("SFAS No. 97"), "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses on the Sale of Investments." Under SFAS No. 97, a benefit
reserve is established at the time of policy issuance in an amount equal to the
deposits received. Thereafter, the benefit reserve is adjusted for any
additional deposits, interest credited and partial or complete withdrawals.
Revenues for annuities and universal and interest-sensitive life policies, other
than certain non-interest sensitive annuities, consist of policy charges for
surrenders and partial withdrawals, mortality and administration, and investment
income earned. Such revenues do not include the annuity and universal and
interest-sensitive life policy deposits. Expenses related to these products
include interest credited to policyowner account balances, operating costs for
policy administration, amortization of DAC and mortality costs in excess of
account balances.
Costs relating to the acquisition of new business, primarily commissions
paid to agents, which vary with and are directly related to the production of
new business, are deferred to the extent that such costs are recoverable from
future profit margins. At the time of issuance, the acquisition expenses,
approximately 12.7% of initial annuity premium deposits and 50% of premiums from
universal and interest-sensitive life products for SMC, are capitalized as DAC.
In accordance with SFAS No. 97, DAC with interest is amortized over the lives of
the policies in a constant relationship to the present value of estimated future
gross profits.
Unit-linked Product Accounting. Separate account assets and liabilities are
maintained primarily for contracts of which the majority represents unit-linked
products where benefits on surrender and maturity are not guaranteed. They
generally represent funds held in accounts to meet specific investment
objectives of policyholders who bear the investment risk. Investment income and
investment gains and losses accrue directly to such policyholders. SMC earns
income from the investment management fee it charges on such unit-linked
contracts, which range from .8% to 1.2% of the value of the underlying separate
accounts.
Proposed Acquisition of Savers Life. Upon the consummation of the Merger,
each share of Savers Life Common Stock outstanding immediately prior to the
Effective Time of the Merger will be converted into 1.2 shares of SMC Common
Stock plus $1.50. Each holder of Savers Life Common Stock may elect to receive
the $1.50 per share portion of the merger consideration in cash or in the form
of additional shares of SMC Common Stock. As a result, the number of shares of
SMC Common Stock outstanding after the Effective Date will be significantly
increased. See "Summary -- The Merger Agreement -- Conversion of Shares in the
Merger" and "Summary -- Comparative Per Share Data of SMC and Savers Life."
The consolidated results of operations of SMC may be adversely impacted by
the acquisition of Savers Life to the extent that the operating losses currently
being experienced by Savers Life continue. SMC intends to pursue the sale of the
Savers Life major medical product line in order to eliminate such operating
losses; however, no assurance can be given that any such sale will be
consummated or that such losses will be eliminated. SMC also intends to attempt
to reduce certain other expenses through the consolidation of certain services
and administration. See "Risk Factors -- No Assurance Businesses Can Be Combined
Successfully" and "The Merger Agreement -- Operation of Savers Life After the
Effective Time."
DISCUSSION OF CHANGES IN THE CONSOLIDATED STATEMENT OF OPERATIONS FROM NINE
MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED SEPTEMBER 30, 1996
Nine Months Ended September 30, 1997 and 1996
Operating Income The income from operations (before net realized investment
gains and gain on disposal of subsidiaries) was $1,726,000 in the first nine
months of 1997, compared to $369,000 for the comparable period in 1996. The
change resulted primarily from operations in the United States producing income
from operations of $539,000 for the first nine months of 1997 compared to a loss
of $71,000 for the first nine months of 1996. The increase is primarily due to
an increase in interest spreads on an increasing asset base. The income from
international operations also increased to $1,187,000 for the first nine months
of 1997 compared to $440,000 for the first nine months of 1996. The
international operating gains resulted primarily
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<PAGE> 95
from increased fees from separate accounts and decreased operating expenses,
primarily due to the strengthening of the U.S. dollar.
Premium Income. GAAP premium income for the first nine months of 1997 was
$5,277,000, a decrease of $3,141,000 or 37% from $8,418,000 for the first nine
months of 1996. This decrease is attributable to the recapture of premiums ceded
of $4,234,000 due to the termination and recapture of the reinsurance agreement
with National Mutual in the second quarter of 1996, which offset increases in
premium income for the inclusion of Shelby Life in the results of operations for
periods after November 1, 1996. SMC recorded net premium income of $1,328,000 in
the first nine months of 1997 for the Shelby Life block which more than offsets
the decline in premiums from the regular policy lapses, surrenders and expires
in SMC's closed blocks of business.
Net premium deposits received from the sales of interest-sensitive
annuities and other financial products (which are not recorded as revenues) were
$38,355,000 compared to $32,153,000 for the first nine months of 1997 and 1996,
respectively. The increase in premium deposits is partially due to an increase
in gross domestic premium deposits. Gross domestic premium deposits received
from interest-sensitive annuities and financial products were $45,141,000 for
the nine months ended September 30, 1997 compared to $39,781,000 for the nine
months ended September 30, 1996. The increase in gross premium deposits is the
result of an aggressive marketing campaign implemented by Standard Life with the
introduction of new annuity products and the effects of increasing first year
crediting rates approximately 1% commencing during the third quarter of 1996.
Also contributing to the increase in premiums is the introduction of new
products, the competitiveness of SMC's products, the continued development of
SMC's distribution system through marketing support from Standard Marketing and
an increase in the agency base achieved through the recruitment of larger
managing general agencies and expanding geographical concentration into the
Mid-South and California.
SMC also decreased the quota-share portion of business ceded pursuant to a
reinsurance agreement from 70% to 50% at September 1, 1995, which was further
decreased to 25% effective April 1, 1996. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium deposits by $6,786,000 in the
first nine months of 1997 compared to $7,628,000 in the first nine months of
1996.
Net Investment Income. Net investment income increased $6,919,000 or 46% to
$21,926,000 for the first nine months of 1997 from $15,007,000 for the
comparable period of 1996. The increase primarily resulted from an increase in
the weighted average annualized yield of SMC's investment portfolio (exclusive
of realized and unrealized gains and losses) to 7.66% from 7.28% for the first
nine months of 1997 and 1996, respectively, and the increase in total invested
assets (amortized costs) of approximately 41% from December 31, 1995 to
September 30, 1997, most of which (approximately $100,000,000) occurred in the
fourth quarter of 1996 due to the acquisition of Shelby Life.
Net Realized Investment Gains. Net realized investment gains decreased
$390,000 or 58% to $287,000 from $677,000 for the first nine months of 1997 and
1996, respectively. Net realized investment gains fluctuate from period to
period and arise when securities are sold in response to changes in the
investment environment which provide opportunities to maximize return on the
investment portfolio without adversely affecting the quality and overall yield
of the investment portfolio.
Gain on Disposal of Subsidiaries. On March 18, 1996, SMC completed the sale
of a duplicate charter associated with First International to GIAC. SMC received
sale proceeds of $10,393,000, including $1,500,000 for the charter and licenses
associated with First International. In addition, First International, Standard
Life and GIAC have entered into a series of agreements that include provisions
for Standard Life to retain an economic interest in certain First International
policies and administer First International policies in force at the date of
such sale.
In an unrelated matter, SMC decided in February 1996 to terminate the
reinsurance agreement between Standard Reinsurance and Salamandra, and not to
renew the Barbados license of Standard Reinsurance. This resulted in a first
quarter 1996 write-off of SMC's investment in Standard Reinsurance and certain
intangible assets of Standard Reinsurance amounting to $156,000.
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<PAGE> 96
The combined effect of the pre-tax gain on the sale of First International
and related contracts, and the Standard Reinsurance write-offs, was $886,000
pre-tax and $2,306,000 after-tax in the first quarter of 1996.
Policy Charges. Policy charges increased $2,278,000 or 124% to $4,110,000
for the nine months ended September 30, 1997 compared to $1,832,000 for the nine
months ended September 30, 1996. The increase in policy charges resulted from an
increase in policy charges for Standard Life's universal life insurance products
of $1,473,000 due to the inclusion of Shelby Life in the results of operations
for periods after November 1, 1996 and an increase in policy surrender charges
on FPDAs of $447,000. The increase in annuity policy withdrawals and surrender
charges on flexible premium deferred annuities generally corresponds to the
aging and growth of SMC's annuity business in force.
Fees From Separate Accounts. Fees from separate accounts increased $162,000
or 15% to $1,255,000 for the first nine months of 1997 from $1,093,000 for the
first nine months of 1996. The increase is due primarily to an increase in the
value of assets held in separate accounts from $122,705,000 at December 31, 1995
to $145,574,000 at September 30, 1997. Such income fluctuates in relationship to
total separate account assets and the return earned on such assets.
Benefit and Claims. Benefits and claims decreased $2,712,000 or 31% to
$5,945,000 for the first nine months of 1997 from $8,657,000 for the first nine
months of 1996. The decrease in benefits and claims resulted from an increase in
change in policy reserves of $4,234,000 related to the termination and recapture
of a reinsurance agreement with National Mutual in the third quarter of 1996.
This decrease offset the increase in benefits and claims from the inclusion of
Shelby Life (approximately $1,132,000 in the first nine months of 1997) in the
results of operations for periods after November 1, 1996. Throughout SMC's
history, it has experienced both 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 claims experience tend to be offset
by periods of lower claims experience.
Interest Credited on Interest-Sensitive Annuities and Other Financial
Products. Interest credited on interest-sensitive annuities and other financial
products was $12,627,000 for the first nine months of 1997, an increase of
$4,982,000 or 65% from $7,645,000 for the comparable prior year period. The
increase resulted primarily from the inclusion of interest credited of
$2,846,000 in the first nine months of 1997 from Shelby Life products, increases
in interest credited rates on new annuity sales and the increases in the growth
in policy reserves for annuities from sales. At September 30, 1997, the weighted
average interest credited rate for Standard Life's currently marketed annuities
and other financial product liabilities was 5.61% compared to 5.40% at September
30, 1996.
Salaries and Wages. Salaries and wages were $4,249,000 for the first nine
months of 1997, an increase of $571,000 or 16% from $3,678,000 for the
comparable prior year period. This increase was caused primarily by an increase
in the number of employees in 1997 and an increase in incentive compensation
expense in the first nine months of 1997 of $216,000 based on operating income
for the nine months ended September 30, 1997.
Amortization. Amortization expense increased $821,000 or 48% to $2,544,000
for the first nine months of 1997 from $1,723,000 for the first nine months of
1996. The increase in current year amortization expense resulted primarily from
the amortization of present value of future profits of $537,000 in the first
nine months of 1997 for the acquisition of Shelby Life.
Other Operating Expenses. Other operating expenses decreased $46,000 or 1%
to $5,127,000 for the first nine months of 1997 from $5,173,000 for the first
nine months of 1996. The decrease in other operating expenses resulted primarily
from eliminating in 1997 the additional cost to convert the operations and
expand the marketing effort in Dixie National Life incurred in the first nine
months of 1996 and a reduction in international operating expenses due to the
strengthening of the U.S. dollar.
Interest Expense and Financing Costs. Interest expense and financing costs
increased $1,294,000 or 301% to $1,724,000 in the nine months ended September
30, 1997 from $430,000 in the nine months ended September 30, 1996. The increase
in interest expense and financing costs during 1997 resulted primarily from
increased borrowing of $10,100,000 on the Amended Credit Agreement and
borrowings of $4,000,000 from an
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<PAGE> 97
insurance company in connection with the acquisition of Shelby Life and
additional borrowings of $5,600,000 in June 1997.
Federal Income Taxes. Federal income tax expense (credit) was $779,000 for
the first nine months of 1997, compared to $(890,000) for the first nine months
of 1996. The large credit in 1996 is primarily due to tax benefits of $1,420,000
related to the sale of First International.
Extraordinary Gain on Early Redemption of Redeemable Preferred
Stock. Extraordinary gains were recorded on the early redemption of the Class S
Preferred Stock for the amount by which SMC was able to repurchase the Class S
Preferred Stock below its book value plus accrued and unpaid dividends. SMC
recorded no extraordinary gain for the first nine months of 1997 compared to
$500,000 for the nine months ended September 30, 1996. Effective August 1, 1997,
SMC redeemed all of its issued and outstanding Class S Preferred Stock at
redemption value of $10.00 per share plus accumulated and unpaid dividends.
DISCUSSION OF CHANGES IN THE CONSOLIDATED STATEMENT OF OPERATIONS FROM YEAR
ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Operating Income. The income from operations (before net realized
investment gains, gain on disposal of subsidiaries and reduction in accruals of
certain legal expenses) was $1,174,000 in 1996, or $.24 per share, compared to
$461,000 for 1995, or $.09 per share. The change resulted primarily from
international operations producing income from operations of $1,218,000 compared
to a loss of $(22,000) for 1996 and 1995, respectively. The international
operating gains resulted primarily from increased management fees on an
increasing separate account base due to portfolio sales in 1995 and 1996, and
increased value of assets under management, coupled with a decrease in marketing
costs in 1996 when compared to 1995. The income from operations in the United
States decreased to ($44,000) in 1996 compared to $483,000 in 1995. The decline
was attributable to an increase in interest expense from borrowings to
repurchase SMC Common Stock, Class S Preferred Stock and the purchase of Shelby
Life and additional costs incurred to convert the operations and expand the
marketing effort in Dixie National Life.
Premium Income. GAAP premium income for 1996 was $10,468,000, an increase
of $4,964,000 or 90% from $5,504,000 for 1995. This increase is mainly
attributable to recapture of premiums ceded of $4,234,000 due to the termination
and recapture of a reinsurance agreement with National Mutual and the inclusion
of Dixie National Life and Shelby Life in the results of operations for periods
after October 2, 1995 and November 1, 1996, respectively. These amounts offset
the decline in premiums from the cession of a portion of First International's
life insurance business and the regular policy lapses, surrenders and expiries
in SMC's closed blocks of business.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $42,347,000
compared to $17,524,000 for the years ended December 31, 1996 and 1995,
respectively. The increase in premium deposits is partially due to an increase
in gross domestic premium deposits. Gross domestic premium deposits received
from interest-sensitive annuities and financial products were $51,254,000 for
the year ended December 31, 1996 compared to $37,614,000 for the year ended
December 31, 1995. The increase is the result of an aggressive marketing
campaign implemented by Standard Life with increased crediting interest rates.
First year interest crediting rates were increased approximately 1% on certain
FPDAs sold after April 1, 1996. Also contributing to the increase in premiums is
the continued development of SMC's distribution system through marketing support
from Standard Marketing and an increase in the agency base achieved through the
recruitment of larger managing general agencies and expanding geographical
concentration into the Mid-South and California.
SMC also decreased the quota-share portion of business ceded pursuant to a
reinsurance agreement from 70% to 50% at September 1, 1995, which was further
decreased to 25% effective April 1, 1996. Premium deposits ceded pursuant to
this reinsurance agreement reduced net premium deposits by $8,907,000 in the
year ended December 31, 1996 compared to $20,090,000 in 1995.
Net Investment Income. Net investment income increased $2,354,000 or 13% to
$20,871,000 for the year ended December 31, 1996 from $18,517,000 for 1995. The
increase primarily resulted from an increase in total
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invested assets (amortized cost) of approximately 32% from 1995 to 1996, most of
which occurred in the fourth quarter due to the acquisition of Shelby Life. The
average net yield on SMC's invested assets was 7.32% for both years ended
December 31, 1996 and 1995. The continued growth in SMC's total invested assets
reflects increased sales of FPDAs and the inclusion of the invested assets from
Dixie National Life of approximately $26,400,000 and Shelby Life of
approximately $100,400,000 in the consolidated balance sheet effective October
2, 1995 and November 1, 1996, respectively, which was offset by the invested
assets ceded in the GIAC reinsurance transaction of approximately $18,000,000.
Net Realized Investment Gains. Net realized investment gains increased
$614,000 or 89% to $1,302,000 from $688,000 for the years ended December 31,
1996 and 1995, respectively. The increase primarily resulted from active
portfolio management by SMC. Net realized investment gains fluctuate from period
to period and arise when securities are sold in response to changes in the
investment environment which provide opportunities to maximize return on the
investment portfolio without adversely affecting the quality and overall yield
of the investment portfolio.
Gain on Disposal of Subsidiaries. On March 18, 1996, SMC completed the sale
of a duplicate charter associated with First International to GIAC. SMC received
sale proceeds of $10,393,000, including $1,500,000 for the charter and licenses
associated with First International. In addition, First International, Standard
Life and GIAC have entered into a series of other agreements that include
provisions for Standard Life to retain the economic interest in certain First
International policies and administer First International policies in force at
the date of such sale.
In an unrelated matter, SMC decided in February 1996 to terminate the
reinsurance agreement between Standard Reinsurance and Salamandra, and not to
renew the Barbados license of Standard Reinsurance. This resulted in a first
quarter 1996 write-off of SMC's investment in Standard Reinsurance and certain
intangible assets of Standard Reinsurance amounting to $156,000.
The combined effect of the pre-tax gain on the sale of First International
and related contracts, and the Standard Reinsurance write-offs, was $886,000
pre-tax and $2,306,000 after tax in the first quarter of 1996.
Policy Charges. Policy charges increased $84,000 or 3% to $2,551,000 for
the year ended December 31, 1996 compared to $2,467,000 for the year ended
December 31, 1995. The increase in policy charges resulted from an increase in
policy surrender charges on FPDAs of $254,000 and the inclusion of Dixie
National Life and Shelby Life in operating results for periods after October 2,
1995 and November 1, 1996, respectively, for an increase of $1,359,000 which
offset a decrease of $1,502,000 for the absence of policy charges from SMC's
closed blocks of universal life business which were sold to GIAC through a
reinsurance contract effective January 1, 1996.
Amortization of Excess of Net Assets Acquired Over Acquisition
Cost. Amortization of negative goodwill was $1,388,000 for each of the years
ended December 31, 1996 and 1995.
Management Fees and Similar Income from Separate Accounts. Management fees
and similar income from separate accounts increased $270,000 or 21% to
$1,564,000 for the year ended December 31, 1996 from $1,294,000 for the year
ended December 31, 1995. This increase is due primarily to an increase in the
value of assets held in separate accounts from $94,301,000 at December 31, 1994
to $128,546,000 at December 31, 1996 and to higher service fees being levied on
certain transactions. Net deposits from sales of unit-linked products by
Standard Management International were $16,902,000 and $31,793,000 for the years
ended December 31, 1996 and 1995, respectively.
Other Income. Other income increased $897,000 or 236% to $1,277,000 for the
year ended December 31, 1996 compared to $380,000 for 1995. The increase
resulted primarily from administration fees of $316,000 and the reserve and
experience refund adjustments in connection with the agreements with GIAC and
increased commissions received by Standard Marketing from the sale of
unaffiliated products.
Benefits and Claims. Benefits and claims increased $4,128,000 or 71% to
$9,919,000 for the year ended December 31, 1996 from $5,791,000 for the year
ended December 31, 1995. The increase resulted primarily from an increase in
reserves of $4,234,000 related to the termination and recapture of a reinsurance
agreement with National Mutual. Throughout SMC's history, it has experienced
both periods of higher and lower benefit
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<PAGE> 99
claims. Such volatility is not uncommon in the life insurance industry and, over
extended periods of time, periods of higher claims experience tend to be offset
by periods of lower claims experience.
Interest Credited on Interest-Sensitive Annuities and Other Financial
Products. Interest credited on interest-sensitive annuities and other financial
products was $11,281,000 for the year ended December 31, 1996, an increase of
$1,272,000 or 13% from $10,009,000 for 1995. The increase resulted primarily
from SMC's increase of credited interest rates on new annuity sales, and the
increases in the growth in policy reserves for FPDAs from sales and the
inclusion of Shelby Life in the operations results effective November 1, 1996.
At December 31, 1996, the weighted average interest credited rate for Standard
Life's annuities and other financial product liabilities was 5.35% compared to
5.27% at December 31, 1995.
Salaries and Wages. Salaries and wages were $5,053,000 for the year ended
December 31, 1996, an increase of $352,000 or 7% from $4,701,000 for 1995. This
fluctuation was caused primarily by an increase in incentive compensation of
$315,000.
Amortization. Amortization expense increased $548,000 or 27% to $2,592,000
for the year ended December 31, 1996 from $2,044,000 for the year ended December
31, 1995. The increase in current year amortization expense resulted primarily
from increased amortization of $79,000 of deferred acquisition costs as gross
profits from business sold in recent years began to emerge and increased
surrenders and their corresponding increase in the amortization of deferred
acquisition costs, and from an increase of $602,000 for the amortization of
present value of future profits for the acquisitions of Dixie National Life,
Shelby Life and National Mutual. These items more than offset reduced
amortization of excess of cost over net assets acquired of $46,000 and present
value of future profits of $120,000 due to the sale of First International.
Other Operating Expenses. Other operating expenses increased $789,000 or
12% to $7,122,000 for the year ended December 31, 1996 from $6,333,000 for the
year ended December 31, 1995. The increase in other operating expenses resulted
primarily from the expenses of Dixie National Life and Shelby Life included in
the results for the periods after October 2, 1995 and November 1, 1996,
respectively, and the increased expenses related to potential acquisitions and
advisory fees.
Interest Expense and Financing Costs. Interest expense and financing costs
increased $687,000 or 582% to $805,000 for the year ended December 31, 1996 from
$118,000 for the year ended December 31, 1995. The increase in interest expense
and financing costs during 1996 resulted primarily from the borrowing on the
Amended Credit Agreement. The borrowing under the Amended Credit Agreement and
the original credit agreement primarily occurred after December 31, 1995 in
connection with the acquisition of Shelby Life and the repurchase of SMC Common
Stock and Class S Preferred Stock.
Class Action Litigation and Settlement Costs. Class action litigation and
settlement costs were recorded to reflect the estimated costs of litigation and
settlement of the shareholder class action lawsuit, based on the terms of the
settlement agreement and assumptions as to the future estimated legal and other
costs to settle the lawsuit, which was settled in March 1995, and to register
the Class S Preferred Stock which was distributed to the class participants in
February 1996. There were no class action litigation and settlement expenses in
the years ended December 31, 1996 and 1995. However, with the signing of the
Settlement Agreement with the 22 persons who previously excluded themselves from
the class and the reevaluation of the future estimated legal and other costs to
settle the lawsuit, SMC recorded a reduction of $314,000 in the second quarter
of 1995 in the estimated future costs to settle the lawsuit and register the
Class S Preferred Stock.
Federal Income Taxes. Federal income tax expense (credit) was $(730,000)
for the year ended December 31, 1996, compared to $243,000 for the year ended
December 31, 1995. The large credit in 1996 is primarily due to tax benefits of
$1,420,000 related to the sale of First International and also from the
amortization of excess of net assets acquired over acquisition cost resulting
from the acquisition of Standard Management International of $472,000 not being
subject to United States income tax.
Extraordinary Gain on Early Redemption of Redeemable Preferred Stock. The
extraordinary gain was $502,000 for the year ended December 31, 1996 compared to
no gain for the year ended December 31, 1995.
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DISCUSSION OF CHANGES IN THE CONSOLIDATED STATEMENT OF OPERATIONS FROM YEAR
ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Operating Income. The income from operations (before net realized
investment gains and class action litigation and settlement costs) increased to
$461,000, or $.09 per share, from $293,000, or $.06 per share, for 1995 and
1994, respectively. The increase resulted from U.S. operations producing income
from operations of $483,000 compared to a U.S. loss from operations of
$(720,000) for 1995 and 1994, respectively. The U.S. operating gains resulted
primarily from increased interest spreads on an increasing asset base due to
annuity sales in 1995 and 1994. The improvement in U.S. operations was offset by
a decline in international income from operations from $1,013,000 in 1994 to a
loss of $(22,000) in 1995 as the costs of resuming marketing were absorbed.
Premium Income. GAAP premium income for 1995 was $5,504,000, an increase of
21% from $4,565,000 for 1994. Increased premium income resulted primarily from
the inclusion of Dixie National Life in the results of operations effective
October 2, 1995.
Net premiums received from the sales of interest-sensitive annuities and
other financial products (which are not recorded as revenues) were $17,524,000
for the year ended December 31, 1995 compared to $53,490,000 for the year ended
December 31, 1994. The decline is partially due to increased competitive
pressures. To protect its profit margins, SMC was not willing to match other
insurers' high interest crediting and commission rates which caused a decrease
in gross domestic premium deposits of $15,876,000 in 1995 when compared to 1994.
Additionally, Standard Life began ceding a portion of its new annuity business
to an unaffiliated reinsurer effective January 1, 1995. Premium deposits ceded
pursuant to the reinsurance agreement with the reinsurer reduced net premiums by
$20,090,000 for 1995. There was no such reinsurance in 1994.
Net Investment Income. Net investment income increased 15% to $18,517,000
in 1995 from $16,057,000 in 1994. This increase primarily resulted from growth
in SMC's total invested assets attributable to the increased sales of FPDAs in
1994 and the inclusion of Dixie National Life in the results of operations
effective October 2, 1995. The amortized cost of total invested assets increased
12% to $274,148,000 in 1995 from $245,619,000 in 1994. These increased assets
also benefited from a higher concentration of investments in fixed maturity
securities. The average annualized yield of SMC's investment portfolio for the
year ended December 31, 1995 increased to 7.32% from 7.26% for 1994.
Net Realized Investment Gains. Net realized investment gains increased 23%
to $688,000 in 1995 from $558,000 in 1994. 1995 results reflect increased gains
on sales of investments due to rising values of fixed maturity securities as
interest rate levels decreased, combined with active portfolio management. Net
realized gains fluctuate from period to period and arise when securities are
sold in response to changes in the investment environment which provide
opportunities to maximize return on the investment portfolio without adversely
affecting the quality of the investment portfolio.
Policy Charges. Policy charges increased 21% to $2,467,000 for 1995
compared to $2,031,000 for 1994. The increase in universal life policy charges
resulted from increased surrender charges on interest-sensitive annuity products
and the inclusion of Dixie National Life in operating results for periods after
October 2, 1995.
Amortization of Excess of Net Assets Acquired Over Acquisition
Cost. Amortization of negative goodwill increased 31% to $1,388,000 for 1995
compared to $1,063,000 for 1994 due to a reallocation of the purchase price of
Standard Management International in the fourth quarter of 1994 which increased
negative goodwill.
Management Fees and Similar Income from Separate Accounts. Management fees
and similar income from separate accounts decreased 32% to $1,294,000 in 1995
from $1,888,000 in 1994. This decrease is due to a change in the mix of the
types of separate accounts whereby those earning higher investment management
fees represent a significantly smaller portion of the total in 1995 than in
1994. Most of the new policies sold in 1995 carried significantly smaller
investment management fees than the policies lapsed or surrendered in 1995. Net
deposits from sales of unit-linked products by Standard Management International
were $31,793,000 in 1995 and $1,715,000 in 1994.
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Other Income. Other income includes primarily override commissions received
by Standard Marketing from unaffiliated companies and other income recorded by
Standard Management International. Other income increased 7% to $380,000 for
1995 from $356,000 in 1994. The increase primarily resulted from commissions
from the sale of unaffiliated products and to a lesser extent the inclusion of
Dixie National Life in the results of operations after October 2, 1995. These
increases more than offset any loss of fee income generated by Standard
Advertising which was sold in early 1995.
Benefits and Claims. Benefits and claims increased 3% to $5,791,000 for
1995 from $5,603,000 for 1994. The increase in benefits and claims resulted
primarily from an increase in death benefits in 1995 when compared to the
favorable mortality experience in 1994. Mortality experience is volatile and
these trends are not predictable from period to period.
Interest Credited on Interest-Sensitive Annuities and Other Financial
Products. Interest credited on interest-sensitive annuities and other financial
products was $10,009,000 for 1995, an increase of $1,333,000 or 15% from
$8,676,000 for the prior year. The increase resulted primarily from increases in
interest credited from the growth in policy reserves for FPDAs. This more than
offset any decreases from the decline in credited interest rates on
interest-sensitive annuities and other financial products. At December 31, 1995,
the weighted average interest credited rate for Standard Life's
interest-sensitive annuities and other financial product liabilities was 5.27%
compared to 5.82% at December 31, 1994.
Salaries and Wages. Salaries and wages were $4,701,000 for 1995, an
increase of 20% from $3,910,000 for the prior year. This increase was caused by
$185,000 of unusual charges due to the termination of certain international
marketing programs and the subsequent reduction of SMC's staff in Luxembourg in
1995, the capitalization of certain salaries of $203,000 associated with the
internal development of computer software in 1994, increased salaries for new
marketing efforts for Standard Management International in 1995 and the
inclusion of Dixie National Life in the results of operations for periods after
October 2, 1995. Additionally, the average wages per employee increased in 1995.
Amortization. Amortization expense for 1995 was $2,044,000, an increase of
$829,000, or 68%, from $1,215,000 for the prior year. The increase in current
year amortization expense resulted primarily from increased amortization of
deferred acquisition costs as gross profits from business sold in recent years
began to emerge and from the amortization of present value of future profits for
the acquisition of Dixie National Life, which more than offset reduced
amortization of present value of future profits on previous acquisitions as
persistency of the purchased business began to improve.
Other Operating Expenses. Other operating expenses for the year ended
December 31, 1995 were $6,333,000, reflecting a decrease of 4%, compared to
$6,563,000 for the year ended December 31, 1994. The decrease in other operating
expenses resulted primarily from decreases in consulting, legal and other
expenses related to potential acquisitions and the sale of Standard Advertising
in early 1995, which more than offset the increased expenses of operating Dixie
National Life from October 2, 1995 to December 31, 1995.
Interest Expense and Financing Costs. Interest expense and financing costs
increased 151% to $118,000 in 1995 from $47,000 in 1994. The increase in
interest expense during 1995 resulted primarily from the payments on the capital
lease obligations.
Class Action Litigation and Settlement Costs. SMC recorded a reduction of
$314,000 in 1995 in the estimated future costs to settle the lawsuit and list
the Class S Preferred Stock.
Federal Income Taxes. Federal income tax expense was $243,000 for 1995,
compared to a credit of $(78,000) for 1994. The effective rate of 16% is less
than the statutory rate of 34% primarily because the amortization of excess of
net assets acquired over acquisition cost resulting from the acquisition of
Standard Management International is not subject to United States income tax.
SMC receives the benefits of a special deduction available to small life
insurance companies and the utilization of capital and operating loss carry
forwards in the life insurance subsidiaries. However, the losses incurred by
Standard Management and the foreign subsidiaries, primarily due to class action
litigation and settlement costs, and operating costs in excess of management
fees, provide no current tax benefit as Standard Management and the foreign
subsidiaries are in a net operating loss carryforward position. The benefits of
the special deduction available to small life insurance companies will no longer
be available when consolidated assets exceed $500,000,000.
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LIQUIDITY AND CAPITAL RESOURCES
Standard Management is an insurance holding company. The liquidity
requirements of Standard Management are met primarily from management fees,
equipment rental fees and payments for other charges and dividends and interest
on Surplus Debentures received from Standard Management's subsidiaries as well
as Standard Management's working capital. These are Standard Management's
primary source of funds to pay operating expenses and meet debt service
obligations. The payment of dividends and interest on Surplus Debentures and
management and other fees by Standard Life to Standard Management is subject to
restrictions under the insurance laws of Indiana, Standard Life's jurisdiction
of domicile. These internal sources of liquidity have been supplemented in the
past by external sources such as lines of credit and revolving credit agreements
and long-term debt and equity financing in the capital markets.
SMC reported on a consolidated GAAP basis net cash provided by operations
of $1,726,000 and $6,331,000 for the years ended December 31, 1996 and 1995,
respectively. 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 $26,717,000 and $6,003,000 for the years ended December 31, 1996
and 1995, respectively. Cash generated on a consolidated basis is available to
Standard Management only to the extent that it is generated at Standard
Management level or is available to Standard Management through dividends,
interest, management fees or other payments from subsidiaries.
In April 1993, Standard Management instituted a program to repurchase SMC
Common Stock from time to time. The purpose of the stock repurchase program is
to enhance shareholder value. Standard Management had repurchased 1,134,356
shares of SMC Common Stock for $5,826,000 as of December 1, 1997. Of these
repurchases 419,026 were paid for through additional borrowing under the Amended
Credit Agreement, 39,016 shares from the proceeds of the additional borrowings
of the subordinated convertible notes, and the remainder were paid from working
capital. At December 1, 1997, Standard Management was authorized to purchase an
additional 365,644 shares under this program.
Between February 1996 and July 1997, SMC repurchased 141,761 shares of
Class S Preferred Stock at an aggregate price of $964,000 primarily through
additional borrowings under the Amended Credit Agreement. On August 1, 1997, SMC
redeemed all of its issued and outstanding shares of Class S Preferred Stock for
an aggregate redemption price of $1,840,000 including accumulated and unpaid
dividends. Such redemption was financed with the proceeds of the additional
borrowings of the subordinated convertible notes.
At November 30, 1997, Standard Management had "parent company only" cash
and short-term investments of $647,000. These funds are available to Standard
Management for general corporate purposes. Standard Management's "parent company
only" operating expenses (not including class action litigation and settlement
costs and interest expense) were $3,470,000 and $2,793,000 for the years ended
December 31, 1996 and 1995, respectively.
Pursuant to the management services agreement with Standard Management,
Standard Life paid Standard Management a monthly fee of $166,667 (annual fee of
$2,000,000) during 1997 for certain management services related to the
production of business, investment of assets and evaluation of acquisitions.
Pursuant to the management services agreements with Standard Life, Dixie
National Life paid a monthly payment of $83,333 (annual fee of $1,000,000) to
Standard Life in 1997. 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 National Life.
Pursuant to the management services agreement with Standard Management,
Premier Life (Luxembourg) paid Standard Management a management fee of $25,000
per quarter during 1997 and 1996 for certain management and administrative
services. The agreement provides that it may be modified or terminated by either
Standard Management or Premier Life (Luxembourg). Standard Management does not
plan to modify this agreement in 1998.
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At April 1, 1995, Standard Management sold its property and equipment to an
unaffiliated leasing/ financing company for $1,396,000 and subsequently entered
into a capital lease obligation whereby Standard Management pays a monthly
rental amount of $45,000. Standard Management charges a monthly equipment rental
fee to its subsidiaries for this equipment and additional equipment purchased
after April 1, 1995. The amount of the rental fee income received from Standard
Management's subsidiaries was $854,000 and $853,000 for the nine months ended
September 30, 1997 and year ended December 31, 1996, respectively.
On November 8, 1996, Standard Life acquired through merger Shelby Life from
DLAC for approximately $14,650,000, including $13,000,000 in cash, 250,000
shares of restricted SMC Common Stock (valued at $1,250,000) and $400,000 of
acquisition costs. Financing for the Shelby Life transaction was provided by
senior debt of $10,000,000 under the Amended Credit Agreement and $4,000,000 in
subordinated convertible debt described below.
The Amended Credit Agreement permits Standard Management to borrow up to
$16,000,000 in the form of a seven-year reducing revolving loan arrangement.
Standard Management has agreed to pay a non-use fee of .50% per annum on the
unused portion of the commitment. In connection with the original and Amended
Credit Agreement, Standard Management issued warrants to the bank to purchase
61,500 shares of SMC Common Stock. Borrowing under the Amended Credit Agreement
may be used for contributions to surplus of insurance subsidiaries, acquisition
financing, and repurchases of Class S Preferred and SMC Common Stock. The debt
is secured by a Pledge Agreement of all of the issued and outstanding shares of
common stock of Standard Life and Standard Marketing. Interest on the borrowing
under the Amended Credit Agreement is determined, at the option of Standard
Management, to be: (i) a fluctuating rate of interest based on the corporate
base rate announced by the bank from time to time plus one percent per annum, or
(ii) a rate at LIBOR plus 3.25%. Annual principal repayments of $2,667,000 begin
in November 1998 and conclude in November 2003. Indebtedness incurred under the
Amended Credit Agreement is subject to certain restrictions and covenants
including, among other things, certain minimum financial ratios, minimum
statutory surplus requirements for the insurance subsidiaries, minimum
consolidated equity requirements for Standard Management and certain investment
and indebtedness limitations. At September 30, 1997, Standard Management was in
compliance with all restrictions and covenants in the Amended Credit Agreement.
At September 30, 1997, Standard Management had borrowed $16,000,000 under the
Amended Credit Agreement at a weighted average interest rate of 9.178%. SMC has
received a commitment to increase the Amended Credit Agreement to $20,000,000 to
finance the acquisition of Savers Life.
In connection with the acquisition of Shelby Life, SMC borrowed $4,000,000
from an insurance company pursuant to a subordinated convertible debt agreement
which was due in December 2003 and required interest payments in cash at 12% per
annum, or, if SMC chose, in non-cash additional subordinated convertible debt
notes at 14% per annum until December 31, 2000. At June 30, 1997, this
subordinated convertible debt agreement was amended at the principal amount of
$4,372,000 which is due July 2004 unless previously converted, and requires
interest payments in cash on January 1 and July 1 of each year at 10% per annum.
At June 30, 1997, SMC borrowed an additional $5,628,000 from an insurance
company pursuant to another subordinated convertible debt agreement
(collectively, the "Notes") which is due July 2004 unless previously converted,
and requires interest payments in cash on January 1 and July 1 of each year at
10% per annum. Proceeds from the additional borrowings were used for
contributions to surplus of insurance subsidiaries of $2,400,000, redemption of
Class S Preferred Stock of approximately $1,840,000 and the balance for other
general corporate purposes. The Notes are convertible into Common Stock at the
rate of $5.747 per share. The Notes may be prepaid in whole or in part at the
option of SMC commencing on July 1, 2000 at redemption prices equal to 105% of
the principal amount (plus accrued interest) and declining to 101% of the
principal amount (plus accrued interest). The Notes may be prepaid prior to July
1, 2000 under certain limited circumstances. The subordinated convertible debt
agreements contains terms and financial covenants substantially similar to those
in the Amended Credit Agreement.
Assuming an increase in the current level of debt under the Amended Credit
Agreement to $20,000,000 and current interest rates at September 30, 1997
(weighted average rate of 9.178%) Standard Management annual debt service would
be approximately $2,800,000 in interest paid. In addition, Standard Management
has 1998 obligations under a capital lease of $151,000.
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From the funds borrowed by Standard Management pursuant to the Amended
Credit Agreement and the subordinated convertible debt agreements, $13,000,000
was loaned to Standard Life pursuant to a 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
$1,000,000 per year beginning in 2007 and concluding in 2019. 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 September 30, 1997 interest rate of 10.50%
continues in 1998, Standard Management will receive interest income of
$1,365,000 from its Surplus Debenture receivable for 1998.
Dividends from Standard Life to Standard Management are limited by laws
applicable to insurance companies. As an Indiana domiciled insurance company,
Standard Life may pay a dividend or distribution from its surplus profits,
without the prior approval of the Indiana Commissioner 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. Also, regulatory approval is
required when dividends to be paid exceed unassigned statutory surplus. For the
year ended December 31, 1996, Standard Life reported statutory net gain from
operations of $1,427,000, statutory surplus of $22,970,000 and unassigned
surplus of $1,140,000. Standard Life paid dividends of $1,600,000 in 1997. For
the year ended September 30, 1997, Standard Life reported a statutory net gain
from operations of $1,114,000 and statutory surplus of $25,923,000 and
anticipates paying the maximum allowable dividends in 1998.
Standard Management anticipates the available cash from its existing
working capital, plus anticipated 1998 dividends, management fees, rental income
and interest payments on its Surplus Debenture receivable will be more than
adequate to meet its anticipated "parent company only" cash requirements for
1998.
Standard Management has a note receivable of $2,858,000 from an affiliate
and a note payable of $2,858,000 to a different affiliate. This note receivable
and note payable are eliminated in the consolidated financial statements.
U.S. Insurance Operations. The principal liquidity requirements of Standard
Life are its contractual obligations to policyholders, dividend, rent,
management fee and Surplus Debenture payments to Standard Management and other
operating expenses. The primary source of funding for these obligations has been
cash flow from premium income, net investment income, investment sales and
maturities and sales of FPDAs. These sources of liquidity for Standard Life
significantly exceed scheduled uses. Liquidity is also affected by unscheduled
benefit payments including death benefits and policy withdrawals and surrenders.
The amount of withdrawals and surrenders is affected by a variety of factors
such as renewal interest crediting rates, interest rates for competing products,
general economic conditions, Standard Life's A.M. Best ratings (currently rated
"B+") and events in the industry that affect policyholders' confidence.
The policies and annuities issued by Standard Life contain provisions that
allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, in light of such activity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect earnings if SMC were required to sell investments at reduced
values to meet liquidity demands. SMC manages the asset and liability portfolios
in order to minimize the adverse earnings effect of changing market interest
rates. SMC seeks assets that have duration characteristics similar to the
liabilities that they support. SMC also prepares cash flow projections and
performs cash flow tests under various market
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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 states in which the
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that: (i)
acquisition costs (primarily commissions and policy issue costs) and (ii)
reserves for future guaranteed principal payments and interest in excess of
statutory rates, be expensed in the year the new business is written. These
items cause a reduction in statutory surplus ("surplus strain") in the year
written for many insurance products. SMC designs its products to minimize such
first-year losses, but certain products continue to cause a statutory loss in
the year written. For each product, SMC controls the amount of net new premiums
written to manage the effect of such surplus strain. SMC's long-term growth
goals contemplate continued growth in its insurance businesses. To achieve these
growth goals, SMC's U.S. insurance subsidiaries will need to increase statutory
surplus. Additional statutory surplus may be secured through various sources
such as internally generated statutory earnings, equity sales, infusions by
Standard Management with funds generated through debt or equity offerings or
mergers with other life insurance companies. If additional capital is not
available from one or more of these sources, SMC believes that it could reduce
surplus strain through the use of reinsurance or through reduced writing of new
business.
Standard Life produced statutory net income of $1,114,000 and $3,291,000
for the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively. As a result, SMC did not make cash capital contributions to
Standard Life during 1996 to maintain adequate levels of statutory capital and
surplus. However, Standard Management contributed $2,400,000 to Standard Life in
the second quarter of 1997 to facilitate growth in premiums written. In March
1996, Standard Life sold its subsidiary, First International, and realized an
increase in statutory capital and surplus of approximately $4,951,000 from the
statutory gain on the sale and related reinsurance transactions.
Commencing January 1, 1995, Standard Life began to reinsure a portion of
its annuity business. This reinsurance agreement has allowed SMC to write
volumes of business that it would not otherwise have been able to write due to
regulatory restrictions based on its ratio of surplus to liabilities as
determined by regulatory authorities in the State of Florida. By reinsuring a
portion of the annuity business, the liability growth is slowed, thereby
avoiding the erosion of surplus that occurs in periods of increasing sales. If
SMC's ratio of surplus to liabilities falls below 4%, the State of Florida could
prohibit SMC from writing new business in Florida. Standard Life's largest
annuity reinsurer at September 30, 1997, Winterthur, is rated "A" ("Excellent")
by A.M. Best. From January 1, 1995 to August 31, 1995, approximately 70% of
certain of Standard Life's annuity business produced was ceded. Standard Life
decreased the quota-share portion of business ceded to 50% at September 1, 1995
and further reduced it to 25% effective April 1, 1996 to reflect the reduced
need for additional capital and increase current earnings potential. This
reduction was possible since the surplus strain experienced by Standard Life was
not as great as originally anticipated as a result of lower than expected sales
in 1995 and the increase in surplus resulting from the sale of First
International. In addition, Standard Life's ability to retain business was
further increased by contributions to surplus of insurance subsidiaries of
$2,400,000 in the second quarter of 1997. Winterthur limits dividends and other
transfers by Standard Life to Standard Management or affiliated companies in
certain circumstances.
Management believes that operational cash flow of Standard Life will be
sufficient to meet its anticipated needs for 1997. As of September 30, 1997,
Standard Life had statutory capital and surplus for regulatory purposes of
$25,923,000 compared to $22,970,000 at December 31, 1996. The increase is
primarily due to the capital contribution of $2,400,000 from Standard Management
in the second quarter of 1997 and an increase in admitted goodwill under
statutory accounting practices for its investment in Dixie National Life. As the
life insurance and annuity business produced by Standard Life and Dixie National
Life increases, Standard Life expects to continue to satisfy statutory capital
and surplus requirements through statutory profits, through the continued
reinsurance of a portion of its new business, and through additional capital
contributions by Standard Management. During 1996, Standard Management did not
make any capital contributions to Standard Life, other than the SMC Common Stock
associated with the Shelby merger. Net cash flow from
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operations on a statutory basis of Standard Life, after payment of benefits and
operating expenses, was $17,921,422 and $4,263,011 for the years ended December
31, 1996 and December 31, 1995, respectively. If the need arises for cash which
is not readily available, additional liquidity could be obtained from the sale
of invested assets.
State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of RBC specify various weighting factors
that are applied to financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by a ratio
(the "RBC Ratio") of the enterprise's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level RBC, as defined by the
NAIC. Enterprises below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. Each of
SMC's insurance subsidiaries has an RBC Ratio that is at least 400% of the
minimum RBC requirements; accordingly, the subsidiaries meet the RBC
requirements.
Standard Life's acquisition of Shelby Life, and merger of Shelby Life into
Standard Life, effective November 1, 1996 is anticipated to have a positive
effect on Standard Life's liquidity and cash flows. Shelby Life ceased writing
new business effective November 1, 1996, thus reducing the surplus strain
normally associated with the issuance of new policies. The anticipated profits
from Shelby Life's book of business are expected to exceed the related interest
expense connected with the $13,000,000 of Surplus Debentures issued by Standard
Life in connection with the acquisition of Shelby Life. The statutory net income
of Shelby Life was $1,660,855 for the year ended December 31, 1995 and $851,472
for the ten months ended October 31, 1996.
International Operations. The consolidated balance sheet of SMC at
September 30, 1997, includes a $1,734,000 credit representing the negative
goodwill on the purchase of Standard Management International which will be
amortized into future earnings. This amortization is a non-cash credit to SMC
statements of operations.
Standard Management International dividends are limited to its accumulated
earnings without regulatory approval. Standard Management International and
Premier Life (Luxembourg) were not permitted to pay dividends in 1997 and 1996
due to accumulated losses. Premier Life (Bermuda) did not pay dividends in 1997
and 1996. SMC does not anticipate any dividends from these companies in 1998.
Due to the nature of unit-linked products issued by Standard Management
International, which represent over 91% of the Standard Management International
portfolio, the investment risk rests with the policyholder. Investment risk for
Standard Management International exists where Standard Management International
makes investment decisions with respect to the remaining traditional business
and for the assets backing certain actuarial and regulatory reserves. The
investments underlying these liabilities mostly represent short-term investments
and fixed maturity securities. These short-term investments and fixed maturity
securities are normally bought and/or disposed of only on the advice of
independent consulting actuaries who perform an annual analysis comparing
anticipated cash flows on the insurance portfolio with the cash flows from the
fixed maturity securities. Any resulting material mismatches are then covered by
adjusting the securities in the investment portfolio as appropriate.
Proposed Acquisition of Savers Life. The acquisition of Savers Life will
cost approximately $17,200,000, plus acquisition costs, of which approximately
$4,000,000 is to be borrowed in cash under the Amended Credit Agreement which
will be used to fund the cash portion of the purchase price, pay acquisition
costs and the balance added to working capital for general corporate purposes.
The balance of the purchase price will be paid in shares of SMC Common Stock.
SMC anticipates that existing working capital, unused proceeds from borrowings
under the Amended Credit Agreement, and management fees and dividends payable by
Savers Life will be adequate to cover debt service on the additional borrowings
under the Amended Credit Agreement through 1998.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Mergers, Acquisitions and Consolidations. The U.S. insurance industry has
experienced an increasing number of mergers, acquisitions, consolidations and
sales of certain business lines. These consolidations have been driven by a need
to reduce costs of distribution and overhead and maintain business in force.
Additionally, increased competition, regulatory capital requirements and
technology costs have also contributed to the level of consolidation in the
industry. These forces are expected to continue as is the level of industry
consolidation.
Foreign Currency Risk. Standard Management International policyholders
invest in assets denominated in a wide range of currencies. Policyholders
effectively bear the currency risk, if any, as these investments are matched by
policyholder separate account liabilities. Therefore, their investment and
currency risk is limited to premiums they have paid. Policyholders are not
permitted to invest directly into options, futures and derivatives. Standard
Management International could be exposed to currency fluctuations if currencies
within the conventional investment portfolio or certain actuarial reserves are
mismatched. The assets and liabilities of this portfolio and the reserves are
continually matched by the company and at regular intervals by the independent
actuary. In addition, Premier Life (Luxembourg)'s shareholders' equity is
denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its
translation risk because its shareholders' equity will remain in Luxembourg
francs for the foreseeable future and no significant realized foreign exchange
gains or losses are anticipated.
Uncertainties Regarding Intangible Assets. Included in SMC's financial
statements as of June 30, 1997 are certain assets that are valued for financial
statement purposes primarily on the basis of assumptions established by SMC's
management. These assets include deferred acquisition costs, present value of
future profits, costs in excess of net assets acquired and organization and
deferred debt issuance costs. The total value of these assets reflected in the
September 30, 1997 consolidated balance sheet aggregated $42,948,000 or 6% of
SMC's assets. SMC has established procedures to periodically review the
assumptions utilized to value these assets and determine the need to make any
adjustments in such values in SMC's consolidated financial statements. SMC has
determined that the assumptions utilized in the initial valuation of these
assets are consistent with the operations of SMC as of September 30, 1997.
Regulatory Environment. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between companies. The
NAIC is in the process of codifying SAP to promote standardization of methods
utilized throughout the industry. Completion of this project might result in
changes in statutory accounting practices for SMC's insurance subsidiaries;
however, it is not expected that such changes would materially affect SMC's
insurance subsidiaries' statutory capital requirements.
Financial Services Deregulation. The United States Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. Proposals
are extant which would allow banks to own or affiliate with insurers and
securities firms. An increased presence of banks in the life insurance and
annuity businesses may increase competition in these markets. The Company cannot
predict the impact of these proposals on the earnings of the Company.
Recently Issued Accounting Standards. In February 1997, the FASB issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 is required to be adopted on
December 31, 1997. At that time, SMC will be required to change the method
currently used to compute earnings per share and to restate prior periods. Under
the new requirements for calculating primary earnings per share, the dilutive
effect of stock options and stock warrants will be excluded. The impact is
expected to result in an increase in primary earnings per share for the first
nine months ended September 30, 1997 and 1996 of $.03 and $.06 per share,
respectively. The impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
Safe Harbor Provisions. Forward-looking statements in this Proxy
Statement/Prospectus are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. There are certain important
factors that could cause results to differ materially from those anticipated by
some of the statements made above. Investors are cautioned that all
forward-looking statements involve risks and
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uncertainty. In addition to the factors discussed immediately above and under
"RISK FACTORS", among the other factors that could cause actual results to
differ materially are the following: economic environment, interest rate changes
generally and credited rates on new business, sales volume, product development,
regulatory changes, the results of financing efforts, SMC's accounting policies,
competition, the reinsurance agreement with GIAC and the acquisition of Shelby
Life.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth information concerning each of SMC's directors and
executive officers, all of whom will continue in office after the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald D. Hunter.................. 46 Director, Chairman of the Board, Chief Executive Officer
and President
Stephen M. Coons.................. 56 Director, Executive Vice President, General Counsel and
Secretary
Raymond J. Ohlson................. 47 Director, Executive Vice President and Chief Marketing
Officer
Paul B. Pheffer................... 46 Director, Executive Vice President, Chief Financial
Officer and Treasurer
Edward T. Stahl................... 51 Director, Executive Vice President and Director of
Corporate Development
Ramesh H. Bhat.................... 48 Director
Martial R. Knieser................ 55 Director
Robert A. Borns................... 62 Director
James C. Lanshe................... 51 Director
</TABLE>
- -------------------------
Additional information regarding the management of SMC, including executive
compensation, options granted during fiscal year 1997, employment agreements,
compensation of directors and related party transactions is discussed herein
under "-- Executive Compensation."
RONALD D. HUNTER, age 46, has been the Chairman of the Board, Chief
Executive Officer and President of SMC since its formation in June 1989 and the
Chairman of the Board and Chief Executive Officer of Standard Life since
December 1987. Previously, Mr. Hunter held several management and sales
positions in the life insurance industry with a number of companies including
Conseco, Inc. (1981-1986), Aetna Life & Casualty Company (1978-1981), United
Home Life Insurance Company (1975-1977) and Prudential Life Insurance Company
(1972-1975).
STEPHEN M. COONS, age 56, has been a director of SMC since August, 1989.
Mr. Coons has been General Counsel and Executive Vice President of SMC since
March 1993 and has been Secretary of SMC since March 1994. He was of counsel to
the law firm of Coons, Maddox & Koeller from March 1993 to December 31, 1995.
Prior to March 1993, Mr. Coons was a partner with the law firm of Coons & Saint.
He has been practicing law for 25 years. Mr. Coons served as Indiana Securities
Commissioner from 1978 to 1983.
RAYMOND J. OHLSON, age 47, has served as Executive Vice President and
director of SMC since December 1993. He has served as President and director of
Standard Marketing since August 1991. Since June 1993, Mr. Ohlson has served as
President of Standard Life. Mr. Ohlson entered the life insurance business in
1971. While still in college, Mr. Ohlson qualified for the Million Dollar Round
Table and is now a life member. He earned his CLU designation in 1980. Mr.
Ohlson owned and operated Ohlson & Associates, an independent insurance
marketing organization, from 1984 to April 1, 1994, when the assets of Ohlson &
Associates were acquired by Standard Marketing.
PAUL ("PETE") B. PHEFFER, age 46, has been Executive Vice President, Chief
Financial Officer and Treasurer of SMC since May 1, 1997 and director of SMC
since June 27, 1997. Prior to joining SMC, Mr. Pheffer was Senior Vice
President -- Chief Financial Officer and Treasurer of Jackson National Life
96
<PAGE> 109
Insurance Company from 1994 to 1996 and prior to that was Senior Vice
President -- Chief Financial Officer at Kemper Life Insurance Companies from
1992 to 1994. Mr. Pheffer, a CPA, received his MBA from the University of
Chicago in 1988.
EDWARD T. STAHL, age 51, has been an Executive Vice President of SMC since
its formation, has been a director of SMC from July 1989 (except for the period
from January 12, 1990 to May 21, 1990) and has served as Director of Corporate
Development since June 1993. Mr. Stahl was Secretary of SMC from June 1989 to
March 1994. Mr. Stahl was President and Chief Operations Officer of Standard
Life from May 1988 to June 1993. He has been a director of Standard Life since
December 1987, and Executive Vice President and Secretary since June 1993. Mr.
Stahl has served in various capacities in the insurance industry since 1966. He
earned his FLMI designation in 1981, and is a member of several insurance
associations.
RAMESH H. BHAT, age 48, has been a director of SMC since July 1989, except
for the period from January 1990 to August 1990. Dr. Bhat has been practicing
obstetrics and gynecology in Fort Wayne, Indiana, since 1978 and is a member of
the medical staff of Parkview Memorial Hospital and partner of Northeast OB-GYN,
P.C., in Fort Wayne, Indiana.
ROBERT A. BORNS, age 62, has served as Chairman of Borns Management
Corporation (real estate management), Indianapolis, Indiana since 1962 and as
Chairman of Correctional Management Company, L.L.C. (privatized correctional
facilities), Indianapolis, Indiana since 1996. Mr. Borns serves on numerous
boards, including IPALCO Enterprises, Inc., Indianapolis Power and Light
Company, Indianapolis Water Company, IWC Resources Corporation, and of Heritage
Partners Management, Inc. He is also a member of the Board of Trustees of
Indianapolis Museum of Art, Indianapolis Symphony Orchestra, Indiana University
Foundation and St. Vincent Hospital Advisory Board.
MARTIAL R. KNIESER, age 55, has been a director of SMC since May 1990. He
was Medical Director of Community Hospital Indianapolis from 1978 to 1989 and
has been Medical Director of Stat Laboratory Services from 1989 to present. Dr.
Knieser also has been Medical Director of Standard Life since December 1987.
JAMES C. LANSHE, age 51, has been a director of SMC since August 1993. From
1989 to 1997, Mr. Lanshe served as Chairman of Norex Corporation and its
predecessors, a financial services holding company. From 1991 to 1997, Mr.
Lanshe served as Chief Executive Officer of Norcross & Company, an investment
banking firm. From 1988 to 1991 he was a partner with the law firm of
Greenbauer, Boone, Treitz, Maggiolo and Brown of Louisville, Kentucky.
COMPENSATION OF DIRECTORS
Each non-employee director of SMC receives an annual cash retainer of
$10,000. Directors who are not employees of SMC receive $1,000 per SMC Board or
SMC Board Committee meeting attended in person. All non-employee directors are
reimbursed for expenses incurred in connection with their services as directors.
Pursuant to the Stock Option Plan, each non-employee director is entitled to
receive, on the date of each Annual Meeting of SMC's Stockholders, an
immediately exercisable option to purchase 500 shares of SMC Common Stock at a
purchase price equal to the fair market value of SMC Common Stock on the date of
grant. The SMC Board may vary, from year to year, the number of shares subject
to options granted to each non-employee director, provided that such number may
not be less than 500. Each such option will be exercisable for ten years and may
terminate earlier upon termination of directorship. Effective October 29, 1997,
the SMC Board granted options to its non-employee directors as follows: Mr.
Borns -- 20,000, Mr. Lanshe -- 30,000, Dr. Bhat -- 40,000 and Dr. Knieser --
40,000. The Stock Option Plan also provides that each non-employee director is
entitled to receive an option to purchase 500 shares of SMC Common Stock upon
commencement of service as a director. Officers of SMC do not receive an annual
retainer, meeting fees, shares of SMC Common Stock or other compensation for
service as directors of SMC or for service on Committees of the SMC Board.
97
<PAGE> 110
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation paid
to Mr. Hunter, Chief Executive Officer, and the four other highest-paid
executive officers of SMC during fiscal year 1997 (the "Named Executive
Officers") for SMC's last three fiscal years:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------------
ANNUAL COMPENSATION AWARDS
------------------- ------------------
NUMBER OF
SECURITIES
FISCAL UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(2) COMPENSATION(3)
--------------------------- ------ ------ ----- ------------------ ---------------
$ $ # $
<S> <C> <C> <C> <C> <C>
Ronald D. Hunter.................... 1997 $325,911 $ (1) 105,000 $40,042
Chairman of the Board............. 1996 316,418 171,996 272,895 28,645
CEO and President 1995 307,800 56,118 130,200 12,867
Raymond J. Ohlson................... 1997 223,140 (1) 65,000 18,130
Executive Vice President and 1996 211,984 85,998 145,005 12,796
Chief Marketing Officer 1995 206,210 28,059 72,450 7,795
Stephen M. Coons.................... 1997 167,355 (1) 60,000 --
Executive Vice President, 1996 162,481 85,998 85,260 --
General Counsel and Secretary 1995 158,055 28,059 52,500 --
Paul B. Pheffer..................... 1997 133,333 -- 150,000 4,500
Executive Vice President,
Chief Financial Officer and
Treasurer(4)
Edward T. Stahl..................... 1997 125,582 (1) 60,000 6,000
Executive Vice President and 1996 121,924 85,998 77,070 6,000
Director of Corporate Development 1995 118,603 33,059 52,500 3,000
</TABLE>
- -------------------------
(1) Incentive bonus compensation pursuant to employment agreements has not been
paid to the Named Executive Officers for fiscal year 1997 as 1997 financial
results have not yet been finalized.
(2) All applicable share amounts have been adjusted to reflect the 5% stock
dividend.
(3) Amounts reported for fiscal year 1997 was as follows: (i) matching
contributions by SMC to the 401(k) plan (Mr. Hunter $6,000, Mr. Ohlson
$6,000 and Mr. Stahl $6,000); (ii) key man life insurance premiums paid by
SMC (Mr. Hunter $4,090, Mr. Ohlson $3,175); (iii) disability income
insurance premiums paid by SMC (Mr. Hunter $6,955, Mr. Ohlson $5,455); (iv)
travel allowance paid by SMC (Mr. Hunter $13,000, Mr. Ohlson $3,500, Mr.
Pheffer $4,500); and (v) dollar value of below-market interest (based on the
applicable federal interest rate) (Mr. Hunter $9,997).
(4) Mr. Pheffer commenced employment on May 1, 1997.
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<PAGE> 111
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted under the
Stock Option Plan in 1996 to the Named Executive Officers. All options granted
in 1997 were non-qualified stock options, and SMC has not issued any Stock
Appreciation Rights ("SARs").
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR PRICE DATE PRESENT VALUE(2)
---- -------------------- ------------------ -------- ---------- ----------------
(#) ($/SH) ($)
<S> <C> <C> <C> <C> <C>
Ronald D. Hunter.......... 105,000 18.92% $ 6.50 10/29/07 $401,100
Raymond J. Ohlson......... 65,000 11.71% $ 6.50 10/29/07 $248,300
Stephen M. Coons.......... 60,000 10.81% $ 6.50 10/29/07 $229,200
Paul B. Pheffer........... 75,000 13.51% $4.875 5/1/97 $214,500
75,000 13.51 6.50 10/29/07 286,500
Edward T. Stahl........... 60,000 10.81% $ 6.50 10/29/07 $229,200
</TABLE>
- -------------------------
(1) The options with an exercise price of $4.875 per share were exercisable with
respect to the first third of the aggregate number of shares subject thereto
on their grant date (May 1, 1997): will become exercisable with respect to
the second third of the aggregate number of shares subject thereto on May 1,
1998 and become exercisable with respect to all the remaining shares subject
thereto on May 1, 1999. The options with an exercise price of $6.50 per
share were exercisable with respect to the first third of the aggregate
number of shares subject thereto on their grant date (October 29, 1997);
will become exercisable with respect to the second third of the aggregate
number of shares subject thereto on October 29, 1998 and will become
exercisable with respect to all the remaining shares subject thereto on
October 29, 1999.
(2) In accordance with SEC rules, these values were established using the
Black-Scholes stock option valuation model that was adapted for use in
valuing executive stock options. Assumptions used to calculate the Grant
Date Present Value were: stock price volatility .3630 and interest rate
5.67%. The valuation model was not adjusted for non-transferability, risk of
forfeiture or the vesting restrictions of the options. SMC does not believe
that the Black-Scholes model, whether modified or not modified, or any other
valuation model, is a reliable method of computing the present value of
SMC's employee stock options. The value ultimately realized, if any, will
depend on the amount that the market price of the stock exceeds the exercise
price on the date of exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
No stock options were exercised by Named Executive Officers during fiscal
year 1997. The following table sets forth information with respect to Named
Executive Officers concerning unexercised options held as of the end of fiscal
year 1997. SMC has not issued any SARs.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald D. Hunter........................ 415,345 92,750 [ ] [ ]
Raymond J. Ohlson....................... 225,122 57,333 [ ] [ ]
Stephen M. Coons........................ 146,385 51,375 [ ] [ ]
Paul B. Pheffer......................... 50,000 100,000 [ ] [ ]
Edward T. Stahl......................... 138,195 51,375 [ ] [ ]
</TABLE>
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<PAGE> 112
EMPLOYMENT AGREEMENTS
SMC has employment agreements with Messrs. Hunter, Ohlson, Coons and Stahl,
which agreements provide that, if their employment is terminated due to certain
acts, for a period of one year thereafter, each shall not (i) sell or attempt to
sell, within Indiana, any type of products marketed by SMC, (ii) sell or attempt
to sell any types of products marketed by SMC to any customer of SMC and (iii)
within Indiana, own, be employed by, or be connected in any manner with any
business similar to the type of business of SMC. Messrs. Hunter, Ohlson, Coons
and Stahl also agree that during the employment term and for a period of six
months thereafter, each will assign to SMC or its nominees all of his right,
title and interest in and to all technical information that each makes, develops
or conceives.
Mr. Hunter's employment agreement terminates on January 1, 1999. His salary
under his employment agreement for 1997 was $325,911 per year and is increased
each year by the percent change of the Consumer Price Index ("CPI"). In
addition, Mr. Hunter receives a bonus equal to 3% of the annual gross operating
income of SMC, but not less than 10% of his annual salary. Following a
termination of his employment with SMC in the event of a change-in-control, Mr.
Hunter will also be entitled to receive a lump sum payment equal to the amount
determined by multiplying the number of shares of SMC Common Stock subject to
unexercised stock options previously granted by SMC and held by Mr. Hunter on
the date of termination, whether or not such options are then exercisable, and
the highest per share fair market value of the SMC Common Stock on any day
during the six-month period ending on the date of termination. Upon payment of
such amount, such unexercised stock options will be deemed to be surrendered and
canceled. In the event of a change-in-control of SMC whereby Mr. Hunter's
employment is terminated, Mr. Hunter is entitled to a lump sum payment equal to
his average annual compensation times 299%.
Mr. Ohlson's employment agreement terminates on June 16, 1998. His salary
under his employment agreement for 1997 was $223,140 per year, and is increased
each year by the percent change of the CPI. In addition, Mr. Ohlson receives a
bonus equal to 1 1/2% of the annual gross operating income of SMC but not less
than 10% of his annual salary. Following a termination of his employment with
SMC in the event of a change-in-control, Mr. Ohlson will also be entitled to
receive a lump sum payment equal to the amount determined by multiplying the
number of shares of SMC Common Stock subject to unexercised stock options
previously granted by SMC and held by Mr. Ohlson on the date of termination,
whether or not such options are then exercisable, and the highest per share fair
market value of the SMC Common Stock on any day during the six month period
ending on the date of termination. Upon payment of such amount, such unexercised
stock options will be deemed to be surrendered and canceled. In the event of a
change-in-control of SMC whereby Mr. Ohlson's employment is terminated, Mr.
Ohlson is entitled to a lump sum payment equal to his average annual
compensation times 299%.
Mr. Coons' employment agreement terminates on March 1, 1999. His salary
under his employment agreement for 1997 was $167,355 per year, and is increased
each year by the percent change of the CPI. In addition, Mr. Coons receives a
bonus equal to 1 1/2% of the annual gross operating income of SMC but not less
than 10% of his annual salary. Following a termination of his employment with
SMC in the event of a change-in-control, Mr. Coons will also be entitled to
receive a lump sum payment equal to the amount determined by multiplying the
number of shares of SMC Common Stock subject to unexercised stock options
previously granted by SMC and held by Mr. Coons on the date of termination,
whether or not such options are then exercisable, and the highest per share fair
market value of the SMC Common Stock on any day during the six month period
ending on the date of termination. Upon payment of such amount, such unexercised
stock options will be deemed to be surrendered and canceled. In the event of a
change-in-control of SMC whereby Mr. Coons' employment is terminated, Mr. Coons
is entitled to a lump sum payment equal to his average annual compensation times
299%.
Mr. Stahl's employment agreement terminates on January 1, 1999. His salary
under this employment agreement for 1997 was $125,582 and is increased each year
by the percent change of the CPI. In addition, Mr. Stahl receives a bonus equal
to 1 1/2% of the annual gross operating income of SMC, but not less than 10% of
his annual salary. Following a termination of his employment with SMC in the
event of a change-in-control, Mr. Stahl will also be entitled to receive a lump
sum payment equal to the amount determined by multiplying
100
<PAGE> 113
the number of shares of SMC Common Stock subject to unexercised stock options
previously granted by SMC and held by Mr. Stahl on the date of termination,
whether or not such options are then exercisable, and the highest per share fair
market value of the SMC Common Stock on any day during the six month period
ending on the date of termination. Upon payment of such amount, such unexercised
stock options will be deemed to be surrendered and canceled. In the event of a
change-in-control of SMC whereby Mr. Stahl's employment is terminated, Mr. Stahl
is entitled to a lump sum payment equal to his average annual compensation times
299%.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the beneficial
ownership of SMC Common Stock; (i) by each stockholder known by SMC to own
beneficially more than five percent (5%) of the outstanding SMC Common Stock;
(ii) by each of SMC's directors; (iii) by each of SMC's Named Executive Officers
and (iv) by all directors and Named Executive Officers of SMC as a group. All
amounts have been adjusted for the 5% stock dividend. This information is as of
December 1, 1997 based upon Schedules 13-G filed with the SEC.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF TOTAL
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING SHARES(2)
------------------------ --------------------- ---------------------
<S> <C> <C>
Ronald D. Hunter..................................... 893,091(3) 16.80%
9100 Keystone Crossing
Indianapolis, Indiana 46240
Ramesh H. Bhat....................................... 375,353(4) 7.60
9100 Keystone Crossing
Indianapolis, Indiana 46240
Martial R. Knieser................................... 326,955(5) 6.65
9100 Keystone Crossing
Indianapolis, Indiana 46240
Raymond J. Ohlson.................................... 262,566 5.13
9100 Keystone Crossing
Indianapolis, Indiana 46240
Edward T. Stahl...................................... 183,806 3.66
Stephen M. Coons..................................... 179,344(6) 2.96
Robert A. Borns...................................... 50,500 1.03*
Paul B. Pheffer...................................... 50,000 1.01
James C. Lanshe...................................... 32,513 --*
Great American Reserve Insurance Company............. 760,670(7)(10) 13.49
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Capitol American Life Insurance Company.............. 631,360(8)(10) 11.46
11815 N. Pennsylvania Street
Carmel, Indiana 46032
Transport Life Insurance Company..................... 348,008(9)(10) 6.66
11815 N. Pennsylvania Street
Carmel, Indiana 46032
All directors and Named Executive Officers as a group
(eight persons).................................... 2,354,128 39.81
</TABLE>
- -------------------------
* Less than one percent
101
<PAGE> 114
(1) Except as otherwise noted below, each person named in the table possesses
sole voting and sole investment power with respect to all shares of SMC
Common Stock listed in the table as owned by such person. Shares
beneficially owned include shares that may be acquired pursuant to the
exercise of outstanding options or warrants that are exercisable within 60
days of December 1, 1997 as follows: Mr. Hunter - 438,095, Dr. Bhat -
60,179, Dr. Knieser - 42,600, Mr. Ohlson - 239,122, Mr. Stahl - 149,570,
Mr. Coons - 157,760, Mr. Borns - 20,500, Mr. Pheffer - 50,000, Mr. Lanshe -
32,075, directors and Named Executive Officers as a group - 1,189,901.
(2) Percentage of total outstanding shares is calculated separately for each
person on the basis of the actual number of outstanding shares as of
December 1, 1997 and assumes, for purposes of the calculation, that shares
issuable upon exercise of options or warrants exercisable and securities
convertible within 60 days held by such person (but no other stockholders)
had been issued as of such date. Percentages less than 1% are not
indicated.
(3) Includes 336 shares beneficially owned by Mr. Hunter's minor child, as to
which Mr. Hunter disclaims beneficial ownership. Includes 250,000 shares
held by Mr. Hunter who is named as a voting trustee under a Voting Trust
created pursuant to the terms of the Stock Purchase Agreement dated as of
July 18, 1996 by and between SMC and DLAC. Under the terms of the voting
trust, the trustees hold and vote the SMC Common Stock held in the trust
and share voting power with respect to such shares. Mr. Hunter disclaims
beneficial ownership of these shares.
(4) Includes 43,260 shares beneficially owned by Dr. Bhat's spouse and minor
children, as to which shares Dr. Bhat disclaims beneficial ownership.
(5) Includes 8,043 shares beneficially owned by Dr. Knieser's spouse and
children, as to which shares Dr. Knieser disclaims beneficial ownership.
(6) Includes 2,100 shares beneficially owned by Mr. Coons' child, as to which
shares Mr. Coons disclaims beneficial ownership.
(7) Includes 760,670 shares issuable upon conversion of $4,371,573 Convertible
Note, which is convertible at any time.
(8) Includes 631,360 shares issuable upon conversion of $3,628,427 Convertible
Note, which is convertible at any time.
(9) Includes 348,008 shares issuable upon conversion of $2,000,000 Convertible
Note, which is convertible at any time.
(10) Great American Reserve Insurance Company, Capitol American Life Insurance
Company and Transport Life Insurance Company ("Conseco Group") are all
entities beneficially owned by Conseco, Inc. All of the shares, when
issued, will be subject to a Voting Trust Agreement by and among the
Conseco Group, SMC, and two voting trustees appointed by SMC and the
Conseco Group. It is anticipated that Mr. Hunter will be the SMC Trustee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The SMC Charter and Bylaws provide for indemnification of its officers and
directors to the maximum extent permitted under the IBCL. In addition, SMC has
entered into separate indemnification agreements with some of its directors
which may require SMC, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors to
the maximum extent permitted under the IBCL.
On October 28, 1997, SMC made an interest free loan to Mr. Hunter, Chairman
of the Board of SMC, in the amount of $775,500, representing a new loan in the
sum of $437,500 and consolidation of an existing loan with a principal balance
of $338,000. The loan is repayable within 10 days of Mr. Hunter's voluntary
termination or resignation as Chairman and CEO of SMC. In the event of a
termination of Mr. Hunter's employment with SMC following a change in control,
the loan is deemed to be forgiven.
102
<PAGE> 115
Mr. Ohlson, President of Standard Life and Standard Marketing, was the sole
owner of Ohlson & Associates, an independent insurance marketing organization.
On April 1, 1994, the assets of Ohlson & Associates were sold to Standard
Marketing for $174,000, payable on an installment basis over a four year period.
ADDITIONAL INFORMATION REGARDING SAVERS LIFE
DESCRIPTION OF BUSINESS
INTRODUCTION
Savers Life is a domestic stock insurance company domiciled in the state of
North Carolina with licenses to sell insurance products in the states of North
Carolina, South Carolina, Virginia and Florida. Savers Life was founded in 1980
and began selling annuities in 1981. Savers Life historically has offered
Medicare supplement health insurance policies, major medical health insurance
policies, term and whole life insurance policies, single premium deferred
annuities and immediate annuities. Savers Life sells its insurance products to
individual customers through an extensive independent broker network. Savers
Life also sells products of other insurance companies through its independent
broker network and receives fee income for this effort. The primary products of
other insurance carriers sold by Savers Life are annuities and Health
Maintenance Organization ("HMO") products. Savers Life and World agreed to the
transfer of the major medical product line of Savers Life to World through a
coinsurance agreement, under which World assumed, through coinsurance effective
July 1, 1997, 100% of the product line subject to certain risk sharing
arrangements. See "RISK FACTORS -- Reinsurance of Major Medical Product Line"
and "ADDITIONAL INFORMATION REGARDING SAVERS LIFE -- Description of Business --
Products". During the first nine months of 1997, the Savers Life major medical
product line experienced a pre-tax loss of $4,069,000. See "SMC Selected
Unaudited Pro Forma Combined Financial Data". At September 30, 1997, Savers
Life's statutory assets were $71,119,419 and the aggregate of its statutory
capital, surplus, AVR and IMR was $9,458,103. The ratio of Savers Life's
statutory capital, surplus, AVR and IMR to its total statutory assets was 13.3%
at September 30, 1997. Savers Life is not rated by A.M. Best.
MARKETING
Savers Life initially sold only annuity products through its affiliations
with a network of North Carolina-based Savings and Loan institutions. In the
late 1980s, the Savings and Loan industry experienced financial crises which led
to a large number of mergers in that industry. Savers Life's distribution
network among the Savings and Loan institutions was threatened by this merger
boom, so Savers Life redirected its marketing efforts, gradually building up a
network of independent brokers. Savers Life currently has approximately 4,000
active brokers. Savers Life is not dependent on any one broker or agency for any
substantial amount of its business.
Savers Life employs three Regional Managers, who are responsible for
personally initiating and maintaining direct communications with every broker
appointed by Savers Life. The Regional Managers are responsible for the
recruitment and training of all new brokers. Each broker operates independently
of Savers Life and is responsible for all of his or her expenses. Savers Life
does not have exclusive agreements with its brokers, and management believes
most of these brokers sell products similar to those sold by Savers Life for
other insurance companies. Factors that help the broker determine which product
to sell are premium rates, commission rates and home office service and
administration. Sales could decline if Savers Life's products were to become
relatively less competitive.
Savers Life compensates its brokers on Medicare supplement and life
policies weekly upon receipt of premium revenues. For annuities, the brokers are
compensated monthly upon receipt of premium revenues. For the products of other
contracted insurance carriers that the brokers sell, Savers Life compensates the
brokers monthly for premiums received in the previous month. The contracted
insurance carriers remit commissions and fee income to Savers Life directly in
order that Savers Life can pay its brokers directly.
103
<PAGE> 116
PRODUCTS
Savers Life issues and markets Medicare supplement health policies, term
and whole life policies, single premium deferred annuities and single premium
immediate annuities. Prior to July 1, 1997, Savers Life wrote association group
major medical health insurance policies. For the three months ended September
30, 1997, the gross premiums received for the major medical product line were
recorded as direct premiums of Savers Life and ceded 100% to World Insurance
Company. The following table illustrates the gross premiums received from each
policy type on a statutory basis for the nine months ended September 30, 1997 as
well as for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED DECEMBER 31,
ENDED ---------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------ ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medicare Supplement............. $20,985 60% $28,079 56% $27,163 52% $24,010 49%
Major Medical................... 12,459 35 19,812 39 22,843 44 21,195 44
Life............................ 787 2 1,025 2 1,104 2 1,104 2
Annuities....................... 1,107 3 1,667 3 959 2 2,213 5
------- --- ------- --- ------- --- ------- ---
Total...................... $35,338 100% $50,583 100% $52,069 100% $48,522 100%
======= === ======= === ======= === ======= ===
</TABLE>
In late 1992, Savers Life management concluded that the life insurance
business was unlikely to grow as fast as the health insurance business. At that
time, Savers Life shifted its focus more towards the health insurance arena and
added a product line to its portfolio of products. That product was an
association group major medical health policy. Savers Life entered into a
brokerage agreement with an agency called American Health Underwriters ("AHU")
to sell the major medical product. This relationship allowed Savers Life to
penetrate this market more quickly than would otherwise have been possible since
AHU had experience with this type of product. AHU had no brokers in the
southeastern United States at that time, so its efforts were directed at
recruiting new brokers in North Carolina, South Carolina and Virginia. Within a
year, AHU was selling the Savers Life major medical product in these three
states.
Sales of major medical products grew rapidly in 1993 and 1994. Because of
this rapid growth of health insurance revenues, Savers Life began to experience
surplus strain. These problems were particularly severe in Florida, which
requires insurance companies to maintain one dollar of capital and surplus for
every four dollars of annual life and health premium revenues. Savers Life
failed this test based upon 1994 premium revenues. Accordingly, in 1995, Savers
Life voluntarily stopped writing new business in Florida. Since that time, the
North Carolina and South Carolina departments of insurance have been closely
monitoring Savers Life's capital and surplus. In response to this situation,
Savers Life took certain other actions which had the effect of restricting sales
of the major medical product, including changing its commission structure and
limiting its recruitment of new brokers. Statutory premiums written in 1996 were
$72,268, $26,089,541 and $15,665,524 in Florida, North Carolina and South
Carolina, respectively. Statutory premiums written for the nine months ended
September 30, 1997 were $45,738, $17,953,991 and $10,893,915 in Florida, North
Carolina and South Carolina, respectively.
Also in 1995, Savers Life began experiencing lack of profitability in its
major medical product line. The profitability of this product line depends
almost entirely on the management of claims expense in relation to premiums
collected. Under the current expense structure of Savers Life, claims divided by
earned premiums ("loss ratio") should be at or near 70%. The loss ratio does not
include all other expenses, such as commission expenses, general expenses and
insurance taxes, licenses and fees which are taken into account in calculating
net income, nor does it include certain cash policy acquisition costs which are
deferred and amortized over future periods. In 1995, Savers Life's loss ratio
for major medical was approximately 84% resulting in a 1995 pre-tax loss of
approximately $2,899,000. This loss was partly the result of the
under-estimation of claim liability of $1,950,811 at December 31, 1994. This
experience continued into 1996, producing a pre-tax loss for the year ended
December 31, 1996 of $2,387,112, as a result of a major medical loss ratio of
80.4%. For the six months ended June 30, 1997, the loss ratio for this product
line was 95%, resulting in a pre-tax loss of
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$3,851,000. In May of 1996, Savers Life took several steps to improve the
profitability of the major medical product. A premium rate increase was
implemented in May of 1996 for all plans issued prior to May of 1995. Because
the vast majority of these policies are monthly premium payment policies, the
impact of this premium rate increase was immediate for this product line. In
addition, the benefits offered for prescription drugs were significantly
changed, reducing the annual maximum payouts and increasing the co-payment
amount each insured must pay. Savers Life also entered into a preferred provider
organization contract in order to receive discounts from hospitals and doctors,
as well as a contract with a managed health care company under which the company
will provide programs such as utilization review and pre-certification for
hospital admissions. Savers Life and World agreed to the transfer of the major
medical product line of Savers Life to World through a coinsurance agreement,
under which World assumed, through coinsurance effective July 1, 1997, 100% of
the product line. This coinsurance agreement was in effect from July 1, 1997
until September 30, 1997 to allow World the time needed to develop a system to
administer this block of business on a direct basis. Savers Life ceased writing
any new business in this product line on June 30, 1997. In October 1997, all of
the policies in this product line were transferred to World as direct insurance
policies of World. Savers Life has agreed to share in the claims experience of
this product line for the period from July 1, 1997 through the end of 1997 to
the extent that the loss ratio for such period does not equal 75%. The loss
ratio is calculated by dividing incurred claims by earned premiums. If the loss
ratio for the period is greater than 75%, Savers Life will be required to
reimburse World in cash for 50% of the amount by which the actual loss ratio
exceeds 75%. If the loss ratio for the period is less than 75%, World will be
required to reimburse Savers Life in cash for 50% of the amount by which the
actual loss ratio is less than 75%. Savers Life anticipates that its liability
for this loss ratio will be between $200,000 and $400,000. Savers Life was paid
$50,000 per month by World to administer this block of business between July 1,
1997 and September 30, 1997. As a result of the agreement with World, Savers
Life wrote off all remaining deferred acquisition costs associated with the
major medical product line, resulting in a $1,752,000 charge against income in
the second quarter of 1997. In September 1997, Savers Life transferred assets of
$4,850,000 and liabilities of $4,928,000 to World.
Savers Life has offered its Medicare supplement product since the
mid-1980's. In recent years, this business has expanded, partly as a result of
legislative changes that made it less difficult for Savers Life to compete in
this area. In 1996, Savers Life experienced unusually high claims expense in its
Medicare supplement product line, producing a pre-tax loss of $1,651,000 and a
loss ratio of 80% for the year ended December 31, 1996. Historically, the loss
ratio for this line of business had been at or near 65%. This increased claims
expense in 1996 was partly the result of the accumulation of claims in late 1995
due to pending changes with certain preferred provider organizations. When these
claims were ultimately processed for payment in 1996, the actual expense
exceeded the reserve, thereby requiring an additional charge. Savers Life
instituted a rate increase in June 1997. Savers Life believes that the current
reserves applicable to the Medicare supplement product line are adequate. For
the nine months ended September 30, 1997, the Medicare supplement product line
recorded a pre-tax loss of approximately $223,000 with a loss ratio of 80%.
Annuities have been a part of Savers Life's traditional offering of
products. The profitability of annuity products depends to a significant degree
on the maintenance of profit margins between investment results from invested
assets and interest credited on annuity products. During 1996, such margins
continued to be positive. There has been an increase over the past ten years of
annuity companies that are focusing on the institutional and the broker
marketplaces. This increase in competition, coupled with the consolidations in
the banking industry, has had a negative impact on margins. Increased
competition typically requires higher credited rates and commission loads. In
response to these changes, Savers Life developed a marketing relationship with
Keyport Life Insurance Company ("Keyport"), a Rhode Island-based seller of
annuities. The profitability of the Keyport annuities depends upon the
difference between the commission received and the marketing expenses that are
associated with this type of product. During 1996 and the first nine months of
1997, these margins also continued to be positive.
SAVERS LIFE PRODUCTS. Medicare Supplement Insurance. Medicare supplement
insurance is designed to help Medicare recipients with the portion of their
medical expenses that Medicare does not cover. This product is regulated by the
federal government. Each insurance company's products are identical in benefits
covered. Medicare supplement plans are identified by the letters A through J.
Savers Life sells plans A through G. Each plan has different benefits to the
insured as well as different premium levels. Medicare
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supplement plans are available to anyone who is eligible for Medicare Part B and
within the ages of 65 and 85 at date of issue. At the time a person initially
becomes eligible for Medicare Part B ("open enrollment period"), Savers Life
must offer a Medicare supplement policy to that person regardless of potential
health problems of the person. If a person requests insurance coverage after the
open enrollment period, Savers Life is allowed to underwrite the policy and
determine insurability based on the health of the individual. Savers Life has a
combination of products in its in-force block of Medicare supplement business,
including pre-standardization plans and standardized plans A through G. Premiums
on all of these policies can be increased only with regulatory approval in the
states in which the policies were written. With the exception of South Carolina,
premium rate increases can occur no more frequently than annually. South
Carolina allows premium rate increases semiannually after the first policy
anniversary.
Major Medical Policies. Prior to July 1, 1997, Savers Life offered major
medical policies under an association group major medical health insurance plan.
All policyholders who purchase this plan were required belong to an association
known as the National Consumers Alliance ("NCA"). The NCA is an independent
organization established for the purpose of providing various benefits to its
members such as insurance, purchase discounts and travel benefits. Eligibility
to participate in Savers Life's major medical plan is a benefit of membership in
the NCA. In connection with its collection of premiums Savers Life also collects
NCA dues and, for that service, Savers Life is paid a fee. All of the major
medical policies are individual or family policies. No employer group policies
are issued under this plan. Savers Life began selling this policy in October
1992. The Savers Life major medical health insurance plan is a typical indemnity
type plan whereby the insured can choose the deductible amount and the insurance
percentage of coverage needed. Premiums are calculated based on the amount of
the deductible and the percentage of covered health benefits that the insured
chooses. This policy also provides a prescription drug benefit. Premiums can be
increased on this product every six months after the first year of coverage
without regulatory approval. In May 1996, several changes were made in the
premiums and benefits of this product. First, Savers Life implemented a premium
rate increase on all plans issued prior to May 1995. Secondly, Savers Life
significantly changed the benefits offered for prescription drugs, reducing the
annual maximum payouts and increasing the copayment amount each insured must
pay. Savers Life also entered into a Preferred Provider Organization contract in
order to receive discounts from hospitals and doctors. Savers Life also entered
into a contract with a managed health care company, whereby the company will
provide such programs as utilization review and pre-certification for hospital
admissions. All of these changes were introduced in an effort to reduce the
rising claims costs Savers Life had been experiencing in the product over the
last two years. Savers Life reinsures a portion of the risk on these policies.
Before September 1, 1996, all claims expenses over $75,000 per incident were
reinsured at a cost of 4.5% of premiums. Effective September 1, 1996, all claims
expenses over $100,000 per incident were reinsured at a cost of 4.7% of
premiums.
Whole Life Insurance. Savers Life offers two whole life policies, both of
which are non-participating. One policy is a guaranteed issue product offered in
face amounts up to $10,000. This product is offered to anyone between the ages
of 50 and 84 and has level premiums. If death occurs during the first three
years of this policy, the only payout on the policy is a return of all premiums
paid plus interest. After the third anniversary of the policy, the full face
amount is paid to the beneficiary. In the case of accidental death, a separate
payout of double the face amount is paid to the beneficiary. The second whole
life policy offered by Savers Life is offered in face amounts up to $25,000 for
issue ages 0 through 80. The maximum amount available to those over 65 at the
time of issue is $10,000. Underwriting is performed on the policy applications
from health questions the potential insured must answer. This policy offers full
coverage from date of issue and has level premiums.
Term Insurance. Savers Life offers two term life insurance products. One
product offers coverage up to issue age 65 with minimum face amounts of $50,000
for those under 45 and $25,000 minimum for those older than 45. The premiums on
this product increase every ten years. This product is reinsured, with Savers
Life keeping the first $20,000 of face amount and the reinsurer accepting all
over $20,000. The second product offers coverage up to issue age 80. The minimum
face amount for this product is $50,000. The premiums on this product increase
every year at the anniversary date. Savers Life keeps the first $10,000 and the
reinsurer accepts all risk over $10,000.
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Single Premium Deferred Annuities. Savers Life offers a tax deferred single
premium annuity product. A minimum deposit of $2,500 is required to purchase
this product. Additional deposits can be made into these annuities. The interest
rate on these products is tied to the 26-week Treasury Bill rate and changes
every 120 days. While this product line has declined in both premium volumes and
management focus, this line had approximately $42,122,000 in accumulated value
at September 30, 1997.
Single Premium Immediate Annuities. Savers Life offers a single premium
immediate annuity, whereby an annuitant purchases an immediate annuity with a
lump sum payment to Savers Life and Savers Life begins a payout stream shortly
thereafter consisting of principal and interest. The interest rate on these
annuities is based on Savers Life's investment portfolio earnings rate at the
date of purchase of the annuity. The average interest rate on this group of
annuities at September 30, 1997 was 6.6%. A beneficiary is designated to receive
the remaining balance, if any exists, upon death of the annuitant. The reserve
recorded on this block of annuities was approximately $1,504,000 at September
30, 1997.
Payout Annuities. Savers Life has a block of annuities in payout status.
These are single premium deferred annuities which have annuitized and the
annuitant has requested monthly principal and interest payments. A beneficiary
is designated to receive the remaining balance, if any exists, upon death of the
annuitant. A reserve of approximately $1,484,000 was recorded on this block at
September 30, 1997.
Annuity Payouts With Life Contingencies. Savers Life has a block of
annuities in payout status which have life contingencies. These policies provide
a monthly payment to the annuitant as long as he or she lives. After a specified
period of time, if the annuitant dies, the payments cease. A reserve of
approximately $1,099,000 was recorded on this block at September 30, 1997.
PRODUCTS OF OTHER COMPANIES. In addition to sales of its own products,
Savers Life markets products of other companies, and for this effort, receives
fee income.
Keyport Annuities. Savers Life sells annuities on behalf of Keyport through
its broker network. Savers Life sells Keyport fixed annuity products that, due
to their relatively high rate of interest, are very popular with Savers Life's
customer base. Savers Life remits the premiums collected to Keyport and is
compensated through commission agreements. Accumulated values which Savers Life
brokers have sold on Keyport's behalf total approximately $155,000,000. A
portion of this fund value, approximately $23,000,000, is subject to renewal
fees paid to Savers Life from Keyport.
QualChoice of North Carolina Product. Savers Life entered into a two-year
marketing and administrative contract with QualChoice of North Carolina
("QualChoice") in 1996 whereby Savers Life is the distribution system for the
small group product offered by QualChoice. QualChoice is an HMO in a twenty-
county area in the northwestern part of North Carolina offering HMO insurance
coverage to both large and small groups. Small group coverage is defined as any
group of employees from one to fifty. Savers Life is compensated for this effort
with a marketing fee, administrative fee and commission reimbursement for its
brokers.
OPERATIONS
Savers Life strives to achieve low expense levels while maintaining a
reasonable level of service to its policyholders and brokers. Savers Life's
principal administrative departments are accounting, Medicare administration,
major medical administration, annuity administration and data processing. The
accounting department is responsible for financial reporting, premium billing
and collection and the payment of all expenses other than claims. Medicare
administration is responsible for life and Medicare policy underwriting, policy
issue for life and Medicare products, customer service of life and Medicare
products and life and Medicare claims payments. Major medical administration is
responsible for major medical policy underwriting, policy issue, customer
service and major medical claims payments. This function was being performed for
World for a charge of $50,000 per month which ceased on October 1, 1997. See
"RISK FACTORS -- Reinsurance of Major Medical Product Line" and "ADDITIONAL
INFORMATION REGARDING SAVERS LIFE -- Description of Business -- Products." Data
processing is responsible for maintaining data processing systems for the life,
annuity and Medicare products as well as the accounting system for those
products. The major medical system used by Savers Life was through Policy
Management Systems Corporation ("PMSC") in Columbia, South Carolina. The life
and health insurance support staff of PMSC is
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located in Dallas, Texas. The information from PMSC's system was manually merged
into the Savers Life accounting system.
INVESTMENTS
Investment activities are an integral part of Savers Life's business.
Although the majority of Savers Life's revenues are contributed from the health
insurance product lines, the majority of the assets are used to support the
annuity product line. Profitability is significantly affected by spreads between
rates credited on insurance liabilities and interest yield on invested assets.
All credited rates on single premium deferred annuities change every 120 days
and are tied to the 26-week U.S. Treasury Bill rate. For the six months ended
September 30, 1997, the average interest rate credited on Savers Life's single
premium deferred annuity portfolio was approximately 5.6%, and the average net
yield of Savers Life's investment portfolio was 6.32%, for a spread of 0.72% at
September 30, 1997. For the year ended December 31, 1996, the average interest
rate credited on Savers Life's single premium deferred annuity portfolio was
approximately 5.1%, and the average net yield of Savers Life's investment
portfolio for the year ended December 31, 1996 was 6.1% for a spread of 1.0% at
December 31, 1996, compared to 0.6% at December 31, 1995. Increases or decreases
in interest rates could increase or decrease the interest rate spread between
investment yields and interest rates credited on insurance liabilities, which in
turn could have a beneficial or adverse effect on the future profitability of
Savers Life. Sales of fixed maturities that result in investment gains may also
tend to decrease future interest yields from the portfolio. State insurance laws
prescribe the types of permitted investments and limit their concentration in
certain classes of investments.
The following table shows Savers Life's pre-tax investment performance for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED ---------------------
SEPTEMBER 30, 1997 1996 1995
------------------ ---- ----
<S> <C> <C> <C>
Average invested assets(1)........................... $70,995 $75,132 $75,686
Net investment income(2)............................. 3,366 4,569 4,852
Average annual yield(3).............................. 6.32% 6.08% 6.40%
Net realized investment gains........................ $ 76 $ 170 $ 387
</TABLE>
- -------------------------
(1) Average invested assets are computed by dividing the total of the amortized
costs of investments and cash and cash equivalents at the beginning of the
period plus the end of the period by two.
(2) Consists principally of interest and dividend income less investment
expenses.
(3) The average annual yield was computed by dividing the net investment income
(exclusive of realized and unrealized gains and losses) by average invested
assets for such period and, in the case of the nine-month period,
multiplying the result by four divided by three.
Savers Life invested in the following mix of invested assets and cash and
cash equivalents at September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT %
------ -
<S> <C> <C>
Fixed Maturities............................................ $23,383 35%
Equity Securities........................................... 3,660 5
Certificates of Deposit..................................... 26,255 39
Short-term Investments...................................... 7,102 10
Cash........................................................ (1,445) (2)
Construction Loans.......................................... 5,669 8
Mortgage and Policy Loans................................... 766 1
Real Estate................................................. 2,409 4
------- ---
Total....................................................... $67,799 100%
======= ===
</TABLE>
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Savers Life has two distinctly different liability lines for which to
invest assets. The first is a block of single premium deferred annuities where
the benefit payments arising from these liabilities are spread over a number of
years. The second block is the health insurance block, consisting of Medicare
supplement policies. The required cash outflows on this block are relatively
short-term in nature. It is, therefore, critical that Savers Life invest in
assets that will match both its short-term needs and its long-term needs.
Certificates of deposit and short-term investments are associated with Savers
Life's health insurance block, and its remaining investments are associated with
its annuity business.
All of the investment decisions of Savers Life are made by management of
Savers Life and are approved by the Finance Committee of the Savers Life Board.
Fixed maturities consist of bonds held for investment and bonds available
for sale. All of the fixed maturities in the table below in NAIC Rating 1 were
securities of the U.S. government and its agencies and mortgage backed
securities of these agencies. Savers Life owns three mortgage backed securities
with a total book value of approximately $295,000. One of these securities is a
collateralized mortgage obligation with a book value of approximately $246,000.
All of the fixed maturity securities were classified as NAIC Designation 1 at
September 30, 1997.
Equity securities consist of both common and preferred stocks. At September
30, 1997, Savers Life owned common stocks with a market value of approximately
$3,609,000 and preferred stocks with a market value of approximately $51,000.
Savers Life invested 39% of its cash and investable assets at September 30,
1997 in certificates of deposit. These certificates of deposit typically have a
maturity of six months or less. These certificates of deposit are usually
purchased in denominations of $99,000 per financial institution. Savers Life
uses the services of investment brokers to find certificates of deposit with
attractive yields in financially stable banking institutions.
Short-term investments at September 30, 1997 consisted solely of funds held
at Federated Investors in Boston, MA. The funds are invested in AVR-exempt
securities. These are securities that the NAIC has designated as Rating 1
securities, which have the further distinction of being exempt from AVR. This
investment increased during 1997 due to the intentional increase of the
liquidity of the investment portfolio in anticipation of transferring the
management of the entire portfolio to SMC. As investments have matured, the
proceeds have been kept in cash or short-term investments.
Construction loans include several land development loans with
developer/builders located in North Carolina and Virginia. After an initial
closing, funds are disbursed to the developer incrementally as the infra-
structure (i.e., site grading, storm and sanitary sewer, water, electric,
roadways, curb gutters and amenities) is constructed. Disbursements are made
monthly subject to engineering certification of work in place and Savers Life's
own site inspection. Terms of these loans are typically 18 to 36 months and have
an interest rate of prime plus one percent or greater. An initial fee of one
percent of the loan amount is charged at the beginning of the loan and a fixed
amount per lot is charged as the lots are released from the security of the deed
of trust. These loans are typically based on a 70% or less loan-to-value ratio,
and value judgments are confirmed by independent appraisers.
Construction loans are also made to numerous unaffiliated borrowers known
to Savers Life. These loans are all secured by first lien deeds of trust along
with title insurance, which includes coverage of all material and mechanic's
liens. The properties include detached single-family dwellings and multi-family
dwellings. All construction lending is committed by Savers Life management and
closed by attorneys designated by Savers Life who follow a detailed list of
closing instructions. All of these loans have maturities of twelve months or
less. Loan-to-value ratios in all cases are 80% or less. The interest rate on
these loans is prime plus one percent along with an origination fee of one
percent of the gross loan amount. Sums are disbursed monthly after a physical
inspection confirms progress on construction.
Long-term mortgage loans include borrowings secured by condominiums in the
Salters Cove Subdivision of Garden City, South Carolina. The original term of
these loans was 15 years, and all will mature within the next seven years. These
loans have variable interest rates equal to the three-year Treasury Note rate
plus
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2.75%. The rate on these loans changes every three years. In addition, there are
six detached single family dwellings in Forsyth County, North Carolina, five of
which have maturities in 1997 and one in 2001. All mortgage loans were based on
loan-to-cost ratios of 75% or less.
The mortgage loan portfolio had one delinquency in 1995. A loan secured by
a condominium near the campus of Virginia Polytechnical Institute was foreclosed
in 1995. This loan was part of a block of mortgage loans that Savers Life had
purchased in 1993. All of the loans in this block were subsequently packaged and
sold, except for this loan. Because of its payment history, this loan was not
attractive to the purchasers of the block of loans. This property is currently
owned by Savers Life and is producing income. The book value of the loan at the
time of foreclosure was approximately $45,000. During 1996, another mortgage
loan became delinquent. This mortgage loan, with a book value of $431,589 became
delinquent in the third quarter of 1996 and foreclosure proceedings began in the
fourth quarter of 1996. The foreclosure date of this property was in January of
1997. The foreclosed property is located near Charlotte, North Carolina, and is
a retail shopping and office complex. This property was sold on June 17, 1997.
Net proceeds received on this property were $445,000, resulting in a pre-tax
gain of approximately $13,000.
Savers Life owns real estate in three states. In South Carolina, real
estate owned includes two 3.5 acre unimproved commercial sites in Garden City,
SC. These tracts are bordered by U.S. 17 on the west and by the Salters Cove
Subdivision on the east. This real estate was acquired in September 1988 upon
the liquidation of a partnership, of which Savers Life was a party. The assets
of the partnership were distributed evenly among the partners. Savers Life
received seven acres in the front part of the property and a group of
condominiums. The condominiums were subsequently sold and Savers Life issued the
mortgage loans on these condominiums. This property is currently listed with a
realtor in South Carolina. In North Carolina, Savers Life owns its two-story
Home Office building in Winston-Salem. This building is a concrete and glass
structure over a steel frame containing a gross area of 27,000 square feet.
Savers Life occupies the top floor of the building and leases out most of the
space on the first floor. Rental income collected for the year ended December
31, 1996 was approximately $100,000. The book value of the building at September
30, 1997 was approximately $1,291,000. By virtue of foreclosure, Savers Life
owns a condominium in Blacksburg, Virginia. This property is leased to students
attending Virginia Polytechnical Institute. The rental income received for this
property for the year ended December 31, 1996 was approximately $7,000 and the
book value of this property at September 30, 1997 was approximately $45,000.
UNDERWRITING
Premiums charged on insurance products are based in part on assumptions
about the incidence and timing of insurance claims. General underwriting
guidelines and reinsurance decisions are the responsibility of the Underwriting
Committee of the Board of Directors.
Savers Life has adopted underwriting standards for its major medical and
Medicare supplement policies that are administered by professional underwriters
in each department. All health insurance underwriting decisions are made in the
Savers Life Home Office. If an applicant does not meet Savers Life's
underwriting standards for issuance of a policy, the application is denied. The
only exception to this is the open enrollment period for certain Medicare
supplement applicants during which no underwriting is permitted.
Generally, policies have the most favorable claims experience in the time
period directly after the policy has been issued, because the underwriting has
identified potential insureds with health problems and the policy has either
been declined, the health problem has been excluded from coverage or an extra
premium has been charged for the health problem. Typically, the older a policy
is, the poorer the claims experience is for the insurer, because the
underwriting has become less recent or "stale".
Savers Life relies on the underwriting decisions of its reinsurer for both
of its term insurance plans. Savers Life has adopted and follows simplified
underwriting procedures for its whole life policies.
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RESERVES
In accordance with applicable insurance laws, Savers Life has established,
and carries as liabilities in its statutory financial statements, actuarially
determined reserves to satisfy its respective annuity contract and life
insurance policy obligations. Reserves, together with premiums to be received on
outstanding policies and interest thereon at certain assumed rates, are
calculated to be sufficient to satisfy policy and contract obligations. The
actuarial factors used in determining such reserves are based on statutorily
prescribed mortality tables and interest rates.
Savers Life also establishes health policy reserves and claim reserves for
both its major medical and Medicare supplement policies. The policy reserves
consist of unearned premium reserves, which record that portion of health
premiums received for insurance coverage beyond the date of the financial
statement being presented. Additionally, claim reserves are established in an
effort to estimate the amount of claims that have been incurred by the insureds,
but have not been reported to the insurer. The method used by Savers Life to
estimate these reserves requires the use of the recent past as an indicator of
claims experience. This method is typically referred to as a lag study, since it
reflects the amount of time between incurred date of the claim and payment date
of the claim. The lag study is used to project claims to be paid in the future
with incurred dates falling on or before the financial statement date.
The reserves recorded in the financial statements included elsewhere in
this Proxy Statement/Prospectus are calculated based on GAAP and differ from
those specified by the laws of the various states and recorded in the statutory
financial statements of Savers Life. These differences arise from the use of the
net unearned premium health reserve for GAAP and the gross unearned premium
health reserve for statutory purposes. Statutory financial statements also
require an additional reserve in anticipation of future premium shortfalls. Life
and annuity reserves are the same for both statutory and GAAP financial
statements.
To determine policy benefit reserves for its life insurance products,
Savers Life performs periodic studies to compare current experience for
mortality, interest and lapse rates with projected experience used in
calculating the reserves. Differences are reflected currently in earnings for
each period. Savers Life historically has not experienced significant adverse
deviations from its assumptions. To determine reserves for single premium
deferred annuities, the full accumulated value is recorded as a liability.
REINSURANCE
Consistent with the general practice of the insurance industry, Savers Life
has reinsured portions of the coverage provided by its insurance products with
other insurance companies under agreements of stop loss coverage and indemnity
reinsurance.
Savers Life had a stop loss reinsurance agreement on its major medical
block with RGA Reinsurance Company ("RGA"). Prior to September 1, 1996, this
agreement stated that, on any single claim incident, Savers Life would pay all
eligible claims expenses, and RGA would reimburse Savers Life for all expenses
over $75,000. Effective September 1, 1996, this agreement was amended. The
expenses in excess of $100,000 are reimbursed to Savers Life under the new
agreement. As of July 1, 1997, all major medical premiums were ceded to World
through a coinsurance agreement. Effective October 1, 1997, all of these major
medical policies became direct policies of World. A receivable of $1,459,000
from World was recorded at September 30, 1997 for the amounts due pursuant to
the coinsurance agreement.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured, but it is the practice of insurers (subject to
certain limitations of state insurance statutes) to account for risks that have
been reinsured with other approved companies, to the extent of the reinsurance,
as though they are not risks for which the original insurer is liable.
Reinsurance ceded on life insurance policies by Savers Life at December 31, 1996
and 1995 represented 62.4% and 63%, respectively, of gross combined individual
life insurance in force at the end of such periods. At September 30, 1997, 60.7%
of life insurance in force amounts were ceded to reinsurers. Savers Life cedes
life reinsurance to three reinsurers. At September 30, 1997, approximately
$34,123,000 of the face value of life policies had been
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ceded to Business Men's Assurance Company, with $10,706,000 ceded to Munich
American Reinsurance Company and $1,623,000 ceded to Optimum Reinsurance
Company. The reinsurance receivable at September 30, 1997 from Business Men's
Assurance Company was $157,054 and from Munich American Reinsurance Company was
$61,185. There was no reinsurance receivable at September 30, 1997 from Optimum
Reinsurance Company. All of the reinsurers have an A. M. Best rating of A- or
better.
COMPETITION
The life and health insurance industry is highly competitive and consists
of a large number of both stock and mutual insurance companies, many of which
have substantially greater financial resources, broader and more diversified
product lines and larger staffs than those possessed by Savers Life. Competition
also is encountered from the expanding number of banks, securities brokerage
firms and other financial intermediaries that are marketing insurance products
and which offer competing products such as savings accounts and securities.
Competition within the life insurance industry occurs on the basis of, among
other things, product features such as price and interest rates, perceived
financial stability of the insurer, policyholder service, name recognition and
ratings assigned by insurance rating organizations. Competition in the health
insurance arena has been heightened by the emergence of HMOs in recent years,
many of which have relationships with hospitals and other medical providers in
order to control rising health care costs.
Savers Life must also compete with other insurers to attract and retain the
allegiance of brokers. Savers Life believes it has been successful in attracting
and retaining brokers because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy issuance,
responsive policyholder service and relationships with Regional Managers.
Savers Life is not rated by A. M. Best, an insurance rating organization.
Management of Savers Life does not believe that the lack of a rating has had a
significant impact on sales of its major product lines.
FEDERAL INCOME TAXATION
The life insurance and annuity products marketed and issued by Savers Life
generally provide the policyholder with an income tax advantage, as compared to
other savings investments such as certificates of deposit and bonds, in that
income taxation on the increase in value of the product is deferred until
receipt by the policyholder. With other savings investments, the increase in
value is taxed as earned. Annuity benefits are generally not taxable until paid,
and life insurance death benefits are generally exempt from income tax. The tax
advantage for life insurance and annuity products is provided in the Internal
Revenue Code and is generally followed in all states and other United States
taxing jurisdictions. Accordingly, it is subject to change by Congress and the
legislatures of the respective taxing jurisdictions.
Savers Life files an individual company return for federal income tax
purposes. Savers Life has no net operating loss carryforwards at December 31,
1996.
INFLATION
The primary direct effects on Savers Life of inflation are the increase in
health care costs and operating expenses. As hospitals, doctors and other health
care providers feel the effects of inflation, those costs are passed on to the
consumers and their insurance companies. In the future, if inflation should rise
sharply, the claims expenses could be incurred by Savers Life at a rate higher
and quicker than Savers Life could recoup in the form of premium rate increases.
The rate of inflation also has an indirect effect on Savers Life. To the
extent that the government's economic policy to control the level of inflation
results in changes in interest rates, Savers Life's new sales of insurance
products and investment income are affected. Changes in the level of interest
rates also have an effect on interest spreads, as investment earnings are
reinvested.
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REGULATORY FACTORS
Savers Life is subject to regulation by the insurance regulatory
authorities in the jurisdictions in which it is domiciled and the insurance
regulatory bodies in the other jurisdictions in which it is licensed to sell
insurance. The purpose of such regulation is primarily to ensure the financial
stability of insurance companies and to provide safeguards for policyholders
rather than to protect the interest of stockholders. The insurance laws of
various jurisdictions establish regulatory agencies with broad administrative
powers relating to the licensing of insurers and their brokers, the regulation
of trade practices, management agreements, the types of permitted investments
and maximum concentration, deposits of securities, the form and content of
financial statements, rates charged by insurance companies, sales literature and
insurance policies, accounting practices and the maintenance of specified
reserves, capital and surplus. Savers Life is required to file quarterly
statutory financial statements in all states in which it is licensed as well as
with the NAIC.
Under North Carolina law, Savers Life may not enter into certain
transactions, including management agreements and service contracts, unless
Savers Life has notified the North Carolina Department of Insurance of its
intention to enter into such transactions and the North Carolina Department of
Insurance has not disapproved of them within the period specified by North
Carolina law. Among other things, such transactions are subject to the
requirement that their terms be fair and reasonable and that the charges or fees
for services performed be reasonable.
Dividends by Savers Life to its stockholders are limited by laws applicable
to insurance companies. As a North Carolina domiciled insurance company, Savers
Life may pay a dividend or distribution from its capital and surplus, without
the prior approval of the North Carolina Commissioner of Insurance, if the
dividend or distribution together with all other dividends and distributions
paid within the preceding twelve months, does not exceed the lesser of (i) net
gain from operations or (ii) 10% of capital and surplus, in each case as shown
in its preceding annual statutory financial statements. Savers Life was not
allowed to pay a dividend in 1996 or 1997 without prior North Carolina
Department of Insurance approval due to its statutory net losses in 1995 and
1996. Savers Life will not be permitted to pay dividends in 1998 without such
approval.
In some instances many state regulatory authorities require deposits of
assets for the protection of policyholders either in those states or for all
policyholders. At September 30, 1997, securities representing approximately 16%
of the book value of Savers Life's invested assets were on deposit with various
state treasurers or custodians. Such deposits must consist of securities that
comply with the standards that the particular state has established.
The NAIC, as well as North Carolina, has adopted RBC requirements for
life/health insurance companies to evaluate the adequacy of statutory capital
and surplus in relation to investment and insurance risks such as asset quality,
mortality and morbidity, asset and liability matching, benefit and loss reserve
adequacy and other business factors. The RBC formula is used by state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. The RBC guidelines are intended to be a regulatory tool only, and
are not intended as a means to rank insurers generally. In addition, the formula
defines minimum capital standards that supplement the previously existing system
of low fixed minimum capital and surplus requirements on a state-by-state basis.
Regulatory compliance is determined by a ratio of the enterprise's regulatory
total adjusted capital, as defined by the NAIC, to its authorized control level
RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios
are classified within certain levels, each of which requires specific corrective
action. The ratio of Total Adjusted Capital to Authorized Control Level RBC for
Savers Life is 2.2 and 2.3 at December 31, 1996 and 1995, respectively. Due to
the negative trend in RBC, the Departments of Insurance of North Carolina and
South Carolina have requested a plan of action to reverse this trend. The
expected plan of action is the sale of the major medical product line, which
sale is expected to substantially increase RBC. However, should Savers Life's
RBC position decline in the future, its ability to pay dividends and the degree
of regulatory supervision or control to which it is subjected may be affected.
The NAIC calculates twelve financial ratios based on statutory financial
statements ("IRIS ratios") to assist state regulators in monitoring the
financial condition of insurance companies. A "usual range" of results for each
ratio is used as a benchmark for analysis, and a company's variation from this
range may be either
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favorable or unfavorable. State insurance departments may make inquiries of
Savers Life when at least four IRIS ratios are outside the usual range. These
inquiries could lead to restrictions on the amount of business that may be
written in an individual state. The following table presents the IRIS ratios as
determined by the NAIC for Savers Life which varied from the "usual range" for
1996.
<TABLE>
<CAPTION>
REPORTED
RATIO NAME USUAL RANGE VALUE
---------- ----------- --------
<S> <C> <C>
Change in capital and surplus............................ 50 to -10 -16
Net income to total income............................... -- to 0 -2
Change in reserving ratio................................ 20 to -20 23
</TABLE>
EXPLANATION OF RATIOS:
Change in capital and surplus. These ratios, calculated on a gross and net
basis, are a measure of improvement or deterioration in a company's financial
position during the year. The negative value was primarily due to the statutory
loss from operations of approximately $1.2 million recorded in 1996.
Net Income to Total Income. This ratio is a measure of a company's
profitability. The negative value was primarily due to the statutory loss from
operations recorded in 1996.
Change in Reserving Ratio. The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. The positive value was due to the reserve strengthening
within the life product line. The majority of the life reserves consist of whole
life policies which have higher reserve requirements than term policies.
All jurisdictions in which Savers Life operates have adopted the NAIC model
regulation of Medicare supplement policies. The standardization of policy
benefits, which became effective in 1992, commission requirements and other
model regulations have reduced the volatility in this marketplace. Policyholders
make their decisions based on price and customer service. Savers Life does not
believe that the NAIC model regulation has had a material negative impact
although it is impossible to predict the future impact of changing state and
federal regulations. This model law does address the loss ratio of Medicare
supplement blocks of business and limits the ratio to no lower than 65%. If this
portion of the regulation is violated, a return of premiums is required to the
policyholders. A return of premiums has not been required of Savers Life in any
of the years since adoption of the model law.
Current proposals in Congress, specifically the Kennedy-Kassenbaum Act, are
expected to have a minimal impact on Savers Life since the primary focus of that
legislation is on employer-sponsored health coverage. Savers Life does not offer
an employer group major medical plan.
New rules adopted by the NAIC are effective only to the extent adopted by
the states in which Savers Life operates, and it is not possible to predict the
future impact of changing state and federal regulation on the operations of
Savers Life.
The statutory filings of Savers Life require classifications of investments
and the establishment of an AVR, an account designed to stabilize a company's
statutory surplus against fluctuations in the market value of stocks and bonds,
according to regulations prescribed by the NAIC. The AVR account consists of two
main components: a "default component" to provide for future credit-related
losses on fixed income investments and an "equity component" to provide for
losses on all types of equity investments, including real estate.
The NAIC requires an additional reserve, called the IMR which consists of
the portion of realized capital gains and losses from the sale of fixed income
securities attributable to changes in interest rates. The IMR is required to be
amortized against earnings on a basis reflecting the remaining period to
maturity of the fixed income securities sold.
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The amounts related to AVR and IMR for Savers Life at September 30, 1997
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
MAXIMUM
AVR AVR IMR
--- ------- ---
<S> <C> <C> <C>
Savers Life......................................... $1,572 $1,642 $1,386
</TABLE>
The annual addition to the AVR for 1997 is 20% of the maximum reserve over
the accumulated balance. If the calculated reserve with current year additions
exceeds the maximum reserve amount, the reserve is reduced to the maximum
amount. For the default component, Savers Life made the required contribution to
AVR at September 30, 1997. For the equity component, the reserve exceeded the
maximum and was reduced to the maximum amount.
Most jurisdictions require insurance companies to participate in guaranty
funds designed to cover claims against insolvent insurers. Insurers authorized
to transact business in these jurisdictions are generally subject to
assessments, based on annual direct premiums written in that jurisdiction, to
pay such claims, if any. These assessments may be deferred or forgiven under
most guaranty laws if they would threaten an insurer's financial strength and,
in certain instances, may be offset against future state premium taxes. The
incurrence and amount of such assessments have increased in recent years and are
generally expected to increase further in future years. Savers Life was
assessed, and paid, approximately $41,000 for the year ended December 31, 1996.
Assessments of $21,000 were paid for the nine months ended September 30, 1997.
The likelihood and amount of all future assessments cannot be reasonably
estimated and are beyond the control of Savers Life.
As part of their routine regulatory oversight process, approximately once
every three to five years, state insurance departments conduct periodic detailed
examinations ("Triennial Examinations") of the books, records and accounts of
insurance companies domiciled in their states. Savers Life underwent a Triennial
Examination during 1995 for the period ended December 31, 1994. The final report
on such examination has been issued by the North Carolina Department of
Insurance, and all issues have been addressed and corrected in the opinion of
management.
EMPLOYEES
As of September 30, 1997, Savers Life had 51 employees. All except the
three Regional Managers work in the Home Office in Winston-Salem, North
Carolina.
PROPERTIES
Savers Life owns its Home Office building containing approximately 27,000
square feet at 8064 North Point Boulevard, Winston-Salem, North Carolina. Savers
Life occupies the top floor of its two story building and leases most of the
first floor.
LEGAL PROCEEDINGS
Savers Life is involved in various legal proceedings in the normal course
of business. In most cases, such proceedings involve claims under insurance
policies or other contracts of Savers Life. The outcomes of these legal
proceedings are not expected to have a material effect on the financial
position, liquidity or future results of operations of Savers Life based on
Savers Life's current understanding of the relevant facts and law.
MARKET PRICE AND DIVIDENDS ON SAVERS LIFE COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
At the close of business on December 1, 1997, there were issued and
outstanding 1,779,908 shares of Savers Life Common Stock, the only outstanding
class of its equity securities, held by approximately 584 owners of record.
There is no established public market for Savers Life Common Stock.
Savers Life has not paid a cash dividend on the Savers Life Common Stock
within the past two years.
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the beneficial
ownership of Savers Life Common Stock; (i) by each stockholder known by Savers
Life to own beneficially more than five percent (5%) of the outstanding Savers
Life Common Stock, (ii) by each member of the Saver's Life Board (including two
executive officers of Savers Life) and (iii) by all directors and executive
officers of Savers Life as a group. This information is as of December 1, 1997.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF SHARES OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) SHARES(2)
------------------------ --------------------- -----------
<S> <C> <C>
F. Edward Broadwell, Jr., Director.......................... 13,556 *
Jerry E. Francis, Director, Senior Vice President and %
Director of Operations.................................... 46,958(3)(4) 2.6
H. Joe King, Jr., Director.................................. 15,916 *
Arthur H. Little, Director.................................. 26,693 1.5%
James P. Marsh, Director.................................... 15,266 *
Ted Y. Matney, Director..................................... 15,199 *
Theo H. Pitt, Jr., Director................................. 14,705(5) *
William C. Rogers, Sr., Director............................ 15,266 *
Joseph H. Sherrill, Jr., Director........................... 94,675(6) 5.3%
1450 Point Crisp Road
Sarasota, Florida 34242
Jerry D. Stoltz, Sr., Director, President and Treasurer..... 221,515(7) 12.4%
8064 North Point Boulevard
Winston-Salem, North Carolina 27106
William G. White, Jr., Director............................. 17,632 *
All Directors and Executive Officers of Savers Life (14 520,259(8) 28.6%
persons)..................................................
</TABLE>
- -------------------------
* Less than 1%
(1) Except as described in the next sentence or in footnotes following, each
person named in the table possesses sole voting and sole investment power
with respect to all shares of Savers Life Common Stock listed in the table
as owned by such person. Each person named in the table has agreed to vote
his shares of Savers Life Common Stock in favor of approval of the Merger
Agreement and against certain other actions. See "VOTING AGREEMENTS." Shares
beneficially owned include shares that may be acquired pursuant to the
exercise of outstanding options or warrants that are exercisable within 60
days of December 1, 1997 as follows: Mr. Francis -- 15,000, Mr.
Stoltz -- 8,500, directors and executive officers as a group -- 38,300.
(2) Percentage of total outstanding shares is calculated separately for each
person on the basis of the actual number of outstanding shares at the close
of business on December 1, 1997 and assumes, for purposes of the
calculation, that shares issuable upon exercise of options or warrants
exercisable within 60 days held by such person (but no other stockholders)
had been issued as of such date. Percentages less than 1% are not indicated.
(3) Does not include 60,825 shares (3.4% of the outstanding shares) held by the
Savers Life 401(k) Plan. As Administrator of the plan, Mr. Francis votes
shares of Savers Life Common Stock held by the plan. The plan does not
provide for pass-through voting rights to beneficial owners of shares of
Savers Life Common Stock vested in their accounts. As beneficial owner of
the shares held by the plan, Mr. Francis intends to vote all shares owned by
the plan in favor of the proposed Merger.
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(4) Does not include 8,509 shares owned of record by the Savers Life 401(k) Plan
in the account of Mr. Francis.
(5) Does not include 2,250 shares owned of record by Mr. Pitt's wife as
custodian for their son, beneficial ownership of which is disclaimed.
(6) Does not include 6,250 shares owned of record by Mr. Sherrill's wife,
beneficial ownership of which is disclaimed.
(7) Does not include 14,375 shares owned of record by the Savers Life 401(k)
Plan in the account of Mr. Stoltz.
(8) Does not include 33,700 shares (1.9% of the outstanding shares) owned of
record by the Savers Life 401(k) Plan for the accounts of executive officers
of Savers Life, including shares held in the accounts of Mr. Stoltz and Mr.
Francis.
Pursuant to the Merger Agreement SMC has agreed to appoint Mr. Francis to
the SMC Board. Mr. Francis will stand for election at the 1998 annual meeting of
the stockholders of SMC. Mr. Francis is 48 and has been Senior Vice President
(since 1991), Director of Operations (since 1982) and a director (since 1991) of
Savers Life. Although nonemployee directors of Savers Life receive compensation
for their services as directors and reimbursement of expenses incurred in
connection with such service, directors of Savers Life who are employees of
Savers Life receive no such compensation for their service as directors. His
ownership of Savers Life Common Stock, as reflected in the foregoing table, will
result in his owning shares of SMC Common Stock as a result of the Merger.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights the principal factors affecting the
results of operations and the significant changes in balance sheet items of
Savers Life for the periods listed as well as Savers Life's liquidity and
capital resources. This discussion should be read in conjunction with the Savers
Life Financial Statements and the Notes thereto appearing elsewhere herein.
INTRODUCTION
Savers Life is an insurance company domiciled in the state of North
Carolina, with licenses to write insurance products in the states of North
Carolina, South Carolina, Virginia and Florida. Savers Life historically has
written Medicare supplement and association group major medical health insurance
policies, single premium deferred and immediate annuity policies and term and
whole life insurance policies. Savers Life and World agreed to the transfer of
the major medical product line of Savers Life to World through a coinsurance
agreement, under which World assumed, through coinsurance effective July 1,
1997, 100% of the product line subject to certain risk sharing arrangements. See
"Additional Information Regarding Savers Life -- Description of Business --
Products". During the first nine months of 1997, the Savers Life major medical
product line experienced a pre-tax loss of $4,069,000. See "SMC Selected
Unaudited Pro Forma Combined Financial Data". Savers Life is not consolidated
with any other entity.
The health products, Medicare supplement and major medical, generate
profits from the excess of premium revenues over the incurred claims and
commission and administrative expenses. The most volatile of these factors is
the incurred claims which can be adversely affected by upward trends in provider
costs from both hospitals and doctors.
The profitability of the major medical product line depends almost entirely
on the management of claims expense in relation to the premiums collected. It is
imperative that the loss ratio, which is defined as incurred claims divided by
earned premiums, be at or near 70%. Until 1995, Savers Life experienced loss
ratios at or below 70%. Beginning in 1995, this product line became unprofitable
as the loss ratio climbed above 70%. For the year ended December 31, 1995, the
loss ratio for major medical was approximately 84%. For the year ended December
31, 1996, this loss ratio was approximately 80%. For the six months ended June
30, 1997, this loss ratio was approximately 95%. These loss ratios resulted in
pre-tax losses for the year ended December 31, 1995 of approximately $2,899,000,
pre-tax losses for the year ended December 31, 1996 of approximately $2,387,000
and pre-tax losses for the six months ended June 30, 1997 of approximately
$3,851,000 in this product line. The loss in 1995 included $1,950,811 of claim
expense related to the prior year which were recorded in 1995 as a result of
underestimation of claims liability in 1994.
Savers Life transferred of the major medical product line to World through
a coinsurance agreement, under which World assumed, through coinsurance
effective July 1, 1997, 100% of the product line. Savers Life ceased writing any
new business in this product line on June 30, 1997. For the period from July 1,
1997 to September 30, 1997, the premiums, claims, commissions and premium taxes
were direct business of Savers Life and then ceded 100% to World. Savers Life
was paid $50,000 per month by World for this administration. In October, 1997,
all of the policies in this product line were transferred to World as direct
insurance policies of World. Savers Life has agreed to share in the claims
experience of this product line for the period from July 1, 1997 through the end
of 1997 to the extent that the loss ratio for such period does not equal 75%.
The loss ratio is calculated by dividing incurred claims by earned premiums. If
the loss ratio for the period is greater than 75%, Savers Life will be required
to reimburse World in cash for 50% of the amount by which the actual loss ratio
exceeds 75%. If the loss ratio for the period is less than 75%, World will be
required to reimburse Savers Life in cash for 50% of the amount by which the
actual loss ratio is less than 75%. Savers Life anticipates that its liability
for this loss ratio will be between $200,000 and $400,000. As a result of the
agreement with World, Savers Life wrote off all remaining deferred acquisition
costs associated with the major medical product line, resulting in a $1,752,000
charge against income in the second quarter of 1997. In September 1997, Savers
Life transferred assets of approximately $4,850,000 and liabilities of
$4,928,000 to World. The impact of this transfer on both the statutory and GAAP
income statements was minimal.
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The profitability of the Medicare supplement product line depends almost
entirely on the management of the loss ratio, as well. It is imperative that
this loss ratio be at or near 65%. Because the benefits to be paid by insurance
companies are defined by the U. S. government, the only adjustment Savers Life
can make is through premium revenues. Until 1996, Savers Life experienced loss
ratios at or near 65%. For the year ended December 31,1996, the Medicare
supplement loss ratio reached approximately 80%. This loss ratio generated a
pre-tax loss in the Medicare supplement product line of approximately $1,651,000
for the year ended December 31, 1996. This product line generated a pre-tax gain
for the year ended December 31, 1995 of approximately $1,805,000. The increased
loss ratio in 1996 was partly the result of the accumulation of claims in late
1995 due to pending changes with certain preferred provider organizations. When
these claims were ultimately processed for payment in 1996, the actual expense
exceeded the reserve, thereby requiring an additional charge in 1996. The 1995
financial results were not restated for this underestimation of the claim
liability. For the nine months ended September 30, 1997, this product line
experienced a loss ratio of 80% and recorded a pre-tax loss of $223,000. Savers
Life implemented a premium rate increase in June 1997 in an attempt to reduce
this loss ratio.
The annuity product line contributes profits in two ways for Savers Life.
The first is the interest spread earned on the annuity block in force. This is
the difference between what Savers Life earns on its investments and what it is
required to pay its annuityholders in interest. The second is the fee income
earned on the sale of annuity products of Keyport. In this case, Savers Life
receives fee income for each annuity written on Keyport's books.
The life insurance product line is very small in relation to the other
product lines of Savers Life. This product line generates profits from favorable
mortality experience.
The vast majority of premium revenues consists of Medicare supplement and
major medical premiums. For the year ended December 31, 1996, Medicare
supplement premiums were $28.1 million and major medical premiums were $18.9
million. These premiums constituted 98% of the premium revenues. For the nine
months ended September 30, 1997, Medicare supplement premiums were $21.0 million
and major medical premiums were $8.0 million, comprising 98% of premium
revenues.
DISCUSSION OF CHANGES IN THE STATEMENT OF OPERATIONS FROM NINE MONTHS ENDED
SEPTEMBER 30, 1997 TO NINE MONTHS ENDED SEPTEMBER 30, 1996
Net Loss. The net loss was $1,896,000 for the nine months ended September
30, 1997, or $1.06 per share, compared to a net loss for the comparable period
of 1996 of $408,000, or $0.23 per share. The change resulted from the increase
in the loss ratio in the major medical product line as well as the write-off of
major medical DAC of $1,752,000, resulting from the agreement with World for the
transfer of the major medical product line.
Premium Income. Premium income for the nine months ended September 30, 1997
was $29,649,000, a decrease of $6,759,000 or approximately 19% from $36,408,000
for the comparable period of 1996. The decrease in premiums in the major medical
product line caused this decrease. Major medical premiums declined $6.6 million,
while Medicare supplement and life premiums remained relatively flat. This
decline in major medical premiums was caused primarily by the agreement with
World for the ceding of all premiums received from July 1, 1997 through
September 30, 1997.
Net Investment Income. Net investment income decreased $53,000 or 2% to
$3,366,000 for the nine months ended September 30, 1997 from $3,419,000 for the
comparable period of 1996. Cash and invested assets declined $6.5 million from
September 30, 1996 to September 30, 1997 causing the decline in investment
income.
Other Revenues. Other revenues, which include fee income from the sale of
products of other companies, increased $253,000, from $778,000 for the nine
months ended September 30, 1996 to $1,031,000 for the comparable period of 1997.
The revenues from the marketing and administration of the QualChoice product
generated this increase. This program began in the third quarter of 1996.
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Increase (Decrease) in Future Policy Benefits. Future policy benefits
increased $224,000 for the nine months ended September 30, 1997, compared with a
decrease of $731,000 for the comparable period of 1996. The 1996 decrease in
future policy benefits includes a decrease of $250,000 in the major medical
product line and a decrease of $400,000 in the Medicare supplement product line
in the first nine months of 1996.
Claims Expenses. Claims expenses decreased $4,263,000, from $28,713,000 for
the nine months ended September 30, 1996 to $24,450,000 for the comparable
period of 1997. Medicare supplement claims decreased $289,000, major medical
claims decreased $4,011,000, and death claims increased $40,000. The decrease in
major medical claims expense was the result of the decision to exit from this
product line and the transfer through coinsurance of these policies effective
July 1, 1997.
Interest Credited on Interest-Sensitive Annuities and Universal Life
Policies. Interest credited on interest-sensitive annuities and universal life
policies declined $66,000 from $1,917,000 for the nine months ended September
30, 1996 to $1,851,000 for the comparable period of 1997. The decline in the
annuity fund balance from September 30, 1996 to September 30, 1997 caused this
decrease, due to the normal surrender activity of this product line.
Commission Expenses. Commission expenses declined $1,633,000 from
$6,300,000 for the nine months ended September 30, 1996 to $4,667,000 for the
comparable period of 1997. This decline was generated by the lower premium
income in the major medical product line for the nine months ended September 30,
1997 when compared with the same period of 1996.
General Expenses. General expenses declined from $2,281,000 for the nine
months ended September 30, 1996 to $2,170,000 for the comparable period of 1997.
Salaries declined $209,000 for the nine months ended September 30, 1997 when
compared with the same period of 1996. This decline was generated from the
reduction in administrative staff in the major medical product line. Partially
offsetting this decrease was the increase in QualChoice expenses.
Insurance Taxes, Licenses and Fees. Insurance taxes, licenses and fees
declined $127,000 to $948,000 for the nine months ended September 30, 1997, from
$1,075,000 for the comparable period of 1996. This decline was caused by the
decline in premium revenues, thus reducing premium taxes.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs increased $669,000 to $2,798,000 for the nine months ended
September 30, 1997 from $2,129,000 for the comparable period of 1996. Major
medical product line amortization increased $1,290,000 for the nine months ended
September 30, 1997 compared with the same period of 1996 as the DAC associated
with this product line was written off during 1997. Offsetting this increase was
a decrease in the Medicare supplement product line's amortization as all of the
deferred acquisition costs associated with the pre-standardized block were
amortized at December 31, 1996. For the nine months ended September 30, 1996,
this amortization was approximately $639,000.
Federal Income Taxes. Federal income tax credit was $985,000 for the nine
months ended September 30, 1996 compared to $456,000 for the comparable period
of 1997. The larger credit in 1997 was generated from the pre-tax operating loss
of $2,881,000 recorded for the first nine months of 1997 compared with a pre-tax
operating loss of $864,000 for the first nine months of 1996.
DISCUSSION OF CHANGES IN THE STATEMENT OF OPERATIONS FROM YEAR ENDED DECEMBER
31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Net Income (Loss). The net loss was $1,691,707 for the year ended December
31, 1996, or $0.94 per share, compared to net income for 1995 of $960,937, or
$0.53 per share. The change resulted primarily from the increase in benefits and
claims during 1996 in the Medicare supplement product line.
Premium Income. Premium income for the year ended December 31, 1996 was
$47.9 million, a decrease of approximately $2,091,000 or approximately 4% from
$49.9 million for 1995. Major medical premiums declined approximately $2,914,000
while Medicare supplement premiums increased approximately $916,000. The
decrease in major medical premiums was due to the implementation of changes such
as introduction of a
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managed care program, joining a preferred provider organization and requiring
hospital precertification during 1996, coupled with premium rate increases.
These changes were in response to rising claims costs and loss ratio in the
major medical product line and led to an increase in the lapse rate for this
product partially easing the problems of surplus strain experienced by Savers
Life. The increase in Medicare supplement premiums was due primarily to premium
rate increases during 1996.
Net Investment Income. Net investment income decreased $282,000 or 5.8% to
$4,569,000 for the year ended December 31, 1996 from $4,851,000 for 1995. This
decrease was due to the lower cash and investable assets coupled with a lower
yield for 1996. The cash and investable assets declined 1.2%, from $75.6 million
at December 31, 1995 to $74.7 million at December 31, 1996 due to the higher
paid claims in 1996. The yield declined from 6.4% for 1995 to 6.1% for 1996. The
declining short-term interest rate environment caused this decrease.
Net Realized Gains. Net realized gains decreased approximately $217,000
from $387,000 for the year ended December 31, 1995 to $170,000 for 1996. This
decrease was the result of the sale of U.S. Treasury and U.S. Treasury Strip
Bonds in 1995 as opportunities arose during the year that were not duplicated in
1996.
Other Revenues. Other revenues, which include fee income from the sale of
products of other companies, declined approximately $624,000, from $1,665,000
for the year ended December 31, 1995 to $1,041,000 for 1996. This decline was
caused by the decline in sales activity of the Keyport annuities, thus
generating less fee income. The decline in Keyport activity reflects the
aggressive marketing campaign that Keyport had in place in 1995, but not in the
first six months of 1996.
Increase (Decrease) in Future Policy Benefits. Future policy benefits
decreased $700,000 for the year ended December 31, 1996. These future policy
benefits consist primarily of unearned premium reserves and additional benefit
reserves established for the major medical and Medicare supplement product lines
as well as policy reserves for the life product line. The decrease in future
policy benefits consists primarily of the release of $970,000 of unearned
premium reserves and benefit reserves established on the major medical and
Medicare supplement product lines. Benefit reserves of $819,000 were established
at December 31, 1995 to supplement the claim liabilities. These reserves were
released entirely in 1996. Partially offsetting this decrease was the increase
in the life and life annuity reserves of $270,000.
Claims Expenses. Claims expenses remained level at $38.7 million for both
the years ended December 31, 1996 and 1995. While Medicare supplement claims
expenses increased $3.5 million, major medical claims expense decreased $3.5
million. The increase in the Medicare supplement block of business coupled with
the underestimation of the claim liability at the end of 1995 caused this
increase in claims expenses in this product line. The major medical decrease was
generated from the decline in the size of the product line coupled with changes
made in the claims administration during 1996.
Interest Credited on Interest-Sensitive Annuities and Universal Life
Policies. Interest credited on interest-sensitive annuities and universal life
policies declined $244,000 from $2,787,000 for the year ended December 31, 1995
to $2,543,000 for 1996. The annuity net cash outflows for the year ended
December 31, 1996 caused this decrease.
Commission Expenses. Commission expenses declined approximately $810,000
from $9,058,000 for the year ended December 31, 1995 to $8,248,000 for 1996.
This decline in commission expense was due to the change made in May 1995 to
cease paying commission expense on the premium rate increases. As premium rate
increases have been implemented in both Medicare supplement and major medical,
no commissions have been paid on the rate increase portion.
General Expenses. General expenses declined approximately $132,000 from
$3,326,000 for the year ended December 31, 1995 to $3,194,000 for 1996. This
decline was caused by the decline in salaries during 1996 as Savers Life had
fewer employees in 1996 than it had in 1995. This lower employee head count was
the result of lower premium volumes in the major medical product line.
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Insurance Taxes, Licenses and Fees. Insurance taxes, licenses and fees
declined 7%, from $1,495,000 for the year ended December 31, 1995 to $1,391,000
for 1996. This decline was caused by the decline in premium revenues, thus
driving down premium taxes.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs ("DAC") increased $505,000 from $2,552,000 for the year ended
December 31, 1995 to $3,057,000 for the same period in 1996. The DAC on the
pre-standardized (pre-1992) closed block of Medicare supplement of approximately
$741,000 was amortized in 1996 compared with approximately $532,000 for 1995
causing the increase in this line. This additional amortization resulted from a
determination by Savers Life that this block of business was no longer
profitable. Due to the increase in lapses in the major medical product line,
amortization was increased $193,000 in 1996.
Federal Income Taxes. Federal income tax expense (credit) was $(1,166,000)
for the year ended December 31, 1996 compared to $116,000 for 1995. The credit
in 1996 was generated from the pre-tax operating loss of $2,858,000 recorded for
the year. Savers Life posted a pre-tax operating gain of $1,077,000 for 1995,
generating a tax expense for that year. The primary difference between the
actual tax rate experienced by Savers Life and the statutory 34% life insurance
tax rate is the Small Life Insurance Company Deduction, which is 60% of its
taxable gain from operations. This deduction generates a tax rate lower than the
34% life insurance rate.
DISCUSSION OF CHANGES IN THE STATEMENT OF OPERATIONS FROM YEAR ENDED DECEMBER
31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Net Income. Net income was $960,937 for the year ended December 31, 1995,
or $0.53 per share, compared to net income for 1994 of $3,241,193 or $1.79 per
share. The change resulted primarily from the increase in benefits and claims
during 1995 in the major medical product line, resulting in operating losses for
this line in 1995. As the majority of this block of business matured and the
underwriting began to wear off, claims expenses rose at a higher rate than
premium rate increases.
Premium Income. Premium income for the year ended December 31, 1995 was
$49.9 million, an increase of approximately $4,403,000 or approximately 10% from
$45.5 million for 1994. Medicare supplement premiums increased approximately
$3,153,000 in 1995 when compared with 1994. Major medical premiums increased
approximately $1,341,000 in 1995 when compared with 1994. The increase in
premium income was caused by premium rate increases on the renewal blocks as
well as aggressive marketing of these two products made possible by the
attractive price of the products when compared with similar products in the
marketplace.
Net Investment Income. Net investment income increased approximately
$731,000 or 18% to $4,851,501 for the year ended December 31, 1995 from
$4,121,303 for 1994. This increase was due to the higher yield earned on the
investment portfolio in 1995 compared with 1994. The yield earned in 1995 was
6.4%, while the yield earned in 1994 was 5.6%. This higher yield was generated
by a change in the mix of investable assets, increasing construction loan
balances over 30% from December 31, 1994 to December 31, 1995, as Savers Life
actively pursued developers and builders in an effort to enhance the investment
portfolio yield.
Net Realized Gains. Net realized gains increased approximately $276,000
from $111,298 for the year ended December 31, 1994 to $387,295 for 1995. This
increase was the result of the sale of U.S. Treasury Bonds and U.S. Treasury
Strip Bonds during 1995 as opportunities arose during the year.
Other Revenues. Other revenues increased approximately $205,000 from
$1,460,000 for the year ended December 31, 1994 to $1,665,000 for 1995. This
increase was caused by the increase in the sales activity of the Keyport
annuities, thus generating more fee income. During the first half of 1995,
Keyport had an aggressive sales campaign in place.
Increase (Decrease) in Future Policy Benefits. Future policy benefits
decreased $2,069,000 for the year ended December 31, 1995. This decrease was
caused by the release of $2.1 million in benefit and unearned premium reserves.
Benefit reserves of $2.5 million were established at December 31, 1994 to
supplement the
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claim liability. At December 31, 1995, benefit reserves were $819,000,
generating a release of $1.7 million. Unearned premium reserves declined
$393,000 for 1995, primarily in the major medical product line.
Claims Expenses. Claims expenses increased $10.4 million from $28.4 million
for the year December 31, 1994 to $38.7 million for 1995. Major medical claims
expenses increased $7.2 million and Medicare supplement claims increased $2.9
million. The increase in the major medical claims expenses was higher than
expected partly due to the underestimation at December 31, 1994 of the claim
liability of $1.9 million and caused a substantial decrease in the operating
income.
Interest Credited on Interest-Sensitive Annuities and Universal Life
Policies. Interest credited on interest-sensitive annuities and universal life
policies declined very slightly from $2,803,000 for the year ended December 31,
1994 to $2,787,000 for 1995. The annuity net cash outflows for the year ended
December 31, 1995 caused this decrease.
Commission Expenses. Commission expenses increased approximately $58,000
from $8,999,749 for the year ended December 31, 1994 to $9,057,738 for 1995.
This increase in commission expense was caused by the increase in premium
revenues, which increased commission expenses by $651,000. This increase was
partially offset by the change made in May 1995 to cease paying commission
expense on the premium rate increases, which decreased commission expenses by
$480,000, coupled with a decrease in the commission rate structure of the single
largest producing agency in the major medical product line. The contract between
Savers Life and AHU allowed amendments if the major medical product line failed
to meet projections. This contract adjustment decreased commission expenses
$115,000.
General Expenses. General expenses declined approximately $162,000 from
$3,488,517 for the year ended December 31, 1994 to $3,326,082 for 1995. This
decline was caused primarily by the decline in salaries during 1995.
Insurance Taxes, Licenses and Fees. Insurance taxes, licenses and fees
increased 10%, from $1,358,450 for the year ended December 31, 1994 to
$1,495,495 for 1995. This increase was caused by the increase in premium
revenues, thus driving up premium taxes.
Amortization of Deferred Acquisition Costs. Amortization of DAC increased
approximately $566,000 from $1,985,634 for the year ended December 31, 1994 to
$2,552,238 for 1995. The DAC previously capitalized during the buildup of the
major medical and Medicare supplement blocks was being amortized, causing an
increase in this expense line.
Federal Income Taxes. Federal income tax expense was $115,927 for the year
ended December 31, 1995 compared to $1,085,973 for 1994. The decrease in federal
income tax expense in 1995 was generated from the decrease in pre-tax operating
income recorded for the year when compared with 1994. Savers Life posted a
pre-tax operating gain of $4,327,166 for 1994 and a pre-tax operating gain of
$1,076,864 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Savers Life is an insurance company regulated by the states in which it is
licensed. As an insurance company domiciled in North Carolina, Savers Life may
pay dividends without prior approval of the North Carolina Department of
Insurance if the dividends and all other distributions within the past twelve
months do not exceed the lesser of statutory basis net gain from operations or
10% of statutory capital and surplus. Due to Savers Life's statutory loss in
1996 and anticipated statutory losses in 1997 no dividends can be paid in 1997
or 1998 without the prior approval of the North Carolina Department of
Insurance.
Savers Life generally pays its claims and operating expenses from premiums
collected and investment income received. In the event these collections are not
sufficient to meet cash outflow requirements, Savers Life has a substantial
portion of its assets in highly liquid investments.
Savers Life does not currently have access to additional capital resources.
As a lone insurance company owned directly by its stockholders, there is
currently no parent company to infuse capital into Savers Life. Savers Life has
voluntarily discontinued new premium writings in Florida as a result of its
inability to satisfy that state's capital and surplus requirements. Florida
requires that annual premium writings be no greater than
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four times an insurer's capital and surplus. Capital and surplus for Savers Life
declined approximately $1,165,000 for the year ended December 31, 1996 and
$272,000 for the year ended December 31, 1995. Capital and surplus at September
30, 1997 was $6,500,776, at December 31, 1996 was $6,339,718 and at December 31,
1995 was $7,504,232. Premium and annuity considerations on a statutory basis
were $49.3 million and $50.5 million for the years ended December 31, 1996 and
1995, respectively, and were $30.6 million for the nine months ended September
30, 1997. The recent decreases in surplus caused by the poor performance of the
health product lines has generated concern from the management of Savers Life
about the company's capital and surplus level. The poor performance of the major
medical product line and the depletion of assets and surplus caused by this
product line led management to seek divestiture of this product line. Savers
Life entered into an agreement for the complete transfer of its major medical
product line to World. Such a transfer had the result of decreasing pressure on
premium writings. This transfer also should eliminate the surplus strain and
asset depletion which Savers Life has experienced in recent years in this
product line.
The decrease in surplus is the reason Savers Life began actively pursuing
either a capital investor, purchaser or merger candidate. Joining a larger
organization with greater access to capital is very attractive to Savers Life's
management in order to take advantage of premium revenue opportunities as they
arise, as well as alleviating the concerns of the various insurance departments.
Savers Life reported net cash used by operations of $7,264,000 and $781 for
the nine months ended September 30, 1997 and 1996, respectively. The increase in
net cash used by operations in the first nine months of 1997 was caused
primarily by the net cash outflows of the major medical product line as cash of
$4.6 million was transferred to World when this product line was transferred.
Savers Life reported net cash used by operations of $771,000 and $202,000
for the years ended December 31, 1996 and 1995, respectively. For the year ended
December 31, 1994 operating activities provided cash flows of $4,563,000. The
decrease in cash flows from operating activities from 1994 to 1995 was caused by
the decrease in major medical operating cash flows during 1995. This decrease
was generated by the higher major medical claims expenses paid in 1995. The
decrease in cash flows from operating activities from 1995 to 1996 was caused by
the decrease in Medicare supplement cash flows during 1996. This decrease was
caused by the higher Medicare supplement claims expenses paid in 1996. Savers
Life implemented a premium rate increase in June 1997 in its Medicare supplement
product line in order to reduce its operating cash flow needs.
At December 31, 1993, Savers Life had approximately $28.8 million in cash
and cash equivalents. During 1994, the majority of this cash was invested in
bonds, certificates of deposit and construction loans, generating the net cash
used by investing activities of $20,573,000. Net cash provided by investing
activities was $2,525,000 in 1995. This increase was generated by the sale of
bonds during 1996 as $20,119,000 was received in sales proceeds, and $17,170,000
was reinvested in bonds. In 1996, the net cash used by investing activities was
$7,550,000. This use of cash was generated by the increase in certificates of
deposit purchased during 1996. For the nine months ended September 30, 1997, net
cash provided by investing activities was $6,219,000. The cash was provided from
the maturity of certificates of deposit. This cash was not reinvested due to the
cash needed to support the World transaction. For the nine months ended
September 30, 1996, net cash used by investing activities was $11,575,000. The
majority of cash was used to purchase additional certificates of deposit. In
each of the years presented, Savers Life purchased and sold U.S. Treasury Bonds
and Notes in order to take advantage of short-term interest gains. During 1995,
$15.4 million in bonds were acquired and sold in the same year. During 1996,
$14.2 million in bonds were acquired and sold in the same year. Certificates of
deposit are typically short-term in nature, with maturities of six months or
less. This generated large volumes of transactions in each of the years
presented as these certificates matured and were re-invested. Certificates of
deposit have become a significant part of the investment portfolio of Savers
Life during the past three years. After the Merger is completed, it is expected
that Savers Life's holdings in certificates of deposit will decrease
significantly as higher yielding assets with longer maturities are purchased.
Financing activities of Savers Life are insignificant to the cash flow and
financial position. Savers Life has no debt and only limited capital stock
transactions.
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If the Merger is not completed, no significant liquidity requirements will
be generated. Growth of product lines will need to be monitored carefully to
assure that statutory surplus strain is avoided.
EXPERTS
The consolidated financial statements and schedules of SMC at December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, appearing herein have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein which,
is based in part on the report of KPMG Audit, independent auditors. The
financial statements referred to above are included in reliance upon such report
given upon the authority of such firms as experts in accounting and auditing.
The financial statements of Savers Life at December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, appearing
herein have been audited by D. E. Gatewood and Company, independent auditors, as
set forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the SMC Common Stock constituting the Common Stock Issuance
will be passed upon for SMC by Stephen M. Coons, Esq., general counsel to SMC,
9100 Keystone Crossing, Indianapolis, Indiana 46240. Mr. Coons owns 21,584
shares of SMC Common Stock and has outstanding options to purchase an additional
197,760 shares of SMC Common Stock as of the date hereof and is an Executive
Vice President and Director of SMC. Certain tax matters in connection with the
Merger will be passed upon by Womble Carlyle Sandridge & Rice, PLLC,
Winston-Salem, North Carolina.
STOCKHOLDER PROPOSALS
SMC's 1998 Annual Meeting is expected to be held on or about April 27,
1998. In order to be considered for inclusion in SMC's Proxy Statement for its
1998 Annual Meeting, a stockholder's proposal must be received by SMC within a
reasonable time before solicitation of proxies for such meeting is made. Such
proposals may be included in next year's Proxy Statement if they comply with
certain rules and regulations promulgated by the SEC.
ANNUAL REPORT TO STOCKHOLDERS OF SMC
A COPY, WITHOUT EXHIBITS, OF SMC'S ANNUAL REPORT ON FORM 10-K/A NO. 2 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1996 WILL BE PROVIDED WITHOUT CHARGE TO ANY
SMC OR SAVERS LIFE STOCKHOLDER SUBMITTING A WRITTEN REQUEST FOR SUCH REPORT TO
KEVIN WEDMORE AT STANDARD MANAGEMENT CORPORATION, 9100 KEYSTONE CROSSING,
INDIANAPOLIS, INDIANA 46240.
OTHER MATTERS
The SMC Board knows of no other matters to be presented at the SMC Special
Meeting, but if any other matters should properly come before the meeting, it is
intended that the persons named in the accompanying proxy card will vote on such
matters in accordance with their best judgment.
The Savers Life Board knows of no other matters to be presented at the
Savers Life Special Meeting, but if any other matters should properly come
before the meeting, it is intended that the persons named in the accompanying
proxy card will vote on such matters in accordance with their best judgment.
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GLOSSARY
The following Glossary includes definitions of certain general insurance
terms.
A.M. BEST COMPANY, INC. ("A.M.
BEST")...................... A rating organization reporting on the
financial condition of insurance companies.
A.M. Best's Ratings are assigned to virtually
every significant insurer operating in the
United States.
ANNUITY....................... A contract that pays a periodic income benefit
for the life of a person (the annuitant), the
lives of two or more persons or a specified
period of time.
ASSET VALUATION RESERVE
("AVR")....................... AVR is established under statutory accounting
practices as a liability on a life insurer's
statutory financial statements. AVR establishes
statutory reserves for mortgage loans, equity
real estate interests and joint ventures as
well as for those investments (fixed maturities
and common and preferred stock) formerly
subject to Mandatory Securities Valuation
Reserve ("MSVR"). AVR generally captures all
realized and unrealized gains and losses on
such assets, other than those resulting from
changes in interest rates. AVR has no effect on
financial statements prepared in conformity
with GAAP.
ASSUMPTION REINSURANCE........ A form of reinsurance under which the
contractual relationship with the insured, as
well as all liabilities and policy
administration responsibilities, is intended to
pass to the reinsurer. In some jurisdictions,
approval of the insured is required in order to
effect the change in insurers.
CEDING........................ The transfer of all or a portion of a risk from
one insurer to another.
CLOSED BLOCK.................. A group of in force life insurance policies or
annuity contracts that SMC has issued or
assumed but no longer markets.
COINSURANCE INDEMNITY
REINSURANCE................... Coinsurance is a form of indemnity reinsurance
in which the ceding company and reinsurer share
agreed upon percentages of the premiums,
claims, surrenders and other benefits related
to the underlying policies.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS").......... Debt obligations issued by a special purpose
entity that are collateralized by and payments
linked to a pool of mortgages or mortgage
backed securities. The CMOs are priced based on
their own maturity and rate of return rather
than those of the underlying mortgage.
CREDITING RATE................ The interest rate credited on a life insurance
policy or annuity contract. This credited
interest rate may be a guaranteed fixed rate, a
variable rate or some combination of both.
DEFERRED ANNUITY (SINGLE
PREMIUM DEFERRED ANNUITY
("SPDA")/FLEXIBLE PREMIUM
DEFERRED ANNUITY
("FPDA"))................... An annuity that (i) can be paid either with a
single premium (SPDA) or an initial premium and
additional optional premiums (FPDA) and (ii)
includes a schedule of periodic income benefits
to commence after an accumulation period.
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DEFERRED POLICY ACQUISITION
COSTS ("DAC")................. Commissions and other selling expenses which
vary with and are directly related to the
production of business. These acquisition costs
are deferred and amortized to achieve a
matching of revenues and expenses when reported
in financial statements prepared in conformity
with GAAP.
DEPOSITS...................... All payments and other consideration received
on certain contracts, principally annuities and
universal and investment-type contracts. These
amounts are not included in revenues under GAAP
but are included directly in policyholder
account balances.
INDEMNITY REINSURANCE......... The practice whereby the reinsurer, in
consideration of premiums received, agrees to
indemnify the ceding company or reinsured, for
all or a portion of the liability under a
policy or policies of insurance issued by the
ceding company, which is not discharged of the
liability.
INTEREST MAINTENANCE RESERVE
("IMR")..................... IMR is established under statutory accounting
practices as a liability on a life insurer's
statutory financial statements and applies to
all types of fixed income investments (bonds,
preferred stocks, mortgage-backed securities
and mortgage loans). IMR captures the net gains
from changes in the overall level of interest
rates which are realized upon the sale of
investments and amortizes these net gains into
income over the remaining life of each
investment sold. IMR has no effect on financial
statements prepared in conformity with GAAP.
LAPSE......................... Termination of a policy because of surrender,
failure to pay a premium or lack of sufficient
cash value to maintain in force status.
MODIFIED COINSURANCE INDEMNITY
REINSURANCE ("MODCO")....... Modco indemnity reinsurance contracts are
similar to coinsurance indemnity reinsurance,
with the exception that the ceding company
retains assets that are equal to the statutory
reserves on the underlying policies reinsured.
The ceding company is obligated to credit
interest on the outstanding amount of those
funds.
NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
("NAIC").................... An association made up of the officials of each
state responsible for the administration of
that state's insurance laws.
PAYOUT ANNUITY................ An annuity for which benefits are being paid.
PERSISTENCY................... Measurement of life insurance or other
insurance policies remaining in force from year
to year.
PREMIUMS...................... Payments and considerations received during the
year on policies and contracts, other than
annuities and universal life and
investment-type contracts, issued or reinsured
(assumed less ceded) by an insurance company
and accounted for as revenues under GAAP.
RECAPTURE..................... Provision whereby a ceding company may reduce
or eliminate existing reinsurance.
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RESERVES...................... Liabilities established by insurers to reflect
the estimated discounted present value of cost
of claims payments or contract liabilities and
the related expenses that the insurer will
ultimately be required to pay in respect of
insurance or annuities it has written.
RISK BASED CAPITAL ("RBC").... A method of measuring the minimum amount of
capital appropriate for an insurance company to
support its overall business operation in
consideration of its size and risk profile. A
company's RBC is calculated by applying factors
to various asset, premium and reserve items.
RBC standards are used by regulators to set in
motion appropriate regulatory actions relating
to insurers that show indications of weak or
deteriorating conditions.
SEPARATE ACCOUNT.............. A segregation of assets (and related earnings)
for the exclusive benefit of a particular
policyholder.
STATUTORY ACCOUNTING.......... Those accounting practices prescribed or
permitted by an insurer's domiciliary state
insurance regulator for purposes of financial
reporting to regulators.
STATUTORY RESERVES............ Amounts established by state insurance law that
an insurer must have available to provide for
future obligations with respect to all
policies. Reserves are liabilities on the
balance sheet prepared in conformity with
statutory accounting practices.
STATUTORY SURPLUS............. The excess of statutory admitted assets over
statutory liabilities.
SURPLUS STRAIN................ For any policy, the excess of first year
statutory reserves and policy acquisition costs
over first year premiums.
SURRENDERS AND WITHDRAWALS.... Surrenders of life insurance polices and
annuity contracts for their entire net cash
surrender values and withdrawals of a portion
of such values.
TERM LIFE INSURANCE........... Life insurance protection during a certain
number of years, but expiring without policy
cash value if the insured survives the stated
period.
UNDERWRITING.................. Process of examining, accepting or rejecting
insurance risks, and classifying those
accepted, in order to charge an appropriate
premium for each risk.
UNIT LINKED PRODUCTS.......... An investment product that includes a provision
for benefit payments to vary according to the
investment experience of the separate account
in which the amounts paid to provide this
policy are allocated; similar to U.S. produced
variable life products.
UNIVERSAL LIFE INSURANCE...... Life insurance under which (i) premiums are
generally flexible, (ii) the level of death
benefits may be adjusted and (iii) expenses and
other charges are specifically disclosed to a
purchaser. This policy is sometimes referred to
as unbundled life insurance because its three
basic elements (investment earnings, cost of
protection and expense charges) are separately
identified both in the policy and in an annual
report to the policyholder.
WHOLE LIFE INSURANCE.......... Permanent life insurance offering guaranteed
death benefits and guaranteed cash values.
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STANDARD MANAGEMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
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<S> <C>
UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets -- September 30, 1997
(Unaudited) and December 31, 1996 (Audited)............... F-2
Consolidated Statements of Operations -- For the Three
Months and Nine Months Ended September 30, 1997 and 1996
(Unaudited)............................................... F-3
Consolidated Statements of Shareholders' Equity -- For the
Nine Months Ended September 30, 1997 and 1996
(Unaudited)............................................... F-4
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)............. F-5
Notes to Consolidated Financial Statements (Unaudited)...... F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors.............................. F-11
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... F-13
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994.......................... F-14
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994.............. F-15
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.......................... F-16
Notes to Consolidated Financial Statements.................. F-17
FINANCIAL STATEMENT SCHEDULES:
The following consolidated financial statement schedules are
included herein and should be read in conjunction with the
Audited Consolidated Financial Statements.
Schedule II -- Condensed Financial Information of Registrant
(Parent Company) for the Years Ended December 31, 1996,
1995 and 1994............................................. F-43
Schedule IV -- Reinsurance for the Years Ended December 31,
1996, 1995 and 1994....................................... F-48
Schedules not listed above have been omitted because they
are not applicable or are not required, or because the
required information is included in the Audited Consolidated
Financial Statements or Notes thereto.
</TABLE>
F-1
<PAGE> 142
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value (amortized
cost: $363,605 in 1997 and $349,151 in 1996)........... $368,658 $347,310
Equity securities, at fair value (cost: $50 in 1997 and
$58 in 1996)........................................... 52 62
Mortgage loans, at unpaid principal balances.............. 397 3,035
Policy loans, at unpaid principal balances................ 9,708 9,903
Real estate, at depreciated cost.......................... 2,334 546
Other invested assets..................................... 810 865
Short-term investments, at cost, which approximates fair
value................................................... 13,483 8,417
-------- --------
Total investments..................................... 395,442 370,138
Cash........................................................ 3,164 5,113
Accrued investment income................................... 6,333 6,198
Amounts due and recoverable from reinsurers................. 68,594 68,811
Deferred policy acquisition costs........................... 19,781 18,078
Present value of future profits, less accumulated
amortization of $5,322 in 1997 and $3,520 in 1996......... 22,242 23,806
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $397 in 1997 and $314 in
1996...................................................... 2,508 2,260
Other assets................................................ 5,758 5,463
Assets held in separate accounts............................ 145,574 128,546
-------- --------
Total assets.......................................... $669,396 $628,413
======== ========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial
products............................................... $350,503 $333,633
Traditional life insurance.............................. 87,245 87,106
-------- --------
Total future policy benefits.......................... 437,748 420,739
Policy claims and other policyholders' benefits and
funds................................................... 4,677 4,585
-------- --------
442,425 425,324
Accounts payable and accrued expenses..................... 5,439 6,189
Obligations under capital lease........................... 270 637
Notes payable............................................. 26,024 20,060
Deferred federal income taxes............................. 5,347 3,206
Excess of net assets acquired over acquisition cost,
less accumulated amortization of $4,880 in 1997 and
$3,839 in 1996.......................................... 1,734 2,775
Liabilities related to separate accounts.................. 145,574 128,546
-------- --------
Total liabilities..................................... 626,813 586,737
-------- --------
Class S Cumulative Convertible Redeemable Preferred Stock,
par value $10 per share:
Authorized 300,000 shares; issued and outstanding 159,889
shares in 1996, redemption value of $10.00 per share
plus accumulated and unpaid dividends................... -- 1,757
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and
outstanding............................................ -- --
Common Stock and additional paid-in capital, no par value:
Authorized 20,000,000 shares; issued 5,752,499 shares... 40,646 40,481
Treasury stock, at cost, 882,259 shares in 1997 and
728,229 shares in 1996 (deduction)...................... (4,604) (3,528)
Unrealized gain (loss) on securities available for sale... 2,072 (746)
Foreign currency translation adjustment................... (370) 691
Retained earnings......................................... 4,839 3,021
-------- --------
Total shareholders' equity............................ 42,583 39,919
-------- --------
Total liabilities, redeemable securities and shareholders'
equity.................................................... $669,396 $628,413
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 143
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Premium income................................... $ 1,715 $ 1,289 $ 5,277 $ 8,418
Net investment income............................ 7,580 5,037 21,926 15,007
Net realized investment gains.................... 81 222 287 677
Gain on disposal of subsidiaries................. -- -- -- 886
Policy charges................................... 1,328 617 4,110 1,832
Amortization of excess of net assets acquired
over acquisition cost.......................... 347 347 1,041 1,041
Fees from separate accounts...................... 417 257 1,255 1,093
Other income..................................... 119 200 1,014 536
--------- --------- --------- ---------
Total revenue.................................. 11,587 7,969 34,910 29,490
Benefits and expenses:
Benefits and claims.............................. 1,577 1,434 5,945 8,657
Interest credited on interest-sensitive annuities
and other financial products................... 4,461 2,641 12,627 7,645
Salaries and wages............................... 1,344 1,215 4,249 3,678
Amortization..................................... 967 564 2,544 1,723
Other operating expenses......................... 1,797 1,263 5,127 5,173
Interest expense and financing costs............. 646 153 1,724 430
--------- --------- --------- ---------
Total benefits and expenses.................... 10,792 7,270 32,216 27,306
--------- --------- --------- ---------
Income before federal income taxes, extraordinary
gain on early redemption of redeemable preferred
stock and preferred stock dividends.............. 795 699 2,694 2,184
Federal income tax expense (credit)................ 204 228 779 (890)
--------- --------- --------- ---------
Income before extraordinary gain on early
redemption of redeemable preferred stock and
preferred stock dividends........................ 591 471 1,915 3,074
Extraordinary gain on early redemption of
redeemable preferred stock, net of $ -- federal
income tax....................................... -- 233 -- 500
--------- --------- --------- ---------
NET INCOME......................................... 591 704 1,915 3,574
Preferred stock dividends.......................... 15 51 97 163
--------- --------- --------- ---------
Earnings available to common shareholders.......... $ 576 $ 653 $ 1,818 $ 3,411
========= ========= ========= =========
Earnings per share:
Income before extraordinary gain on early
redemption of redeemable preferred stock and
preferred stock dividends...................... $ .11 $ .10 $ .36 $ .61
Extraordinary gain on early redemption of
redeemable preferred stock..................... -- .04 -- .09
--------- --------- --------- ---------
NET INCOME....................................... .11 .14 .36 .70
Preferred stock dividends........................ .01 .01 .02 .02
--------- --------- --------- ---------
Earnings available to common shareholders........ $ .10 $ .13 $ .34 $ .68
========= ========= ========= =========
Weighted average number of shares outstanding:
Common shares.................................... 4,882,467 4,774,840 4,973,580 4,835,657
Common equivalent shares......................... 547,603 165,242 360,914 463,842
--------- --------- --------- ---------
5,430,070 4,940,082 5,334,494 5,299,499
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 144
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
AMOUNTS SHARES
----------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock and additional paid-in capital:
Balance, beginning of period....................... $40,481 $39,808 5,752,499 5,459,573
Issuance of common stock........................ -- 100 -- 20,000
5% common stock dividend........................ -- 850 -- 272,926
Issuance of common stock warrants............... 165 239 -- --
------- ------- --------- ---------
Balance, end of period............................. 40,646 40,997 5,752,499 5,752,499
------- ------- --------- ---------
Treasury stock (at cost):
Balance, beginning of period....................... (3,528) (2,621) (728,229) (502,025)
Treasury stock acquired......................... (1,079) (2,126) -- (431,026)
5% common stock dividend........................ -- -- (154,903) (46,402)
Reissuance of treasury stock in connection with
exercise of stock options..................... 4 6 873 1,224
------- ------- --------- ---------
Balance, end of period............................. (4,604) (4,741) (882,259) (978,229)
------- ------- --------- ---------
Unrealized gain (loss) on securities:
Balance, beginning of period....................... (746) 2,582
Change in unrealized gain (loss) on securities
available for sale, net....................... 2,818 (4,474)
------- -------
Balance, end of period............................. 2,072 (1,892)
------- -------
Foreign currency translation adjustments:
Balance, beginning of period....................... 691 1,159
Translation adjustments for the period.......... (1,061) (442)
------- -------
Balance, end of period............................. (370) 717
------- -------
Retained earnings:
Balance, beginning of period....................... 3,021 (686)
Net income...................................... 1,915 3,574
5% common stock dividend, plus cash in lieu of
fractional shares............................. -- (850)
Preferred stock dividend........................ (97) (1)
Loss on reissuance of treasury stock............ -- (163)
------- -------
Balance, end of period............................. 4,839 1,874
------- -------
Total shareholders' equity and common shares
outstanding........................................ $42,583 $36,955 4,870,240 4,774,270
======= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 145
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,915 $ 3,574
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs......... 1,039 837
Policy acquisition costs deferred......................... (5,323) (4,519)
Deferred federal income taxes............................. 695 (471)
Depreciation and amortization............................. 960 308
Future policy benefits and reinsurance recoverable........ 6,858 5,995
Policy claims and other policyholders' benefits and
funds.................................................. 132 (228)
Net realized investment gains............................. (287) (677)
Accrued investment income................................. 114 (244)
Extraordinary gain on early redemption of redeemable
preferred stock........................................ -- (500)
Other..................................................... (1,477) (1,318)
--------- ---------
Net cash provided by operating activities.............. 4,626 2,757
FINANCING ACTIVITIES
Borrowings.................................................. 5,628 2,600
Repayments on long term debt and capital lease obligation... (402) (364)
Premiums received on interest-sensitive annuities and other
financial products credited to policyholder account
balances, net of premiums ceded........................... 38,355 32,153
Return of policyholder account balances on
interest-sensitive annuities and other financial products,
net of premiums ceded..................................... (27,986) (12,993)
Redemption of redeemable preferred stock.................... (1,855) (941)
Reissuance of treasury stock in connection with exercise of
stock options............................................. 4 --
Proceeds from common and treasury stock sales............... 165 100
Purchase of Common Stock for treasury....................... (1,079) (2,126)
--------- ---------
Net cash provided by financing activities.............. 12,830 18,429
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases................................................. (158,353) (136,972)
Sales..................................................... 123,113 94,247
Maturities................................................ 23,632 6,381
Short-term investments, net................................. (5,116) 2,647
Other investments, net...................................... (2,681) (68)
Proceeds from sale of First International Life Insurance
Company, less cash transferred to seller of $265.......... -- 11,228
--------- ---------
Net cash provided (used) by investing activities....... (19,405) (22,537)
Net increase (decrease) in cash............................. (1,949) (1,351)
Cash at beginning of period................................. 5,113 5,762
--------- ---------
Cash at end of period....................................... $ 3,164 $ 4,411
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 146
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such adjustments are of
a normal recurring nature. Certain amounts in the 1996 Consolidated Financial
Statements and Notes have been reclassified to conform with the 1997
presentation.
The nature of the insurance business of Standard Management Corporation and
its consolidated subsidiaries ("SMC" or the "Company") requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example, the
Company uses significant estimates and assumptions in calculating deferred
policy acquisition costs, present value of future profit, goodwill, future
policy benefits and deferred federal income taxes. Such estimates and
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
The consolidated financial statements as of and for the three months and
nine months ended September 30, 1997 include the assets and liabilities and
results of operations of Shelby Life Insurance Company ("Shelby Life") which was
acquired and merged into Standard Life Insurance Company of Indiana ("Standard
Life"), a wholly-owned subsidiary of Standard Management Corporation ("Standard
Management"), the parent company, effective November 1, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Annual Report on Form 10-K/A No. 2 of Standard
Management for the year ended December 31, 1996.
NOTE 2 -- COMMON STOCK
Standard Management declared a 5% stock dividend on shares of Standard
Management Common Stock ("SMC Common Stock") for shareholders of record on May
17, 1996 which was distributed on June 21, 1996. All applicable number of shares
and per share amounts included in the consolidated financial statements and
notes have been retroactively adjusted to reflect this stock dividend for all
periods presented.
NOTE 3 -- NOTE PAYABLE
In connection with the acquisition of Shelby Life, Standard Management
borrowed $4,000 from an insurance company pursuant to a subordinated convertible
debt agreement which was due in December 2003 and required interest payments in
cash at 12% per annum, or, if Standard Management chose, in non-cash additional
subordinated convertible debt notes at 14% per annum until December 31, 2000. At
June 30, 1997, this subordinated convertible debt agreement was amended at the
principal amount of $4,372 which is due July 2004 unless previously converted,
and requires interest payments in cash on January 1 and July 1 of each year at
10% per annum. At June 30, 1997, Standard Management borrowed an additional
$5,628 from an insurance company pursuant to another subordinated convertible
debt agreement (collectively, the "Notes") which is due July 2004 unless
previously converted, and requires interest payments in cash on January 1 and
July 1 of each year at 10% per annum. Proceeds from the additional borrowings
were used for contributions to surplus of insurance subsidiaries of $2,400,
redemption of Class S Cumulative Convertible Redeemable
F-6
<PAGE> 147
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- NOTE PAYABLE (CONTINUED)
Preferred Stock ("Class S Preferred Stock") of approximately $1,840 (see Note
4), and the balance for other general corporation purposes. The Notes are
convertible into SMC Common Stock at the rate of $5.747 per share.
The Notes may be prepaid in whole or in part at the option of Standard
Management commencing on July 1, 2000 at redemption prices equal to 105% of the
principal amount (plus accrued interest) and declining to 102% of the principal
amount (plus accrued interest). The Notes may be prepaid prior to July 1, 2000
under certain limited circumstances. The Notes are subject to certain
restrictions and covenants including, among other things, certain minimum
financial ratios, minimum consolidated equity requirements for SMC, positive net
income, minimum statutory surplus requirements for the Company's insurance
subsidiaries and certain limitations on acquisitions, additional indebtedness,
investments, mergers, consolidations and sales of assets.
NOTE 4 -- REDEEMABLE PREFERRED STOCK
In connection with the class action lawsuit settlement in March 1995,
300,000 shares designated as Class S Preferred Stock, $10.00 per share par
value, were issued February 8, 1996. The Class S Preferred Stock is redeemable
in February 2003, has an 11% annual cumulative dividend payable in February
2003, and is convertible into SMC Common Stock at $7.62 per share until February
1998 and $10.00 per share thereafter, subject to adjustment under a formula
intended to protect against dilution.
Standard Management may voluntarily redeem the Class S Preferred Stock
prior to February 2003 at redemption value of $10.00 per share plus accumulated
and unpaid dividends. In February 1996, Standard Management instituted a program
to repurchase from time to time up to 300,000 shares of its Class S Preferred
Stock in the open market or private negotiated transactions. Through July 31,
1997, Standard Management has repurchased and retired 141,761 shares of Class S
Preferred Stock on the open market at a cost of $964. These repurchases resulted
in an extraordinary gain on early redemption of redeemable preferred stock of
$233 and $500 for the three and nine month periods ended September 30, 1996.
Effective as of August 1, 1997, Standard Management redeemed all of the issued
and outstanding Class S Preferred Stock at redemption value of $10.00 per share
plus accumulated and unpaid dividends.
NOTE 5 -- 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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Fair value of securities available for sale................. $368,710 $347,372
Amortized cost of securities available for sale............. 363,655 349,209
-------- --------
Gross unrealized gain (loss) on securities available
for sale.............................................. 5,055 (1,837)
Adjustments for:
Deferred policy acquisition costs......................... (1,789) 696
Present value of future profits........................... (123) 20
Deferred federal income tax recoverable (liability)....... (1,071) 375
-------- --------
Net unrealized gain (loss) on securities available for
sale.................................................. $ 2,072 $ (746)
======== ========
</TABLE>
F-7
<PAGE> 148
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6 -- INCOME TAXES
The effective consolidated federal income tax expense (credit) rate for the
Company was 26% and 29% for the three and nine months ended September 30, 1997,
compared to 33% and (41)% for the three and nine months ended September 30,
1996. The effective rates in 1997 are less than the statutory rates primarily
because the amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International S.A.
("Standard Management International") is not subject to U.S. income tax. The
large credit for the nine months ended September 30, 1996 is primarily due to
tax benefits of $1,420 related to the sale of First International Life Insurance
Company ("First International") (see Note 7).
NOTE 7 -- DISPOSAL OF SUBSIDIARIES
On March 18, 1996, Standard Life completed the sale of a duplicate charter
associated with its wholly-owned subsidiary, First International, to Guardian
Insurance and Annuity Co., Inc. ("GIAC"), a subsidiary of The Guardian Group,
New York, New York. Standard Life received proceeds of $10,393, including $1,500
for the charter and licenses associated with First International. Standard Life
realized a net pretax gain of $1,042 and a tax benefit of $1,420 on this sale or
$2,462 ($.46 per share) for the nine months ended September 30, 1996. In
addition, First International, Standard Life and GIAC have entered into a series
of other agreements that include provisions for Standard Life to continue to
administer First International policies in force at the date of sale and for
Standard Life to continue to receive the profit stream from the majority of
First International's in force business at the date of sale.
In an unrelated matter, the Company decided in February 1996 to terminate
the reinsurance agreement between Standard Reinsurance of North America Ltd.
("Standard Reinsurance") and Salamandra Joint-Stock Insurance Company in Ukraine
("Salamandra"), and not to renew the Barbados license of Standard Reinsurance
due to an insignificant amount of reinsurance premium volume. This resulted in
the termination of Standard Reinsurance operations and the write-off of the
Company's investment in Standard Reinsurance and certain intangible assets of
Standard Reinsurance amounting to $156 ($.03 per share) for the nine months
ended September 30, 1996.
The combined effect of the gain on sale of First International and related
contracts, and the Standard Reinsurance write-offs, was an increase in revenues
of $886 and a tax benefit of $1,420, for net income effect of approximately
$2,306 or $.44 per share for the nine months ended September 30, 1996.
NOTE 8 -- SAVER'S LIFE ACQUISITION
On December 20, 1996, SMC and Savers Life entered into an Agreement and
Plan of Merger (the "1996 Merger Agreement") providing for, among other things,
the merger of a wholly-owned subsidiary of SMC with and into Savers Life, with
Savers Life surviving as a wholly-owned subsidiary of SMC. Consummation of the
transactions contemplated by the 1996 Merger Agreement was subject to the
approval of SMC stockholders and Savers Life stockholders. In addition, SMC
reserved the right not to consummate such transactions if 5% or more of the
Savers Life stockholders perfected their dissenters' rights under the North
Carolina Business Corporation Act. The approval of SMC stockholders was secured
at the SMC Annual Meeting of Stockholders held on October 22, 1997. The meeting
of Savers Life stockholders originally scheduled to be held on October 22, 1997,
at which the 1996 Merger Agreement was to be considered, was postponed
indefinitely because holders of approximately 22% of the Savers Life Common
Stock had filed notice of intent to exercise dissenters' rights. Thereafter,
discussions continued to restructure the proposed transaction in a manner that
would be acceptable to each of them.
F-8
<PAGE> 149
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share." SFAS No. 128 is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate prior periods. SFAS No. 128 will
eliminate the presentation of primary earnings per share and replace it with
basic earnings per share. Basic earnings per share differs from primary earnings
per share because common stock equivalents are not considered in computing basic
earnings per share. Fully diluted earnings per share will be replaced with
diluted earnings per share. Diluted earnings per share is similar to fully
diluted earnings per share, except in determining the number of dilutive shares
outstanding for options and warrants, the proceeds that would be received upon
the conversion of all dilutive options and warrants are assumed to be used to
repurchase the Company's common shares at the average market price of such stock
during the period. For fully diluted earnings per share, the higher of the
average market price or ending market price is used. The impact is expected to
result in an increase in primary earnings per share for the quarter ended
September 30, 1997 of $.02 per share and the nine months ended September 30,
1997 and 1996 of $.03 and $.06 per share, respectively. There will be no change
in the primary earnings per share for the quarter ended September 30, 1996. The
impact of SFAS No. 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for all
changes in a company's equity during a period except those resulting from
investments by owners and distributions to owners. SFAS No. 130 is effective for
financial statements issued for fiscal years beginning after December 15, 1997
and will be adopted by the Company in the first quarter of 1998. Because the
statement is merely a change in presentation, the Company does not expect the
adoption of this statement to have any impact on the amount of net income,
earnings per share or total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. Currently, the Company considers its
life insurance operations to be its only material operating segment. The Company
is in the process of defining additional business segments and developing
allocation methods to assess their performance. Once the process is completed,
additional disclosures will be provided in accordance with SFAS No. 131.
NOTE 10 -- RESTATEMENT
The Company has restated the previously issued September 30, 1996
consolidated financial statements for recognition of administration fee income.
Effective May 31, 1996, Standard Life terminated by recapture a reinsurance
agreement with National Mutual Life Insurance Company ("National Mutual"). In
connection with this transaction, the Company recorded the collection of
administration fees of $375 from National
F-9
<PAGE> 150
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Mutual for services provided in prior years as a reduction to present value of
future profits. Previously the administration fees were recorded as revenues.
The following summarizes the net effect of the restatement:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Income before federal income taxes,
extraordinary gain on early redemption of
redeemable preferred stock and preferred stock
dividends..................................... $699 $699 $2,559 $2,184
Net income...................................... 704 704 3,821 3,574
Net income per share............................ .14 .14 .74 .70
</TABLE>
F-10
<PAGE> 151
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management Corporation
We have audited the accompanying consolidated balance sheets of Standard
Management Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedules listed in the Index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits. We did not audit the consolidated balance sheets
at September 30, 1996 and 1995 or the consolidated statements of operations,
shareholder's equity and cash flows for the three years ended September 30, 1996
of Standard Management International S.A. and subsidiaries, a wholly owned
subsidiary group, which financial statements reflect assets totaling
approximately 23% and 28% of the Company's consolidated assets at December 31,
1996 and 1995 and revenues totaling approximately 9%, 12% and 14% of
consolidated revenues for each of the three years in the period ended December
31, 1996. Those financial statements, which as explained in Note 1 are included
in the Company's consolidated balance sheets at December 31, 1996 and 1995, and
the Company's consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996,
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the data included for Standard Management
International S.A., is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Standard Management Corporation at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Ernst & Young LLP
Indianapolis, Indiana
March 18, 1997, except for Note 20,
as to which the date is August 21, 1997
F-11
<PAGE> 152
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Standard Management International S.A.
We have audited the consolidated balance sheets of Standard Management
International S.A. and subsidiaries as at September 30, 1996 and 1995 and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the three years in the period ended September 30, 1996 (none
of which aforementioned financial statements are separately presented herein).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material aspects, the consolidated financial position of Standard
Management International S.A. and subsidiaries as at September 30, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996 in conformity
with generally accepted accounting principles in the United States of America.
Luxembourg City, Luxembourg
March 12, 1997
KPMG Audit
F-12
<PAGE> 153
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost: $349,151 in 1996 and $225,643 in
1995)............................................................................... $347,310 $232,092
Equity securities, at fair value (cost: $58 in 1996 and
$52 in 1995)........................................................................ 62 52
Mortgage loans on real estate, at unpaid principal
balances............................................................................. 3,035 2,963
Policy loans, at unpaid principal balances............................................. 9,903 8,509
Real estate, at cost less accumulated depreciation of $91
in 1996 and $81 in 1995.............................................................. 546 556
Other invested assets.................................................................. 865 1,367
Short-term investments, at cost, which approximates fair
value................................................................................ 8,417 35,058
-------- --------
Total investments.................................................................. 370,138 280,597
Cash..................................................................................... 5,113 5,762
Accrued investment income................................................................ 6,198 4,637
Amounts due and recoverable from reinsurers.............................................. 68,811 33,419
Deferred policy acquisition costs........................................................ 18,078 10,054
Present value of future profits, less accumulated
amortization of $3,520 in 1996 and
$2,803 in 1995......................................................................... 23,806 15,246
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $314 in 1996 and $393 in 1995.............................. 2,260 3,175
Other assets............................................................................. 5,463 4,003
Assets held in separate accounts......................................................... 128,546 122,705
-------- --------
Total assets....................................................................... $628,413 $479,598
======== ========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial
products............................................................................ $333,633 $212,500
Traditional life insurance........................................................... 87,106 82,762
-------- --------
Total future policy benefits....................................................... 420,739 295,262
Policy claims and other policyholders' benefits and
funds................................................................................ 4,585 2,572
-------- --------
425,324 297,834
Accounts payable and accrued expenses.................................................. 6,189 4,880
Class action litigation and settlement liability....................................... -- 3,000
Obligations under capital lease........................................................ 637 1,084
Notes payable.......................................................................... 20,060 3,107
Deferred federal income taxes.......................................................... 3,206 2,583
Excess of net assets acquired over acquisition cost, less
accumulated amortization of $3,839 in 1996 and $2,451 in 1995........................ 2,775 4,163
Liabilities related to separate accounts............................................... 128,546 122,705
-------- --------
Total liabilities.................................................................. 586,737 439,356
Class S Cumulative Convertible Redeemable Preferred Stock,
par value $10 per share:
Authorized 300,000 shares; issued and outstanding
159,889 shares...................................................................... 1,757 --
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and
outstanding.......................................................................... -- --
Common Stock, no par value:
Authorized 20,000,000 shares
Issued 5,752,499 shares in 1996 and 5,459,573 in 1995................................ 40,481 39,808
Treasury stock, at cost, 728,229 shares in 1996 and
502,025 shares in 1995 (deduction)................................................... (3,528) (2,621)
Unrealized gain (loss) on securities available for sale................................ (746) 2,582
Foreign currency translation adjustment................................................ 691 1,159
Retained earnings (deficit)............................................................ 3,021 (686)
-------- --------
Total shareholders' equity......................................................... 39,919 40,242
-------- --------
Total liabilities, redeemable securities and
shareholders' equity.............................................................. $628,413 $479,598
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 154
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Premium income............................................ $10,468 $ 5,504 $ 4,565
Net investment income..................................... 20,871 18,517 16,057
Net realized investment gains............................. 1,302 688 558
Gain on disposal of subsidiaries.......................... 886 -- --
Policy charges............................................ 2,551 2,467 2,031
Amortization of excess of net assets acquired over
acquisition cost....................................... 1,388 1,388 1,063
Management fees and similar income from separate
accounts............................................... 1,564 1,294 1,888
Other income.............................................. 1,277 380 356
--------- --------- ---------
Total revenues....................................... 40,307 30,238 26,518
Benefits and expenses:
Benefits and claims....................................... 9,919 5,791 5,603
Interest credited on interest-sensitive annuities and
other financial products............................... 11,281 10,009 8,676
Salaries and wages........................................ 5,053 4,701 3,910
Amortization.............................................. 2,592 2,044 1,215
Other operating expenses.................................. 7,122 6,333 6,563
Interest expense and financing costs...................... 805 118 47
Class action litigation and settlement costs (credit)..... -- (314) 4,018
--------- --------- ---------
Total benefits and expenses.......................... 36,772 28,682 30,032
--------- --------- ---------
Income (loss) before federal income taxes, extraordinary
gain on early redemption of redeemable preferred stock and
preferred stock dividends................................. 3,535 1,556 (3,514)
Federal income tax expense (credit)......................... (730) 243 (78)
--------- --------- ---------
Income (loss) before extraordinary gain on early redemption
of redeemable preferred stock and preferred stock
dividends................................................. 4,265 1,313 (3,436)
Extraordinary gain on early redemption of redeemable
preferred stock, net of $-- federal income tax............ 502 -- --
--------- --------- ---------
NET INCOME (LOSS)........................................... 4,767 1,313 (3,436)
Preferred stock dividends................................... 208 -- --
--------- --------- ---------
Earnings available to common shareholders................... $ 4,559 $ 1,313 $(3,436)
========= ========= =========
Earnings per share:
Income (loss) before extraordinary gain on early
redemption of redeemable preferred stock and preferred
stock dividends........................................ $.84 $.25 $(.62)
Extraordinary gain........................................ .09 -- --
--------- --------- ---------
NET INCOME (LOSS)......................................... .93 .25 (.62)
Preferred stock dividends................................. .03 -- --
--------- --------- ---------
Earnings available to common shareholders................. $.90 $.25 $(.62)
========= ========= =========
Weighted average number of common and common equivalent
shares outstanding........................................ 5,250,094 5,345,937 5,504,039
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 155
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
AMOUNTS NUMBER OF SHARES
---------------------------- ---------------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Common Stock:
Balance, beginning of year.............. $39,808 $39,695 $ 36,348 5,459,573 5,457,906 4,820,739
Issuance of common stock.............. 100 -- -- 20,000 -- --
5% common stock dividend.............. 850 -- -- 272,926 -- --
Issuance of common stock warrants..... 285 107 -- -- -- --
Repurchase of common stock warrants... (600) -- -- -- -- --
Gain on reissuance of treasury stock
in connection with purchase of
Shelby Life........................ 38 -- -- -- -- --
Issuance of common stock in connection
with exercise of stock options..... -- 6 -- -- 1,667 --
Issued in connection with the offshore
offering at an average per share
price of $5.85 in 1994 less $382 in
1994 in related issuance costs..... -- -- 3,347 -- -- 637,167
------- ------- -------- --------- --------- ---------
Balance, end of year.................... 40,481 39,808 39,695 5,752,499 5,459,573 5,457,906
------- ------- -------- --------- --------- ---------
Treasury stock (at cost):
Balance, beginning of year.............. (2,621) (2,221) (867) (502,025) (418,425) (102,000)
Treasury stock acquired............... (2,126) (400) (1,354) (431,026) (83,600) (316,425)
5% common stock dividend.............. -- -- -- (46,402) -- --
Reissuance of treasury stock in
connection with exercise of stock
options............................ 6 -- -- 1,224 -- --
Reissuance of treasury stock in
connection with purchase of Shelby
Life............................... 1,213 -- -- 250,000 -- --
------- ------- -------- --------- --------- ---------
Balance, end of year.................... (3,528) (2,621) (2,221) (728,229) (502,025) (418,425)
------- ------- -------- --------- --------- ---------
Unrealized gain (loss) on securities:
Balance, beginning of year.............. 2,582 (13,411) (4)
Change in unrealized gain (loss) on
securities available for sale,
net................................ (3,328) 15,993 (14,538)
Cumulative effect of adoption of SFAS
No. 115 as of January 1, 1994 (net
of deferred federal income taxes of
$583).............................. -- -- 1,131
------- ------- --------
Balance, end of year.................... (746) 2,582 (13,411)
------- ------- --------
Foreign currency translation adjustments:
Balance, beginning of year.............. 1,159 546 --
Translation adjustments for the
year............................... (468) 613 546
------- ------- --------
Balance, end of year.................... 691 1,159 546
------- ------- --------
Retained earnings (deficit):
Balance, beginning of year.............. (686) (1,999) 1,437
Net income (loss)..................... 4,767 1,313 (3,436)
5% common stock dividend, plus cash in
lieu of fractional shares.......... (850) -- --
Loss on reissuance of treasury
stock.............................. (2) -- --
Preferred stock dividend.............. (208) -- --
------- ------- --------
Balance, end of year.................... 3,021 (686) (1,999)
------- ------- --------
Total shareholders' equity and common
shares outstanding...................... $39,919 $40,242 $ 22,610 5,024,270 4,957,548 5,039,481
======= ======= ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 156
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 4,767 $ 1,313 $ (3,436)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Amortization of deferred policy acquisition costs......... 1,221 1,142 262
Policy acquisition costs deferred......................... (6,169) (1,863) (5,462)
Class action litigation and settlement liability.......... -- (655) 3,655
Deferred federal income taxes............................. 158 353 (80)
Depreciation and amortization............................. 544 78 513
Future policy benefits and reinsurance recoverable........ 4,143 6,533 2,490
Policy claims and other policyholders' benefits and
funds................................................... 642 (260) (33)
Net realized investment gains............................. (1,302) (688) (558)
Accrued investment income................................. (770) 347 (1,226)
Extraordinary gain on early redemption of redeemable
preferred stock......................................... (502) -- --
Other..................................................... (1,006) 31 1,097
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES...... 1,726 6,331 (2,778)
FINANCING ACTIVITIES
Issuance of Common Stock, net............................... -- 6 3,347
Borrowings, net of debt issuance costs of $208 in 1996 and
$81 and 1995.............................................. 16,792 2,923 --
Repayments on long-term debt and capital lease obligation... (491) (353) --
Short-term borrowings, net.................................. -- (550) 550
Premiums received on interest-sensitive annuities and other
financial products credited to policyholder account
balances, net of premiums ceded........................... 42,347 17,524 53,490
Return of policyholder account balances on
interest-sensitive annuities and other financial products,
net of premiums ceded..................................... (17,356) (17,852) (10,922)
Redemption of redeemable preferred stock.................... (949) -- --
Repurchase of Common Stock warrants......................... (600) -- --
Proceeds from common and treasury stock sales............... 100 -- --
Purchase of Common Stock for treasury....................... (2,126) (400) (1,353)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............. 37,717 1,298 45,112
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases................................................. (249,638) (183,183) (307,358)
Sales..................................................... 194,244 191,477 253,773
Maturities................................................ 10,254 7,812 3,768
Purchase of Shelby Life Insurance Company, less cash
acquired of $32........................................... (14,618) -- --
Dividends paid by Shelby Life Insurance Company to former
parent.................................................... (3,000) -- --
Purchase of Dixie National Life Insurance Company, less cash
acquired of $4,626........................................ -- (3,393) --
Purchase of Standard Management International, less cash
acquired of $314.......................................... -- -- (67)
Short-term investments, net................................. 11,890 (21,662) 2,104
Other investments, net...................................... (551) 4,082 763
Proceeds from sale of property and equipment under capital
lease..................................................... -- 1,396 --
Proceeds from sale of First International Life Insurance
Company, less cash transferred to seller of $265.......... 11,327 -- --
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES................. (40,092) (3,471) (47,017)
--------- --------- ---------
Net increase (decrease) in cash............................. (649) 4,158 (4,683)
Cash at beginning of year................................... 5,762 1,604 6,287
--------- --------- ---------
CASH AT END OF YEAR......................................... $ 5,113 $ 5,762 $ 1,604
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 157
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Standard Management Corporation ("SMC") is an international insurance
holding company, which directly and through its subsidiaries acquires and
manages in force life insurance and annuity business and distributes life
insurance and annuity products issued by its subsidiaries and a select group of
unaffiliated insurers.
SMC's active subsidiaries at December 31, 1996 include: (i) Standard Life
Insurance Company of Indiana ("Standard Life") and its subsidiary, Dixie
National Life Insurance Company ("Dixie National Life"), (ii) Standard
Management International S.A. ("Standard Management International") and its
subsidiaries, Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") and
Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)"), and (iii) Standard
Marketing Corporation ("Standard Marketing").
Basis of Presentation
The accompanying consolidated financial statements of SMC and its
subsidiaries (the "Company") have been prepared in conformity with generally
accepted accounting principles ("GAAP") and include the accounts of SMC and its
majority-owned subsidiaries since acquisition or organization. Subsidiaries that
are not majority-owned are reported on the equity method. All significant
intercompany balances and transactions have been eliminated.
The fiscal year end for Standard Management International is September 30.
To facilitate reporting on the consolidated level, the fiscal year end for
Standard Management International was not changed and the consolidated balance
sheets and statements of operations for Standard Management International at
September 30, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, are included in the Company's consolidated balance sheets at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996.
Use of Estimates
The nature of the Company's insurance businesses requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
Investments
The Company classifies its fixed maturity and equity securities as
available-for-sale and, accordingly such securities are carried at fair value.
Fixed maturity securities include bonds and redeemable preferred stocks. Changes
in fair values of securities available for sale, after adjustment for deferred
policy acquisition costs, present value of future profits and deferred income
taxes, are reported as unrealized gains or losses directly in shareholders'
equity and, accordingly, have no effect on net income. The deferred policy
acquisition costs and present value of future profits adjustments to the
unrealized gains or losses represent valuation adjustments or reinstatements of
these assets that would have been required as a charge or credit to operations
had such unrealized amounts been realized.
F-17
<PAGE> 158
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of fixed maturity securities is adjusted for amortization of
premiums and discounts. The amortization is provided on a constant effective
yield method over the life of the securities and is included in net investment
income.
Mortgage-backed and other collateralized securities, classified as fixed
maturity securities in the balance sheet, are comprised principally of
obligations backed by an agency of the United States government (although
generally not by the full faith and credit of the United States government). The
Company has reduced the risk normally associated with these investments by
primarily investing in highly rated securities and in those that provide more
predictable prepayment patterns. The income from these securities is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the income recognized is adjusted
currently to match that which would have been recorded had the effective yield
been applied since the acquisition of the security. This adjustment is included
in net investment income.
Mortgage loans on real estate and policy loans are carried at unpaid
principal balances and are generally collateralized. Real estate investments,
which the Company has the intent to hold for the production of income, are
carried at cost, less accumulated depreciation. Short-term investments are
carried at amortized cost.
Net Realized Investment Gains or Losses
Net realized investment gains and losses are calculated using the specific
identification method and included in the consolidated statements of operations.
If the values of investments decline below their amortized cost and this decline
is considered to be other than temporary, the amortized cost of these
investments is reduced to net realizable value and the reduction is recorded as
a realized loss.
Future Policy Benefits
Liabilities for future policy benefits for deferred annuities and universal
life policies are equal to full account value that accrues to the policyholder
(cumulative premiums less certain charges, plus interest credited with rates
ranging from 4.5% to 9% in 1996 and 4% to 9.75% in 1995). The average credited
rate for deferred annuities and universal life policies is 5.35% at December 31,
1996. Liabilities for future policy benefits for immediate annuities are based
on the 1983 Basic Annuity Mortality Table with interest rates ranging from 6.5%
to 7.5%. Group annuities in payout status are recorded at discounted future cash
flows with interest rates ranging from 5.5% to 6.15% in 1996 and 5.5% to 6.5% in
1995.
Future policy benefits for traditional life insurance contracts are
computed using the net level premium method on the basis of assumed investment
yields, mortality and withdrawals which were appropriate at the time the
policies were issued. Assumed investment yields are based on interest rates
ranging from 6.5% to 7.5%. Mortality is based upon various actuarial tables,
principally the 1965-1970 Select and Ultimate Table. Withdrawals are based upon
Company experience and range from 5% to 20% per year.
Recognition of Insurance Policy Revenue and Related Benefits and Expenses
Revenue for interest-sensitive annuity contracts consists of policy charges
for surrenders and investment income earned. Premiums received for these annuity
contracts are reflected as premium deposits and are not recorded as revenues.
Expenses related to these annuities include interest credited to policyholder
account balances. Revenue for universal life insurance policies consists of
policy charges for the cost of insurance, policy administration charges,
surrender charges and investment income earned during the period. Expenses
related to universal life policies include interest credited to policyholder
account balances and death benefits incurred during the period in excess of
policyholder account balances.
F-18
<PAGE> 159
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Traditional life insurance and immediate annuity premiums are recognized as
premium revenue when due over the premium paying period of the policies.
Benefits are charged to expense in the period when claims are incurred and are
associated with related premiums through changes in reserves for future policy
benefits which results in the recognition of profit over the premium paying
period of the policies.
Reinsurance
Premiums, annuity policy charges, benefits and claims, interest credited
and amortization expense are reported net of reinsurance ceded. Reinsurance
premiums, annuity policy charges, benefits and claims, interest credited and
amortization expense are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts
Separate account assets and liabilities are maintained primarily for
universal-life contracts written by Standard Management International of which
the majority represent unit-linked business where benefits on surrender and
maturity are not guaranteed; also there are investment contracts under which
fixed benefits are paid to the policyholder and the terms of which are such that
there is little or no mortality risk. Separate account assets and liabilities
also generally represent funds maintained in accounts to meet specific
investment objectives of policyholders who bear the investment risk. Investment
income and investment gains and losses accrue directly to such policyholders.
The assets of each account are segregated and are not subject to claims that
arise out of any other business of the Company. Deposits, net investment income
and realized gains and losses on separate accounts assets are not reflected in
the consolidated statements of operations. Management fees received by Standard
Management International for administrative and policyholder maintenance
services performed for these separate accounts are included in management fees
and similar income from separate accounts in the consolidated statements of
operations.
Foreign Currency Translation
The Company's foreign subsidiaries' balance sheets and statements of
operations are translated at the year end exchange rates and average exchange
rates for the year, respectively. The resulting unrealized gain or loss
adjustment from the translation to U.S. dollars is recorded in the foreign
currency translation adjustment as a separate component of shareholders' equity.
Other translation adjustments for foreign exchange gains or losses have been
reflected in the consolidated statements of operations. Foreign exchange gains
or losses relating to policyholders' funds in separate accounts are allocated to
the relevant separate account.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change is
enacted.
Standard Life and Dixie National Life file separate federal income tax
returns and are taxed as separate life insurance companies. SMC, Standard
Marketing and other U.S. non-insurance subsidiaries are taxed as regular
corporations and file a consolidated return. SMC and its U.S. non-insurance
subsidiaries were able to consolidate with Standard Life for income tax purposes
beginning in 1996, but do not currently plan to do so.
F-19
<PAGE> 160
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Standard Management International is incorporated as a holding company in
the Grand Duchy of Luxembourg and, accordingly, is not currently subject to
taxation on income or capital gains. Standard Management International is
subject to an annual capital tax which is calculated on the nominal value of the
statutory shareholder's equity at an annual rate of .20%. Premier Life
(Luxembourg) is a normal commercial taxable company and is subject to income tax
at regular corporate rates (statutory corporate rate of 39.39%), and annual
capital taxes amounting to approximately 1% of its net equity. Premier Life
(Bermuda) is exempt from taxation on income until March 2016 pursuant to a
decree from the Minister of Finance in Bermuda. To the extent that such income
is taxable under U.S. law, such income will be included in SMC's consolidated
return.
Present Value of Future Profits
Present value of future profits is recorded in connection with acquisitions
of insurance companies or a block of policies. The initial value is based on the
actuarially determined present value of the projected future gross profits from
the in-force business acquired. In selecting the interest rate to calculate the
discounted present value of the projected future gross profits, the Company uses
the risk rate of return believed to best reflect the characteristics of the
purchased policies, taking into account the relative risks of such policies, the
cost of funds to acquire the business and other factors. The value of insurance
in force purchased is amortized on a constant yield basis over the estimated
life of the insurance in force at the date of acquisition in proportion to the
emergence of profits over a period of approximately 20 years. For acquisitions
the Company made on or before November 19, 1992, the Company amortizes the asset
with interest at the same discount rate used to determine the present value of
future profits at date of purchase. For acquisitions after November 19, 1992,
including the acquisitions of Dixie National Life and Shelby Life, the Company
amortizes the asset using the interest rate credited to the underlying policies.
Deferred Policy Acquisition Costs
Costs relating to the acquisition of universal life insurance,
interest-sensitive annuities, and traditional life insurance (primarily
commissions and certain costs of marketing, policy issuance and underwriting)
which vary with and are directly related to the production of new business are
deferred and included in the deferred policy acquisition cost asset to the
extent that such costs are recoverable from future related policy revenues. For
interest-sensitive annuities and other financial products, deferred policy
acquisition costs, with interest, are amortized over the lives of the policies
and products in a constant relationship to the present value of estimated future
gross profits, discounted using the interest rate credited to the policy.
Traditional life insurance deferred policy acquisition costs are being amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves.
The Company periodically reviews the carrying value of the deferred policy
acquisition costs. For interest-sensitive annuities and other financial
products, the Company considers estimated future gross profits in determining
whether the carrying value is appropriate; for other insurance products, the
Company considers estimated future premiums. In all cases, the Company considers
expected mortality, interest earned and crediting rates, persistency and
expenses. Amortization is adjusted retrospectively for interest-sensitive
annuities and other financial products when estimates of future gross profits to
be realized are revised.
Excess of Acquisition Cost Over Net Assets Acquired
The excess of the cost to acquire purchased companies over the fair value
of net assets acquired is being amortized on a straight-line basis over periods
that generally correspond with the benefits expected to be derived from the
acquisitions, usually 20 to 40 years. The Company continually monitors the value
of excess of
F-20
<PAGE> 161
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquisition cost over net assets acquired ("goodwill") based on estimates of
future earnings. If it determines that goodwill has been impaired, the carrying
value is reduced with a corresponding charge to expense.
Excess of Net Assets Acquired Over Acquisition Cost
The excess of the net assets acquired over the cost to acquire purchased
companies ("negative goodwill"), after reducing the basis in property and
equipment and other noncurrent assets to zero, is being amortized into earnings
on a straight-line basis over a five year period.
Stock Options
The Company recognizes compensation expense for its stock option plan using
the intrinsic value method of accounting. Under the terms of the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date, or other measurement date, over the amount an
employee must pay to acquire the stock. Under the Company's stock option plans,
no expense is recognized since the exercise price equals or exceeds the market
price at the measurement date.
Earnings Per Share
Earnings per share is computed by dividing earnings available to common
shareholders by the weighted average number of common and common equivalent
shares outstanding for the applicable period. The weighted average number of
common equivalent shares outstanding is determined by calculating the number of
shares issuable on exercise of common stock options and warrants, reduced by the
number of shares assumed to have been repurchased (at the average market price
per share of Common Stock) with the proceeds from their exercise; these shares
are then added to the number of average common shares outstanding during the
period.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements and
notes have been reclassified to conform with the 1996 presentation. These
reclassifications had no effect on previously reported shareholders' equity or
net income during the periods involved.
2. CHANGES IN ACCOUNTING PRINCIPLES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities." The Company
adopted the provisions of SFAS No. 115 as of January 1, 1994. Under SFAS No.
115, securities are classified as available for sale, held-to-maturity, or
trading. The Company recognizes that there may be circumstances where it may be
appropriate to sell a security prior to maturity in response to unforeseen
changes in circumstances. The Company classified all of its fixed maturity
portfolio as of January 1, 1994 as available for sale. Securities classified as
available for sale are carried at fair value and unrealized gains and losses on
such securities are reported as a separate component of shareholders' equity.
With the adoption of SFAS No. 115, the January 1, 1994 balance of
shareholders' equity was increased by $1,131 (net of deferred taxes of $583 that
would have been recorded if such securities had been sold at their fair value on
January 1, 1994) to reflect the net unrealized gains on securities classified as
available for sale that were previously carried at lower of amortized cost or
market.
F-21
<PAGE> 162
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSALS
On November 8, 1996, Standard Life acquired through merger Shelby Life
Insurance Company ("Shelby Life") from Delta Life and Annuity Corporation
("DLAC"), a life insurance company located in Memphis, Tennessee (the "Shelby
Merger"). The purchase price was approximately $14,650, including $13,000 in
cash, 250,000 shares of restricted Common Stock (valued at $1,250) and
acquisition costs of $400 associated with the purchase of Shelby Life. Financing
for the Shelby Merger was provided by senior debt of $10,000 and $4,000 in
subordinated convertible debt.
The acquisition of Shelby Life was accounted for using the purchase method
of accounting and the consolidated financial statements will include the results
of Shelby Life from November 1, 1996, the effective date of acquisition. Under
purchase accounting, Standard Life allocated the total purchase price of Shelby
Life to the assets and liabilities acquired, based on a preliminary
determination of their fair values and recorded the excess of acquisition cost
over net assets acquired as goodwill. Standard Life recorded goodwill of $9
which will be amortized on a straight-line basis over 20 years. Standard Life
may adjust this allocation when a final determination of such values is made.
On October 2, 1995, Standard Life completed its acquisition of 99.3% of
Dixie National Life from Dixie National Corporation ("DNC"), a life insurance
holding company located in Jackson, Mississippi. Dixie National Life markets a
variety of life insurance products throughout the Mid-South offering primarily
"burial expense" policies. The purchase price was $8,019, including costs
associated with acquiring Dixie National Life of $684, the forgiveness of a
$3,689 DNC note payable to Standard Life and a $1,720 repayment of a DNC note
payable. The remaining purchase price of $1,926 was paid in cash from internally
generated funds.
The acquisition was accounted for using the purchase method of accounting
and the consolidated financial statements include the results of Dixie National
Life from the date of acquisition. Under purchase accounting, Standard Life
allocated the total purchase price of Dixie National Life to the assets and
liabilities acquired, based on a determination of their fair values. Standard
Life recorded goodwill of $1,589 which will be amortized on a straight-line
basis over 40 years.
F-22
<PAGE> 163
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSALS (CONTINUED)
The following schedule summarizes the assets acquired and the liabilities
assumed with the Shelby Life and Dixie National Life acquisitions described
above:
<TABLE>
<CAPTION>
DIXIE
SHELBY NATIONAL
LIFE LIFE
------ --------
<S> <C> <C>
Assets acquired:
Fixed maturity securities............................... $ 93,376 $17,804
Policy loans............................................ 2,430 3,042
Guaranteed government student loans..................... -- 5,158
Short term investments.................................. 4,725 567
Cash.................................................... 32 4,626
Present value of future profits......................... 9,372 7,901
Other assets............................................ 2,880 1,599
-------- -------
Total assets acquired..................................... 112,815 40,697
Liabilities assumed:
Policy reserves......................................... 91,221 30,981
Policy claims and policyholder funds.................... 1,101 2,030
Deferred federal income taxes........................... 1,750 450
Other liabilities....................................... 1,102 761
Dividends payable to DLAC............................... 3,000 --
Minority interest....................................... -- 45
-------- -------
Total liabilities assumed................................. 98,174 34,267
-------- -------
Net assets acquired....................................... 14,641 6,430
Excess of acquisition cost over net assets acquired....... 9 1,589
-------- -------
Total purchase price...................................... $ 14,650 $ 8,019
======== =======
</TABLE>
The following are supplemental unaudited pro forma consolidated results of
operations of the Company as if the acquisitions for Shelby Life and Dixie
National Life had occurred at the beginning of the period presented at the same
purchase price, based on estimates and assumptions considered appropriate.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Revenues................................................... $49,344 $45,097
Income (loss) before extraordinary gain.................... 4,695 (90)
Net income (loss).......................................... 5,197 (61)
Income (loss) per common share and common equivalent share
before extraordinary gain................................ .85 (.01)
Net income (loss) per common share......................... $ .94 $ (.01)
</TABLE>
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable and do not reflect any benefit from savings
which might be achieved from combined operations. The unaudited pro forma
results do not necessarily represent results which would have occurred if the
acquisitions had taken place on the basis assumed above, nor are they indicative
of the results of future combined operations.
On March 18, 1996, Standard Life completed the sale of a duplicate charter
associated with First International Life Insurance Company ("First
International") to The Guardian Insurance and Annuity
F-23
<PAGE> 164
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSALS (CONTINUED)
Company, Inc. ("GIAC"), a subsidiary of The Guardian Group, New York, NY.
Standard Life received proceeds of approximately $10,393, including $1,500 for
the charter and licenses associated with First International. Standard Life
realized a net pretax gain of $1,042 and a tax benefit of $1,420 on this sale,
or $2,462 ($.47 per share). In addition, First International, Standard Life and
GIAC have entered into a series of reinsurance and other agreements that include
provisions for Standard Life to administer First International policies in force
at the date of sale, and for Standard Life to continue to receive the profit
stream from the majority of First International's in force business at the date
of sale (See Note 10).
SMC decided in February 1996 to terminate the reinsurance agreement between
Standard Reinsurance of North America Ltd. ("Standard Reinsurance") and
Salamandra Joint-Stock Insurance Company in Ukraine ("Salamandra"), and to not
renew the Barbados license of Standard Reinsurance. This resulted in the
termination of Standard Reinsurance operations and the write-off of SMC's
investment in Standard Reinsurance and certain intangible assets of Standard
Reinsurance amounting to $156 ($.03 per share).
4. INVESTMENTS
The amortized cost, gross unrealized gain (loss) and estimated fair value
of securities available for sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale:
Fixed maturity securities:
United States Treasury securities and
obligations of United States government
agencies..................................... $ 20,753 $ 51 $ 420 $ 20,384
Obligations of states and political
subdivisions................................. 3,588 106 -- 3,694
Foreign government securities.................. 10,042 51 166 9,927
Utilities...................................... 31,000 295 675 30,620
Corporate bonds................................ 210,977 3,086 3,539 210,524
Mortgaged-backed securities.................... 72,264 247 919 71,592
Redeemable preferred stock..................... 527 42 -- 569
-------- ------ ------ --------
Total fixed maturity securities........... 349,151 3,878 5,719 347,310
Equity securities................................. 58 4 -- 62
-------- ------ ------ --------
Total securities available for sale............ $349,209 $3,882 $5,719 $347,372
======== ====== ====== ========
</TABLE>
F-24
<PAGE> 165
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale:
Fixed maturity securities:
United States Treasury securities and
obligations of United States government
agencies..................................... $ 19,331 $ 452 $ 19 $ 19,764
Obligations of states and political
subdivisions................................. 60 -- -- 60
Foreign government securities.................. 5,056 118 3 5,171
Utilities...................................... 23,916 462 186 24,192
Corporate bonds................................ 132,119 7,281 1,657 137,743
Mortgaged-backed securities.................... 45,161 417 416 45,162
-------- ------ ------ --------
Total fixed maturity securities........... 225,643 8,730 2,281 232,092
Equity securities................................. 52 -- -- 52
-------- ------ ------ --------
Total securities available for sale............ $225,695 $8,730 $2,281 $232,144
======== ====== ====== ========
</TABLE>
The estimated fair values for fixed maturity securities are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent pricing
services, or by discounting expected future cash flows using a current market
rate applicable to the coupon rate, credit, and maturity of the investments.
The change in net unrealized gains (losses) of securities available for
sale before effects of deferred acquisition costs, present value of future
profits and deferred federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities......................... $(8,290) $27,142 $(22,407)
Equity securities................................. 4 -- --
------- ------- --------
$(8,286) $27,142 $(22,407)
======= ======= ========
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties and
because most mortgage-backed securities provide for periodic payments throughout
their lives.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -----
<S> <C> <C>
Due in one year or less.................................. $ 7,418 $ 7,435
Due after one year through five years.................... 24,818 24,970
Due after five years through ten years................... 123,503 123,075
Due after ten years...................................... 120,621 119,669
-------- --------
Subtotal............................................ 276,360 275,149
Redeemable preferred stock............................... 527 569
Mortgage-backed securities............................... 72,264 71,592
-------- --------
Total fixed maturity securities..................... $349,151 $347,310
======== ========
</TABLE>
F-25
<PAGE> 166
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The Company maintains a highly-diversified investment portfolio with
limited concentration of financial instruments in any given region, industry or
economic characteristic. Investments in any entity in excess of 10% of
shareholders' equity at December 31, 1996, other than asset-backed securities
and investments issued or guaranteed by the U.S. government or a U.S. government
agency, all of which were classified as fixed maturity securities available for
sale and are investment-grade securities, were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
INVESTMENT COST VALUE
---------- --------- -----
<S> <C> <C>
Republic of Indonesia....................................... $5,676 $5,566
AMERCO...................................................... 5,080 5,161
Eastern Energy Limited...................................... 4,974 4,932
Delta Airlines.............................................. 4,590 4,767
Torchmark Corporation....................................... 4,362 4,259
</TABLE>
Net investment income was attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities.......................... $19,865 $17,457 $15,350
Mortgage loans on real estate...................... 309 152 121
Policy loans....................................... 447 305 331
Real estate........................................ 65 120 290
Short-term investments and other................... 602 990 801
------- ------- -------
Gross investment income....................... 21,288 19,024 16,893
Investment expenses................................ 417 507 836
------- ------- -------
Net investment income......................... $20,871 $18,517 $16,057
======= ======= =======
</TABLE>
The Company had no investments in fixed maturity securities available for
sale, mortgage loans or real estate that were non-income producing for the year
ended December 31, 1996.
Net realized investment gains arose from the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities available for sale:
Gross realized gains................................ $2,012 $2,115 $1,933
Gross realized losses............................... 911 1,662 1,240
------ ------ ------
Net.............................................. 1,101 453 693
Real estate........................................... -- 124 (504)
Other................................................. 201 111 204
Change in allowance for losses........................ -- -- 165
------ ------ ------
Net realized investment gains.................... $1,302 $ 688 $ 558
====== ====== ======
</TABLE>
Life insurance companies are required to maintain certain amounts of assets
with state or other regulatory authorities. At December 31, 1996 fixed maturity
securities carried at $15,326 and short-term investments carried at $691 were
held on deposit by various state regulatory authorities in compliance with
statutory regulations. Additionally, fixed maturity securities carried at $2,539
and short-term investments carried at $5,211 of Standard Management
International were held by a custodian bank approved by the Luxembourg
regulatory authorities to comply with local insurance laws.
F-26
<PAGE> 167
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
The activity related to the deferred policy acquisition costs of business
produced is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year....................... $10,054 $12,206 $ 6,513
Deferrals during the year........................ 6,169 1,863 5,462
Amortization during the year..................... (1,221) (1,142) (262)
Adjustment relating to net unrealized (gain) loss
on fixed maturity securities available for
sale.......................................... 3,076 (2,873) 493
------- ------- -------
Balance at end of year............................. $18,078 $10,054 $12,206
======= ======= =======
</TABLE>
The activity related to the present value of future profits of the business
acquired for the Company is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year....................... $15,246 $ 8,299 $ 9,144
Additions during the year from acquisitions...... 10,348 7,901 --
Deletions during the year from disposal of
subsidiaries.................................. (733) -- --
Interest accreted on unamortized balance......... 2,563 1,566 1,461
Amortization during the year..................... (3,812) (2,346) (2,306)
Adjustments relating to net unrealized (gain)
loss on fixed maturities available for sale... 194 (174) --
------- ------- -------
Balance at end of year............................. $23,806 $15,246 $ 8,299
======= ======= =======
</TABLE>
The percentages of future expected net amortization of the beginning
balance of the present value of future profits before the effect of net
unrealized gains and losses, based on the present value of future profits at
December 31, 1996 and current assumptions as to future events on all policies in
force, will be between 6% and 8% in each of the years 1997 through 2001.
The discount rate used to calculate the present value of future profits
reflected in the Company's consolidated balance sheet at December 31, 1996,
ranged from 7.5% to 18%. The Company used a 15% discount rate to calculate the
present value of future profits on the Shelby Life and Dixie National Life
acquisitions.
6. NOTES PAYABLE
SMC has outstanding borrowings at December 31, 1996 pursuant to an Amended
Revolving Line of Credit Agreement with a bank (the "Amended Credit Agreement")
that provides for it to borrow up to $16,000 in the form of a seven-year
reducing revolving loan arrangement. SMC has agreed to pay a non-use fee of .50%
per annum on the unused portion of the commitment. In connection with the
original and Amended Credit Agreement, SMC issued warrants to the bank to
purchase 61,500 shares of Common Stock. Borrowings under the Amended Credit
Agreement may be used for contributions to surplus of insurance subsidiaries,
acquisition financing, and repurchases of Class S Cumulative Convertible
Redeemable Preferred Stock ("Class S Preferred Stock") and Common Stock. The
debt is secured by a Pledge Agreement of all of the issued and outstanding
shares of common stock of Standard Life and Standard Marketing. Interest on the
borrowings under the Amended Credit Agreement is determined, at the option of
SMC, to be: (i) a
F-27
<PAGE> 168
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
fluctuating rate of interest to the corporate base rate announced by the bank
from time to time plus 1% per annum, or (ii) a rate at LIBOR plus 3.25%. Annual
principal repayments of $2,667 begin in November 1998 and conclude in November
2003. Indebtedness incurred under the Amended Credit Agreement is subject to
certain restrictions and covenants including, among other things, certain
minimum financial ratios, minimum consolidated equity requirements for SMC,
positive net income, minimum statutory surplus requirements for the Company's
insurance subsidiaries and certain limitations on acquisitions, additional
indebtedness, investments, mergers, consolidations and sales of assets. At
December 31, 1996, SMC had borrowed $16,000 under this Amended Credit Agreement
at a weighted average interest rate of 8.849%.
In connection with the acquisition of Shelby Life, SMC borrowed $4,000 from
an insurance company pursuant to a subordinated convertible debt agreement which
is due in December 2003 and requires interest payments in cash at 12% per annum,
or, if SMC chooses, in non-cash additional subordinated convertible debt notes
at 14% per annum until December 31, 2000. The subordinated convertible notes are
convertible into Common Stock at the rate of $6.00 per share through November
1997, and $5.75 per share thereafter. SMC may prepay the subordinated
convertible debt with not less than thirty days notice at any time. The
subordinated convertible debt agreement contains terms and financial covenants
substantially similar to those in the Amended Credit Agreement.
Standard Management International has an unused line of credit of $1,583
which was renewed in February 1997. There were no borrowings in connection with
this line of credit in 1996.
Interest expense during 1996, 1995 and 1994 was $773, $116 and $47,
respectively. Cash paid for interest was $356, $100 and $105 in 1996, 1995 and
1994, respectively.
7. INCOME TAXES
The components of the federal income tax expense (credit), applicable to
earnings before extraordinary gains, was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax provision (benefit).................... $(888) $(110) $ 2
Deferred tax provision (benefit)................... 158 353 (80)
----- ----- ----
$(730) $ 243 $(78)
===== ===== ====
</TABLE>
F-28
<PAGE> 169
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The effective tax rate on pre-tax income before extraordinary gain is lower
than the statutory corporate federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income tax statutory rate.................. 34% 34% 34%
======= ===== =======
Federal income tax expense (credit) at statutory
rates............................................ $ 1,202 $ 529 $(1,195)
Amortization of excess of acquisition cost over net
assets acquired.................................. 41 37 33
Small insurance company deduction.................. -- (128) (290)
Non recognition of losses in SMC consolidated
return and in foreign subsidiaries............... 543 372 290
Class action litigation and settlement costs....... -- (107) 1,366
Amortization of excess of net assets acquired over
acquisition cost................................. (472) (472) (361)
Tax benefit from disposal of subsidiary............ (1,420) -- --
Release of reserve for tax adjustments............. (325) -- --
Other items, net................................... (299) 12 79
------- ----- -------
Federal income tax expense (credit).............. $ (730) $ 243 $ (78)
======= ===== =======
Effective tax rate............................... (21)% 16% 2%
======= ===== =======
</TABLE>
The Company recovered $130, $280 and $684 in federal income taxes in 1996,
1995 and 1994, respectively and paid federal income taxes of $900 in 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax return purposes. Significant temporary
differences included in the Company's deferred tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Unrealized loss on securities available for sale........ $ 355 $ --
Future policy benefits.................................. 8,267 6,902
Capital and net operating loss carryforwards............ 7,719 7,230
Other-net............................................... 1,385 864
------- -------
Gross deferred tax assets............................ 17,726 14,996
Valuation allowance for deferred tax assets............. (8,750) (8,680)
------- -------
Deferred income tax assets, net of valuation
allowance.......................................... 8,976 6,316
Deferred income tax liabilities:
Unrealized gain on securities available for sale........ -- (1,961)
Present value of future profits......................... (8,093) (5,184)
Deferred policy acquisition costs....................... (4,089) (1,754)
------- -------
Total deferred income tax liabilities................ (12,182) (8,899)
------- -------
Net deferred income tax assets (liabilities)............ $(3,206) $(2,583)
======= =======
</TABLE>
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which are unlikely to be realized. The
valuation allowance for deferred tax assets includes $2,308 at
F-29
<PAGE> 170
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
December 31, 1996 with respect to corporate income tax loss carryforwards of
Standard Management International which, if recognized in the future, will
result in an addition to negative goodwill and be amortized into income over its
remaining life. The valuation allowance for deferred tax assets includes $2,745
at December 31, 1996 with respect to deferred tax assets at the date of
acquisition and net tax operating loss carryforwards of Dixie National Life and
Shelby Life which, if recognized in the future, will result in a reduction in
goodwill and be amortized into income over its remaining life by reducing
goodwill amortization expense.
As of December 31, 1996, SMC and its noninsurance subsidiaries had
consolidated net operating loss carryforwards of approximately $8,600 for tax
return purposes which expire from 2005 through 2011. At December 31, 1996,
Standard Life had tax return net operating loss carryforwards of approximately
$1,400 which expire in 2004 and 2005. As a result of changes in ownership of SMC
and Standard Life, use of the loss carryforwards of Standard Life are subject to
annual limitations. The maximum tax return operating loss carryforwards
available for use by Standard Life in any one year are approximately $300. At
December 31, 1996, Dixie National Life had tax return net operating loss
carryforwards of approximately $5,800 which expire in 2010 and 2011. These
carryforwards will only be available to reduce the respective taxable income of
SMC, Standard Life and Dixie National Life. At December 31, 1996, Premier Life
(Luxembourg) had accumulated corporate income tax loss carryforwards of
approximately $5,900, all of which may be carried forward indefinitely.
The Internal Revenue Service has completed its examination of the Company
for years through 1993 in 1996. All adjustments to taxable income determined by
completed examinations, which were not material, have reduced the net operating
loss carryforwards. Upon completion of the examination, a tax reserve for
adjustments of $325 was released and recorded in income in 1996.
8. SHAREHOLDERS' EQUITY
Redeemable Preferred Stock
Shareholders have authorized 1,000,000 shares of Preferred Stock. Other
terms, including preferences, voting and conversion rights, may be established
by the Board of Directors. In connection with the class action lawsuit
settlement in March 1995, 300,000 of these shares designated as Class S
Preferred Stock, $10.00 per share par value, were issued February 8, 1996. The
Class S Preferred Stock is redeemable in February 2003, has an 11% annual
cumulative dividend payable in February 2003, and is convertible into SMC Common
Stock at $7.62 per share until February 1998 and $10.00 per share thereafter,
subject to adjustment under a formula intended to protect against dilution.
SMC may voluntarily redeem the Class S Preferred Stock prior to February
2003 at par value plus accumulated and unpaid dividends. In February 1996, SMC
instituted a program to repurchase from time to time up to 300,000 shares of its
Class S Preferred Stock in the open market or privately negotiated transactions.
As of December 31, 1996, SMC had repurchased and retired 140,111 shares of its
Class S Preferred Stock for $949, primarily paid through additional borrowings
under the Amended Credit Agreement. This repurchase resulted in an extraordinary
gain on early redemption of redeemable preferred stock of $502 for the year
ended December 31, 1996.
Common Stock
SMC declared a 5% stock dividend on shares of its Common Stock for
shareholders of record on May 17, 1996 which was distributed on June 21, 1996.
All applicable number of shares and per share amounts included in the
accompanying consolidated financial statements and notes have been retroactively
adjusted to reflect this stock dividend for all periods presented.
F-30
<PAGE> 171
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (CONTINUED)
The Company commenced an offshore offering of newly issued Common Stock
exclusively to foreign investors in December 1993. During December 1993 and
January 1994 the Company sold 1,666,667 shares of common stock at an average
offering price of $5.87 per share. Certain costs amounting to $852 and related
to the offering, including legal and underwriting fees, have been charged to
common stock and deducted from the proceeds of the offering. The Company
received total consideration of $9,783 from the offering, of which 637,167
shares with net proceeds of $3,347 were received during January 1994. A portion
of the proceeds was used to complete the acquisition of Standard Management
International, with the additional proceeds used to infuse capital into Standard
Life and provide working capital to SMC.
The Company has a stock repurchase program and repurchases its Common Stock
from time to time for the purpose of enhancing shareholder value. The Company
repurchased 431,026, 83,600 and 316,425, shares of Common Stock for $2,126, $400
and $1,354 in 1996, 1995 and 1994, respectively. At December 31, 1996, the
Company is authorized to purchase an additional 771,771 shares under this
program. The Company implemented a policy to issue shares for the exercise of
stock options from treasury stock. The Company reissued 1,224 shares at a cost
of $6 in 1996 under this program.
The following table represents the Company's warrants outstanding to
purchase Common Stock as of December 31, 1996:
<TABLE>
<CAPTION>
ISSUE DATE EXPIRATION DATE EXERCISE PRICE WARRANTS OUTSTANDING
---------- --------------- -------------- --------------------
<S> <C> <C> <C>
June 1989..................................... December 1999 $3.5216 236,858
July 1992..................................... June 1998 3.5296 175,800
January 1994.................................. January 1998 7.8571 42,000
September 1995................................ September 1998 5.2381 4,200
November 1995................................. November 2002 4.5238 31,500
July 1996..................................... July 2003 4.375 30,000
August 1996................................... August 1998 4.3125 100,000
September 1996................................ September 1998 5.00 25,000
September 1996................................ September 1999 5.50 17,000
-------
662,358
=======
</TABLE>
Unrealized Gain (Loss) on Securities
The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Fair value of securities available for sale.............. $347,372 $232,144
Amortized cost of securities available for sale.......... 349,209 225,695
-------- --------
Gross unrealized gain (loss) on securities available
for sale.......................................... (1,837) 6,449
Adjustments for:
Deferred policy acquisition costs...................... 696 (2,380)
Present value of future profits........................ 20 (174)
Deferred federal income tax recoverable (liability).... 375 (1,311)
Minority interest...................................... -- (2)
-------- --------
Net unrealized gain (loss) on securities available
for sale.......................................... $ (746) $ 2,582
======== ========
</TABLE>
F-31
<PAGE> 172
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN
SMC has a Non-qualified Stock Option Plan (the "Plan") under which
1,500,000 shares of Common Stock are reserved for grants of stock options to
employees and directors. The purchase price per share specified in any Plan
option must be at least equal to the fair market value of common stock at the
grant date. Options generally become exercisable over a three-year period and
have a term of 10 years. The Plan is administered by the Board of Directors and
officers of SMC. The terms of the options, including the number of shares and
the exercise price, are subject to the sole discretion of the Board of
Directors.
Statement of Financial Accounting Standard No. 123 entitled "Accounting for
Stock-Based Compensation" ("SFAS 123") issued in October 1995, was adopted by
the Company as of December 31, 1996. The provisions of SFAS 123 allow companies
to either expense the estimated fair value of stock options or to continue their
current practice but disclose the pro forma effects on net income and earnings
per share had the fair value of the options been expensed. The Company has
elected to continue its practice of recognizing compensation expense for its
Plan using the intrinsic value based method of accounting and to provide the
required pro forma information for stock options granted after December 31,
1994.
Had compensation cost for the Plan been determined based on the fair value
at the grant date for awards in 1995 and 1996 consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Net income -- as reported................................... $4,767 $1,313
Net income -- pro forma..................................... 3,847 685
Earnings per share -- as reported........................... .93 .25
Earnings per share -- pro forma............................. $ .73 $ .13
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: expected volatility
of .3882% and .4980%; risk-free interest rate of 6.62% and 5.88%; and expected
lives of 7 years.
Information regarding the Plan for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- --------------- ---------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE SHARES SHARES
------ --------- ------ ------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year............................... 1,164,720 $6.464 520,294 523,194
Exercised............................ (1,224) $3.571 (1,667) --
Granted.............................. 769,122 $6.140 655,008 2,600
Expired or forfeited................. (486,449) $7.564 (8,915) (5,500)
--------------- ------ --------------- ---------------
Options outstanding, end of year..... 1,446,169 $5.984 1,164,720 520,294
=============== =============== ===============
Option price range at end of year.... $3.571 - $9.405 $3.571 - $9.405 $4.286 - $9.405
Option price range for exercised
shares............................. $ 3.571 $ 3.571 --
Options available for grant at end of
year............................... 50,939 333,613 979,706
=============== =============== ===============
Weighted-average fair value of
options granted during the year.... $ 3.623 $ 2.906
=============== ===============
</TABLE>
F-32
<PAGE> 173
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLAN (CONTINUED)
Shares under options that were exercisable at year-end are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C>
Options exercisable......................................... 1,097,028 762,374 363,179
</TABLE>
Information with respect to stock options outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------- ----------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES DEC. 31, 1996 LIFE (YEARS) PRICE DEC. 31, 1996 PRICE
-------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$3 - $5............... 337,224 8 Years $4.25 145,775 $4.20
$5 - $7............... 517,975 8 Years $5.27 360,283 $5.29
$7 - $9............... 571,282 9 Years $7.38 571,282 $7.38
$9 - $11.............. 19,688 6 Years $9.41 19,688 $9.41
--------- ---------
1,446,169 1,097,028
========= =========
</TABLE>
Effective May 1, 1996, the Board of Directors cancelled 480,480 options
that had previously been granted to certain executive officers with exercise
prices ranging from $8.00 to $13.00 per share (representing the market price of
the Common Stock on the date such options were initially granted), and granted
an identical number of new options with identical terms and vesting periods (the
"Replacement Options") to these persons with an exercise price of $7.60, the
book value per share of Common Stock on September 30, 1995. On May 1, 1996, the
last reported sale price per share of the Common Stock was $4.375. The per share
exercise price relating to each Replacement Option was reduced to $7.238 in
connection with the 5% stock dividend effected on June 21, 1996 for holders of
record of Common Stock on May 17, 1996.
10. REINSURANCE
The Company's insurance subsidiaries have entered into reinsurance
agreements with non-affiliated companies to limit the net loss arising from
large risks, maintain their exposure to loss within capital resources, provide
additional capacity for future growth, and effect sharing arrangements. The
maximum amount of life insurance retained on any one life ranges from $30 to
$150. Amounts of standard risk in excess of that limit are reinsured.
Reinsurance premiums ceded to other insurers were $2,152, $4,312 and $5,534
in 1996, 1995 and 1994, respectively. Reinsurance ceded has reduced benefits and
claims incurred by $6,201, $1,369 and $4,664 in 1996, 1995 and 1994,
respectively. A contingent liability exists to the extent any of the reinsuring
companies are unable to meet their obligations under reinsurance agreements. To
minimize its exposure to significant losses from reinsurance insolvencies, the
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers. The Company believes
the assuming companies are able to honor all contractual commitments under the
reinsurance agreements, based on its periodic reviews of these companies.
The Company's largest annuity reinsurer at December 31, 1996 represented
$26,138, or 38% of total reinsurance recoverable, $8,907 of premium deposits
ceded in 1996 and is rated "A" (Excellent) by A.M. Best. From January 1, 1995 to
August 31, 1995, approximately 70% of Standard Life's annuity business pursuant
to the terms of the agreement produced after December 31, 1994 was ceded.
Standard Life decreased the quota-share portion of business ceded pursuant to
this agreement to 50% at September 1, 1995,
F-33
<PAGE> 174
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE (CONTINUED)
and further reduced it to 25% effective April 1, 1996. This agreement limits
dividends and other transfers by Standard Life to SMC or affiliated companies in
certain circumstances.
All the inforce business of First International effective January 1, 1996
was ceded to GIAC through a coinsurance indemnity reinsurance agreement. Under
the terms of the agreement, approximately $18,841 of First International's
reserves and the related assets were ceded to GIAC as of January 1, 1996. The
inforce business related to this automatic coinsurance indemnity reinsurance
agreement is comprised of the following two blocks; ("Block I") - ordinary life
policies (issued in New York and New Jersey), universal life, immediate and
deferred annuities (issued in New York, New Jersey and Vermont), supplemental
contracts and group waivers, and ("Block II") - ordinary life policies (not
issued in New York and New Jersey) issued prior to 1989, and term life policies
(issued in New York, New Jersey and Vermont) issued after 1988.
Effective at January 1, 1996, GIAC entered into a modified coinsurance
indemnity reinsurance agreement with Standard Life with respect to Blocks I and
II. Under the terms of the agreement, approximately $18,841 of Standard Life's
reserves were assumed from GIAC as of January 1, 1996. Standard Life incurs
experience rating refunds to GIAC on Block I. There is no experience rating
refund on Block II.
As part of the acquisition of First International by SMC in 1992, Standard
Life entered into an indemnity reinsurance agreement with First International
effective July 1, 1992. This business was subsequently assumed by Standard Life
effective January 1, 1993. At the date of the sale of First International to
GIAC, Standard Life ceded this block of business with policy reserves of $12,514
and related assets to GIAC. This block of business ("Block III") consisted of
term life policies (not issued in New York, New Jersey or Vermont) issued after
1988 and immediate and deferred annuities (not issued in New York, New Jersey
and Vermont) and lottery annuities. Standard Life will continue to receive
profits from Block III through experience rating refunds from GIAC on Block III.
Standard Life received an administration fee of $316 for the year ended
December 31, 1996 from First International for the administration of the Block I
and Block II policies that were in force at the time of the sale of First
International.
In June 1988, Standard Life ceded a block of business to National Mutual
Life Insurance Company ("National Mutual"). Effective May 31, 1996, Standard
Life terminated by recapture the reinsurance agreement with National Mutual. As
a result of this recapture, Standard Life received assets of $4,826 and
liabilities of $4,826, primarily ordinary life policies. In connection with this
transaction, Standard Life agreed to pay National Mutual a recapture fee of
$1,200 and Standard Life collected administration fees of $375 related to
services provided in prior years that had not been recorded previously due to
uncertainty as to collection. The net proceeds of $825 were recorded as the
present value of the future profits on this block of business, which is being
amortized in proportion to the emergence of profits over 20 years (see Note 20).
The premium income, and corresponding increase in reserves, of $4,234 recorded
in connection with the recapture will not recur in the future.
11. RELATED PARTY TRANSACTIONS
The Company paid legal fees of $23 and $114 in 1995 and 1994, respectively,
to a law firm of which a partner is a director and officer of SMC. This director
and officer resigned from the law firm effective January 1, 1996. In April 1994,
the Company made a loan to this director and officer in the amount of $70, due
May 1, 1995, at an annual interest rate of 7%. This loan was renewed in May 1995
and was due in two installments of $40 on May 1, 1996 and $30 on August 1, 1997.
This loan was collateralized by 10,000 shares of Common Stock owned by the
director and officer. The outstanding principal balance at December 31, 1995 was
$70. This note was repaid in 1996, with SMC becoming a guarantor supporting a
$70 loan to this director
F-34
<PAGE> 175
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
and officer on June 25, 1996. The guaranty will be effective until the earlier
of repayment of the loan or June 25, 1999.
A director and officer of SMC was the sole owner of an independent
insurance marketing organization. On April 1, 1994, the assets of this marketing
organization were sold to Standard Marketing for $174 payable on an installment
basis over a four year period. The outstanding principal balance due on this
installment note was $60 and $104 on December 31, 1996 and 1995, respectively.
Until the consummation of this transaction, this marketing organization was a
master general agent for Standard Marketing and received commissions from
Standard Life for sales made on its behalf. These commissions, which amounted to
approximately $128 in 1994, were paid at rates comparable to commissions
received by non-affiliated master general agents. As a result of the purchase of
the marketing organization assets, Standard Marketing receives those commissions
previously received by the marketing organization.
In December 1994, SMC consolidated two loans to an officer and director of
SMC, in the amount of $325 with an annual interest rate of 6.5%, repayable at $2
per month (principal and interest) with a final payment due on December 31,
1996. This loan was refinanced December 29, 1995, and again at December 31,
1996, at an annual interest rate of 5%, payable at $1 per month, with additional
annual payments ranging from $50 to $84 through December 31, 2001. The
outstanding principal balance was $338 and $333 at December 31, 1996 and 1995,
respectively.
A director of SMC received $197 in fees for services rendered in connection
with the offshore offering of common stock in December 1993 and January 1994.
In December 1993, the Company entered into a consulting agreement with a
director. The consulting agreement was effective December 1, 1993 and expired on
November 30, 1996. Under the terms of the agreement the Company agreed to pay
the director $30, $35 and $40 during the first, second and third year of the
agreement, respectively. In July 1994, SMC made two loans to this director of
SMC in the amounts of $100 and $80. Both notes were at an annual interest rate
of prime plus 1%, require quarterly principal repayments and were due in 1996.
The outstanding principal balances on these notes were $127 at December 31,
1995. Both notes were repaid in 1996.
SMC entered into a covenant not to compete agreement with a former officer
and director in February 1997, effective July 1, 1996, the date his employment
agreement terminated. In accordance with the covenant not to compete agreement,
the officer and director received a lump sum payment of $150 in February 1997,
and will receive $125 in each of July 1997 and 1998, and $100 in July 1999.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company rents office and storage space under noncancellable operating
leases. The Company incurred rent expense for operating leases of $1,037, $1,092
and $916 in 1996, 1995 and 1994, respectively. Pursuant to the terms of a lease
agreement effective June 1, 1991, Standard Life has agreed to lease office space
for a ten year period. After the initial ten year lease period, Standard Life
may continue to lease the premises on a month to month basis at a rental of 125%
of the prevailing market rate for the leased premises in effect at that time.
In April 1995, SMC sold its equipment and leased it back under a capital
lease. SMC has the option to renew or purchase the equipment at the end of the
lease term in April 1998. The cost and accumulated depreciation of the equipment
was $1,396 and $814, respectively at December 31, 1996.
F-35
<PAGE> 176
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future required minimum rental payments, by year and in the aggregate,
under noncancellable capital leases and operating leases as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997........................................................ $539 $ 958
1998........................................................ 144 717
1999........................................................ -- 558
2000........................................................ -- 558
2001........................................................ -- 232
Thereafter.................................................. -- --
---- ------
Total minimum lease payments................................ 683 $3,023
======
Less amounts representing interest.......................... 46
----
Present value of net minimum lease payments under capital
lease..................................................... $637
====
</TABLE>
Employment Agreements
Certain officers are employed pursuant to executive employment agreements
that create certain liabilities in the event of the termination of the covered
executives following a change of control of the Company. The commitment under
these agreements is approximately three times their current annual salaries.
Additionally, following termination from the Company following a change in
control, each executive is entitled to receive a lump sum payment equal to all
unexercised stock options granted multiplied by the highest per share fair
market value during the six month period ending on the date of termination.
There were unexercised options outstanding to these executives to buy 1,081,080
shares at December 31, 1996.
In the first quarter of 1997, the chief financial officer gave notice that
he will be terminating his employment at the Company. The Company is currently
discussing benefits that may or may not be due to the officer. The amount of
such benefits can not be determined at this time.
13. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan, available to substantially all
salaried employees, containing a matched savings provision that permits both
pretax and after-tax employee contributions pursuant to Section 401(k) of the
Internal Revenue Code. Participants can contribute from 1% to 15% of their
annual compensation and receive a matching employer contribution not to exceed
4% of their annual compensation. The matching contribution is at the discretion
of the Company pursuant to the savings plan contract. The contributions may be
invested in several investment funds including Common Stock. The Company's total
expense for the plan was $104, $43 and $38 in 1996, 1995 and 1994, respectively.
14. LITIGATION
SMC and certain of its officers, directors and underwriters were named as
defendants in a class action lawsuit originally filed in March 1993 related to
allegations surrounding SMC's initial public offering ("IPO") of 2.3 million
shares of Common Stock in February 1993.
On November 9, 1994, SMC signed a Stipulation of Settlement in the class
action suit. The settlement was approved by the United States District Court on
March 2, 1995 after notice and hearing. On April 28, 1995, SMC signed a
Settlement Agreement with the 22 persons who previously excluded themselves from
the
F-36
<PAGE> 177
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. LITIGATION (CONTINUED)
class of plaintiffs in the November 9, 1994 settlement. The settlement was
approved by the United States District Court on April 28, 1995.
Although SMC firmly believes the lawsuit was without merit, management
decided it was in the best interest of shareholders and policyholders to settle
the suit, thereby decreasing legal costs and enhancing the Company's ability to
make acquisitions and obtain related financing. SMC charged the estimated future
costs of the settlement of $3,700 to earnings in 1994. The $3,700 charge
includes $3,000 of Class S Preferred Stock (see Note 8), $263 in cash which was
distributed to the class participants, and $437 of estimated future legal and
other costs to settle the lawsuit and register the Class S Preferred Stock. The
$263 cash settlement was part of a $650 cash settlement fund, the remainder of
which was paid by the underwriters of the IPO. When aggregated with the class
action lawsuit litigation costs already incurred prior to the settlement, the
total class action lawsuit litigation and settlement costs were $4,018 ($.73 per
share) for 1994.
With the signing of the Settlement Agreement with the 22 persons who
previously excluded themselves from the class and a reevaluation of the
estimated future legal and other costs to settle the lawsuit, SMC recorded a
reduction in the estimated future costs to settle the lawsuit and list the Class
S Preferred Stock of $314 in 1995. The Class S Preferred Stock was issued on
February 8, 1996.
In addition, the Company is involved in various legal proceedings in the
normal course of business. In most cases, such proceedings involve claims under
insurance policies or other contracts of the Company. The outcomes of these
legal proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity, or future results of operations of
the Company based on the Company's current understanding of the relevant facts
and law.
15. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES
The Company's domestic insurance subsidiaries maintain their records in
conformity with statutory accounting practices prescribed or permitted by state
insurance regulatory authorities. Statutory accounting practices differ in
certain respects from GAAP. In consolidation, adjustments have been made to
conform the Company's domestic subsidiaries' accounts with GAAP.
The Company's U.S. life insurance subsidiaries had consolidated statutory
capital and surplus of $22,970 and $12,877 at December 31, 1996 and 1995,
respectively, after appropriate eliminations of intercompany accounts among such
subsidiaries. Consolidated net income (loss) of the Company's life insurance
subsidiaries on a statutory basis, after appropriate eliminations of
intercompany accounts among such subsidiaries, was $3,291, $(1,339) and $68 for
the years ended December 31, 1996, 1995 and 1994, respectively. Minimum capital
and surplus required by the Indiana Insurance Code as of December 31, 1996 was
$450 on a statutory basis.
"Prescribed" statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations, and general administrative rules. "Permitted"
statutory accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC
currently is in the process of codifying statutory accounting practices, the
result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is expected to
be completed in 1998, will likely change, to some extent, prescribed statutory
accounting practices, and may result in changes to the accounting practices that
insurance enterprises use to prepare their statutory financial statements.
Policy reserves for Dixie National Life's fixed premium universal life
policies were calculated according to the Commissioners' Reserve Valuation
Method ("CRVM") for traditional whole life policies. This differs
F-37
<PAGE> 178
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES (CONTINUED)
from prescribed statutory accounting practices. Effective October 2, 1995, Dixie
National Life received permission from the Mississippi Insurance Department to
strengthen the reserves for these policies by using the CRVM methodology as
modified by the Universal Life Model Regulation. This reserve strengthening will
be recorded quarterly through September 30, 1998. This permitted accounting
practice increased statutory surplus as of December 31, 1996 by $1,053.
From the funds borrowed by SMC pursuant to the Amended Credit Agreement and
the subordinated convertible debt agreement, $13,000 was loaned to Standard Life
pursuant to an Unsecured Surplus Debenture Agreement ("Surplus Debenture") which
requires Standard Life to make quarterly interest payments to SMC at a variable
corporate base rate plus 2% per annum, and annual principal payments of $1,000
per year beginning in 2007 and concluding in 2019. As required by state
regulatory authorities, the balance of the surplus debenture at December 31,
1996 of $13,000 is classified as a part of capital and surplus of Standard Life.
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.
SMC's ability to pay operating expenses and meet debt service obligations
is partially dependent upon the amount of dividends received from Standard Life.
Standard Life's ability to pay cash dividends to SMC is, in turn, restricted by
law or subject to approval by the insurance regulatory authorities of Indiana.
Dividends are permitted based on, among other things, the level of preceding
year statutory surplus and net income. In 1994 and 1995, Standard Life paid no
dividends to SMC. In 1996, Standard Life paid a dividend of $1,000 to SMC.
During 1997, Standard Life can pay dividends of $2,297 without regulatory
approval; Standard Life must notify the Indiana regulatory authorities of the
intent to pay dividends at least thirty days prior to payment.
State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of investment and insurance
risks. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Enterprises below specific
trigger points or ratios are classified within certain levels, each of which
requires specified corrective action. Each of the Company's insurance
subsidiaries has a Ratio that is at least 400% of the minimum RBC requirements;
accordingly, the subsidiaries meet the RBC requirements.
The statutory capital and surplus for Premier Life (Luxembourg) was $8,243
and $6,857 at fiscal years ended 1996 and 1995, respectively, and minimum
capital and surplus under local insurance regulations was $3,295 and $2,736 at
fiscal years ended 1996 and 1995, respectively. The statutory capital and
surplus for Premier Life (Bermuda) was $1,307 and $1,245 at fiscal years ended
1996 and 1995, respectively, and minimum capital and surplus under local
insurance regulations was $250 at fiscal years ended 1996 and 1995. Standard
Management International dividends are limited to its accumulated earnings
without regulatory approval. Standard Management International and Premier Life
(Luxembourg) were not permitted to pay dividends under Luxembourg law in 1996
and 1995 due to accumulated losses.
16. OPERATIONS BY GEOGRAPHIC AREA
The Company operates exclusively in one business segment -- the sale and
administration of life insurance business (principally annuities and other
financial products).
F-38
<PAGE> 179
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. OPERATIONS BY GEOGRAPHIC AREA (CONTINUED)
The revenues, pre-tax income and assets by geographic area for 1994 through
1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States................................. $36,524 $26,851 $22,514
Europe........................................ 3,783 3,379 3,911
Caribbean..................................... -- 8 93
------- ------- -------
Total.................................... $40,307 $30,238 $26,518
======= ======= =======
Income (loss) before federal income taxes,
extraordinary gain on early redemption of
redeemable preferred stock and preferred stock
dividends: YEAR ENDED DECEMBER 31,
-------------------------------
United States................................. $ 2,313 $ 1,224 $(4,710)
Europe........................................ 1,243 411 1,259
Caribbean..................................... (21) (79) (63)
------- ------- -------
Total.................................... $ 3,535 $ 1,556 $(3,514)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assets:
United States................................. $486,576 $343,040 $264,906
Europe........................................ 141,837 136,318 108,237
Caribbean..................................... -- 240 381
-------- -------- --------
Total.................................... $628,413 $479,598 $373,524
======== ======== ========
</TABLE>
The states in the U.S. with the largest share of U.S. premiums collected in
1996 were Indiana (18%), Ohio (16%), Florida (14%), California (11%) and
Michigan (6%). No other state accounted for more than 4% of total collected
premiums.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methods and assumptions used by the
Company in estimating its fair value disclosures for its financial instrument
assets and liabilities as of December 31, 1996 and 1995. Because fair values for
all balance sheet items are not required to be disclosed pursuant to SFAS No.
107, "Disclosures about Fair Values of Financial Instruments", the aggregate
fair value amounts presented herein do not necessarily represent the underlying
value of the Company; likewise, care should be exercised in deriving conclusions
about the Company's business or financial condition based on the fair value
information presented herein.
Fixed maturity securities: Fair values for fixed maturity securities are
based on quoted market prices from broker-dealers, where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services, or, in the case of private
placements, are estimated by discounting the expected future cash flows using
current market rates applicable to the coupon rate, credit, and maturity of the
investments.
Equity securities: The fair values for equity securities are based on the
quoted market prices.
Mortgage loans and policy loans: The estimated fair values for mortgage
loans and policy loans are estimated using discounted cash flow analyses and
interest rates currently being offered for similar loans to borrowers with
similar credit ratings.
F-39
<PAGE> 180
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Assets and liabilities held in separate accounts: Fair values for the
assets held in separate accounts are determined from broker-dealer market
makers, or valuations supplied by internationally recognized statistical rating
organizations. The separate account liability represents the Company's
obligations to policyholders and approximates fair value.
Insurance liabilities for investment contracts: Fair values for the
Company's liabilities under investment-type insurance contracts are estimated
using discounted cash flow calculations, based on interest rates currently being
offered for similar contracts with maturities consistent with those remaining
contracts being valued. The estimated fair value of the liabilities for
investment contracts was approximately equal to its carrying value at December
31, 1996 and 1995, as credited rates on the vast majority of account balances
approximate current rates paid on similar investments and because these rates
are generally not guaranteed beyond one year.
Insurance liabilities for non-investment contracts: Fair value disclosures
for the Company's reserves for insurance contracts other than investment-type
contracts are not required and have not been determined by the Company. However,
the Company closely monitors the level of its insurance liabilities and the fair
value of reserves under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk.
Notes payable: The Company believes the fair value of its variable rate
long-term debt was equal to its carrying value at December 31, 1996 and 1995.
The Company negotiated the terms of its Amended Credit Agreement with its
lenders in November 1996. Those negotiations were based on the financial
condition of the Company and market conditions at that time. The financial
condition of the Company has not changed significantly since the negotiations
and although market conditions have changed, the Company pays a variable rate of
interest on the debt which reflects the changed market conditions.
The carrying amount for all other financial instruments approximates their
fair values.
The fair value of the Company's financial instruments is shown below using
a summarized version of the Company's assets and liabilities at December 31,
1996 and 1995. Refer to Note 4 for additional information relating to the fair
value for investments.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995
-------------------- --------------------
FAIR CARRYING FAIR CARRYING
VALUE AMOUNT VALUE AMOUNT
----- -------- ----- --------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available for sale:
Fixed maturity securities.................... $347,310 $347,310 $232,092 $232,092
Equity securities............................ 62 62 52 52
Mortgage loans on real estate.................. 3,041 3,035 2,990 2,963
Policy loans................................... 7,767 9,903 6,674 8,509
Other invested assets.......................... 888 865 1,401 1,367
Short-term investments......................... 8,417 8,417 35,058 35,058
Assets held in separate accounts............... 128,546 128,546 122,705 122,705
Liabilities:
Insurance liabilities for investment
contracts.................................... 333,633 333,633 212,500 212,500
Class action litigation and settlement
liability.................................... -- -- 3,000 3,000
Capital lease obligation....................... 637 637 1,084 1,084
Notes payable.................................. 20,060 20,060 3,107 3,107
Liabilities related to separate accounts....... 128,546 128,546 122,705 122,705
</TABLE>
F-40
<PAGE> 181
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. PENDING ACQUISITION
SMC has entered into an Agreement and Plan of Merger dated as of December
19, 1996, as amended, with Savers Life Insurance Company ("Savers Life"). Savers
Life offers retirement products, major medical insurance and Medicare supplement
insurance through 5,000 independent brokers, primarily in North Carolina, South
Carolina and Virginia. SMC will pay approximately $14,200 plus acquisition costs
for the approximately $80,000 asset company, with shareholders of Savers Life
initially receiving $8.00 for each share of Savers Life Common Stock, consisting
of Common Stock and an election of up to $1.50 per share in cash. The proposed
acquisition is subject to normal closing conditions including SMC and Savers
Life shareholder approval and approval by applicable regulatory authorities. The
acquisition is expected to close during 1997.
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Earnings per common and common equivalent share for each quarter are
computed independently of earnings per share for the year. Due to the
transactions affecting the weighted average number of shares outstanding in each
quarter and due to the uneven distribution of earnings during the year, the sum
of the quarterly earnings per share may not equal the earnings per share for the
year. All applicable per share amounts have been retroactively adjusted to
reflect the 5% stock dividend.
<TABLE>
<CAPTION>
1996 QUARTERS
--------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Total revenues............................................ $8,856 $12,665 $7,969 $10,817
====== ======= ====== =======
Components of net income:
Operating income (loss)................................. $ 214 $ (187) $ 342 $ 804
Net realized investment gains........................... 145 125 129 387
Gain on disposal of subsidiaries........................ 2,306 -- -- --
Extraordinary gain on early redemption of redeemable
preferred stock...................................... 101 166 233 2
------ ------- ------ -------
Net income.............................................. $2,766 $ 104 $ 704 $ 1,193
====== ======= ====== =======
Net income per common and common equivalent share......... $ .48 $ .02 $ .14 $ .24
====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTERS
------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Total revenues.............................................. $7,379 $6,910 $7,104 $8,846
====== ====== ====== ======
Components of net income:
Operating income (loss)................................... $ 250 $ (279) $ 323 $ 167
Net realized investment gains............................. 36 213 122 167
Class action litigation and settlement credit............. -- 314 -- --
------ ------ ------ ------
Net income................................................ $ 286 $ 248 $ 445 $ 334
====== ====== ====== ======
Net income per common and common equivalent share........... $ .05 $ .05 $ .08 $ .06
====== ====== ====== ======
</TABLE>
Reporting the results of insurance operations on a quarterly basis requires
the use of numerous estimates throughout the year, primarily in the computation
of reserves and the effective rate for federal income taxes. It is the Company's
practice to review estimates at the end of each quarter and, if necessary, make
appropriate adjustments, with the effect of such adjustments being reported in
current operations. Only at year-end is the Company able to assess the accuracy
of its previous quarterly estimates. The Company's fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results of the entire year.
F-41
<PAGE> 182
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. RESTATEMENT
The Company has restated the previously issued 1996 consolidated financial
statements for recognition of administration fee income. As discussed in Note 10
to the consolidated financial statements, the Company recorded the collection of
administration fees of $375 from National Mutual as a reduction to present value
of future profits. Previously the administration fees were recorded as revenues.
The following summarizes the net effect of the restatement:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Income before federal income taxes, extraordinary gain on
early redemption of redeemable preferred stock and
preferred stock dividends................................. $ 3,910 $ 3,535
Net income.................................................. 5,014 4,767
Net income per share........................................ .98 .93
Present value of future profits............................. 24,181 23,806
Retained earnings........................................... 3,268 3,021
</TABLE>
F-42
<PAGE> 183
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Investment in subsidiaries................................ $46,422 $44,452
Surplus debenture due from Standard Life.................. 13,000 --
Equity securities available for sale, at fair value
(amortized cost: $8)................................... 12 --
Real estate, at cost less accumulated depreciation of $23
in 1996 and $15 in 1995................................ 139 147
Investment in joint venture............................... 320 --
Notes receivable from officers and directors.............. 338 534
Short-term investments, at cost, which approximates fair
value.................................................. 124 714
------- -------
60,355 45,847
Cash........................................................ 900 254
Property and equipment, less accumulated depreciation of
$989 in 1996 and $399 in 1995............................. 1,087 1,431
Note receivable from affiliate.............................. 2,858 2,858
Amounts receivable from subsidiaries........................ 638 505
Other assets................................................ 829 484
------- -------
Total assets......................................... $66,667 $51,379
======= =======
LIABILITIES, REDEEMABLE SECURITIES
AND SHAREHOLDERS' EQUITY
Liabilities:
Obligations under capital lease............................. 637 1,084
Class action litigation and settlement liability............ -- 3,000
Notes payable............................................... 20,000 3,000
Note payable to affiliate................................... 2,858 2,858
Amounts due to subsidiaries................................. 473 677
Other liabilities........................................... 1,023 518
------- -------
Total liabilities.................................... 24,991 11,137
Class S Cumulative Convertible Redeemable Preferred Stock,
par value $10 per share:
Authorized 300,000 shares; issued and outstanding 159,889
shares................................................. 1,757 --
Shareholders' Equity:
Preferred Stock, no par value:
Authorized 700,000 shares; none issued and outstanding.... -- --
Common Stock, no par value:
Authorized 20,000,000 shares
Issued 5,752,499 shares in 1996 and 5,459,573 in 1995..... 40,481 39,808
Treasury stock, at cost, 728,229 shares in 1996 and 502,025
shares in 1995 (deduction)................................ (3,528) (2,621)
Unrealized gain (loss) on securities available for sale of
subsidiaries.............................................. (746) 2,582
Foreign currency translation adjustment of subsidiaries..... 691 1,159
Retained earnings (deficit)................................. 3,021 (686)
------- -------
Total shareholders' equity........................... 39,919 40,242
------- -------
Total liabilities, redeemable securities and
shareholders' equity................................ $66,667 $51,379
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
F-43
<PAGE> 184
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income..................................... $ 32 $ 112 $ 130
Interest income from subsidiaries......................... 357 172 90
Net realized investment gains (losses).................... -- 23 (276)
Loss on disposal of subsidiary............................ (156) -- --
Other income.............................................. 135 28 --
Rental income from subsidiaries........................... 853 715 525
Management fees from subsidiaries......................... 1,905 1,930 1,630
------- ------ -------
Total revenues......................................... 3,126 2,980 2,099
Expenses:
Other operating expenses.................................. 3,470 2,793 2,772
Interest expense and financing costs...................... 799 110 38
Interest expense on note payable to affiliate............. 161 172 90
Class action litigation and settlement costs (credit)..... -- (314) 4,018
------- ------ -------
Total expenses......................................... 4,430 2,761 6,918
------- ------ -------
Income (loss) before federal income taxes, equity in
earnings of consolidated subsidiaries, extraordinary gain
on early redemption of redeemable preferred stock and
preferred stock dividends................................. (1,304) 219 (4,819)
Federal income tax expense (credit)......................... -- (57) (67)
------- ------ -------
Income (loss) before equity in earnings of consolidated
subsidiaries, extraordinary gain on early redemption of
redeemable preferred stock and preferred stock
dividends................................................. (1,304) 276 (4,752)
Equity in earnings of consolidated subsidiaries............. 5,569 1,037 1,316
------- ------ -------
Income (loss) before extraordinary gain on early redemption
of redeemable preferred stock and preferred stock
dividends................................................. 4,265 1,313 (3,436)
Extraordinary gain on early redemption of redeemable
preferred stock, net of $-- federal income tax............ 502 -- --
------- ------ -------
NET INCOME (LOSS)........................................... 4,767 1,313 (3,436)
Preferred stock dividends................................... 208 -- --
------- ------ -------
Earnings available to common shareholders................... $ 4,559 $1,313 $(3,436)
======= ====== =======
</TABLE>
See accompanying notes to condensed financial statements.
F-44
<PAGE> 185
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 4,767 $ 1,313 $(3,436)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on early redemption of redeemable
preferred stock........................................ (502) -- --
Amortization of deferred debt issuance costs.............. 32 2 --
Class action litigation and settlement liability.......... -- (655) 3,655
Depreciation and amortization............................. 564 562 470
Equity in earnings of subsidiaries........................ (5,569) (1,037) (1,316)
Accrued interest payable.................................. 320 -- --
Other liabilities......................................... 192 480 495
Net realized investment gain (loss)....................... -- (23) 276
Dividend from Standard Life............................... 1,000 -- --
Other..................................................... 165 (250) 179
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 969 392 323
FINANCING ACTIVITIES
Issuance of Common Stock, net............................... -- 6 3,347
Borrowings, net of debt issuance costs of $208 in 1996 and
$81 in 1995............................................... 16,792 2,923 --
Repayments on long-term debt and capital lease obligation... (491) (312) --
Short-term borrowings, net.................................. -- (550) 550
Redemption of redeemable preferred stock.................... (949) -- --
Repurchase of stock warrants................................ (600) -- --
Proceeds from common and treasury stock sales............... 100 -- --
Purchase of Common Stock for treasury....................... (2,126) (822) (931)
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 12,726 1,245 2,966
INVESTING ACTIVITIES
Investments, net............................................ 197 653 (1,309)
Surplus debenture contributed to Standard Life.............. (13,000) -- --
Capital contribution to Standard Life....................... -- (3,000) (1,225)
Capital contribution to Standard Management International... -- (170) (90)
Capital contribution to Standard Advertising, Inc........... -- (173) --
Capital contribution to Standard Reinsurance................ -- (6) --
Purchase of Standard Management International............... -- -- (67)
Proceeds from sale of property and equipment under sales
leaseback................................................. -- 1,396 --
Purchase of property and equipment, net..................... (246) (475) (1,448)
-------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES.................. (13,049) (1,775) (4,139)
-------- ------- -------
Net increase (decrease) in cash............................. 646 (138) (850)
Cash at beginning of year................................... 254 392 1,242
-------- ------- -------
Cash at end of year......................................... $ 900 $ 254 $ 392
======== ======= =======
</TABLE>
See accompanying notes to condensed financial statements.
F-45
<PAGE> 186
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
For purposes of these condensed financial statements Standard Management
Corporation ("SMC") carries its investments in subsidiaries at cost plus equity
in undistributed earnings of subsidiaries since date of acquisition. Net income
of its subsidiaries is included in income using the equity method. These
condensed financial statements should be read in conjunction with SMC's
consolidated financial statements included elsewhere in this document.
2. DIVIDENDS FROM SUBSIDIARIES
SMC received a cash dividend from subsidiaries of $1,000 in 1996. There
were no cash dividends paid to SMC from its subsidiaries in 1995 and 1994.
3. NOTES PAYABLE
SMC has outstanding borrowings at December 31, 1996 pursuant to an Amended
Revolving Line of Credit Agreement with a bank (the "Amended Credit Agreement")
that provides for it to borrow up to $16,000 in the form of a seven-year
reducing revolving loan arrangement. SMC has agreed to pay a non-use fee of .50%
per annum on the unused portion of the commitment. In connection with the
original and Amended Credit Agreement, SMC issued warrants to the bank to
purchase 60,000 shares of Common Stock. Borrowings under the Amended Credit
Agreement may be used for contributions to surplus of insurance subsidiaries,
acquisition financing, and repurchases of Class S Cumulative Convertible
Redeemable Preferred Stock ("Class S Preferred Stock") and Common Stock. The
debt is secured by a Pledge Agreement of all of the issued and outstanding
shares of common stock of Standard Life and Standard Marketing. Interest on the
borrowings under the Amended Credit Agreement is determined, at the option of
SMC, to be: (i) a fluctuating rate of interest to the corporate base rate
announced by the bank from time to time plus 1% per annum, or (ii) a rate at
LIBOR plus 3.25%. Annual principal repayments of $2,667 begin in November 1998
and conclude in November 2003. Indebtedness incurred under the Amended Credit
Agreement is subject to certain restrictions and covenants including, among
other things, certain minimum financial ratios, minimum consolidated equity
requirements for SMC, positive net income, minimum statutory surplus
requirements for the Company's insurance subsidiaries and certain limitations on
acquisitions, additional indebtedness, investments, mergers, consolidations and
sales of assets. At December 31, 1996, SMC had borrowed $16,000 under this
Amended Credit Agreement at a weighted average interest rate of 8.849%.
In connection with the acquisition of Shelby Life, SMC borrowed $4,000 from
an insurance company pursuant to a subordinated convertible debt agreement which
is due in December 2003 and requires interest payments in cash at 12% per annum,
or, if SMC chooses, in non-cash additional subordinated convertible debt notes
at 14% per annum until December 31, 2000. The subordinated convertible notes are
convertible into Common Stock at the rate of $6.00 per share through November
1997, and $5.75 per share thereafter. SMC may prepay the subordinated
convertible debt with not less than thirty days notice at any time. The
subordinated convertible debt agreement contains terms and financial covenants
substantially similar to those in the Amended Credit Agreement.
4. SURPLUS DEBENTURE
From the funds borrowed by SMC pursuant to the Amended Credit Agreement and
the subordinated convertible debt agreement, $13,000 was loaned to Standard Life
pursuant to an Unsecured Surplus Debenture Agreement ("Surplus Debenture") which
requires Standard Life to make quarterly interest
F-46
<PAGE> 187
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. SURPLUS DEBENTURE (CONTINUED)
payments to SMC at a variable corporate base rate plus 2% per annum, and annual
principal payments of $1,000 per year beginning in 2007 and concluding in 2019.
As required by state regulatory authorities, the balance of the surplus
debenture at December 31, 1996 of $13,000 is classified as a part of capital and
surplus of Standard Life. 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.
5. REDEEMABLE PREFERRED STOCK
In connection with the class action lawsuit settlement in March 1995,
300,000 of these shares designated as Class S Preferred Stock, $10.00 per share
par value, were issued February 8, 1996. The Class S Preferred Stock is
redeemable in February 2003, has an 11% annual cumulative dividend payable in
February 2003, and is convertible into Common Stock at $7.62 per share until
February 1998 and $10.00 per share thereafter, subject to adjustment under a
formula intended to protect against dilution.
SMC may voluntarily redeem the Class S Preferred Stock prior to February
2003 at par value plus accumulated and unpaid dividends. In February 1996, SMC
instituted a program to repurchase from time to time up to 300,000 shares of its
Class S Preferred Stock in the open market or privately negotiated transactions.
As of December 31, 1996, SMC had repurchased and retired 140,111 shares of its
Class S Preferred Stock for $949, primarily paid through additional borrowings
under the Amended Credit Agreement. This repurchase resulted in an extraordinary
gain on early redemption of redeemable preferred stock of $502 for the year
ended December 31, 1996.
6. STOCK DIVIDEND
SMC declared a 5% stock dividend on shares of its common stock for
shareholders of record on May 17, 1996 which was distributed on June 21, 1996.
All applicable number of shares and per share amounts included in the
accompanying condensed financial statements and notes have been retroactively
adjusted to reflect this stock dividend for all periods presented.
F-47
<PAGE> 188
SCHEDULE IV -- REINSURANCE
STANDARD MANAGEMENT CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Life insurance in force............... $3,000,763 $1,633,340 $252 $1,367,675 .02%
========== ========== ==== ========== ===
Premiums
Life insurance and annuities........ $ 11,862 $ 2,152 $ -- $ 9,710
Accident and health insurance....... 21 -- -- 21
Supplementary contract and other
funds on deposit................. 737 -- -- 737
---------- ---------- ---- ----------
Total premiums................... $ 12,620 $ 2,152 $ -- $ 10,468
========== ========== ==== ==========
YEAR ENDED DECEMBER 31, 1995:
Life insurance in force............... $2,316,826 $1,490,812 $282 $ 826,296 .03%
========== ========== ==== ========== ===
Premiums
Life insurance and annuities........ $ 9,574 $ 4,312 $ -- $ 5,262
Accident and health insurance....... 22 -- -- 22
Supplementary contract and other
funds on deposit................. 220 -- -- 220
---------- ---------- ---- ----------
Total premiums................... $ 9,816 $ 4,312 $ -- $ 5,504
========== ========== ==== ==========
YEAR ENDED DECEMBER 31, 1994:
Life insurance in force............... $2,561,412 $1,774,308 $310 $ 787,414 .04%
========== ========== ==== ========== ===
Premiums
Life insurance and annuities........ $ 9,670 $ 5,534 $ -- $ 4,136
Accident and health insurance....... 27 -- -- 27
Supplementary contracts and other
funds on deposit................. 402 -- -- 402
---------- ---------- ---- ----------
Total premiums................... $ 10,099 $ 5,534 $ -- $ 4,565
========== ========== ==== ==========
</TABLE>
F-48
<PAGE> 189
SAVERS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED FINANCIAL STATEMENTS
Balance Sheets -- September 30, 1997 (Unaudited) and
December 31, 1996 (Audited)............................... F-50
Statements of Stockholders' Equity -- For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)............. F-51
Statements of Income -- For the Nine Months Ended September
30, 1997 and 1996
(Unaudited)............................................... F-52
Statements of Cash Flows -- For the Nine Months Ended
September 30, 1997 and 1996
(Unaudited)............................................... F-53
Notes to Financial Statements (Unaudited)................... F-54
AUDITED FINANCIAL STATEMENTS
Independent Auditor's Report................................ F-56
Balance Sheets.............................................. F-57
Statements of Stockholders' Equity.......................... F-58
Statements of Income........................................ F-59
Statements of Cash Flows.................................... F-60
Notes to Financial Statements............................... F-62
</TABLE>
F-49
<PAGE> 190
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Certificates of deposit................................... $26,255 $30,495
Debt securities, held for investment, at amortized cost
(fair value $14,240 and $16,050)....................... 16,437 17,442
Debt securities, available for sale, at fair value
(amortized cost $7,543 and $7,992)..................... 6,946 7,585
Preferred stocks, market (Cost: $133; $133)............... 51 50
Common stocks, market (Cost: $2,447; $2,737).............. 3,609 3,241
Mortgage loans -- secured................................. 6,435 6,760
Real estate (less accumulated depreciation of $70 and
$52)................................................... 2,409 2,414
------- -------
Total investments...................................... 62,142 67,987
Cash and cash equivalents................................... 5,657 6,702
Accrued investment income................................... 384 721
Accounts receivable......................................... 19 55
Refundable income taxes..................................... 0 298
Deferred income taxes....................................... 2,052 1,088
Reinsurance receivables..................................... 1,677 296
Equipment, at cost, less accumulated depreciation of $422
and $407.................................................. 74 115
Deferred acquisition cost, net of amortization.............. 1,360 3,962
Other assets................................................ 14 5
------- -------
Total Assets........................................... $73,379 $81,229
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities:
Future policy benefits -- annuities....................... $45,109 $47,342
Future policy benefits -- life............................ 3,223 3,267
Unearned premiums and health benefit reserves............. 2,811 3,808
Claim liability (Note 12)................................... 7,521 10,455
Accrued expenses............................................ 685 779
Current taxes payable....................................... 43 --
------- -------
Total Liabilities...................................... 59,392 65,651
------- -------
Stockholders' Equity:
Capital stock -- no par value -- stated value -- $1 per
share: 20,000,000 shares authorized; issued and
outstanding: 1,779,908 at September 30, 1997 and
December 31, 1996...................................... 1,780 1,780
Additional paid-in capital................................ 1,823 1,823
Retained earnings:
Appropriated........................................... 1,572 1,365
Unappropriated......................................... 8,494 10,597
Net unrealized investment gains............................. 318 13
------- -------
Total Stockholders' Equity................................ 13,987 15,578
------- -------
Total Liabilities and Stockholders' Equity................ $73,379 $81,229
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 191
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Common stock:
Balance, beginning of period.............................. $ 1,780 $ 3,552
Change in stated value of stock from $2 per share to $1
per share............................................. 0 (1,776)
Exercise of stock options.............................. 0 4
------- -------
Balance, end of period.................................... $ 1,780 $ 1,780
======= =======
Additional paid-in capital:
Balance, beginning of period.............................. $ 1,823 $ 33
Change in stated value of stock from $2 per share to $1
per share............................................. 0 1,776
Exercise of stock options.............................. 0 14
------- -------
Balance, end of period.................................... $ 1,823 $ 1,823
======= =======
Unrealized gain (loss) on securities:
Balance, beginning of period.............................. $ 13 $ 12
Change in unrealized gain (loss) on securities
available for sale.................................... 14 (511)
Change in unrealized gain (loss) on trading account and
equity securities..................................... 291 221
------- -------
Balance, end of period.................................... $ 318 $ (278)
------- -------
Retained earnings:
Balance, beginning of period.............................. $11,962 $13,653
Net income (loss)......................................... (1,896) (408)
------- -------
Balance, end of period.................................... $10,066 $13,245
------- -------
Total Stockholders' Equity.................................. $13,987 $16,570
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 192
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF INCOME
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Premium considerations --
Life and health.................................... $7,111 $11,900 $29,649 $36,408
Policy charges..................................... 60 85 207 230
Investment income, net of expenses: (1997 -- $181;
1996 -- $187)...................................... 1,097 1,111 3,366 3,419
Fees from Keyport and other income.................... 327 243 1,031 778
Realized investment gains............................. 41 95 76 189
------ ------- ------- -------
8,636 13,434 34,329 41,024
------ ------- ------- -------
BENEFITS AND EXPENSES:
Increase (decrease) in future policy benefits -- life
and health......................................... (101) (74) 224 (731)
Annuity benefits...................................... 25 127 102 204
Claims expenses....................................... 5,839 8,944 24,450 28,713
Interest credited on interest-sensitive annuities and
universal life policies............................ 611 592 1,851 1,917
Commission expenses................................... 909 2,015 4,667 6,300
General expenses...................................... 791 758 2,170 2,281
Insurance taxes, licenses and fees excluding income
taxes.............................................. 257 362 948 1,075
Amortization of deferred acquisition costs............ 140 823 2,798 2,129
------ ------- ------- -------
8,471 13,547 37,210 41,888
------ ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES....................... 165 (113) (2,881) (864)
------ ------- ------- -------
INCOME TAXES:
Current............................................... 99 90 142 42
Deferred.............................................. (457) (186) (1,127) (498)
------ ------- ------- -------
(358) (96) (985) (456)
------ ------- ------- -------
NET INCOME (LOSS)....................................... $ 523 $ (17) $(1,896) $ (408)
====== ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Net income (loss)..................................... $0.29 $(0.01) $(1.06) $(0.23)
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 193
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ (1,896) $ (408)
-------- --------
Adjustments to reconcile net income to net cash provided
by operations:
Amortization of deferred acquisition costs and
depreciation........................................... 2,853 2,185
Deferred income taxes................................... (1,127) (498)
Gain on sale of fixed assets............................ 6 (2)
Gain on sale of investments............................. (76) (189)
Accrual of bond discount/amortization of premium........ 151 188
(Increase) decrease in assets:............................
Accrued investment income............................... 337 260
Income tax receivables.................................. 298 (170)
Reinsurance receivables................................. (1,381) (256)
Deferred acquisition costs.............................. (197) (265)
Other assets............................................ (9) (11)
Accounts receivable..................................... 36 190
Increase (decrease) in liabilities:
Policy liabilities...................................... (2,277) 440
Unearned premiums and health benefit reserves........... (997) (944)
Claims liability........................................ (2,934) (1,087)
Accrued expenses........................................ (94) (37)
Current income tax...................................... 43 (177)
-------- --------
Total adjustments......................................... (5,368) (373)
-------- --------
Net cash provided (used) by operating activities...... (7,264) (781)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... 0 18
-------- --------
Net cash provided (used) by financing activities...... 0 18
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................. (6) (60)
Sale of fixed assets...................................... 3 3
Proceeds from sales of investments:
Fixed maturities available for sale and equity
securities............................................. 9,475 19,185
Fixed maturities held-to-maturity....................... 1,000 0
Purchase of investment securities:
Fixed maturities available for sale and equity
securities............................................. (8,820) (23,137)
Purchase of certificates of deposit....................... (28,179) (29,865)
Proceeds from matured certificates of deposit............. 32,419 22,805
Mortgage loans disbursed.................................. (5,051) (6,344)
Principal collected on mortgage loans..................... 5,376 5,838
Proceeds from sale of real estate......................... 434 0
Real estate purchased..................................... (432) 0
-------- --------
Net cash provided (used) by investing activities...... 6,219 (11,575)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (1,045) (12,338)
Cash and cash equivalents at beginning of period............ 6,702 15,005
-------- --------
Cash and cash equivalents at end of period.................. $ 5,657 $ 2,667
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest................................................ $ 0 $ 0
-------- --------
Income taxes............................................ $ 25 $ 389
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 194
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 and
morbidity results in interim periods can vary substantially from such results
over a longer period. In the opinion of management, the information contained
herein reflects all adjustments necessary to make the results of operations for
the interim periods a fair statement of such operations. All such adjustments
are of a normal recurring nature.
For the nine months ended September 30, 1997 and September 30, 1996, net
income per common and common equivalent share is based on the weighted average
number of shares outstanding of 1,790,379 and 1,793,248, respectively, which
include dilutive stock options outstanding during each period. Primary and fully
diluted earnings per share are essentially the same.
The preparation of financial statements, in conformity with GAAP, requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from reported results using those estimates.
NOTE 2 -- NET UNREALIZED GAINS AND LOSSES ON SECURITIES
The changes during the nine months ended September 30, 1997 in amounts
affecting net unrealized gains and losses included in the separate component of
stockholders' equity were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED GAINS (LOSSES)
------------------------------
DEBT EQUITY TOTAL
---- ------ -----
<S> <C> <C> <C>
Net unrealized gains (losses) as of January 1, 1997......... $(408) $ 421 $ 13
Increase (decrease) in stated amount of securities.......... (190) 658 468
----- ------ ----
Subtotal.................................................... (598) 1,079 481
Increase (decrease) in deferred income taxes................ (204) 367 163
----- ------ ----
Net unrealized gains (losses) as of September 30, 1997...... $(394) $ 712 $318
----- ------ ----
</TABLE>
NOTE 3 -- INCOME TAXES
The effective income tax rate for September 30, 1997 was approximately 34%.
NOTE 4 -- REINSURANCE OF MAJOR MEDICAL PRODUCT LINE
Savers Life and World Insurance Company ("World") agreed to the transfer of
the major medical product line of Savers Life to World through a coinsurance
agreement, under which World assumed, through coinsurance effective July 1,
1997, 100% of the product line. Savers Life ceased writing any new business in
this product line on June 30, 1997. For the three months ended September 30,
1997, the premiums, claims expenses, commissions and premium taxes were recorded
as direct revenues and expenses of Savers Life and then ceded 100% to World. In
October 1997, all of the policies in this product line were transferred to World
as direct insurance policies of World. Savers Life has agreed to share in the
claims experience of this product line for the period from July 1, 1997 through
the end of 1997 to the extent that the loss ratio for such period does not equal
75%. The loss ratio is calculated by dividing incurred claims by earned
premiums. If the
F-54
<PAGE> 195
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
loss ratio for the period is greater than 75%, Savers Life will be required to
reimburse World in cash for 50% of the amount by which the actual loss ratio
exceeds 75%. If the loss ratio for the period is less than 75%, World will be
required to reimburse Savers Life in cash for 50% of the amount by which the
actual loss ratio is less than 75%. Savers Life was paid $50 per month by World
to administer this block of business between July 1, 1997 and September 30,
1997. As a result of the agreement with World, Savers Life wrote off all
remaining deferred acquisition costs associated with the major medical product
line, resulting in a $1,752 charge against income in the second quarter of 1997.
In September 1997, Savers Life transferred cash of $4,850 and liabilities of
$4,928 to World.
NOTE 5 -- PENDING MERGER
On December 20, 1996, Savers Life and SMC entered into an Agreement and
Plan of Merger (the "1996 Merger Agreement") providing for, among other things,
the merger of a wholly-owned subsidiary of SMC with and into Savers Life, with
Savers Life surviving as a wholly-owned subsidiary of SMC. Consummation of the
transactions contemplated by the 1996 Merger Agreement was subject to the
approval of SMC stockholders and Savers Life stockholders. In addition, SMC
reserved the right not to consummate such transactions if 5% or more of the
Savers Life stockholders perfected their dissenters' rights under the North
Carolina Business Corporation Act. The approval of SMC stockholders was secured
at the SMC Annual Meeting of Stockholders held on October 22, 1997. The meeting
of Savers Life stockholders originally scheduled to be held on October 22, 1997,
at which the 1996 Merger Agreement was to be considered, was postponed
indefinitely because holders of approximately 22% of the Savers Life Common
Stock had filed notice of intent to exercise dissenters' rights. Thereafter,
discussions continued to restructure the proposed transaction in a manner that
would be acceptable to each of them.
F-55
<PAGE> 196
Board of Directors and Stockholders
Savers Life Insurance Company
Winston-Salem, North Carolina
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of SAVERS LIFE INSURANCE
COMPANY as of December 31, 1996 and 1995, and the related statements of
stockholders' equity, income, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Savers Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
D.E. GATEWOOD AND COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
WINSTON-SALEM, NORTH CAROLINA
MARCH 7, 1997
F-56
<PAGE> 197
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments: (Notes 1, 7, 10 and 13)
Certificates of deposit................................... $30,495 $23,681
Debt securities, held for investment, at amortized cost
(fair value $16,050 and $17,510)....................... 17,442 17,485
Debt securities, available for sale, at fair value
(amortized cost $7,992 and $7,270)..................... 7,585 7,377
Preferred stocks, market (Cost: $133; $133)............... 50 52
Common stocks, market (Cost: $2,737; $2,644).............. 3,241 2,636
Mortgage loans -- secured................................. 6,760 6,934
Real estate (less accumulated depreciation of $52 and
$29)................................................... 2,414 2,438
------- -------
Total Investments.................................... 67,987 60,603
Cash and cash equivalents................................... 6,702 15,005
Accrued investment income................................... 721 683
Accounts receivable......................................... 55 263
Refundable income taxes..................................... 298 0
Deferred income taxes....................................... 1,088 2
Reinsurance receivables..................................... 296 358
Equipment, at cost, less accumulated depreciation of $407;
(1995 -- $310)............................................ 115 105
Deferred acquisition cost, net of amortization (Note 1)..... 3,962 6,677
Other assets................................................ 5 4
------- -------
Total Assets......................................... $81,229 $83,700
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities: (Note 2)
Future policy benefits -- annuities....................... $47,342 $47,569
Future policy benefits -- life............................ 3,267 3,089
Unearned premiums and health benefit reserves............. 3,808 4,672
Claim liability (Note 12)................................... 10,455 10,110
Accrued expenses............................................ 779 833
Current income taxes........................................ 0 177
------- -------
Total Liabilities.................................... 65,651 66,450
------- -------
Stockholders' Equity: (Notes 1, 4, 6 and 7)
Capital stock -- no par value -- stated value 1996 -- $1
per share; 1995 -- $2 per share: 20,000,000 shares
authorized; Issued and outstanding: 1996 -- 1,779,908
shares; 1995 -- 1,775,903 shares....................... 1,780 3,552
Additional paid-in capital................................ 1,823 33
Retained earnings:
Appropriated........................................... 1,365 823
Unappropriated......................................... 10,597 12,830
Net unrealized investment gains........................... 13 12
------- -------
Total Stockholders' Equity........................... $15,578 $17,250
------- -------
Total Liabilities and Stockholders' Equity........... $81,229 $83,700
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 198
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Capital stock:
Balance at beginning of year.............................. $ 3,552 $ 3,572 $ 2,834
Change in stated value.................................... (1,776) 0 0
Capital stock purchased -- stated value................... 0 (45) (5)
Stated value of common stock issued (Notes 5 and 6)....... 4 25 743
------- ------- -------
Balance at end of year.................................... $ 1,780 $ 3,552 $ 3,572
======= ======= =======
Additional paid-in capital:
Balance at beginning of year.............................. $ 33 $ 0 $ 0
Change in stated value.................................... 1,776 0 0
Exercise of stock options................................. 14 33 0
------- ------- -------
$ 1,823 $ 33 $ 0
======= ======= =======
Retained earnings:
Appropriated:
Balance at beginning of year........................... $ 823 $ 325 $ 88
Change in asset valuation reserve...................... 542 498 237
------- ------- -------
Balance at end of year................................. $ 1,365 $ 823 $ 325
======= ======= =======
Unappropriated:
Balance at beginning of year........................... $12,830 $12,468 $ 9,474
Net income............................................. (1,692) 961 3,241
Dividends paid......................................... 0 0 (1)
Capital stock purchased in excess of stated value...... 0 (101) (9)
Transfer of asset valuation reserve.................... (541) (498) (237)
------- ------- -------
Balance at end of year................................. $10,597 $12,830 $12,468
======= ======= =======
Net unrealized investment gains (losses):
Balance at beginning of year.............................. $ 12 $ (584) $ (416)
Net changes in unrealized capital gains (losses).......... 1 596 (168)
------- ------- -------
Balance at end of year.................................... $ 13 $ 12 $ (584)
======= ======= =======
TOTAL STOCKHOLDERS' EQUITY.................................. $15,578 $17,250 $15,781
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 199
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Premium considerations --
Life and health........................................ $47,855 $49,946 $45,543
Policy charges......................................... 275 295 280
Investment income, net of expenses:
(1996 -- $266; 1995 -- $221; 1994 -- $128)............. 4,569 4,851 4,121
Fees from Keyport and other income........................ 1,041 1,665 1,460
Realized investment gains................................. 170 387 111
------- ------- -------
$53,910 $57,144 $51,515
------- ------- -------
BENEFITS AND EXPENSES:
Increase (decrease) in future policy benefits -- life and
health................................................. $ (700) $(2,069) $ (166)
Annuity benefits.......................................... 287 170 348
Claims expenses........................................... 38,748 38,748 28,371
Interest credited on interest-sensitive annuities and
universal life policies................................ 2,543 2,787 2,803
Commissions expenses...................................... 8,248 9,058 9,000
General expenses.......................................... 3,194 3,326 3,488
Insurance taxes, licenses and fees excluding income
taxes.................................................. 1,391 1,495 1,358
Amortization of deferred acquisition costs................ 3,057 2,552 1,986
------- ------- -------
$56,768 $56,067 $47,188
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES........................... $(2,858) $ 1,077 $ 4,327
------- ------- -------
INCOME TAXES: (Note 3)
Current................................................... $ (86) $ 464 $ 395
Deferred.................................................. (1,080) (348) 691
------- ------- -------
$(1,166) $ 116 $ 1,086
------- ------- -------
NET INCOME (LOSS)........................................... $(1,692) $ 961 $ 3,241
======= ======= =======
NET INCOME (LOSS) PER SHARE: (Notes 1 and 6)
Net income (loss)......................................... $(.94) $.53 $1.79
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE> 200
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,692) $ 961 $ 3,241
------- ------- -------
Adjustments to reconcile net income to net cash provided
by operations:
Amortization of deferred acquisition costs and
depreciation......................................... $ 3,131 $ 2,647 $ 2,045
Deferred income taxes.................................. (1,080) (348) 691
Gain on sale of fixed assets........................... (2) 0 0
Gain on sale of investments............................ (170) (387) (75)
Accrual of bond discount/amortization of premium....... 249 231 162
(Increase) decrease in assets:
Unincorporated joint venture........................... 0 9 0
Accrued investment income.............................. (38) 86 (166)
Income tax receivables................................. (298) 10 114
Reinsurance receivables................................ 62 (65) 0
Deferred acquisition costs............................. (342) (1,567) (5,008)
Other assets........................................... (1) 35 (29)
Accounts receivables................................... 208 339 498
Increase (decrease) in liabilities:
Policy liabilities..................................... (49) (1,737) (1,134)
Unearned premiums and health benefit reserves.......... (864) (2,208) (416)
Claims liability....................................... 345 2,114 4,042
Accrued expenses....................................... (53) (499) 598
Current income tax..................................... (177) 177 0
------- ------- -------
Total adjustments...................................... $ 921 $(1,163) $ 1,322
------- ------- -------
Net cash provided (used) by operating activities..... $ (771) $ (202) $ 4,563
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 201
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................. $ (61) $ (21) $ (4)
Sale of fixed assets...................................... 3 0 0
Proceeds from sales of investments:
Fixed maturities available for sale and equity
securities........................................... 18,575 20,119 17,740
Purchase of investment securities:
Fixed maturities available for sale and equity
securities........................................... (19,429) (17,170) (20,311)
Fixed maturities held-to-maturity...................... 0 0 (1,000)
Purchase of certificates of deposit....................... (47,033) (38,714) (37,136)
Proceeds from matured certificates of deposit............. 40,221 39,977 23,824
Mortgage loans disbursed.................................. (8,085) (7,951) (9,030)
Principal collected on mortgage loans..................... 8,259 6,327 6,694
Real estate purchased 0 (42) (1,350)
-------- -------- --------
Net cash provided (used) by investing
activities...................................... $ (7,550) $ 2,525 $(20,573)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options................... $ 18 $ 58 $ 41
Cash dividends paid....................................... 0 0 (1)
Capital stock purchased................................... 0 (146) (20)
-------- -------- --------
Net cash provided (used) by financing
activities...................................... $ 18 $ (88) $ 20
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ $ (8,303) $ 2,235 $(15,990)
Cash and cash equivalents at beginning of year.............. 15,005 12,770 28,760
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 6,702 $ 15,005 $ 12,770
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $9 $4 $5
======== ======== ========
Income taxes........................................... $389 $277 $283
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 202
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Savers Life Insurance Company provides life,
accident and health insurance services in North Carolina, South Carolina,
Virginia and Florida.
The accompanying financial statements are presented on the basis of
generally accepted accounting principles (GAAP) which vary in certain respects
from reporting practices prescribed or permitted by state insurance regulatory
authorities (Note 4) and include the following policies:
INVESTMENTS -- Cash on deposit in savings and loan associations and banks
(including certificates of deposit) is stated at cost, which is market value.
The Company classifies investments in debt securities in three categories: held
for investment, available for sale and trading. Debt securities which the
Company has the positive intent and ability to hold to maturity are classified
as held for investment and are carried at amortized cost, net of write-downs for
other than temporary declines in value. Debt securities which might be sold
prior to maturity are classified as available for sale and carried at fair
value.
Available for sale debt securities are written down (as realized losses) to
fair value as the new cost basis for other than temporary declines in value.
Unrealized gains and losses, related to available for sale debt securities, are
reflected in stockholders' equity. Unrealized gains and losses on common and
preferred stocks carried at market value are also reflected in stockholders'
equity. Provisions for impairments that are other than temporary are included in
net realized capital gains and losses. Common and preferred stocks are shown at
market value (Note 7). Realized investment gains and losses are determined by
specific identification and are presented as a separate component of net income.
Mortgage loans are shown at their unpaid balances, net of allowances for
uncollectible amounts, and are secured by deeds of trust on real estate.
Allowances for uncollectible loans are estimates based on management's judgment,
but there were no allowances for uncollectible amounts at December 31, 1996 and
1995. Mortgage loan interest rates are adjusted periodically based on the prime
lending rate. A mortgage loan with a carrying value of $432 is not being repaid
according to the terms of the loan. Foreclosure proceedings are being conducted,
and management has determined that foreclosure is probable. The net realizable
value of the underlying collateral is expected to be greater than the carrying
value, and no reserve for impairment has been recognized at December 31, 1996.
Interest income on impaired loans is recognized when received. Investment real
estate consisting of undeveloped land held for sale is carried at fair value
less estimated selling costs. A property held for the production of income and
also partially occupied by the Company is carried at depreciated cost plus
capital additions. The accumulated depreciation for real estate was $52 and $29
at December 31, 1996 and 1995, respectively. Depreciation is calculated using
the straight-line method based on a useful life of 39 years.
RECOGNITION OF INCOME AND RELATED COSTS -- Premiums on life insurance are
reported as revenue when due. Fees on annuities are reported as earned when due.
Expenses are reported in a manner which results in the recognition of profits
over the life of the contracts. Benefits and expenses are associated with
premiums by means of the provisions for future policy benefits, unearned
premiums and amortization of policy acquisition costs.
Investment income is accrued and recognized as earned.
EQUIPMENT -- Equipment is stated at cost; depreciation is calculated using
an accelerated method for assets acquired after 1980 and the straight-line
method for assets acquired prior to 1981. The depreciation provision is based on
the estimated useful lives of the assets (automobiles 5 years; office equipment
and furniture 5 to 10 years).
F-62
<PAGE> 203
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS -- Certain costs of acquiring insurance
business are deferred. These costs, all of which vary with and are primarily
related to the production of new business, consist principally of commissions,
certain expenses of underwriting and issuing contracts and certain agency
expenses. Deferred policy acquisition costs for traditional life business are
amortized over the premium-paying periods of the related policies in proportion
to the ratio of the annual premium revenue to the total anticipated premium
revenue. Deferred policy acquisition costs for other lines of business are
generally amortized over the life of the contract or at a constant rate based on
the estimated gross profits expected to be realized. These costs and the
amortization periods are the estimates of management based on the expected
period of benefit from the costs incurred.
Deferred policy acquisition costs would be written off to the extent that
it is determined that future policy premiums and investment income or gross
profits would not be adequate to cover related losses and expenses.
Due to the unprofitability of the major medical product line, no costs
associated with this line were deferred during 1996. Deferred policy acquisition
costs relating to the major medical product line remaining from prior years were
amortized over a two-year period. Deferred acquisition costs relating to
Medicare supplement policies of a type no longer offered by the Company were
written off in 1996.
INCOME TAXES -- Income tax provisions are based on earnings reported in the
financial statements. Deferred income taxes relate principally to the deferred
acquisition costs and the liability for future policy benefits.
CLAIMS PAYABLE -- The Company establishes provisions for claims in the
process of review and for claims incurred but not reported. These provisions are
estimates of the ultimate cost of incurred claims based on historical payment
patterns using actuarial techniques. Claims payable were $10,455 and $10,110 at
December 31, 1996 and 1995, respectively. (See Note 12)
NET INCOME PER SHARE -- In 1996, 1995 and 1994, net income per common and
common equivalent share is based on the weighted average number of shares
outstanding of 1,792,530, 1,797,436 and 1,813,370, respectively (Note 5), which
include dilutive stock options outstanding during each period. Primary and fully
diluted earnings per share are essentially the same.
APPROPRIATED RETAINED EARNINGS -- Appropriated retained earnings have been
computed according to a statutory formula specified by regulations to provide
for possible losses on securities.
CASH EQUIVALENTS -- For purposes of the statement of cash flows, cash
equivalents include all short-term investments (highly liquid debt instruments)
with original maturities of three months or less. Short-term investments were
$6,101, $12,608 and $11,500 at December 31, 1996, 1995 and 1994, respectively.
USE OF ESTIMATES -- The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from reported
results using those estimates.
RECLASSIFICATION -- Certain 1995 and 1994 amounts have been reclassified to
conform with classifications in 1996. The reclassification had no effect on net
income. Reinsurance receivables and future policy benefits-life amounts for 1995
were reclassified to present future policy benefits without the effect of
reductions due to reinsurance. The effect of this reclassification increased
total assets and liabilities by $245 for 1995.
F-63
<PAGE> 204
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -- As of January 1, 1995,
the Company adopted Statement of Financial Accounting Standards SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosure. In
accordance with these standards, a loan is considered impaired when it is
probable that the Company will be unable to collect amounts due according to the
contractual terms of the loan agreement. For impaired loans, a specific
impairment reserve would be established for the difference between the recorded
investment in the mortgage loan and the fair value of the collateral. Adoption
of these standards had no impact on 1995 net income.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES --
Effective for the year ended December 31, 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires the classification of
debt securities into three categories and equity securities into two categories.
The cumulative effect of this change increased the carrying value of bonds by
$11 at January 1, 1994, thus increasing stockholders' equity by $11.
NOTE 2: POLICY LIABILITIES
The Company markets life, accident and health, and single premium deferred
and immediate annuity policies. The single premium deferred annuity permits the
policyholder to make additional premium payments to Savers Life Insurance
Company. The amount of such additional premium payments may be varied at the
policyholder's discretion but may not be less than $0.5, and premiums may be
withdrawn upon request as provided in the annuity contract. The actual interest
rate guaranteed by the Company is determined by the Company's directors at the
beginning of each policy year. Savers Life Insurance Company guarantees that the
rate for future contract periods will not be less than as stated in the annuity
contract.
Liabilities for future policy benefits on life insurance are provided on
the net level premium valuation method based on estimated future investment
yield and mortality with interest rates ranging from 4.2% to 5.0%. Mortality
assumptions are drawn from the 1980 Commissioners Standard Ordinary Mortality
tables, and there are no withdrawal assumptions used in computing the future
policy benefits on life insurance. Since the reserves are based on estimates,
the ultimate liability may be more or less than such reserves. The effects of
changes in such estimated reserves are included in the results of operations in
the period in which the estimates are changed.
NOTE 3: INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current taxes (benefits):
Income -- federal taxes................................... $ (115) $ 398 $ 376
Realized capital gains.................................... 29 66 19
------- ----- ------
$ (86) $ 464 $ 395
Deferred taxes (benefits):
Income -- federal taxes................................... (1,080) (348) 691
------- ----- ------
TOTAL..................................................... $(1,166) $ 116 $1,086
======= ===== ======
</TABLE>
F-64
<PAGE> 205
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Deferred tax assets:
Insurance reserves........................................ $ 0 $ 0
Net unrealized capital losses............................. 469 0
AMT tax credit carryovers................................. 411 349
Deferred policy acquisition costs......................... 1,567 248
------- -----
Total gross assets..................................... $ 2,447 $ 597
Less valuation allowance............................... 881 349
------- -----
Assets net of valuation........................... $ 1,566 $ 248
------- -----
Deferred tax liabilities:
Deferred policy acquisition costs......................... $ 0 $ 0
Insurance reserves........................................ 478 240
Net unrealized capital gains.............................. 0 6
------- -----
Total liabilities...................................... $ 478 $ 246
------- -----
Net deferred tax asset...................................... $ 1,088 $ 2
======= =====
</TABLE>
Net unrealized capital gains and losses are presented in stockholders'
equity net of deferred taxes. Due to the uncertainty of future capital gains,
valuation allowances were established of $469 and $0 at December 31, 1996 and
1995, respectively. Valuation allowances have also been established for AMT tax
credit carryovers in the amounts of $411 and $349 for the years ended December
31, 1996 and 1995, respectively. These allowances for the AMT tax credit
carryovers are estimates and have been established because management believes
it is uncertain that the AMT tax credits, which apply only against the Company's
regular tax liability, can be utilized in the future.
The effective income tax rate for 1996, 1995 and 1994 was approximately
20%. These amounts vary from those computed by applying the current federal
income tax rate of 34% to income before income taxes. The principal differences
result from special life insurance company tax deductions and the federal surtax
exemption.
For years beginning after December 31, 1983, the Tax Reform Act passed by
Congress changed the tax laws concerning life insurance companies. Under the new
law, certain timing differences relating to deferred taxes cease to exist.
As required by the Revenue Reconciliation Act of 1990, the Company changed
its method of reporting policy acquisition costs for federal income tax purposes
during 1990. The 1990 Act required that the deduction for policy acquisition
costs be determined based on prescribed percentages of annual net premiums, and
spreads the deduction over a five-year period.
Prior to January 1, 1984, life insurance companies were taxed on the lesser
of taxable investment income or gain from operations (as defined by the Internal
Revenue Code) plus one-half of any excess of the gain from operations over
taxable investment income. One-half of the excess of gain from operations over
taxable investment income, an amount which is not currently subject to taxation,
plus special deductions allowed in computing the gain from operations, was set
aside in a special memorandum tax account designated "policyholders' surplus
account."
F-65
<PAGE> 206
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INCOME TAXES (CONTINUED)
The accumulated amount of income subject to current taxation, less the tax
thereon, was set aside in another special memorandum tax account designated
"stockholders' surplus account." At December 31, 1996 and 1995, respectively,
the Company, on a tax basis, had balances of $17,845 and $17,872 in its
stockholders' surplus account and $72 in its policyholders' surplus account for
both years.
NOTE 4: STATUTORY ACCOUNTING RECONCILIATION
Following are reconciliations of net income and stockholders' equity on the
statutory basis to the generally accepted accounting principles (GAAP) basis:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (losses) -- statutory basis...................... $ (582) $ (639) $ (496)
Increase (decrease) in deferred acquisition costs........... (2,715) (985) 3,022
Adjustment to claim liabilities............................. (250) 0 0
Adjustment to health reserves............................... 717 2,125 1,416
Adjustment to health premiums............................... 19 (84) 0
Interest Maintenance Reserve................................ 39 196 (10)
Deferred income taxes....................................... 1,080 348 (691)
------- ------- -------
NET INCOME (LOSS) -- GAAP BASIS........................... $(1,692) $ 961 $ 3,241
======= ======= =======
Stockholders' equity -- statutory basis..................... $ 6,340 $ 6,934 $ 7,776
Additions (deductions):
Deferred acquisition costs................................ 3,962 6,677 7,661
Deferred income taxes..................................... 1,088 2 (339)
Non-admitted assets....................................... 69 51 134
Adjustment to health reserves............................. 1,716 1,249 (876)
Asset valuation reserve................................... 1,364 823 325
Interest Maintenance Reserve.............................. 1,446 1,406 1,210
Unrealized gains (losses) on marketable securities........ (407) 108 (110)
------- ------- -------
STOCKHOLDERS' EQUITY -- GAAP BASIS........................ $15,578 $17,250 $15,781
======= ======= =======
</TABLE>
Under applicable laws and regulations, cash dividends to stockholders are
limited to the extent of statutory operating profits and realized capital gains.
The Company files financial statements prepared in accordance with
statutory accounting practices prescribed or permitted by domestic insurance
regulatory authorities. The principal differences between statutory financial
statements and financial statements prepared in accordance with generally
accepted accounting principles (GAAP) are that statutory financial statements do
not reflect deferred policy acquisition costs and deferred income taxes, most
bonds are carried at amortized cost and reinsurance assets and liabilities are
presented net of reinsurance. The Company's use of permitted statutory
accounting practices does not have a significant impact on statutory surplus.
Statutory capital and surplus are subject to certain restrictions imposed
by state insurance departments as to minimum levels and payments of dividends.
The minimum levels of capital and surplus required by the North Carolina
Department of Insurance are $1,200 and $300, respectively. The Company may pay
dividends without prior approval of the North Carolina Department of Insurance
if the dividends and all other dividends and distributions within the past
twelve months do not exceed the lesser of statutory basis net gain from
operations or 10% of statutory capital and surplus. Due to the Company's
statutory net losses in 1996, 1995
F-66
<PAGE> 207
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: STATUTORY ACCOUNTING RECONCILIATION (CONTINUED)
and 1994, no dividends are allowed to be paid without prior approval of the
North Carolina Department of Insurance.
NOTE 5: STOCKHOLDERS' EQUITY
The Company purchased 0, 22,457 and 2,621 shares of its own capital stock
in 1996, 1995 and 1994, respectively, reducing the outstanding shares. On August
26, 1996, the Board of Directors adopted a resolution changing the stated value
of the Company's stock from $2.00 per share to $1.00 per share. The resolution
resulted in the reduction of the capital stock account by $1,776 and the
increase of the gross paid-in surplus by $1,776.
NOTE 6: STOCK OPTIONS
On February 25, 1982, the Company's Board of Directors amended the 1980
employee incentive stock option plan to qualify as an incentive stock option
plan for all key employees, under which 189,000 shares of the Company's
authorized but unissued common stock were reserved for possible issuance. The
grant to any one individual could not exceed 20% of the shares covered by the
plan. The option price is the greater of $1.00 per share or the fair market
value on the date of grant, as determined by the Board of Directors. Options
expire ten years after the grant date. This plan expired January 21, 1990.
On April 25, 1984, the Company's stockholders approved an additional
incentive stock option plan under which 75,600 shares of the Company's common
stock were reserved for issuance to key employees. Options under this plan
expire ten years after the date the option is granted. This plan expired April
24, 1994. On May 22, 1995, the Company's stockholders approved an additional
stock option plan under which 50,000 shares of the Company's common stock were
reserved for issuance to key employees. Options under this plan expire ten years
after the date the option is granted. This plan expires March 5, 2005.
Under the plans as originally issued, options could be exercised over the
option period in the following amounts: none during the first year, twenty-five
percent of the total shares in the second year and twenty-five percent of the
total in each of the following three years, and in any year prior to expiration
an amount equal to options exercisable in prior years but unexercised. However,
the Company's Board of Directors adopted a resolution on December 22, 1996
whereby all outstanding options to purchase shares of the Company's common stock
were declared to be fully vested as of that date.
The option price is equal to the fair market value on the date of grant for
all plan options outstanding December 31, 1996 as follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE OF GRANT SHARES PRICE TOTAL
------------- --------- ----- -----
<S> <C> <C> <C>
August 19, 1987.................................. 6,600 $5.33 $ 35
November 22, 1988................................ 12,600 $5.00 63
November 28, 1989................................ 9,375 $4.80 45
May 24, 1991..................................... 10,000 $5.20 52
March 15, 1993................................... 9,374 $5.60 53
August 18, 1995.................................. 16,350 $6.50 106
------ ----
64,299 $354
====== ====
</TABLE>
The Company applies APB Opinion 25 in accounting for its fixed stock
compensation plan. Accordingly, no compensation has been recognized for the
fixed plan for 1996, 1995 and 1994. Proforma disclosure of net
F-67
<PAGE> 208
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: STOCK OPTIONS (CONTINUED)
income and net income per share recognizing compensation costs determined on the
basis of fair value pursuant to FASB Statement No. 123 are not presented because
the amounts are immaterial.
The following is a summary of the status of stock option plans for 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 73,066 $5.41 64,713 $4.96 84,223 $4.46
Granted............................... 0 $ 0 16,600 $6.50 0 $ 0
Exercised............................. (4,005) $4.58 (7,560) $3.97 (17,010) $2.43
Forfeited............................. (937) $5.53 (687) $5.17 (2,500) $5.60
Expired............................... (3,825) $4.58 0 $ 0 0 $ 0
------ ------ -------
Outstanding at end of year............ 64,299 $5.51 73,066 $5.41 64,713 $4.96
====== ====== =======
Options exercisable at end of year.... 64,299 51,625 54,715
====== ====== =======
Weighted average fair value of options
granted during year................. $ 0 $ 6.50 $ 0
====== ====== =======
</TABLE>
The following is a summary of plan options outstanding at December 31,
1996, all of which are exercisable:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE NUMBER CONTRACTUAL LIFE
-------------- ------ ----------------
<S> <C> <C> <C>
$5.33 6,600 .63 years
$5.00 12,600 1.89 years
$4.80 9,375 2.91 years
$5.20 10,000 4.40 years
$5.60 9,374 6.20 years
$6.50 16,350 8.63 years
</TABLE>
In addition to the plan options, 37,500 nonqualified options were granted
to the owner of an insurance agency in 1992. At the end of 1996, 5,000 of these
options had been exercised, and 32,500 were exercisable at an option price of
$5.60 per share. The total option price was $182, and the fair market value was
$211.
The Company is a party to an Agreement and Plan of Merger subject to
approval of the Company's stockholders, the stockholders of Standard Management
Corporation, the North Carolina Department of Insurance and other regulatory
authorities. The Company's stockholders will have the opportunity to consider
the Merger Agreement at a special meeting to be held in June, 1997. If the
Merger Agreement is approved and the merger becomes effective, each stock option
that is outstanding immediately prior to the effective time will be converted
into the right to receive cash in an amount equal to the number of shares of the
Company's stock subject to such stock option times the difference between $8.00
per share and the per share exercise price for such stock option. At December
31, 1996, the amount of the payment would be $238.
F-68
<PAGE> 209
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS
Debt securities at December 31 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1996
Held for investment:
U.S. Treasury securities and obligations of U.S.
government agencies and corporations............. $17,442 $ 10 $1,402 $16,050
------- ---- ------ -------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government agencies and corporations............. $ 7,388 $ 4 $ 422 $ 6,970
Other corporate securities.......................... 604 11 0 615
------- ---- ------ -------
Total available for sale............................ $ 7,992 $ 15 $ 422 $ 7,585
------- ---- ------ -------
TOTAL DEBT SECURITIES................................. $25,434 $ 25 $1,824 $23,635
======= ==== ====== =======
1995
Held for investment:
U.S. Treasury securities and obligations of U.S.
government agencies and corporations............. $17,485 $ 25 $ 0 $17,510
------- ---- ------ -------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government agencies and corporations............. $ 6,271 $113 0 $ 6,384
Other corporate securities.......................... 999 0 6 993
------- ---- ------ -------
Total available for sale............................ $ 7,270 $113 $ 6 $ 7,377
------- ---- ------ -------
TOTAL DEBT SECURITIES................................. $24,755 $138 $ 6 $24,887
======= ==== ====== =======
</TABLE>
The amortized cost and estimated market value of debt securities, by
contractual maturity at December 31, 1996, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
--------- ------------
<S> <C> <C>
Due in one year or less..................................... $ 380 $ 379
Due after one year through five years....................... 946 934
Due after five years through ten years...................... 59 76
Due after ten years......................................... 24,049 22,246
------- -------
$25,434 $23,635
======= =======
</TABLE>
F-69
<PAGE> 210
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS (CONTINUED)
Investments in "available for sale equity securities" were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
1996
Equity securities....................................... $2,870 $655 $234 $3,291
====== ==== ==== ======
1995
Equity securities....................................... $2,777 $227 $315 $2,689
====== ==== ==== ======
</TABLE>
The changes during 1996 in amounts affecting net unrealized gains and
losses included in the separate component of stockholders' equity are as
follows:
<TABLE>
<CAPTION>
NET UNREALIZED GAINS (LOSSES)
------------------------------
DEBT EQUITY TOTAL
---- ------ -----
<S> <C> <C> <C>
Net unrealized gains (losses) on securities available for
sale as of January 1, 1996................................ $ 70 $(58) $12
Increase (decrease) in stated amount of securities.......... (478) 479 1
----- ---- ---
Subtotal.................................................... $(408) $421 $13
----- ---- ---
Deferred federal income taxes............................... $ 0 $ 0 $ 0
----- ---- ---
Net unrealized gains (losses) on securities available for
sale as of December 31, 1996.............................. $(408) $421 $13
----- ---- ---
</TABLE>
NOTE 8: REINSURANCE
As part of its ongoing business, the Company seeks to limit its exposure to
losses by ceding reinsurance to other insurance enterprises under excess
coverage and coinsurance contracts. The Company retains a maximum of $20 of
coverage per individual life contract.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurers' insolvencies.
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Direct premiums and amounts assessed against
policyholders............................................. $50,635 $52,125 $48,567
Reinsurance assumed......................................... 0 0 0
Reinsurance ceded........................................... 1,113 1,261 903
------- ------- -------
Net premiums and amounts earned............................. $49,522 $50,864 $47,664
======= ======= =======
</TABLE>
F-70
<PAGE> 211
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: EMPLOYEE RETIREMENT PLAN
During 1988, the Company initiated a 401(k) Profit Sharing Plan for the
benefit of eligible employees and their beneficiaries. Employees who have
completed one year of service and have reached their 21st birthday are eligible
under the plan. Participants are entitled to 100% benefits upon retirement or
death. If participants are terminated, they are entitled to receive the vested
percentage of their account balance.
Participants may defer up to 15% of their compensation annually, subject to
dollar limits set by law. The Company matches the employees' salary reduction
100%. In applying the matching contribution, only salary reductions up to 5% of
base compensation are considered. The Company's funding policy is to contribute
annually no more than the maximum amount that can be deducted for federal income
tax purposes. The amount of expense for contributions to the 401(k) plan for the
years 1996, 1995 and 1994 was $39, $39 and $35, respectively. At December 31,
1996 (the most recent actuarial valuation date), the plan's accumulated benefit
obligation was $443 including vested benefits of $429, and the fair market value
of plan assets was $443.
NOTE 10: CONCENTRATIONS OF CREDIT RISK
The Company is required by SFAS No. 105, "Disclosure of Information About
Financial Instruments With Off-Balance-Sheet Risk and Financial Instruments With
Concentrations of Credit Risk", to disclose significant concentrations of credit
risk regardless of the degree of such risk. Financial instruments that
potentially subject the Company to concentration of credit risk consist
primarily of cash, cash equivalents and mortgage loans receivable. Since the
Company's inception, it has been management's policy to place its cash on
deposit and certificates of deposit with a diversified group of high credit
quality financial institutions. At December 31, 1996, the Company had accounts
with approximately 250 such institutions with a higher concentration of
institutions in North Carolina and South Carolina. Although, as of December 31,
1996, there were amounts in some of those financial institutions that exceed the
insured deposit coverage, management does not believe any significant credit
risk relating to cash deposits exists as of December 31, 1996.
Mortgage loans consist of long-term notes secured by real estate in North
Carolina and South Carolina and construction loans to several construction
companies located mainly in the Piedmont of North Carolina. The Company had
long-term notes of approximately $1,331 and $1,433 at December 31, 1996 and
1995, respectively. No individual long-term note exceeds 1% of total investments
as of December 31, 1996 and 1995. The Company had construction loans of
approximately $5,424 and $5,498 at December 31, 1996 and 1995, respectively.
Construction loans to one construction company totaled approximately $2,130 and
$2,854 at December 31, 1996 and 1995, respectively. To reduce credit risk, all
construction loans are monitored on a continuing basis, secured by the property
being built, and limited to a maximum percentage of the builders' price.
NOTE 11: OPERATING LEASES
The Company is the lessor of a portion of its home office building under
operating leases expiring in various years through 1999. The leased property
(including land) has a carrying value of $1,298 net of accumulated depreciation
of $52. These leases have been accounted for under the operating method, which
recognizes the lease revenue as earned over the life of the lease.
F-71
<PAGE> 212
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: OPERATING LEASES (CONTINUED)
Minimum future rentals to be received on non-cancellable leases as of
December 31, 1996 for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- ------
<S> <C>
1997...................................................... $ 67
1998...................................................... 33
1999...................................................... 7
2000...................................................... 0
2001...................................................... 0
Thereafter................................................ 0
----
TOTAL MINIMUM FUTURE RENTALS......................... $107
====
</TABLE>
NOTE 12: LIABILITY FOR UNPAID CLAIMS
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning of year.................................. $10,110 $ 7,996 $ 3,923
Reinsurance recoverable............................ 99 30 0
------- ------- -------
$10,011 $ 7,966 $ 3,923
------- ------- -------
Claims incurred.................................... $43,204 $44,063 $34,442
Claims paid (net of reinsurance)................... 42,802 42,018 30,399
------- ------- -------
$ 402 $ 2,045 $ 4,043
------- ------- -------
Balance at December 31............................. $10,413 $10,011 $ 7,966
Plus reinsurance receivables....................... 42 99 30
------- ------- -------
$10,455 $10,110 $ 7,996
======= ======= =======
</TABLE>
During 1995, the Company changed its estimate of health claims liability.
This change in estimate was the result of management's underestimation of the
major medical claims backlog. The effect of this change was to decrease net
income before taxes for 1995 by $1,951 ($1.09 per share). During 1996, the
Company changed its estimate of health claims liability. This change in estimate
was the result of an accumulation of claims due to the pending change with
certain preferred provider organizations. The effect of this change was to
decrease net income before taxes for 1996 $1,197 ($.67 per share).
F-72
<PAGE> 213
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents........................... $ 601 $ 601 $ 2,397 $ 2,397
Short-term investments (cash equivalents)........... $ 6,101 $ 6,101 $12,608 $12,608
Certificates of deposit............................. $30,496 $30,496 $23,681 $23,681
Debt securities..................................... $25,027 $23,634 $24,862 $24,887
Equity securities................................... $ 3,291 $ 3,291 $ 2,689 $ 2,689
Mortgage loans...................................... $ 6,760 $ 6,760 $ 6,934 $ 6,934
Liabilities:
Future policy benefits-annuities.................... $47,342 $47,466 $47,569 $47,712
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument, such
as estimates of timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of unrealized gains or
losses. In some cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
SHORT-TERM INSTRUMENTS -- Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, the carrying amounts reported in the balance sheets approximate fair
value. Short-term instruments have a maturity date of three months or less.
CERTIFICATES OF DEPOSIT -- Fair values are based on purchase price of
certificates and prevailing rates of interest. The certificates of deposit
typically have very short maturity periods (six months or less) or variable
interest rates. Fair values are approximated by carrying values due to the
short-term nature of the instruments.
DEBT AND EQUITY SECURITIES -- Fair values are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are estimated by using quoted market prices for similar
securities or discounted cash flow methods.
MORTGAGE LOANS -- Fair values are estimated by discounting expected
mortgage loan cash flows at market rates, which reflect the rates at which
similar loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans. The
loans have variable interest rates, which are linked to the prime rate.
Estimated fair values for mortgage loans are not materially different from
carrying value.
FUTURE POLICY BENEFITS-ANNUITIES -- The majority of these investment
contract liabilities are made up of deferred annuity policies with adjustable
interest rates. All deferred policies have guaranteed minimum rates of interest,
but the guaranteed rates are lower than current market rates. Because of the
short-term adjustability of the interest rates, fair value is approximated by
carrying value for deferred annuities. Other contract deposit funds, which make
up about 7% of these investment contract liabilities, are immediate
F-73
<PAGE> 214
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
annuities which pay a fixed monthly amount for a fixed period. Fair value of
these liabilities is estimated by discounting cash flows at interest rates
currently being offered by the Company for similar contracts.
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS -- Commitments to extend credit are legally binding agreements
to lend monies at a specified interest rate and within a specified time period.
Risk arises from the potential inability of counterparties to perform under the
terms of the contracts and from interest rate fluctuations. The Company's
exposure to credit risk is reduced by the existence of conditions within the
commitment agreements that release the Company from its obligations in the event
of a material adverse change in the counterparty's financial condition. At
December 31, 1996 and 1995, the Company had $7,491 and $8,138, respectively, in
total construction loan commitments to general contractors. At December 31, 1996
and 1995, the Company had outstanding loan commitments of approximately $2,067
and $2,640 respectively.
LITIGATION -- The Company is continuously involved in a number of lawsuits
arising, for the most part, in the ordinary course of its business operations.
At December 31, 1996, the Company was named as a defendant in several lawsuits.
The total amount of damages sought was $1,245, including $1,000 in punitive
damages. After consulting with counsel, the Company estimated that its liability
for these lawsuits was less than $100. Additionally, there are several cases
pending for which outside counsel cannot offer an opinion as to probable
outcome. Outside counsel believes the range of damages for these lawsuits is
between $0 and $50. While the ultimate outcome of any litigation cannot be
determined at this time, management believes it is remote that this litigation
will result in judgments for additional amounts material to the financial
condition of the Company. Counsel has further advised that an award of punitive
damages against the Company in any pending suit is highly unlikely. Materiality
was calculated as anything greater than 5% of pre-tax gain or loss.
NOTE 15: EXAMINATION BY NORTH CAROLINA DEPARTMENT OF INSURANCE
During the year 1995, the North Carolina Department of Insurance conducted
its triennial examination of the financial condition and affairs of the Company
for the years ended December 31, 1992, 1993 and 1994. The report concluded that
the Company was in compliance with the capital and surplus requirements of North
Carolina for the kinds of insurance which the Company is authorized to write.
NOTE 16: MERGER
The Company is a party to an Agreement and Plan of Merger, dated as of
December 19, 1996, as amended, pursuant to which, subject to approval by the
Company's stockholders, the stockholders of Standard Management Corporation, the
North Carolina Department of Insurance and other regulatory authorities, the
Company will become a wholly-owned subsidiary of Standard Management
Corporation, an Indiana insurance holding company. The Company's Board of
Directors has unanimously approved the Merger Agreement and has recommended that
the Company's stockholders approve it at a special meeting to be held in
September of 1997. If the Merger Agreement is approved and the merger becomes
effective, stockholders of the Company will be entitled to receive $1.50 cash
and $6.50 in value of Standard Management Corporation's Common Stock for each
share of the Company's Common Stock owned by them immediately prior to
effectiveness of the merger. Stockholders may elect to receive stock in lieu of
the cash portion of the merger consideration. In addition, holders of shares of
the Company's Common Stock outstanding immediately prior to effectiveness of the
merger will be eligible to receive a Performance Premium based on 1997 and 1998
earnings of the Company calculated on a statutory accounting basis, conditioned
upon the Company's earnings in those years exceeding certain minimum levels.
F-74
<PAGE> 215
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: INVESTMENT CONTRACT ACCOUNTING
The Company has changed to a generally accepted method of recording
premiums received on investment-type insurance contracts. Payments received by
the Company relating to investment-type contracts are now reported as
liabilities and accounted for in a manner consistent with the accounting for
interest-bearing or other financial instruments. The balances in premium
considerations, annuity policy charges, change in future policy benefits,
annuity benefits and interest expense were restated as a correction for all
years presented. There were no changes to net income or retained earnings as a
result of these restatements.
F-75
<PAGE> 216
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The following unaudited pro forma combined statements of operations for the
nine months ended September 30, 1997 and the year ended December 31, 1996, are
presented as if (i) the acquisition of Shelby Life from DLAC and its merger into
Standard Life, (ii) the transfer of the major medical product line from Savers
Life to World through a coinsurance agreement, under which World assumed,
through coinsurance effective July 1, 1997, 100% of the product line, and (iii)
the acquisition of Savers Life by SMC had occurred as of January 1, 1996. The
following unaudited pro forma combined balance sheet as of September 30, 1997,
gives effect to the acquisition of Savers Life by SMC as if it had occurred as
of the balance sheet date.
The unaudited pro forma combined financial statements do not purport to
represent what SMC's balance sheet or results of operations actually would have
been had the merger of Shelby Life into Standard Life, the transfer of the major
medical product line from Savers Life to World through a coinsurance agreement,
whereby World assumed, through coinsurance effective July 1, 1997, 100% of the
product line, and the acquisition of Savers Life by SMC in fact occurred on the
dates indicated, or to project SMC's balance sheet or results of operations for
any future date or period. The unaudited pro forma combined financial statements
should be read in conjunction with the accompanying notes thereto and the
separate historical consolidated financial statements of SMC and Savers Life as
of and for the nine months ended September 30, 1997 and as of and for the year
ended December 31, 1996 which are contained elsewhere in this Proxy
Statement/Prospectus.
The pro forma adjustments and combined amounts are provided for
informational purposes only, and if the acquisition of Savers Life by SMC is
consummated, SMC's consolidated financial statements will reflect the effects of
the acquisition of Savers Life by SMC only from the date such transaction
occurs. The acquisition and merger of Shelby Life into Standard Life occurred on
November 8, 1996, with an effective date of November 1, 1996. Savers Life
transferred the major medical product line to World through a coinsurance
agreement, under which World assumed, through coinsurance effective July 1,
1997, 100% of the product line. Savers Life ceased writing any new business in
this product line on June 30, 1997. In October 1997, all of the policies in this
product line were transferred to World as direct insurance policies of World.
The pro forma adjustments are applied to the historical consolidated financial
statements of SMC, Shelby Life and Savers Life to account for the merger of
Shelby Life into Standard Life and the acquisition of Savers Life by SMC under
the purchase method of accounting in accordance with APB No. 16. Under this
method of accounting, the total purchase cost has been allocated to Shelby
Life's and Savers Life's assets and liabilities based on their estimated
relative fair values. These allocations are subject to valuations as of the date
of the transaction based on appraisals and other studies, which are not yet
completed. Accordingly, the final allocations will be different from the amounts
reflected herein. Any purchase price adjustments will be made within one year
from the acquisition date and are not expected to be material to the unaudited
pro forma combined financial statements taken as a whole. The unaudited pro
forma combined financial statements, however, reflect management's best estimate
based on currently available information.
F-76
<PAGE> 217
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL
STATEMENTS PRO FORMA
----------------------------- ADJUSTMENTS
10 MONTHS RELATED TO
YEAR ENDED ENDED PRO FORMA TRANSFER OF
DEC. 31, 1996 OCT. 31, 1996 ADJUSTMENTS PRO FORMA MAJOR
------------- ------------- RELATING TO SMC BEFORE MEDICAL
STANDARD SHELBY THE SHELBY THE SAVERS HISTORICAL PRODUCT
MANAGEMENT LIFE LIFE MERGER LIFE ACQUISITION SAVERS LIFE LINE(5)
---------- ------ ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premium income............ $10,468 $1,288 $ -- $11,756 $47,855 $(18,910)
Net investment income..... 20,871 6,008 (556)(1) 26,323 4,569 (407)
Net realized investment
gains................... 1,302 147 -- 1,449 170 (15)
Gain on disposal of
subsidiaries............ 886 -- -- 886 -- --
Policy charges............ 2,551 1,715 -- 4,266 275 --
Amortization of excess of
net assets acquired over
acquisition cost........ 1,388 -- -- 1,388 -- --
Management fees and
similar income from
separate accounts....... 1,564 -- -- 1,564 -- --
Other income.............. 1,277 435 -- 1,712 1,041 --
--------- ------ ------- --------- --------- --------
Total revenues.......... 40,307 9,593 (556) 49,344 53,910 (19,332)
Benefits and expenses:
Benefits and claims....... 9,919 1,746 -- 11,665 38,335 (15,129)
Interest credited on
interest-sensitive
annuities and other
financial products...... 11,281 3,761 -- 15,042 2,543 --
Amortization.............. 2,592 251 (251)(1) 3,255 3,057 (1,753)
663(1)
Other operating
expenses................ 12,175 1,523 -- 13,698 12,833 (4,837)
Interest expense and
financing costs......... 805 -- 1,238(2) 2,043 -- --
--------- ------ ------- --------- --------- --------
Total benefits and
expenses.............. 36,772 7,281 1,650 45,703 56,768 (21,719)
--------- ------ ------- --------- --------- --------
Income (loss) before
federal income taxes,
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends................. 3,535 2,312 (2,206) 3,641 (2,858) 2,387
Federal income tax expense
(credit).................. (730) 879 (750)(3) (601) (1,166) 974
--------- ------ ------- --------- --------- --------
Income (loss) before
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends................. $ 4,265 $1,433 $(1,456) $ 4,242 $(1,692) $ 1,413
========= ====== ======= ========= ========= ========
Income (loss) before
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends per share....... $.84 $.80
========= =========
Weighted average number of
common and common
equivalent shares
outstanding............... 5,250,094 230,000(4) 5,480,094
========= ======= =========
<CAPTION>
SAVERS LIFE PRO FORMA
AFTER ADJUSTMENTS
TRANSFER OF RELATING TO
MAJOR MEDICAL THE SAVERS PRO FORMA
PRODUCT LINE LIFE ACQUISITION COMBINED
------------- ---------------- ---------
<S> <C> <C> <C>
Revenues:
Premium income............ $28,945 $ -- $40,701
Net investment income..... 4,162 24(6) 30,509
Net realized investment
gains................... 155 -- 1,604
Gain on disposal of
subsidiaries............ -- -- 886
Policy charges............ 275 -- 4,541
Amortization of excess of
net assets acquired over
acquisition cost........ -- -- 1,388
Management fees and
similar income from
separate accounts....... -- -- 1,564
Other income.............. 1,041 -- 2,753
------- --------- ---------
Total revenues.......... 34,578 24 83,946
Benefits and expenses:
Benefits and claims....... 23,206 -- 34,871
Interest credited on
interest-sensitive
annuities and other
financial products...... 2,543 -- 17,585
Amortization.............. 1,304 (1,304)(7) 4,212
957(7)
Other operating
expenses................ 7,996 -- 21,694
Interest expense and
financing costs......... -- 371(8) 2,414
------- --------- ---------
Total benefits and
expenses.............. 35,049 24 80,776
------- --------- ---------
Income (loss) before
federal income taxes,
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends................. (471) -- 3,170
Federal income tax expense
(credit).................. (192) --(9) (793)
------- --------- ---------
Income (loss) before
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends................. $ (279) $ -- $ 3,963
======= ========= =========
Income (loss) before
extraordinary gain on
early redemption of
redeemable preferred stock
and preferred stock
dividends per share....... $.52
=========
Weighted average number of
common and common
equivalent shares
outstanding............... 2,135,889(10) 7,615,983
============ =========
</TABLE>
F-77
See accompanying notes to unaudited pro forma combined financial statements.
F-78
<PAGE> 218
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
RELATED TO
HISTORICAL FINANCIAL TRANSFER OF SAVERS LIFE PRO FORMA
STATEMENTS MAJOR AFTER ADJUSTMENTS
----------------------------- MEDICAL TRANSFER OF RELATING TO
STANDARD SAVERS PRODUCT MAJOR MEDICAL THE SAVERS PRO FORMA
MANAGEMENT LIFE LINE(5) PRODUCT LINE LIFE ACQUISITION COMBINED
---------- ------ ----------- ------------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premium income.................... $ 5,277 $29,649 $ (8,039) $21,610 $ -- $26,887
Net investment income............. 21,926 3,366 (300) 3,066 18(6) 25,010
Net realized investment gains..... 287 76 (7) 69 -- 356
Policy charges.................... 4,110 207 -- 207 -- 4,317
Amortization of excess of net
assets acquired over acquisition
cost............................ 1,041 -- -- -- -- 1,041
Management fees and similar income
from separate accounts.......... 1,255 -- -- -- -- 1,255
Other income...................... 1,014 1,031 (626) 405 -- 1,419
--------- ------- -------- ------- --------- ---------
Total revenues.................. 34,910 34,329 (8,972) 25,357 18 60,285
Benefits and expenses:
Benefits and claims............... 5,945 24,776 (7,657) 17,119 -- 23,064
Interest credited on
interest-sensitive annuities and
other financial products........ 12,627 1,851 -- 1,851 -- 14,478
Amortization...................... 2,544 2,798 (2,399) 399 (399)(7) 3,270
726(7)
Other operating expenses.......... 9,376 7,785 (2,985) 4,800 -- 14,176
Interest expense and financing
costs........................... 1,724 -- -- -- 279(8) 2,003
--------- ------- -------- ------- --------- ---------
Total benefits and expenses..... 32,216 37,210 (13,041) 24,169 606 56,991
--------- ------- -------- ------- --------- ---------
Income (loss) before federal income
taxes............................. 2,694 (2,881) 4,069 1,188 (588) 3,294
Federal income tax expense
(credit).......................... 779 (985) 1,383 398 (166)(9) 1,011
--------- ------- -------- ------- --------- ---------
Net income.......................... $ 1,915 $(1,896) $ 2,686 $ 790 $(422) $ 2,283
========= ======= ======== ======= ========= =========
Net income per share................ $.36 $.31
============= =========
Weighted average number of common
and common equivalent shares 5,334,494 2,135,889(10) 7,470,383
outstanding.......................
========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-78
<PAGE> 219
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
FINANCIAL PRO FORMA
STATEMENTS ADJUSTMENTS
------------------------ RELATING TO
STANDARD THE SAVERS PRO FORMA
MANAGEMENT SAVERS LIFE LIFE ACQUISITION COMBINED
---------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed maturity securities............................. $368,658 $ 6,946 $ 16,437(11) $389,842
(2,199)(12)
Equity securities..................................... 52 3,660 -- 3,712
Fixed maturity securities held to maturity.............. -- 16,437 (16,437)(11) --
Mortgage loans on real estate........................... 397 6,435 -- 6,832
Policy loans............................................ 9,708 -- -- 9,708
Real estate............................................. 2,334 2,409 -- 4,743
Other invested assets................................... 810 -- -- 810
Short-term investments.................................. 13,483 26,255 -- 39,738
-------- -------- -------- --------
Total investments................................... 395,442 62,142 (2,199) 455,385
Cash...................................................... 3,164 5,657 601(13) 9,422
Accrued investment income................................. 6,333 384 -- 6,717
Amounts due and recoverable from reinsurers............... 68,594 1,677 -- 70,271
Deferred policy acquisition costs......................... 19,781 1,360 (1,360)(14) 19,781
Present value of future profits........................... 22,242 -- 7,400(15) 29,642
Excess of acquisition cost over net assets acquired....... 2,508 -- 2,662(16) 5,170
Deferred federal income taxes............................. -- 2,052 (2,052)(20) --
Other assets.............................................. 5,758 107 80(17) 5,945
Assets held in separate accounts.......................... 145,574 -- -- 145,574
-------- -------- -------- --------
Total assets........................................ $669,396 $ 73,379 $ 5,132 $747,907
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-79
<PAGE> 220
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL PRO FORMA
STATEMENTS ADJUSTMENTS
-------------------- RELATING TO
STANDARD SAVERS THE SAVERS PRO FORMA
MANAGEMENT LIFE LIFE ACQUISITION COMBINED
---------- ------ ---------------- ---------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits.................................... $442,425 $58,664 $ -- $501,089
Accounts payable and accrued expenses..................... 5,439 728 900(18) 7,067
Obligations under capital lease........................... 270 -- -- 270
Notes payable............................................. 26,024 -- 4,000(9) 30,024
Deferred federal income taxes............................. 5,347 -- (762)(20) 4,585
Excess of net assets acquired over acquisition cost....... 1,734 -- -- 1,734
Liabilities related to separate accounts.................. 145,574 -- -- 145,574
-------- ------- -------- --------
Total liabilities..................................... 626,813 59,392 4,138 690,343
Shareholders' equity:
Common stock and additional paid-in capital............... 40,646 3,603 (3,603)(21) 55,627
14,981(22)
Treasury stock (deduction)................................ (4,604) -- -- (4,604)
Unrealized gain (loss) on securities available for sale... 2,072 318 (318)(21) 2,072
Foreign currency translation adjustment................... (370) -- -- (370)
Retained earnings......................................... 4,839 10,066 (10,066)(21) 4,839
-------- ------- -------- --------
Total shareholders' equity............................ 42,583 13,987 994 57,564
-------- ------- -------- --------
Total liabilities and shareholders' equity............ $669,396 $73,379 $ 5,132 $747,907
======== ======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-80
<PAGE> 221
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE SHELBY LIFE MERGER
The purchase price for Shelby Life was approximately $14,650, including
$13,000 in cash, 250,000 shares of restricted SMC Common Stock (valued at
$1,250) and acquisition costs of $400 associated with the purchase of Shelby
Life. Financing for the Shelby Merger was provided by senior debt of $10,000 and
$4,000 in subordinated convertible debt.
The costs to acquire Shelby Life are allocated as follows:
<TABLE>
<S> <C>
Book value of net assets acquired based on the date of the
purchase (October 31, 1996)............................... $ 16,709
Dividend paid to former parent of Shelby Life on November 8,
1996 (DLAC)............................................... (3,000)
--------
Adjusted book value of net assets acquired................ 13,709
Increase (decrease) in Shelby Life net asset value to
reflect estimated fair value and asset reclassifications at
the date of Shelby Life acquisition:
Fixed maturity securities available for sale.............. 58,609
Fixed maturity securities held to maturity................ (60,026)
Present value of future profits (related to
acquisition)........................................... 9,372
Present value of future profits and deferred policy
acquisition costs (historical)......................... (5,335)
Goodwill (related to acquisition)......................... 9
Deferred federal income taxes............................. (1,688)
--------
Total estimated fair value adjustments................. 941
--------
Total cost to acquire Shelby Life.................... $ 14,650
========
</TABLE>
Adjustments to the pro forma combined statement of operations to give
effect to the purchase of Shelby Life as of January 1, 1996 are summarized
below.
(1) Amortization of deferred acquisition costs and present value of
future profits recorded by Shelby Life prior to the purchase has been
eliminated and replaced with the amortization of the present value of the
future profits as a result of the transaction. The portion of present value
of future profits recorded by Shelby Life prior to the purchase that
related to the purchase accounting adjustments for investments was included
in net investment income. The amount of present value of future profits
resulting from the transaction is being amortized on a constant yield basis
over the estimated life of insurance in force at the date of acquisition in
proportion to the emergence of profits over a period of 20 years, with
interest equal to the interest rate credited to the underlying policies.
Amortization of goodwill acquired in the transaction is recognized over a
20-year period on a straight-line basis.
The 15 percent discount rate used to determine the present value of
future profits is the rate of return required by SMC to invest in the
business being acquired. In determining such rate of return, the following
factors are considered:
-- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
-- Cost of capital available to fund the acquisition.
-- The perceived likelihood of changes in insurance regulations and tax
laws.
F-82
<PAGE> 222
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
-- Complexity of the acquired company.
-- Prices paid (i.e., discount rates used in determining valuations) on
similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly this allocation may be adjusted upon final
determination of such value. Expected gross amortization of such value using
current assumptions and accretion of interest based on an interest rate equal to
the liability rate (such rate averages 6 percent) for each of the years in the
five-year period ending December 31, 2001, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING BEGINNING NET ENDING
DECEMBER 31, BALANCE AMORTIZATION BALANCE
- ------------ --------- ------------ -------
<C> <S> <C> <C> <C>
1997 ....................................................... $9,601 $ 783 $8,818
1998 ....................................................... 8,818 629 8,189
1999 ....................................................... 8,189 601 7,588
2000 ....................................................... 7,588 579 7,009
2001 ....................................................... 7,009 596 6,413
</TABLE>
(2) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and the
subordinated convertible debt and amortization of deferred debt issuance
costs associated with the Amended Credit Agreement.
The Amended Credit Agreement provides for SMC to borrow up to $16,000
in the form of a seven year reducing revolving loan arrangement. Interest
on the borrowings under the Amended Credit Agreement is determined, at the
option of SMC, to be: (i) a fluctuating rate of interest based on the
corporate base rate announced by the bank from time to time plus 1% per
annum, or (ii) a rate at LIBOR plus 3.25%. Annual principal repayments of
$2,667 begin in November 1998 and conclude in November 2003. At December
31, 1996, SMC had borrowed $16,000 under the Amended Credit Agreement at an
interest rate of 8.793% for the acquisition of Shelby Life.
In connection with the acquisition of Shelby Life, SMC borrowed an
additional $4,000 from an insurance company pursuant to a subordinated
convertible debt agreement which is due in December 2003 and requires
interest payments in cash at 12% per annum, or, if SMC chooses, in non-cash
additional subordinated convertible debt notes at 14% per annum until
December 31, 2000. The subordinated convertible notes are convertible into
SMC Common Stock at the rate of $6.00 per share through November 1997, and
$5.75 per share thereafter. SMC is currently making interest payments in
the form of subordinated convertible debt notes for which the assumed
non-cash interest rate is 14% per annum.
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<PAGE> 223
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
The interest expense on the borrowings for the Shelby Life acquisition
for the ten months ended October 31, 1996 is calculated as follows:
<TABLE>
<CAPTION>
10 MONTHS ENDED
OCTOBER 31, 1996
----------------
<S> <C>
Borrowings:
Amended Credit Agreement.................................. $10,100
=======
Subordinated convertible debt............................. 4,000
=======
Interest expense:
Amended Credit Agreement borrowings (LIBOR + 3.25%,
8.793%)................................................ 737
Subordinated convertible debt borrowings (PIK at 14.0%)... 465
-------
Total interest expense on Borrowings................... 1,202
-------
Deferred debt issuance costs:
Amended Credit Agreement borrowings....................... 24
Subordinated convertible debt borrowings.................. 12
-------
Total deferred debt issuance costs..................... 36
-------
Total interest expense and financing costs........ $ 1,238
=======
</TABLE>
(3) Federal income tax expense has been adjusted to reflect the income
tax effects of the pro forma adjustments, based on SMC's tax rate of 34
percent.
(4) Weighted average common and common equivalent shares outstanding
are increased to reflect the restricted SMC Common Stock shares issued to
DLAC, the repurchase of SMC Common Stock warrants previously issued to an
unaffiliated insurer as part of the debt issuance costs for the
subordinated convertible debt agreement and the issuance of SMC Common
Stock warrants in connection with the Amended Credit Agreement.
TRANSACTIONS RELATING TO THE TRANSFER OF THE MAJOR MEDICAL PRODUCT LINE OF
SAVERS LIFE
Savers Life and World agreed to the transfer of the major medical product
line of Savers Life to World through a coinsurance agreement, under which World
assumed, through coinsurance effective July 1, 1997, 100% of the product line.
This coinsurance agreement was in effect from July 1, 1997 until September 30,
1997 to allow World the time needed to develop a system to administer this block
of business on a direct basis. Savers Life ceased writing any new business in
this product line on June 30, 1997. For the period from July 1, 1997 to
September 30, 1997, the premiums, claims, commissions and premium taxes were
direct business of Savers Life and subsequently ceded 100% to World. Savers Life
was paid $50 per month to administer this block of business between July 1, 1997
and September 30, 1997. In October 1997, all of the policies in this product
line were transferred to World as direct insurance policies of World. Savers
Life agreed to share in the claims experience of this product line for the
period from July 1, 1997 through the end of 1997 to the extent that the loss
ratio for such period does not equal 75%. The loss ratio is calculated by
dividing incurred claims by earned premiums. If the loss ratio for the period is
greater than 75%, Savers Life will be required to reimburse World in cash for
50% of the amount by which the actual loss ratio exceeds 75%. If the loss ratio
for the period is less than 75%, World will be required to reimburse Savers Life
in cash for 50% of the amount by which the actual loss ratio is less than 75%.
There can be no assurance that the actual losses from the major medical product
line will not exceed 75% during this period. The actual loss ratio for this
product line for 1996 was 80%. For the six months ended June 30, 1997, the loss
ratio was 95%. As a result of the agreement with World, Savers Life wrote off
all remaining deferred acquisition costs associated with the major medical
product line, resulting in a $1,752 charge against income in the second quarter
of 1997. In September 1997 Savers Life transferred assets of $4,850 and
liabilities of $4,928 to World.
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<PAGE> 224
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) The selected pro forma combined statement of operations financial
data is adjusted to eliminate the results of operations for the major
medical product line to give effect to the transfer of the major medical
product line as of January 1, 1996.
TRANSACTIONS RELATING TO THE SAVERS LIFE ACQUISITION
In the acquisition of Savers Life, each share of Savers Life Common Stock
held immediately prior to the Effective Time of the Merger will be converted
into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life
Common Stock may elect to receive the $1.50 per share portion of the merger
consideration in cash or in the form of additional shares of SMC Common Stock.
Assuming holders of Savers Life Common Stock receive $1.50 per share cash
consideration in lieu of electing to receive shares of SMC Common Stock, based
on the number of shares of Savers Life Common Stock outstanding at the close of
business on December 1, 1997, SMC will pay approximately $2,670 in cash and
issue 2,135,889 shares of SMC Common Stock with a value of approximately $14,951
(assuming a $7.00 per share value) to acquire the Savers Life Common Stock.
In addition, SMC is expected to incur costs relating to the acquisition of
Savers Life (including legal, accounting and other fees) of approximately $900.
The cost to acquire Savers Life is allocated as follows:
<TABLE>
<S> <C>
Book value of net assets acquired based on an assumed
Effective Time of September 30, 1997...................... $ 13,987
Costs to be incurred by Savers Life prior to the closing.... (679)
--------
13,308
Increase (decrease) in Savers Life net asset value to
reflect estimated fair value and asset reclassifications
at the assumed Effective Time
Fixed maturity securities available for sale.............. 14,238
Fixed maturity securities held to maturity................ (16,437)
Present value of future profits (related to
acquisition)........................................... 7,400
Deferred policy acquisition costs (historical)............ (1,360)
Goodwill (related to acquisition)......................... 2,662
Deferred federal income taxes............................. (1,290)
--------
Total estimated fair value adjustments................. 5,213
--------
Total cost to acquire Savers Life................. $ 18,521
========
</TABLE>
Adjustments to the pro forma combined statement of operations to give
effect to the acquisition of Savers Life as of January 1, 1996 are summarized
below.
(6) Net investment income is increased for the investment income
earned on the amount of borrowings under the Amended Credit Agreement that
exceed the cash payment to Savers Life stockholders that increase existing
working capital.
(7) Amortization of deferred acquisition costs recorded by Savers Life
prior to the purchase has been eliminated and replaced with the
amortization of the present value of the future profits as a result of the
transaction. The amount of present value of future profits resulting from
the transaction is being amortized on a constant yield basis over the
estimated life of insurance in force at the date of acquisition in
proportion to the emergence of profits over a period of 20 years, except
for the Medicare supplement product line which is being amortized over a
period of 10 years, with interest equal to the interest rate credited to
the underlying policies. No future value has been assigned to the major
medical product line.
F-84
<PAGE> 225
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
Amortization of goodwill acquired in the transaction is recognized over a
20-year period on a straight-line basis.
(8) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and amortization
of deferred debt issuance costs associated with the purchase of Savers
Life.
(9) Federal income tax expense has been adjusted to reflect the income
tax effects of the pro forma adjustments, based on SMC's tax rate of 34
percent.
(10) Weighted average common and common equivalent shares outstanding
are increased to reflect the SMC Common Stock shares issued in the
acquisition of Savers Life and the issuance of SMC Common Stock warrants in
connection with the Amended Credit Agreement.
Adjustments to the pro forma combined balance sheet to give effect to the
acquisition of Savers Life as of September 30, 1997, are summarized below.
(11) Held to maturity securities have been reclassified as available
for sale securities at the purchase consistent with the intention of new
management.
(12) Savers Life's fixed maturity securities held to maturity are
restated to estimated fair value.
(13) Amount is net proceeds from borrowings under the Amended Credit
Agreement, payments made to Savers Life shareholders for the purchase of
Savers Life and certain costs incurred by Savers Life in connection with
the acquisition of Savers Life prior to closing (fee paid to Daiwa and cash
payment to holders of options to purchase Savers Life Common Stock).
(14) Deferred policy acquisition costs of Savers Life have been
eliminated under purchase accounting.
(15) Present value of future profits for business has been recorded
from existing insurance acquired in association with the purchase of Savers
Life. The 15 percent discount rate used to determine such value is the rate
of return required by SMC to invest in the business being acquired. In
determining such rate of return, the following factors are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
- Cost of capital available to fund the acquisition.
- The perceived likelihood of changes in insurance regulations and tax
laws.
- Complexity of the acquired company.
- Prices paid (i.e., discount rates used in determining valuations) on
similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly, this allocation may be adjusted upon
final determination of such value. Expected gross amortization of such
value using current assumptions and accretion of interest based on an
interest rate equal to the
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<PAGE> 226
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
liability rate (such rate averages 6 percent) for each of the years in the
five-year period ending December 31, 2001, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING BEGINNING NET ENDING
DECEMBER 31, BALANCE AMORTIZATION BALANCE
------------ --------- ------------ -------
<S> <C> <C> <C>
1997........................................ $7,400 $823 $6,577
1998........................................ 6,577 720 5,857
1999........................................ 5,857 630 5,227
2000........................................ 5,227 552 4,675
2001........................................ 4,675 485 4,190
</TABLE>
(16) Goodwill acquired in the purchase of Savers Life is recognized.
(17) Other assets have been increased for the deferred debt issuance
costs of the commitment fees paid for the borrowings on the Amended Credit
Agreement.
(18) Accounts payable have been increased due to the accrual of
estimated acquisition costs associated with the transaction.
(19) Notes payable are increased to reflect the increased borrowings
under the Amended Credit Agreement for the acquisition of Savers Life. The
Amended Credit Agreement provides for SMC to borrow up to $16,000 in the
form of a seven year reducing revolving loan arrangement. Interest on the
borrowings under the Amended Credit Agreement is determined, at the option
of SMC, to be: (i) a fluctuating rate of interest to the corporate base
rate announced by the bank from time to time plus 1% per annum, or (ii) a
rate at LIBOR plus 3.25%. Annual principal repayments of $2,667 begin in
November 1998 and conclude in November 2003. At December 31, 1996, SMC had
borrowed $16,000 under the Amended Credit Agreement at a weighted average
interest rate of 8.793%. SMC anticipates increasing borrowings under the
Amended Credit Agreement by $4,000 for the acquisition of Savers Life at an
interest rate of 9%.
(20) Deferred tax liabilities have been recorded, primarily for the
actuarially determined present value of future profits from existing
insurance, and the deferred tax assets of Savers Life are netted against
the deferred tax liabilities of SMC.
(21) The Savers Life historical shareholders' equity and related
average common and common equivalent shares outstanding is eliminated under
purchase accounting.
(22) Common stock has been increased to reflect the issuance of the
SMC Common Stock in the acquisition of Savers Life and the issuance of SMC
Common Stock warrants to Fleet Bank in connection with the increased line
of credit on the Amended Credit Agreement.
F-86
<PAGE> 227
ANNEX A
- --------------------------------------------------------------------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
STANDARD MANAGEMENT CORPORATION,
STANDARD ACQUISITION CORPORATION
AND
SAVERS LIFE INSURANCE COMPANY
DATED AS OF DECEMBER 9, 1997
- --------------------------------------------------------------------------------
<PAGE> 228
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS............................................... 1
1.1 Terms Defined............................................... 1
1.2 Other Definitional Provisions............................... 1
ARTICLE II THE MERGER............................................... 1
2.1 Merger...................................................... 1
2.2 Effective Time.............................................. 2
2.3 Terms of the Merger......................................... 2
Articles of Incorporation, Bylaws and Directors and
2.4 Officers.................................................... 2
2.5 Conversion of Securities.................................... 2
2.6 Stock Election.............................................. 3
2.7 Election Procedure.......................................... 3
2.8 Exchange Agent.............................................. 3
2.9 Dividends; Transfer Taxes................................... 4
2.10 No Fractional Securities.................................... 4
2.11 Return of Exchange Fund and Fractional Securities Fund...... 5
2.12 Adjustment of Exchange Ratio................................ 5
2.13 No Further Ownership Rights in Savers Common Stock.......... 5
2.14 Dissenting Shares........................................... 5
2.15 Lost Certificates........................................... 5
2.16 Closing of Company Transfer Books........................... 5
2.17 Further Assurances.......................................... 6
2.18 Closing..................................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SAVERS................ 6
3.1 Organization................................................ 6
3.2 Authority................................................... 6
3.3 Capital Stock............................................... 7
3.4 No Subsidiaries............................................. 7
3.5 No Conflicts or Violations.................................. 7
3.6 Books and Records........................................... 7
3.7 SAP Statements.............................................. 8
3.8 GAAP Statements............................................. 8
3.9 Registration Statement and Proxy Statement.................. 8
3.10 Availability of Assets...................................... 8
3.11 No Other Financial Statements............................... 8
3.12 Reserves.................................................... 8
3.13 Absence of Changes.......................................... 9
3.14 No Undisclosed Liabilities.................................. 11
3.15 Taxes....................................................... 11
3.16 Litigation.................................................. 13
3.17 Compliance With Laws........................................ 13
3.18 Benefit Plans, ERISA........................................ 14
3.19 Employee Relations.......................................... 16
3.20 Properties.................................................. 16
3.21 Environmental Matters....................................... 16
3.22 Contracts................................................... 17
3.23 Insurance Issued by Savers.................................. 19
3.24 Threats of Cancellation..................................... 19
3.25 Licenses and Permits........................................ 20
3.26 Operations Insurance........................................ 20
3.27 Intercompany Accounts....................................... 20
3.28 Bank Accounts............................................... 20
</TABLE>
<PAGE> 229
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.29 Brokers..................................................... 20
3.30 Disclosure.................................................. 20
3.31 State Takeover Statutes..................................... 21
3.32 Sensitive Payments.......................................... 21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SMC.................... 21
4.1 Organization................................................ 21
4.2 Authority................................................... 21
4.3 No Conflicts or Violations.................................. 22
4.4 Registration Statement and Proxy Statement.................. 22
4.5 Litigation.................................................. 22
4.6 Capitalization.............................................. 23
4.7 Brokers..................................................... 23
4.8 Disclosure.................................................. 23
ARTICLE V REPRESENTATIONS AND WARRANTIES REGARDING SAC.............. 23
5.1 Organization and Standing................................... 23
5.2 Capital Structure........................................... 23
5.3 Authority................................................... 23
5.4 No Conflicts or Violations.................................. 24
ARTICLE VI COVENANTS OF SAVERS...................................... 24
6.1 Conduct of Business......................................... 24
6.2 Financial Statements and Reports............................ 25
6.3 Investments................................................. 26
6.4 Employee Matters............................................ 26
6.5 No Charter Amendments....................................... 26
6.6 No Issuance of Securities................................... 26
6.7 No Dividends................................................ 27
6.8 No Disposal of Property..................................... 27
6.9 No Breach or Default........................................ 27
6.10 No Indebtedness............................................. 27
6.11 No Acquisitions............................................. 27
6.12 Intercompany Liabilities.................................... 27
6.13 Tax Matters................................................. 27
6.14 Notice and Cure............................................. 27
ARTICLE VII COVENANTS OF SMC........................................ 28
7.1 Notice and Cure............................................. 28
7.2 Form A Filing............................................... 28
7.3 Jerry E. Francis to be Appointed a Director................. 28
7.4 Notice of Material Changes.................................. 28
ARTICLE VIII ADDITIONAL AGREEMENTS.................................. 28
8.1 Stockholder Approval........................................ 28
8.2 Registration Statement and Proxy Statement.................. 29
8.3 Stock Exchange Listing...................................... 29
8.4 Reasonable Efforts.......................................... 29
8.5 State Takeover Laws......................................... 29
8.6 Improvements Act Filings.................................... 29
8.7 Financial Statements........................................ 30
8.8 Certain Notices............................................. 30
ARTICLE IX CONDITIONS OF BOTH PARTIES............................... 30
9.1 Stockholder Approval........................................ 30
9.2 NASDAQ Listing.............................................. 30
9.3 Regulatory Approvals........................................ 30
9.4 Registration Statement...................................... 30
</TABLE>
<PAGE> 230
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE X CONDITIONS TO OBLIGATIONS OF SMC AND SAC.................. 30
10.1 Representations and Warranties.............................. 30
10.2 Performance................................................. 31
10.3 Certificates of Officer of Savers........................... 31
10.4 No Injunction............................................... 31
10.5 No Proceeding or Litigation................................. 31
10.6 Consents, Authorizations, etc. ............................. 31
10.7 No Adverse Change........................................... 31
10.8 Opinion of Counsel.......................................... 31
10.9 Approval by Fleet and Conseco............................... 31
10.10 Consulting Agreement........................................ 32
10.11 Lockup Agreements........................................... 32
10.12 Dissenters' Rights.......................................... 32
10.13 SMC Stockholders Approval................................... 32
10.14 Savers Adjusted Capital and Surplus......................... 32
10.15 Savers Stockholders Approval................................ 32
ARTICLE XI CONDITIONS TO OBLIGATIONS OF SAVERS...................... 32
11.1 Representations and Warranties.............................. 32
11.2 Performance................................................. 32
11.3 Officers' Certificates...................................... 32
11.4 No Injunction............................................... 32
11.5 No Proceeding or Litigation................................. 32
11.6 Consents, Authorizations, etc. ............................. 33
11.7 Opinion of Counsel.......................................... 33
ARTICLE XII SURVIVAL OF PROVISIONS; REMEDIES........................ 33
12.1 Survival.................................................... 33
12.2 Available Remedies.......................................... 33
ARTICLE XIII TERMINATION............................................ 33
13.1 Termination................................................. 33
13.2 Effect of Termination....................................... 34
13.3 Certain Payments............................................ 34
ARTICLE XIV MISCELLANEOUS........................................... 35
14.1 Notices..................................................... 35
14.2 Entire Agreement............................................ 36
14.3 Expenses.................................................... 36
14.4 Public Announcements........................................ 36
14.5 Confidentiality............................................. 36
14.6 Waiver...................................................... 36
14.7 Amendment................................................... 37
14.8 Counterparts................................................ 37
14.9 No Third Party Beneficiary.................................. 37
14.10 Governing Law............................................... 37
14.11 Binding Effect.............................................. 37
14.12 Assignment.................................................. 37
14.13 Headings, etc. ............................................. 37
14.14 Invalid Provisions.......................................... 37
</TABLE>
<PAGE> 231
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of December 9,
1997, among STANDARD MANAGEMENT CORPORATION, an Indiana corporation ("SMC"),
STANDARD ACQUISITION CORPORATION, a North Carolina corporation ("SAC") and
SAVERS LIFE INSURANCE COMPANY, a North Carolina domestic stock insurance company
("Savers") (SAC and Savers being hereinafter collectively referred to as the
"Constituent Corporations").
RECITALS
WHEREAS, the parties acknowledge that, because of events that have
transpired since the execution of the Agreement and Plan of Merger dated as of
December 19, 1996, and amended as of February 17, 1997, as of May 7, 1997, as of
June 27, 1997 and as of July 31, 1997 they now desire to amend and restate the
Merger Agreement in its entirety.
WHEREAS, subject to the terms hereof, SMC, SAC and Savers have agreed to
the statutory merger (the "Merger") of SAC and Savers upon the terms and
conditions set forth herein, pursuant to which each issued and outstanding share
of common stock, no par value, of Savers (the "Savers Common Stock") will be
converted into shares of the common stock, no par value, of SMC ("SMC Common
Stock") and cash.
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a purchase; and
WHEREAS, SMC, SAC and Savers desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants made herein and of the mutual benefits to be derived herefrom, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Terms Defined. The capitalized terms used in this Amended and Restated
Merger Agreement and not otherwise defined herein shall have the meanings
specified in Exhibit A, which Exhibit is incorporated herein by reference.
1.2 Other Definitional Provisions. Unless the context otherwise requires,
(a) references in this Amended and Restated Merger Agreement to the singular
number shall include the plural, and the plural number shall include the
singular; (b) words denoting gender shall include the masculine, feminine and
neuter; (c) the words "hereof," "herein" and "hereunder" and words of similar
import refer to this Amended and Restated Merger Agreement as a whole and not to
any particular provision of this Amended and Restated Merger Agreement, (d)
unless otherwise specified, all Article and Section references pertain to this
Amended and Restated Merger Agreement, and all references to Exhibits or
Schedules are to the Exhibits or Schedules to this Amended and Restated Merger
Agreement; (e) the term "or" means "and/or"; and (f) the phrase "ordinary course
of business and consistent with past practice" refers to the business and
practice of Savers.
ARTICLE II
THE MERGER
2.1 Merger. Upon the terms and subject to the conditions hereof, and in
accordance with the North Carolina Business Corporation Act (the "NCBCA"), SAC
shall be merged with and into Savers at the
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<PAGE> 232
Effective Time (as hereinafter defined). At the election of SMC, any direct
wholly-owned subsidiary of SMC may be substituted for SAC as a constituent
corporation in the Merger. In such event, the parties agree to execute an
appropriate amendment to this Amended and Restated Merger Agreement in order to
reflect the foregoing. Following the Merger, the separate corporate existence of
SAC shall cease, and Savers shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of SAC in accordance with the NCBCA.
2.2 Effective Time. The Merger shall become effective when the Articles of
Merger (the "Articles of Merger"), executed in accordance with the relevant
provisions of the NCBCA, are filed with the Secretary of State of the State of
North Carolina; provided, however, that, upon mutual consent of the Constituent
Corporations the Articles of Merger may provide for a later date of
effectiveness of the Merger not more than 90 days after the date the Articles of
Merger are filed. When used in this Amended and Restated Merger Agreement, the
term "Effective Time" shall mean the later of the date and time at which the
Articles of Merger are accepted for record or such later time established by the
Articles of Merger. The filing of the Articles of Merger shall be made as soon
as practicable after the satisfaction or waiver of the conditions to the Merger
set forth herein.
2.3 Terms of the Merger. The Merger shall have the effects set forth in
Section 55-11-06 of the NCBCA.
2.4 Articles of Incorporation, Bylaws and Directors and Officers. The
Articles of Incorporation and Bylaws of SAC, as in effect immediately prior to
the Effective Time, shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law. The directors and officers of SAC at the Effective Time shall
be the directors and officers, respectively, of the Surviving Corporation until
their respective successors have been duly elected or appointed in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation or by
applicable law.
2.5 Conversion of Securities. As of the Effective Time, by virtue of the
Merger and without any action on the part of any stockholder of Savers:
(a) All shares of Savers Common Stock that are held in the treasury of
Savers or by any wholly-owned Subsidiary of Savers and any shares of Savers
Common Stock owned by SMC, SAC or any other wholly-owned Subsidiary of SMC
shall be cancelled, and no capital stock of SMC or other consideration
shall be delivered in exchange therefor.
(b) Each issued and outstanding share of capital stock of SAC shall be
converted into and become one fully paid and nonassessable share of Common
Stock, no par value per share, of the Surviving Corporation.
(c) Subject to the provisions of Sections 2.10 and 2.12 hereof, each
share of Savers Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares to be canceled in accordance with
Section 2.5(a)) shall be converted into (i) subject to Section 2.6, below,
$1.50 in cash, plus (ii) 1.2 shares of SMC Common Stock, the number of such
shares, to be rounded to the nearest hundredth of a share. All such shares
of Savers Common Stock, when so converted, shall no longer be outstanding
and shall automatically be cancelled and retired and each holder of a
Certificate (as defined in Section 2.8(a)) representing any such shares
shall cease to have any rights with respect thereto, except the right to
receive shares of SMC Common Stock, cash as provided in this Section 2.5
and Section 2.6, certain dividends and other distributions as contemplated
by Section 2.9 and any cash, without interest, in lieu of fractional shares
to be issued or paid in consideration therefor upon the surrender of such
Certificate in accordance with Section 2.8.
(d) Each option to purchase Savers Common Stock ("Savers Stock
Option") outstanding immediately prior to the Effective Time shall be
converted into the right to receive cash from Savers equal in amount with
respect to each such option to the difference between 1.2 times the Average
Trading Price (as defined in Section 2.6, below) plus $1.50 per option
share and the exercise price for each such option.
A-2
<PAGE> 233
2.6 Stock Election. Each holder of Savers Common Stock may elect to receive
SMC Common Stock in lieu of the cash to which such holder would otherwise be
entitled pursuant to Section 2.5(c). In the event that any holder of Savers
Common Stock shall make such election, such holder shall be entitled to receive,
in lieu of the cash into which such Savers Common Stock would otherwise be
converted pursuant to Section 2.5(c), an additional number of shares of SMC
Common Stock, rounded to the nearest hundredth of a share, determined by
dividing $1.50 by the average of the closing prices as reported by the NASDAQ
National Market (the "Average Trading Price") of SMC Common Stock for the ten
(10) consecutive trading days ending on the fifth day prior to the Savers
Stockholders Meeting.
2.7 Election Procedure. Each holder of shares of Savers Common Stock may
indicate (an "Election") in a request made in accordance with this Section 2.7
whether such holder wishes to receive cash or SMC Common Stock pursuant to
Section 2.5(c)(ii):
(a) SMC and Savers shall prepare a form (the "Form of Election")
pursuant to which each holder of Savers Common Stock may make an Election.
The Form of Election shall be mailed to stockholders of record of Savers as
of the record date for the Savers Stockholder Meeting and shall accompany
the Proxy Statement.
(b) Savers shall use reasonable commercial efforts to make the Form of
Election available to all persons who become stockholders of record of
Savers during the period between such record date and the fifth Business
Day prior to the date of the Savers Stockholders Meeting.
(c) An Election shall have been properly made only if the Exchange
Agent shall have received, by 5:00 p.m. on the last Business Day preceding
the date of the Savers Stockholders Meeting (the "Election Date") a Form of
Election properly completed and signed.
(d) Any holder of record of shares of Savers Common Stock may at any
time prior to the Election Date change his Election by written notice
received at or prior to the Election Date accompanied by a properly
completed Form of Election. SMC shall have the right in its sole discretion
to permit changes in Elections after the Election Date.
(e) Any holder of record of shares of Savers Common Stock may at any
time prior to the Election Date revoke his Election by written notice
received at or prior to the Election Date. Any Election relating to shares
of Savers Common Stock which become Dissenting Shares shall be deemed
automatically revoked as of the Election Date.
(f) SMC and Savers shall have the right to make rules, not
inconsistent with the terms of this Amended and Restated Merger Agreement,
governing the validity of Forms of Election, the issuance and delivery of
certificates for shares of SMC Common Stock into which shares of Savers
Common Stock are converted in the Merger and the payment for the portion of
shares of Savers Common Stock converted into the right to receive cash in
the Merger.
2.8 Exchange Agent.
(a) Delivery of Certificates and Cash. SMC shall authorize a
commercial bank (or such other person or persons as shall be acceptable to
SMC and Savers) to act as Exchange Agent hereunder (the "Exchange Agent").
As soon as practicable after the Effective Time, (i) SMC shall deposit with
the Exchange Agent in trust for the holders of certificates which
immediately prior to the Effective Time represented shares of Savers Common
Stock (the "Certificates") certificates representing the shares of SMC
Common Stock, into which the outstanding shares of Savers Common Stock have
been converted pursuant to Section 2.5(c)(i) and Section 2.6 and (ii) SMC
shall make available to the Surviving Corporation, which in turn shall
deposit with the Exchange Agent in trust for the holders of the
Certificates, the cash into which the outstanding shares of Savers Common
Stock have been converted pursuant to Section 2.5(c)(ii), (such shares of
SMC Common Stock, together with any dividends or distributions with respect
thereto and such cash, being hereinafter referred to as the "Exchange
Fund").
(b) Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a
Certificate whose shares were converted pursuant to Section 2.5
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and Section 2.6 a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon actual delivery of the Certificates to the Exchange Agent
and shall contain instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of SMC Common
Stock and cash). Upon surrender of a Certificate for cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of SMC
Common Stock plus any cash which such holder has the right to receive
pursuant to this Article II, and the Certificate so surrendered shall
forthwith be cancelled. Until surrendered as contemplated by this Section
2.8, each Certificate shall, at and after the Effective Time, be deemed to
represent only the right to receive, upon surrender of such Certificate,
certificates representing the appropriate number of shares of SMC Common
Stock and the appropriate amount of cash, cash in lieu of fractional shares
as contemplated by Section 2.10 and certain dividends and other
distributions as contemplated by Section 2.9.
2.9 Dividends; Transfer Taxes. No dividends or other distributions that are
declared on or after the Effective Time on SMC Common Stock or are payable to
the holders of record thereof on or after the Effective Time will be paid to
persons entitled by reason of the Merger to receive certificates representing
SMC Common Stock until such persons surrender their Certificates, as provided in
Section 2.8, and no cash payment pursuant to Section 2.5(c)(ii) or in lieu of
fractional shares pursuant to Section 2.10 shall be paid to any such holder
until such holder of such Certificate shall so surrender such Certificate.
Subject to the effect of applicable law, there shall be paid to the record
holder of the certificates representing such SMC Common Stock (i) at the time of
such surrender or as promptly as practicable thereafter, the amount of any
dividends or other distributions theretofore paid with respect to whole shares
of such SMC Common Stock and having a record date on or after the Effective Time
and a payment date prior to such surrender and (ii) at the appropriate payment
date or as promptly as practicable thereafter, the amount of dividends or other
distributions payable with respect to whole shares of SMC Common Stock and
having a record date on or after the Effective Time but prior to surrender and a
payment date subsequent to surrender. In no event shall the person entitled to
receive such dividends or other distributions be entitled to receive interest on
such dividends or other distributions. If any cash or certificate representing
shares of SMC Common Stock is to be paid to or issued in a name other than that
in which the Certificate surrendered in exchange therefor is registered, it
shall be a condition of such exchange that the Certificate so surrendered shall
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange shall pay to the Exchange Agent any transfer or
other taxes required by reason of the issuance of certificates for such shares
of SMC Common Stock or delivery of such cash to a Person other than the
registered holder of the Certificate surrendered, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
2.10 No Fractional Securities. No certificates or scrip representing
fractional shares of SMC Common Stock shall be issued upon the surrender for
exchange of Certificates pursuant to this Article II, and no SMC dividend or
other distribution or stock split shall relate to any fractional security, and
such fractional interests shall not entitle the owner thereof to vote or to any
rights of a security holder of SMC. In lieu of any such fractional securities,
each holder of Savers Common Stock who would otherwise have been entitled to a
fraction of a share of SMC Common Stock upon surrender of Certificates for
exchange pursuant to this Article II will be paid, in addition to the cash to
which such holder is entitled pursuant to Section 2.5(c)(ii), an amount in cash
(without interest) equal to such holder's proportionate interest in the net
proceeds from the sale or sales in the open market by the Exchange Agent, on
behalf of all such holders, of the aggregate fractional shares of SMC Common
Stock issued pursuant to this Article II. As soon as practicable following the
Effective Time, the Exchange Agent shall determine the excess of (x) the number
of full shares of SMC Common Stock delivered to the Exchange Agent by SMC over
(y) the aggregate number of full shares of SMC Common Stock to be distributed to
holders of Savers Common Stock pursuant to Section 2.8(b) (such excess being
herein called the "Excess Shares") and the Exchange Agent, as agent for the
former holders of Savers Common Stock, shall sell the Excess Shares at the
prevailing prices on the NASDAQ National Market. The sale of the Excess Shares
by the Exchange Agent shall be executed on the NASDAQ National Market through
one or more member firms of NASDAQ and shall be executed in round lots to the
extent
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practicable. SMC shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent, incurred in connection with such sale of Excess Shares. Until
the net proceeds of such sale have been distributed to the former stockholders
of Savers, the Exchange Agent will hold such proceeds in trust for such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former stockholders of
Savers in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with this Amended and Restated Merger Agreement such
amounts to such former stockholders.
2.11 Return of Exchange Fund and Fractional Securities Fund. Any portion of
the Exchange Fund and the Fractional Securities Fund which remains undistributed
to the former stockholders of Savers for one year after the Effective Time shall
be delivered to SMC, upon demand of SMC, and any former stockholders of Savers
who have not theretofore complied with this Article II shall thereafter look
only to SMC for payment of their claim for SMC Common Stock, cash, including any
cash in lieu of fractional shares of SMC Common Stock, and any dividends or
distributions with respect to SMC Common Stock.
2.12 Adjustment of Exchange Ratio. In the event of any reclassification,
stock split or stock dividend with respect to SMC Common Stock (or if a record
date with respect to any of the foregoing should occur) between the date of this
Amended and Restated Merger Agreement and the Effective Time, appropriate and
proportionate adjustments, if any, shall be made to the exchange ratios referred
to in Sections 2.5 and 2.6.
2.13 No Further Ownership Rights in Savers Common Stock. All shares of SMC
Common Stock and cash issued or delivered upon the surrender for exchange of
Certificates in accordance with the terms hereof (including any cash paid
pursuant to Sections 2.5(c)(ii), 2.9 or 2.10) shall be deemed to have been
issued or delivered in full satisfaction of all rights pertaining to the shares
of Savers Common Stock, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distribution with a record
date prior to the Effective Time which may have been declared or made by Savers
on such shares of Savers Common Stock in accordance with the terms of this
Amended and Restated Merger Agreement.
2.14 Dissenting Shares. Notwithstanding anything in this Amended and
Restated Merger Agreement to the contrary, shares of Savers Common Stock which
immediately prior to the Effective Time are held by shareholders who have
properly exercised dissenters' rights under Article 13 of the NCBCA (the
"Dissenting Shares") shall not be converted as provided in Section 2.5 hereof,
but the holders of Dissenting Shares shall be entitled to receive such
consideration as shall be determined pursuant to Article 13 of the NCBCA;
provided, however, that, if any such holder shall withdraw or lose such holder's
right to dissent and payment under the NCBCA, such holder's outstanding shares
of Savers Common Stock shall thereupon be deemed to have been converted as of
the Effective Time as provided in Section 2.5, without any adjustment for
interest, and such shares shall no longer be Dissenting Shares. Savers shall
give SMC prompt notice of any demands for payment under Section 55-13-21 of
Article 13 of the NCBCA received by Savers. Except as required by applicable
law, prior to the Effective Time, Savers shall not, except with the prior
written consent of SMC, make any payment with respect to, or settle or offer to
settle, any such demands.
2.15 Lost Certificates. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such certificate to be lost, stolen or destroyed, the Exchange Agent
shall deliver to such person the certificates representing the SMC Common Stock
and the amount of cash to which the holder of such lost, stolen or destroyed
certificate is entitled pursuant to this Article II. When authorizing such
payment in exchange for any lost, stolen or destroyed Certificate, the person to
whom such certificates and cash are to be delivered shall, as a condition
precedent to such delivery, give the Surviving Corporation an affidavit of lost
certificate and indemnity agreement, indemnifying the Surviving Corporation
against loss, or a bond satisfactory to the Surviving Corporation in such sum as
it may direct or otherwise indemnify the Surviving Corporation in a manner
satisfactory to the Surviving Corporation against any claim that may be made
against SMC, SAC or the Surviving Corporation with respect to the Certificate
alleged to have been lost, stolen or destroyed.
2.16 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of Savers shall be closed, and no transfer of shares of Savers
Common Stock shall thereafter be made. If, after the
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Effective Time, Certificates are presented to the Surviving Corporation, they
shall be cancelled and exchanged as provided in this Article II.
2.17 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, its right, title or interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations, or (b) otherwise to carry out the purposes of this
Amended and Restated Merger Agreement, the Surviving Corporation and its proper
officers and directors or their designees shall be authorized to execute and
deliver, in the name and on behalf of either of the Constituent Corporations in
the Merger, all such deeds, bills of sale, assignments and assurances and do, in
the name and on behalf of such Constituent Corporations, all such other acts and
things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of such Constituent Corporation and otherwise
to carry out the purposes of this Amended and Restated Merger Agreement.
2.18 Closing. The closing of the transactions contemplated by this Amended
and Restated Merger Agreement (the "Closing") shall take place at the offices of
Womble Carlyle Sandridge & Rice, PLLC, in Winston-Salem, North Carolina at 10:00
a.m. local time, on the second business day after the day on which the last of
the conditions set forth in Articles IX, X and XI hereof shall have been
fulfilled or waived or at such other time and place as SMC and Savers shall
agree.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SAVERS
Savers hereby represents and warrants to SMC as follows:
3.1 Organization. Savers is a domestic stock insurance company duly
organized, validly existing and in good standing under the laws of the State of
North Carolina and has full corporate power and authority to enter into this
Amended and Restated Merger Agreement and to perform its obligations under this
Amended and Restated Merger Agreement. Except as disclosed in Section 3.1 of the
Disclosure Schedule, Savers is duly licensed, qualified, or admitted to do
business as an insurance company and is in good standing in all jurisdictions in
which the failure to be so licensed, qualified, or admitted and in good
standing, individually or in the aggregate with other such failures, has or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement, on the ability of
Savers to perform its obligations under this Amended and Restated Merger
Agreement, or on the Business or Condition of Savers. Section 3.1 of the
Disclosure Schedule contains a true and complete list of the states in which
Savers is licensed to write life and health insurance. Savers has furnished to
SMC true and complete copies of the Articles of Incorporation (as certified by
the appropriate governmental or regulatory authorities) and the Bylaws of
Savers, including all amendments thereto. Savers has made available to SMC the
minute books and stock records of Savers. Such minute books do not omit any
material minutes of meetings or written resolutions of the board of directors,
committees of the board of directors or shareholders of Savers. Such stock
records are accurate and complete in all material respects.
3.2 Authority. The Board of Directors of Savers has duly and validly
approved this Amended and Restated Merger Agreement and the transactions
contemplated hereby. The shareholders of Savers must approve the Merger. Subject
to and upon the prior approval by the shareholders of Savers, this Amended and
Restated Merger Agreement constitutes a legal, valid, and binding obligation of
Savers and is enforceable against Savers in accordance with its terms, except to
the extent that (a) enforcement may be limited by or subject to any bankruptcy,
insolvency, reorganization, moratorium, or similar Laws now or hereafter in
effect relating to or limiting creditors' rights generally and (b) the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court or
other similar Person before which any proceeding therefor may be brought.
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3.3 Capital Stock. The authorized common capital stock of Savers consists
of 20,000,000 shares of common stock, no par value per share, of which 1,779,908
shares are issued and outstanding at the date hereof, all of which shares are
validly issued and outstanding, fully paid and nonassessable. Except as
disclosed in Section 3.3 of the Disclosure Schedule, there are no outstanding
securities, obligations, rights, subscriptions, warrants, options, charter or
founders insurance policies, phantom stock rights, or (except for this Amended
and Restated Merger Agreement) other Contracts of any kind that give any Person
the right to (a) purchase or otherwise receive or be issued any shares of
capital stock of Savers (or any interest therein) or any security or Liability
of any kind convertible into or exchangeable for any shares of capital stock of
Savers (or any interest therein) or (b) receive any benefits or rights similar
to any rights enjoyed by or accruing to a holder of the Common Stock, or any
rights to participate in the equity, income, or election of directors or
officers of Savers. There are no obligations of Savers to repurchase, redeem or
otherwise acquire any of Savers' securities.
3.4 No Subsidiaries. Savers does not control (whether directly or
indirectly, whether through the ownership of securities or by Contract or proxy,
and whether alone or in combination with others) any corporation, partnership,
business organization, or other similar Person.
3.5 No Conflicts or Violations. The execution and delivery of this Amended
and Restated Merger Agreement by Savers does not, and the performance by Savers
of its obligations under this Amended and Restated Merger Agreement will not:
(a) subject to obtaining the approvals contemplated by Section 3.5(e)
of the Disclosure Schedule hereof, violate any term or provisions of any
Law or any writ, judgment, decree, injunction, or similar order applicable
to Savers;
(b) conflict with or result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default under, any of
the terms, conditions, or provisions of the Articles of Incorporation or
Bylaws of Savers;
(c) result in the creation or imposition of any Lien upon Savers or
any of its Assets and Properties that individually or in the aggregate with
any other Liens has or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Amended and
Restated Merger Agreement, on the ability of Savers to perform its
obligations under this Amended and Restated Merger Agreement, or on the
Business or Condition of Savers or the Surviving Corporation;
(d) conflict with or result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default under, or give
to any Person any right of termination, cancellation, acceleration, or
modification in or with respect to, any Contract to which Savers is a party
or by which any of its Assets or Properties may be bound and as to which
any such conflicts, violations, breaches, defaults, or rights individually
or in the aggregate have or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Amended and
Restated Merger Agreement, on the ability of Savers to perform its
obligations under this Amended and Restated Merger Agreement, or on the
Business or Condition of Savers or the Surviving Corporation; or
(e) require Savers to obtain any consent, approval, or action of, or
make any filing with or give any notice to, any Person except: (i) as
disclosed in Section 3.5(e) of the Disclosure Schedule; or (ii) those which
the failure to obtain, make, or give individually or in the aggregate with
any other such failures has or may reasonably be expected to have no
material adverse effect on the validity or enforceability of this Amended
and Restated Merger Agreement, on the ability of Savers to perform its
obligations under this Amended and Restated Merger Agreement, or on the
Business or Condition of Savers or the Surviving Corporation.
3.6 Books and Records. Except as disclosed in Section 3.6 of the Disclosure
Schedule, the minute books and other similar records of Savers contain a true
and complete record, in all material respects, of all actions taken at all
meetings and by all written consents in lieu of meetings of the stockholders,
Board of Directors, and each committee thereof of Savers. The Books and Records
of Savers accurately reflect in all material
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respects the Business or Condition of Savers, and have been maintained in all
material respects in accordance with good business and bookkeeping practices.
3.7 SAP Statements. Savers has previously delivered to SMC true and
complete copies of the Annual Statements, and audited SAP basis financial
statements of Savers for each of the years ended December 31, 1993, 1994, 1995
and 1996, and unaudited SAP basis financial statements of Savers for the nine
months ended September 30, 1997 (and the notes relating thereto, whether or not
included therein). Except as disclosed in Section 3.7 of the Disclosure
Schedule, each such SAP Statement complied in all material respects with all
applicable Laws when so filed, and all material deficiencies known to Savers
with respect to any such SAP Statement have been cured or corrected. Each such
SAP Statement (and the notes relating thereto, whether or not included therein),
including, without limitation, each balance sheet and each of the statements of
operations, capital and surplus account, and cash flow contained in the
respective SAP Statement, was prepared in accordance with SAP, is true and
complete in all material respects, and fairly presents the financial condition,
the Assets and Properties, and the Liabilities of Savers as of the respective
dates thereof and the results of operations and changes in capital and surplus
and in cash flow of Savers for and during the respective periods covered
thereby.
3.8 GAAP Statements. Section 3.8 of the Disclosure Schedule contains (i)
the audited balance sheets of Savers as of December 31, 1993, 1994, 1995 and
1996 and the related statements of income, stockholders' equity and cash flows
for the years then ended, together with the appropriate notes to such financial
statements, and (ii) the unaudited balance sheet of Savers as of September 30,
1997, 1996 and 1995 and the related statements of income and cash flows for the
nine months then ended. Except as set forth therein or in the notes thereto,
such balance sheets and statements of income and cash flows, have been prepared
in conformity with generally accepted accounting principles consistently applied
except as otherwise noted, and such balance sheets and related statements of
income and cash flows present fairly the financial position and results of
operations of Savers as of their respective dates and for the respective periods
covered thereby.
3.9 Registration Statement and Proxy Statement. None of the information
supplied or to be supplied by Savers for inclusion or incorporation by reference
in the Registration Statement or the proxy statement (together with any
amendments or supplements thereto, the "Proxy Statement") relating to the
Stockholders Meetings will (i) in the case of the Registration Statement, at the
time it becomes effective and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading or (ii) in the case of the Proxy Statement, at the time of the
mailing of the Proxy Statement and at the time of each Stockholder Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event with respect to
Savers or its officers and directors should occur which is required to be
described in an amendment of, or a supplement to, the Proxy Statement or the
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of Savers and/or SMC as appropriate. The
Registration Statement will comply (with respect to Savers) as to form in all
material respects with the provisions of the Securities Act, and the Proxy
Statement will (with respect to Savers) comply as to form in all material
respects with the requirements of the Exchange Act.
3.10 Availability of Assets. Except as set forth in Section 3.10 of the
Disclosure Schedule, Savers owns all of the assets used in its Business
(including, but not limited to, all books, records, computers and computer
programs and data processing systems) and all such assets are in good condition
(subject to normal wear and tear) and serviceable condition and are suitable for
the uses for which intended.
3.11 No Other Financial Statements. Except for the financial statements
described in Section 3.7 and Section 3.8 (collectively, the "Financial
Statements"), since September 30, 1997 no other financial statements have been
prepared by or with respect to Savers (whether on a GAAP, SAP, or other basis).
3.12 Reserves. All reserves and other similar amounts with respect to
insurance and annuities as established or reflected in the SAP Statements of
Savers dated as of September 30, 1997 (including, without
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limitation, the reserves and amounts reflected respectively on lines 1 through
11.3 of page 3 of the September 30, 1997 Quarterly Statement), were determined
in accordance with generally accepted actuarial principles that are in
accordance with those called for by the provisions of the related insurance and
annuity Contracts and in the related reinsurance, coinsurance, and other similar
Contracts of Savers, and meet the requirements of the insurance Laws of the
State of North Carolina and states in which such insurance and annuity Contracts
were issued or delivered. All such reserves and other similar amounts will be
adequate (under generally accepted actuarial principles consistently applied) to
cover the total amount of all reasonably anticipated matured and unmatured
benefits, dividends, claims, and other Liabilities of Savers under all insurance
and annuity Contracts under which Savers has or will have any Liability
(including, without limitation, any Liability arising under or as a result of
any reinsurance, coinsurance, or other similar Contract) on the respective dates
of such SAP Statements. Savers owns assets that qualify as legal reserve assets
under applicable insurance Laws in an amount at least equal to all such required
reserves and other similar amounts.
3.13 Absence of Changes. Except as disclosed in Section 3.13 of the
Disclosure Schedule or as specifically reflected in the September 30, 1997 SAP
Statement, or except for changes or developments relating to the conduct of the
Business of Savers after the date of this Amended and Restated Merger Agreement
in conformity with this Amended and Restated Merger Agreement, since December
31, 1996, there has not been, occurred, or arisen any change in, or any event
(including without limitation any damage, destruction, or loss whether or not
covered by insurance), condition, or state of facts of any character that
individually or in the aggregate has or may reasonably be expected to have a
material adverse effect on the Business or Condition of Savers. Except as
disclosed in Section 3.13 of the Disclosure Schedule (with paragraph references
corresponding to those set forth below), or except as specifically reflected in
the September 30, 1997 SAP Statement, since December 31, 1996, Savers has
operated only in the ordinary course of business and consistent with past
practice, and (without limiting the generality of the foregoing) there has not
been, occurred, or arisen:
(a) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock of Savers or any direct
or indirect redemption, purchase, or other acquisition by Savers of any
such stock or of any interest in or right to acquire any such stock;
(b) any employment, deferred compensation, or other salary, wage, or
compensation Contract entered into between Savers and any of its officers,
directors, employees, agents, consultants, or similar representatives,
except for normal and customary Contracts with officers, employees, agents
and consultants in the ordinary course of business and consistent with past
practices; or any increase in the salary, wages, or other compensation of
any kind, whether current or deferred, of any officer, director, employee,
agent, consultant, or other similar representative of Savers other than
routine increases that were made in the ordinary course of business and
consistent with past practices; or any creation of any Benefit Plan or any
contribution to or amendment or modification of any Benefit Plan;
(c) any issuance, sale, or disposition by Savers of any debenture,
note, stock, or other security issued by Savers, or any modification or
amendment of any right of the holder of any outstanding debenture, note,
stock, or other security issued by Savers;
(d) any Lien created on or in any of the Assets and Properties of
Savers, or assumed by Savers with respect to any of such Assets and
Properties, which Lien relates to Liabilities individually or in the
aggregate exceeding $25,000 for Savers or which Lien individually or in the
aggregate with any other Liens has or may reasonably be expected to have a
material adverse effect on the Business or Condition of Savers or the
Surviving Corporation;
(e) any prepayment of any Liabilities individually or in the aggregate
exceeding $10,000;
(f) any Liability involving the borrowing of money by Savers;
(g) any Liability incurred by Savers in any transaction (other than
pursuant to any insurance or annuity Contract entered into in the ordinary
course of business and consistent with past practice) not involving the
borrowing of money;
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(h) any damage, destruction, or loss (whether or not covered by
insurance) affecting any of the Assets and Properties of Savers, which
damage, destruction, or loss individually exceeds $25,000 or the result of
which individually or in the aggregate has or may reasonably be expected to
have a material adverse effect on the Business or Condition of Savers or
the Surviving Corporation;
(i) any work stoppage, strike, slowdown, other labor difficulty, or
(to the best knowledge of Savers) union organizational campaign (in process
or threatened) at or affecting Savers;
(j) any material change in any underwriting, actuarial, investment,
financial reporting, or accounting practices or policies followed by
Savers, or in any assumption underlying such a practices or policies, or in
any method of calculating any bad debt, contingency, or other reserve for
financial reporting purposes or for any other accounting purposes;
(k) any payment, discharge, or satisfaction by Savers of any Lien or
Liability other than Liens or Liabilities that were paid, discharged, or
satisfied since December 31, 1996 in the ordinary course of business and
consistent with past practice, or were paid, discharged, or satisfied as
required under this Amended and Restated Merger Agreement;
(l) any cancellation of any Liability owed to Savers by any other
Person;
(m) any write-off or write-down of, or any determination to write off
or down any of, the Assets and Properties of Savers or any portion thereof,
except for write-offs or write-downs that do not exceed $10,000
individually or in the aggregate for Savers;
(n) any sale, transfer, or conveyance of any investments, or any other
Assets and Properties, of Savers with an individual book value or with an
aggregate book value in excess of $10,000, except as contemplated in
Section 6.3, and except in the ordinary course of business and consistent
with past practices;
(o) any amendment, termination, waiver, disposal, or lapse of, or
other failure to preserve, any license, permit, or other form of
authorization of Savers, the result of which individually or in the
aggregate has or may reasonably be expected to have a material adverse
effect on the Business or Condition of Savers or the Surviving Corporation;
(p) any transaction or arrangement under which Savers paid, lent, or
advanced any amount to or in respect of, or sold, transferred, or leased
any of its Assets and Properties or any service to, (i) any employee,
officer, director or shareholder of Savers (except for payments of salaries
and wages in the ordinary course of business and consistent with past
practice, and except for payments made pursuant to any Contract disclosed
in Section 3.13(b) or Section 3.22(a) of the Disclosure Schedule), or of
any Affiliate of Savers, or of any such employee, officer, director or
shareholder; (ii) any business or other Person in which Savers, any such
employee, officer, director or shareholder, or any such Affiliate has any
material interest, except for advances made to, or reimbursements of,
officers or directors of Savers for travel and other business expenses in
reasonable amounts in the ordinary course of business and consistent with
past practice; or any Affiliate of Savers pursuant to any Contract of the
type described in Section 3.22(g);
(q) any material amendment of, or any failure to perform all of its
obligations under, or any default under, or any waiver of any right under,
or any termination (other than on the stated expiration date) of, any
Contract that involves or reasonably would involve the annual expenditure
or receipt by Savers of more than $25,000 or that individually or in the
aggregate is material to the Business or Condition of Savers or the
Surviving Corporation;
(r) any decrease in the amount of, or any material change in the
nature of, the insurance or annuities in force of Savers or any material
change in the amount or nature of the reserves, liabilities or other
similar amounts of Savers with respect to insurance and annuity Contracts
(including, without limitation, reserves and other similar amounts of a
type required to be reflected respectively on lines 1 through 11.3 on page
3 of an Annual Statement of Savers);
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(s) any amendment to the Articles of Incorporation or Bylaws of
Savers;
(t) any termination, amendment, or execution by Savers of any
reinsurance, coinsurance, or other similar Contract, as ceding or assuming
insurer;
(u) any expenditure or commitment for additions to property, plant,
equipment or other tangible or intangible capital assets of Savers, except
for any expenditure or commitment that does not exceed $10,000 individually
or the result of which individually or in the aggregate does not have and
may not reasonably be expected to have a material adverse effect on the
Business or Condition of Savers or the Surviving Corporation;
(v) any amendment or introduction by Savers of any insurance or
annuity Contract other than in the ordinary course of business and
consistent with past practice; or
(w) any Contract to take any of the actions described in this Section
other than actions expressly permitted under this Section.
3.14 No Undisclosed Liabilities. Except to the extent specifically
reflected in the balance sheet included in the September 30, 1997 SAP Statement
(or in the notes relating thereto), or except as disclosed in Section 3.14 of
the Disclosure Schedule, there were no Liabilities (other than policyholder
benefits payable in the ordinary course of business and consistent with past
practices) against, relating to, or affecting Savers as of September 30, 1997
that individually or in the aggregate have or may reasonably be expected to have
a material adverse effect on the Business or Condition of Savers or the
Surviving Corporation. Except to the extent specifically reflected in the
balance sheet included in the September 30, 1997 SAP Statement (or in the notes
relating thereto), or except as disclosed in Section 3.14 of the Disclosure
Schedule, since September 30, 1997, Savers has not incurred any Liabilities
(other than policyholder benefits payable in the ordinary course of business and
consistent with past practice) that individually or in the aggregate have or may
reasonably be expected to have a material adverse effect on the Business or
Condition of Savers or the Surviving Corporation.
3.15 Taxes. Except as disclosed in Section 3.15 of the Disclosure Schedule
(with paragraph references corresponding to those set forth below):
(a) All Tax Returns required to be filed with respect to Savers have
been duly and timely filed, and all such Tax Returns are true and complete
in all material respects. Savers has duly and timely paid all Taxes that
are due, or claimed or asserted by any taxing authority to be due, from
Savers for the periods covered by such Tax Returns or has duly provided for
all such Taxes in the Books and Records of Savers and in accordance with
GAAP and SAP, including, without limitation, in the Financial Statements.
There are no Liens with respect to Taxes (except for Liens with respect to
real and personal property Taxes not yet due) upon any of the Assets and
Properties of Savers.
(b) With respect to any period for which Tax Returns have not yet been
filed, or for which Taxes are not yet due or owing, Savers have made due
and sufficient current accruals for such Taxes in its Books and Records and
in accordance with SAP and GAAP, and such current accruals through the
Closing Date are duly and fully provided for in the SAP and GAAP Financial
Statements of Savers for the period then ended.
(c) The United States federal income Tax Returns of Savers and of each
affiliated group (within the meaning of the Code) of which Savers is or has
been a member have not been audited or examined by the IRS, and the statute
of limitations for all periods through the year 1989 has expired. The
state, local, and foreign income Tax Returns of Savers have not been
audited or examined, and all statutes of limitation for all applicable
state, local, and foreign taxable periods through the respective years
specified in Section 3.15(c) of the Disclosure Schedule have expired. There
are no outstanding agreements, waivers, or arrangements extending the
statutory period of limitation applicable to any claim for, or the period
for the collection or assessment of, Taxes due from Savers for any taxable
period. Savers has previously delivered to SMC true and complete copies of
each of the United States federal, state, local, and foreign income Tax
Returns, for each of the last three taxable years, filed by Savers (insofar
as such
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returns relate to either Savers) filed by any affiliated or consolidated
group of which Savers was then a member.
(d) No audit or other proceeding by any court, governmental or
regulatory authority, or similar Person is pending or (to the knowledge of
Savers) threatened with respect to any Taxes due from Savers or any Tax
Return filed by or relating to Savers. To the best knowledge of Savers, no
assessment of Tax is proposed against Savers or any of its Assets and
Properties.
(e) No election under any of Sections 108, 168, 338, 441, 463, 472,
1017, 1033, or 4977 of the Code (or any predecessor provisions) has been
made or filed by or with respect to Savers or any of its Assets and
Properties. No consent to the application of Section 341(f)(2) of the Code
(or any predecessor provision) has been made or filed by or with respect to
Savers or any of its Assets and Properties. None of the Assets and
Properties of Savers is an asset or property that SMC or any of its
Affiliates is or will be required to treat as being owned by any other
Person pursuant to the provisions of Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect immediately before the
enactment of the Tax Reform Act of 1986, or tax-exempt use property within
the meaning of Section 168(h)(1) of the Code. No closing agreement pursuant
to Section 7121 of the Code (or any predecessor provision) or any similar
provision of any state, local, or foreign Law has been entered into by or
with respect to Savers or any of its Assets and Properties.
(f) Savers has not agreed to nor is required to make any adjustment
pursuant to Section 481(a) of the Code (or any predecessor provision) by
reason of any change in any accounting method of Savers, and Savers does
not have any application pending with any taxing authority requesting
permission for any changes in any accounting method of Savers. To the best
knowledge of Savers, the IRS has not proposed any such adjustment or change
in accounting method.
(g) Savers has not been or is in violation (or with notice or lapse of
time or both, would be in violation) of any applicable Law relating to the
payment or withholding of Taxes. Savers has duly and timely withheld from
employee salaries, wages, and other compensation and paid over to the
appropriate taxing authorities all amounts required to be so withheld and
paid over for all periods under all applicable Laws.
(h) Savers is not a party to, is not bound by, and has no obligation
under, any Tax sharing Contract or similar Contract; notwithstanding any
disclosure contained in the Disclosure Schedule, Savers represents and
warrants that, at the Closing, Savers shall not be a party to, be bound by
or have any obligation under, any Tax sharing Contract or similar Contract
or arrangement. Savers is not a foreign person within the meaning of
Section 1445(f)(3) of the Code.
(i) Savers has not made any direct, indirect, or deemed distributions
that have been or could be taxed under Section 815 of the Code.
(j) All ceding commission expenses paid or accrued by Savers in
connection with any reinsurance arrangement or Contract or transaction have
been capitalized and amortized over the life or lives of such reinsurance
arrangement or Contract in accordance with the decision of the United
States Supreme Court in Colonial American Life Insurance Company v.
Commissioner of Internal Revenue, 109 S.Ct. 240 (1980).
(k) No material Liabilities have been proposed in connection with any
audit or other proceeding by any court, governmental or regulatory
authority, or similar Person with respect to any Taxes due from Savers or
any Tax Return filed by or relating to Savers.
(l) Savers is a not party to any agreement, contract, plan or
arrangement that has resulted, or would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code.
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3.16 Litigation. Except as disclosed in Section 3.16 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) There are no actions, suits, investigations, or proceedings
pending, or (to the best knowledge of Savers) threatened, against or
affecting Savers or any of its Assets and Properties, at law or in equity,
in, before, or by any Person that individually or in the aggregate have or
may reasonably be expected to have a material adverse effect on the
validity or enforceability of this Amended and Restated Merger Agreement,
on the ability of Savers to perform its obligations under this Amended and
Restated Merger Agreement, or on the Business or Condition of Savers or the
Surviving Corporation.
(b) There are no actions, suits, investigations, or proceedings
pending, or (to the best knowledge of Savers) threatened, against Savers or
any of its Assets and Properties, at law or in equity, in, before, or by
any Person that individually involve a claim or claims for any injunction
or similar relief or for Damages exceeding $25,000 or an unspecified amount
of Damages.
(c) There are no writs, judgments, decrees, or similar orders of any
Person outstanding against Savers that individually exceed $10,000 or that
individually or in the aggregate have or may reasonably be expected to have
a material adverse effect on the Business or Condition of Savers, and there
are no injunctions or similar orders of any Person outstanding against
Savers or the Surviving Corporation.
3.17 Compliance With Laws. To the best knowledge of Savers and except as
disclosed in Section 3.17 of the Disclosure Schedule, Savers has not been and is
not in violation (or with or without notice or lapse of time or both, would be
in violation) of any term or provision of any Law or any writ, judgment, decree,
injunction, or similar order applicable to Savers or any of its Assets and
Properties, the result of which violation individually or violations in the
aggregate has or may reasonably be expected to have a material adverse effect on
the Business or Condition of Savers or the Surviving Corporation. Without
limiting the generality of the foregoing:
(a) Since January 1, 1997, Savers has duly and validly filed or caused
to be so filed all reports, statements, documents, registrations, filings,
or submissions that were required by Law to be filed with any Person and as
to which the failure to so file, individually in the aggregate with other
such failures, has or may reasonably be expected to have a material adverse
effect on the Business or Condition of Savers or the Surviving Corporation;
all such filings complied with applicable Laws in all material respects
when filed and, no material deficiencies have been asserted by any Person
with respect to any such filings.
(b) Savers has previously delivered to SMC the reports reflecting the
results of the most recent financial examination of Savers issued by the
North Carolina Department of Insurance. All material deficiencies or
violations in such previously issued reports have been resolved to the
satisfaction of the State of North Carolina Department of Insurance.
(c) Except as disclosed in Section 3.17(c) of the Disclosure Schedule,
all outstanding insurance and annuity Contracts issued, reinsured, or
underwritten by Savers are, to the extent required under applicable Laws,
on forms approved by the insurance regulatory authority of the jurisdiction
where issued or have been filed with and not objected to by such authority
within the period provided for objection.
(d) (1) Section 3.17(d) of the Disclosure Schedule contains a true and
complete list of each master or prototype (as well as any individually
designed) pension, profit sharing, defined benefit, Code Section 401(k),
and other retirement or employee benefit plan or Contract (including, but
not limited to, simplified employee pension plans, Code Section 403(a), (b)
and (c) annuities, Keogh plans, and individual retirement accounts and
annuities) offered or sold by Savers to, or maintained or sponsored for the
benefit of any employees of, any other Person, and each determination
letter relating to the creation or amendment of any such plan or Contract.
Except as disclosed in Section 3.17(d) of the Disclosure Schedule, each
such plan or Contract in all material respects conforms with, and has been
offered, sold, maintained, and sponsored in accordance with, all applicable
Laws. Except as disclosed in Section 3.17(d) of the Disclosure Schedule,
Savers is not a fiduciary with respect to any plan or Contract referenced
in this Section 3.17(d).
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(2) Savers does not provide administrative or other contractual
services for any plan or Contract referenced in this Section 3.17(d),
including, but not limited to, any third party administrative services for
an Employee Welfare Benefit Plan.
(3) To the extent that Savers maintains any collective or
commingled funds or accounts which restrict the Persons who may invest
therein to tax-exempt entities or qualified plans, each such fund or
account (of which a true and complete list and description is disclosed in
Section 3.17(d)(3) of the Disclosure Schedule) has been established,
maintained and operated in accordance with all applicable Laws, has
maintained its tax-exempt status and has no nonqualified plans or trusts or
other taxable entities investing in it.
(4) In addition to the representations and warranties contained
in Section 3.16, there are no claims pending, or (to the best knowledge of
Savers) threatened, against Savers or any of its Assets and Properties,
under any fiduciary liability insurance policy issued by or to Savers that
individually or in the aggregate has or may reasonably be expected to have
a material adverse effect on the Business or Condition of Savers or the
Surviving Corporation.
3.18 Benefit Plans, ERISA.
Except as disclosed in Section 3.18 of the Disclosure Schedule, Savers has
not had within the past six (6) years and does not currently have any Benefit
Plan or any commitment or obligation to create any Benefit Plan.
(a) Neither Savers, nor any of its respective Affiliates has any
Contract, plan, or commitment, whether legally binding or not, to create
any additional Benefit Plan or to modify or change any existing Benefit
Plan. Each contribution or other payment required to be made or to be
voluntarily made by Savers on or before December 31, 1995 with respect to
any of the Benefit Plans has been made.
(b) None of the Benefit Plans is or has been a multi-employer plan, as
that term is defined in Section 3(37) of ERISA. There has been no
transaction, action, or omission involving Savers, any ERISA Affiliate, or
(to the best knowledge of Savers) any fiduciary, trustee, or administrator
of any Benefit Plan, or any other Person dealing with any such Benefit Plan
or the related trust or funding vehicle, that in any manner violates or
will result in a violation (with or without notice or lapse of time or
both) of Sections 404 or 406 of ERISA or constitutes or will constitute
(with or without notice or lapse of time or both) a prohibited transaction
(as defined in Section 4975(c)(I) of the Code or Section 406 of ERISA) for
which there exists neither a statutory nor a regulatory exemption and which
could subject Savers or any party in interest (as defined in Section 3(14)
of ERISA) to criminal or civil sanctions under Section 501 or 502 of ERISA,
or to Taxes under Code Section 4975, or to any other Liability.
(c) There has been no reportable event (as defined in Section 4043(b)
of ERISA) with respect to any Employee Pension Benefit Plan or any Employee
Welfare Benefit Plan for which notice to the PBGC has not been waived by
rule or regulation. Neither Savers, nor any ERISA Affiliate has any
Liability to the PBGC (other than any Liability for insurance premiums not
yet due to the PBGC), to any present or former participant in or
beneficiary of any Benefit Plan (or any beneficiary of any such participant
or beneficiary), or to any Employee Pension Benefit Plan or any Employee
Welfare Benefit Plan. No event, fact, or circumstance has arisen or
occurred that has resulted or may reasonably be expected to result in any
such Liability or a claim against Savers by the PBGC, by any present or
former participant in or any beneficiary of any Employee Pension Benefit
Plan or any Employee Welfare Benefit Plan (or any beneficiary of any such
participant or beneficiary), or by any such Benefit Plan. No filing has
been or will be made by Savers, or any ERISA Affiliate, and no proceeding
has been commenced, for the complete or partial termination of any Employee
Pension Benefit Plan or any Employee Welfare Benefit Plan, and no complete
or partial termination of any such Benefit Plan has occurred or, as a
result of the execution or delivery of this Amended and Restated Merger
Agreement or the consummation of the transactions contemplated hereby, will
occur.
(d) All amounts that Savers is required to pay by Law or under the
terms of the Benefit Plans as a contribution or other payment to or in
respect of such Benefit Plans as of December 31, 1996 have been
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paid. The funding method used in connection with each Benefit Plan that is
or at any time has been subject to the funding requirements of Title I,
Subtitle B, Part 3 of ERISA, meets the requirements of ERISA and the Code.
No Benefit Plan subject to Title IV of ERISA (or any trust established
thereunder) has ever incurred any accumulated funding deficiency (as
defined in Section 302 of ERISA and Section 412 of the Code), whether or
not waived, as of the last day of the most recent fiscal year of such
Benefit Plan. With respect to any period for which any contribution or
other payment to or in respect of any Benefit Plan is not yet due or owing,
Savers has made due and sufficient current accruals for such contributions
and other payments in accordance with GAAP and SAP, and such current
accruals through the Closing will be duly and fully provided for in the SAP
Statement of Savers for the period then ended.
(e) Each Benefit Plan is and has been operated and administered in all
material respects in accordance with all applicable Laws, including,
without limitation, ERISA and the Code. Each of the Employee Pension
Benefit Plans and Employee Welfare Benefit Plans that is intended to be
qualified within the meaning of Section 401(a) of the Code is so qualified
and satisfies the requirements of Sections 401(a) and 501(a) of the Code.
There exists no fact, condition, or set of circumstances that has or may
reasonably be expected to have a material adverse effect on the qualified
status of any Employee Pension Benefit Plan or any Employee Welfare Benefit
Plan intended to be so qualified or the intended United States federal
income Tax treatment or consequences of any Employee Pension Benefit Plan
or any Employee Welfare Benefit Plan. None of the Benefit Plans, or any
related trust or funding vehicle, conducts or has conducted any unrelated
trade or business as that term is defined in Section 513 of the Code. All
necessary governmental approvals, determinations, and notifications for all
Employee Pension Benefit Plans and all Employee Welfare Benefit Plans have
been obtained.
(f) Any actuarial assumptions utilized by Savers in connection with
determining the funding of each Employee Pension Benefit Plan (as set forth
in the actuarial report for such Benefit Plan) are reasonable in all
material respects. The fair market value of the Assets or Properties held
under each Employee Pension Benefit Plan exceeds the actuarially determined
present value of all accrued benefits of such Benefit Plan (whether or not
vested) determined on an ongoing-Benefit Plan basis.
(g) Except as disclosed in Section 3.18(g) of the Disclosure Schedule,
and except for claims by third parties for benefits owed to participants or
beneficiaries under the Benefit Plans, and except for divorce proceedings,
there are no pending or (to the best knowledge of Savers) threatened
actions, suits, investigations, or other proceedings by any present or
former participant or beneficiary under any Benefit Plan (or any
beneficiary of any such participant or beneficiary) involving any Benefit
Plan or any rights or benefits under any Benefit Plan or any rights or
benefits under any Benefit Plan other than ordinary and usual claims for
benefits by participants or beneficiaries thereunder. There is no writ,
judgment, decree, injunction, or similar order of any court, governmental
or regulatory authority, or other similar Person outstanding against or in
favor of any Benefit Plan or any fiduciary thereof.
(h) Except as disclosed in Section 3.18(h) of the Disclosure Schedule,
Savers is not a party to any employee collective bargaining agreement,
advisory or service agreement, deferred compensation agreement,
confidentiality agreement or covenant not to compete.
(i) Except as disclosed in Section 3.18(i) of the Disclosure Schedule,
Savers does not have any stock option, stock purchase, bonus or other
incentive plan or agreement.
(j) Section 3.18(j) of the Disclosure Schedule contains: (i) a list of
all employees of Savers as of September 30, 1997 whose then current annual
compensation was in excess of $50,000; (ii) the then current annual
compensation of, and a description of the fringe benefits (other than those
generally available to employees of Savers) provided by Savers to any such
employees; (iii) a list of all present or former employees of Savers paid
in excess of $50,000 in calendar year 1996 who have terminated or given
notice of their intention to terminate their relationship with Savers since
January 1, 1997; (iv) a list of any increase, effective after December 31,
1996, in the rate of compensation of any employees if such increase exceeds
10% of the previous annual salary of such employee; and (v) a list of all
substantial changes in job assignments of, or arrangements with, or
promotions or appointments of, any employees whose compensation as of
December 31, 1996 was in excess of $50,000 per annum.
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3.19 Employee Relations. Except as set forth in Section 3.19 of the
Disclosure Schedule, Savers has complied in respect of the Business with all
applicable laws, rules and regulations which relate to prices, wages, hours,
discrimination in employment and collective bargaining and to the operation of
the Business of Savers and is not liable for any arrears of wages or any taxes
or penalties for failure to comply with any of the foregoing. Savers believes
that its relations with the employees are satisfactory. Savers is not a party
to, and is not affected by or threatened with, any dispute or controversy with a
union or with respect to unionization or collective bargaining. Savers is not
materially affected by any dispute or controversy with a union or with respect
to unionization or collective bargaining involving any supplier or customer of
Savers.
3.20 Properties. Except as disclosed in Section 3.20 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) Savers has good and valid title to all debentures, notes, stocks,
securities, and other assets that are of a type required to be disclosed in
Schedules B through DB of its Annual Statement and that are owned by it,
free and clear of all Liens.
(b) Savers owns good and indefeasible title to, or has a valid
leasehold interest in, all real property used in the conduct of its
business, operations, or affairs or of a type required to be disclosed in
Schedule A of Savers' Annual Statement, free and clear of all Liens. All
such real property, other than raw land, is in good operating condition and
repair and is suitable for its current uses. No improvement on any such
real property owned, leased, or held by Savers encroaches upon any real
property of any other Person. Savers owns, leases, or has a valid right
under Contract to use adequate means of ingress and egress to, from, and
over all such real property. Section 3.20(b) of the Disclosure Schedule
contains a brief description of (i) each parcel of real property owned by
Savers (the "Owned Real Property") (showing the record title holder, legal
description, permanent index number, location, improvements, the uses being
made thereof and any indebtedness secured by a mortgage or other Lien
thereon) and (ii) each option held by Savers to acquire any real property.
Complete and correct copies of any title opinions, surveys and appraisals
Savers' possession or any policies of title insurance currently in force
and in the possession of Savers with respect to each such parcel have
heretofore been delivered to SMC.
(c) Savers owns good and indefeasible title to, or has a valid
leasehold interest in or has a valid right under Contract to use, all
tangible personal property that is used in the conduct of its business,
operations, or affairs, free and clear of all Liens. All such tangible
personal property is in good operating condition and repair and is suitable
for its current uses.
(d) Savers has, and at all times after the Closing will have, the
right to use, free and clear of any royalty or other payment obligations,
claims of infringement or alleged infringement, or other Liens, all marks,
names, trademarks, service marks, patents, patent rights, assumed names,
logos, trade secrets, copyrights, trade names, and service marks that are
used in the conduct of its business, operations, or affairs (of which a
true and complete list and description is disclosed in Section 3.20(d) of
the Disclosure Schedule), and all computer software, programs, and similar
systems owned by or licensed to Savers, or any Affiliate of Savers or used
in the conduct of its business, operations, or affairs (of which a true and
complete list and description is disclosed in Section 3.20(d) of the
Disclosure Schedule). Savers is not in conflict with or in violation or
infringement of, and Savers has not received any notice of any conflict
with or violation or infringement of or any claimed conflict with, any
asserted rights of any other Person with respect to any intellectual
property or any computer software, programs, or similar systems, including,
without limitation, any of such items disclosed in Section 3.20(d) of the
Disclosure Schedule.
3.21 Environmental Matters. Except as set forth in Section 3.21 of the
Disclosure Schedule:
(a) The operations of Savers comply with all applicable Environmental
Laws.
(b) Savers has obtained all environmental, health and safety
Governmental Permits necessary for its operation, and all such Governmental
Permits are in good standing and Savers is in compliance with all terms and
conditions of such permits.
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(c) None of Savers nor any of its Property or operations, or its past
Property or operations, is subject to any on-going investigation by, order
from or agreement with any Person(including without limitation any prior
owner or operator of Property) respecting (i) any Environmental Law, (ii)
any Remedial Action or (iii) any claim of Losses and Expenses arising from
the Release or threatened Release of a Contaminant into the environment.
(d) Savers is not subject to any judicial or administrative
proceeding, order, judgment, decree or settlement alleging or addressing a
violation of or liability under any Environmental Law.
(e) Savers has not with respect to the Business of Savers:
(i) reported a Release of a hazardous substance pursuant to Section
103(a) of CERCLA, or any state equivalent;
(ii) filed a notice pursuant to Section 103(c) of CERCLA;
(iii) filed notice pursuant to Section 3010 of RCRA, indicating the
generation of any hazardous waste, as that term is defined under 40 CFR
Part 261 or any state equivalent; or
(iv) filed any notice under any applicable Environmental Law
reporting a substantial violation of any applicable Environmental Law.
(f) There is not now, nor to the best knowledge of Savers has there
ever been, on or in any of its Property:
(i) any treatment, recycling, storage or disposal of any hazardous
waste, as that term is defined under 40 CFR Part 261 or any state
equivalent, that requires or required a Governmental Permit pursuant to
Section 3005 of RCRA; or
(ii) any underground storage tank or surface impoundment or
landfill or waste pile.
(g) There is not now on or in any of its Property any polychlorinated
biphenyls (PCB) used in pigments, hydraulic oils, electrical transformers
or other equipment.
(h) Savers has not received any notice or claim to the effect that it
is or may be liable to any Person as a result of the Release or threatened
Release of a Contaminant.
(i) No Environmental Encumbrance has attached to any Property of
Savers.
(j) Any asbestos-containing material which is on or part of any
Property of Savers is in good repair according to the current standards and
practices governing such material, and its presence or condition does not
violate any currently applicable Environmental Law.
3.22 Contracts. Section 3.22 of the Disclosure Schedule (with paragraph
references corresponding to those set forth below) contains a true and complete
list of each of the following Contracts or other documents or arrangements (true
and complete copies, or, if none, written descriptions, of which have been made
available to SMC, together with all amendments thereto), to which Savers is a
party or by which any of its Assets and Properties is or may be bound:
(a) all employment, agency, consultation, or representation Contracts
or other Contracts of any type (including, without limitation, loans or
advances) with any present officer, director, employee, agent, consultant,
or other similar representative of Savers (or former officer, director,
employee, agent, consultant or similar representative of Savers, if there
exists any present or future liability with respect to such Contract,
whether now existing or contingent) (other than Contracts with consultants
and similar representatives who do not receive compensation of $25,000 or
more per year and other than employment or agency Contracts, not containing
terms which are unduly burdensome to Savers, with agents who do not receive
compensation of $25,000 or more per year), and the name, position, and rate
of compensation of each such Person and the expiration date of each such
Contract, as well as all sick leave, vacation, holiday, and other similar
practices, procedures, and policies of Savers established or administered
other than as Benefit Plans;
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(b) all Contracts with any Person containing any provision or covenant
limiting the ability of Savers to engage in any line of business or to
compete with or to obtain products or services from any Person or limiting
the ability of any Person to compete with or to provide products or
services to Savers;
(c) all partnership, joint venture, profit-sharing, alliance or
similar Contracts with any Person (other than Benefit Plans);
(d) all Contracts relating to the borrowing of money by Savers or to
the direct or indirect guarantee by Savers of any obligation for borrowed
money in excess of $25,000 in the aggregate for Savers or any of its
Affiliates, or any other Liability in respect of indebtedness of any other
Person, including without limitation any Contract relating to the
maintenance of compensating balances that are not terminable by Savers
without penalty upon not more than sixty (60) calendar days' notice, any
line of credit or similar facility, the payment for property, products, or
services of any other Person even if such property, products, or services
are not conveyed, delivered, or rendered, or the obligation to take-or-pay,
keep-well, make-whole, or maintain surplus or earnings levels or perform
other financial ratios or requirements; Section 3.22(d) of the Disclosure
Schedule contains a true and complete list of any requirements for consents
or approvals of creditors needed to consummate the transactions
contemplated hereby;
(e) all leases or subleases of real property used in Savers' business,
operations, or affairs, and all other leases, subleases, or rental or use
Contracts for which Savers is liable;
(f) all Contracts relating to the future disposition or acquisition of
any investment in or security of any Person or of any interest in any
business enterprise (other than the disposition or acquisition of
investments in the ordinary course of business and consistent with past
practice);
(g) all Contracts or arrangements (including, without limitation,
those relating to the sharing or allocation of expenses, personnel,
services, or facilities) between or among Savers and any of its Affiliates
or any other Person who is described in Section 4.13(p);
(h) all reinsurance, coinsurance, or other similar Contracts
indicating, with respect to each such Contract, the information required to
be disclosed in Schedule S of Savers' Annual Statement;
(i) all outstanding proxies, powers of attorney, or similar
delegations of authority of Savers, except for powers of attorney for the
service of process pursuant to applicable insurance Laws, except as
incident to participation by Savers in the insurance guaranty fund of any
State wherein Savers is required or elects to participate in such fund.
(j) all Contracts for any product, service, equipment, facility, or
similar item (other than insurance and annuity Contracts issued, reinsured,
or underwritten by Savers and other than reinsurance, coinsurance, and
other similar Contracts) that by their respective terms do not expire or
terminate or are not terminable by Savers, without penalty or other
Liability, within six (6) months after December 31, 1997; and
(k) all other Contracts (other than insurance and annuity Contracts
issued, reinsured, or underwritten by Savers) that involve the payment or
potential payment pursuant to the terms of such Contracts, by or to Savers
of more than $10,000 individually or in the aggregate or that are otherwise
material to the Business or Condition of Savers or the Surviving
Corporation.
Except as set forth in Section 3.22 of the Disclosure Schedule, each of the
leases, contracts and other agreements listed the Disclosure Schedule
(collectively, the "Savers Agreements") constitutes a valid and binding
obligation of the parties thereto and is in full force and effect and (except
for those Savers Agreements which by their terms will expire or are otherwise
terminated prior to the Effective Time in accordance with the provisions hereof)
and will continue in full force and effect after the Effective Time, in each
case without breaching the terms thereof or resulting in the forfeiture or
impairment of any rights thereunder and without the consent, approval or act of,
or the making of any filing with, any other party. Savers has fulfilled and
performed its obligations under each of the Savers Agreements, and Savers is not
in, or alleged to be in, breach or default under, nor is there or is there
alleged to be any basis for termination of, any of the Savers Agreements, and no
other party to any of the Savers Agreements has breached or defaulted
thereunder, and
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no event has occurred and no condition or state of facts exists which, with the
passage of time or the giving of notice or both, would constitute such a default
or breach by Savers or by any such other party. Savers is not currently
renegotiating any of the Savers Agreements or paying liquidated damages in lieu
of performance thereunder. None of the Savers Agreements contains terms unduly
burdensome to Savers or is harmful to the Business. Complete and correct copies
of each of the Savers Agreements have heretofore been made available to SMC.
3.23 Insurance Issued by Savers. Except as required by Law or except as
disclosed in Section 3.23 of the Disclosure Schedule (with paragraph references
corresponding to those set forth below):
(a) All insurance or annuity Contract benefits payable to Savers by
any other Person that is a party to or bound by any reinsurance,
coinsurance, or other similar Contract with Savers have in all material
respects been paid in accordance with the terms of the insurance, annuity,
and other Contracts under which they arose.
(b) No outstanding insurance or annuity Contract issued, reinsured, or
underwritten by Savers entitles the holder thereof or any other Person to
receive dividends, distributions, or to share in the income of Savers or
receive any other benefits based on the revenues or earnings of Savers or
any other Person.
(c) The underwriting standards utilized and ratings applied by Savers
and (to the best knowledge of Savers) by any other Person that is a party
to or bound by any reinsurance, coinsurance, or other similar Contract with
Savers conform in all material respects to industry accepted practices and
to the standards and ratings required pursuant to the terms of the
respective reinsurance, coinsurance or other similar Contracts.
(d) To the best knowledge of Savers all amounts to which Savers is
entitled under reinsurance, coinsurance, or other similar Contracts
(including without limitation amounts based on paid and unpaid losses) are
fully collectible.
(e) To the best knowledge of Savers, each insurance agent, at the time
such agent wrote, sold, or produced business for Savers, was duly licensed
as an insurance agent (for the type of business written, sold, or produced
by such insurance agent) in the particular jurisdiction in which such agent
wrote, sold or produced such business for Savers.
(f) To the best knowledge of Savers, no such insurance agent violated
(or with or without notice or lapse of time or both, would have violated)
any term or provision of any Law or any writ, judgment, decree, injunction,
or similar order applicable to the writing, sale or production of business
for Savers.
(g) The tax treatment under the Code of all insurance, annuity or
investment policies, plans, or contracts; all financial products, employee
benefit plans, individual retirement accounts or annuities; or any similar
or related policy, contract, plan, or product, whether individual, group,
or otherwise, issued or sold by Savers is and at all times has been the
same or more favorable to Savers, policyholder or intended beneficiaries
thereof as the tax treatment under the Code for which such contracts
qualified or purported to qualify at the time of its issuance or purchase.
For purposes of this Section 3.23(g), the provisions of the Code relating
to the tax treatment of such contracts shall include, but not be limited
to, Sections 72, 79, 89, 101, 104, 105, 106, 125, 130, 401, 402, 403, 404,
408, 412, 415, 419, 419A, 501, 505, 817, 818, 7702, and 7702A of the Code.
(h) There are no reinsurance, coinsurance or other similar Contracts
under which Savers receives or has received surplus relief.
3.24 Threats of Cancellation. Except as disclosed in Section 3.24 of the
Disclosure Schedule, since December 31, 1996, no policyholder, group of
policyholder Affiliates, or Persons writing, selling, or producing insurance
business that individually or in the aggregate accounted for five percent 5% or
more of the premium or annuity income of Savers for the year ended December 31,
1996, has terminated or (to the best knowledge of Savers) threatened to
terminate its relationship with Savers.
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3.25 Licenses and Permits. Except as disclosed in Section 3.25 of the
Disclosure Schedule (with paragraph references corresponding to those set forth
below):
(a) Savers owns or validly holds, all licenses, franchises, permits,
approvals, authorizations, exemptions, classifications, certificates,
registrations and similar documents or instruments that are required for
its business, operations and affairs and that the failure to so own or hold
has or may reasonably be expected to have a material adverse effect on its
Business or Condition.
(b) All such licenses, franchises, permits, approvals, authorizations,
exemptions, classifications, certificates, registrations and similar
documents or instruments are valid and in full force and effect and free of
any restrictions imposed by any Person.
(c) Savers is in compliance in all material respects with its
obligations under the foregoing, with only such exceptions as, individually
or in the aggregate, would not reasonably be expected to have a material
adverse effect on the Business or Condition of Savers, and no event has
occurred that allows, or after notice or lapse of time, or both, would
allow, revocation or termination of any of the foregoing.
3.26 Operations Insurance. Section 3.26 of the Disclosure Schedule contains
a true and complete list and description of all liability, property, workers'
compensation, directors and officers liability and other similar insurance
Contracts that insure the business, operations, or affairs of Savers or affect
or relate to the ownership, use, or operations of any of the Assets and
Properties of Savers and that have been issued to Savers or any of its
Affiliates (including, without limitation, the names and addresses of the
insurers, the expiration dates thereof, and the annual premiums and payment
terms thereof) or that are held by Savers or by any Affiliate of Savers for the
benefit of the Surviving Corporation following the Effective Time. All such
insurance is in full force and effect and (to the best knowledge of Savers) is
with financially sound and reputable insurers and, in light of the business,
operations, and affairs of Savers, is in amounts and provides coverage that are
reasonable and customary for Persons in similar businesses.
3.27 Intercompany Accounts. Except as reflected in the December 31, 1996
SAP Statement, or except as disclosed in Section 3.27 of the Disclosure
Schedule, there are no accounts between Savers and any of its Affiliates, and
none of its Affiliates provides or causes to be provided to Savers any products,
services, equipment, facilities, or similar items. Except as disclosed in
Section 3.27 of the Disclosure Schedule, since December 31, 1996, no such
intercompany accounts in excess of $10,000 have been paid or received, and all
settlements of such intercompany accounts have been made, and all allocations of
such intercompany expenses have been applied, in the ordinary course of business
and consistent with past practice. All intercompany accounts shall be written
off prior to the Effective Time and, if constituting an admitted asset, taken
into account in calculating the Adjusted Capital and Surplus of Savers.
3.28 Bank Accounts. Section 3.28 of the Disclosure Schedule contains a true
and complete list of the names and locations of all banks, trust companies,
securities brokers, and other financial institutions at which Savers has an
account or safe deposit box or maintains a banking, custodial, trading or other
similar relationship and a true and complete list and description of each such
account, box and relationship, indicating in each case the account number and
the names of the officers, employees, agents or other similar representatives of
Savers transacting business with respect thereto.
3.29 Brokers. All negotiations relative to this Amended and Restated Merger
Agreement and the transactions contemplated hereby have been carried out by
Savers directly with SMC, without the intervention of any Person on behalf of
Savers in such manner as to give rise to any valid claim by any Person against
SMC, Savers or the Surviving Corporation for a finder's fee, brokerage
commission, or similar payment. Notwithstanding the foregoing, Savers is a party
to an agreement with Daiwa Securities America, Inc., pursuant to which a fee may
be owing as a result of the transaction contemplated by this Amended and
Restated Merger Agreement
3.30 Disclosure. Neither this Amended and Restated Merger Agreement nor any
certificate furnished by Savers or Savers to SMC in connection with this Amended
and Restated Merger Agreement or the transactions contemplated hereby contains
any untrue statement of a material fact by Savers or omits to state a material
fact by Savers necessary to make the statements herein or therein not misleading
in light of the
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circumstances in which they were made. There is no fact which adversely affects
or in the future is likely to adversely affect the Business or Condition of
Savers in any material respect which has not been set forth or referred to in
this Amended and Restated Merger Agreement or the Disclosure Schedule.
3.31 State Takeover Statutes. Valid and irrevocable exemptions from the
Control Share Acquisition Act (Article 9A) and the Shareholder Protection Act
(Article 9) of the NCBCA exist and are applicable to all of the transactions
contemplated by this Amended and Restated Merger Agreement. No other similar
laws are applicable to the Merger, this Amended and Restated Merger Agreement or
the transactions contemplated hereby.
3.32 Sensitive Payments. Except as disclosed in Section 3.32 of the
Disclosure Schedule, (i) to the best knowledge of Savers, Savers is not involved
in any transaction or other situation with any employee, officer, director or
Affiliate of Savers which may be generally characterized as a "conflict of
interest", including, but not limited to, direct or indirect interests in the
business of competitors, suppliers or customers of Savers, and (ii) there are no
situations which involved or involves (A) the use of any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses related
to political activity, (B) the making of any direct or indirect unlawful
payments to government officials or others from corporate funds or the
establishment or maintenance of any unlawful or unrecorded funds, (C) the
violation of any of the provisions of The Foreign Corrupt Practices Act of 1977,
or any rules or regulations promulgated thereunder, (D) the receipt of any
illegal discounts or rebates or any other violation of the antitrust laws or (E)
any investigation by the Securities and Exchange Commission or any other
federal, foreign, state or local government agency or authority.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SMC
SMC hereby represents and warrants to Savers as follows:
4.1 Organization. SMC is a corporation duly organized, validly existing,
and in good standing under the Laws of the State of Indiana and has full
corporate power and authority to enter into this Amended and Restated Merger
Agreement and to perform its obligations under this Amended and Restated Merger
Agreement. SMC is duly licensed, qualified, or admitted to do business and is in
good standing in all jurisdictions in which the failure to be so licensed,
qualified or admitted and in good standing, individually or in the aggregate
with other such failure, has or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Amended and Restated
Merger Agreement, on the ability of SMC to perform its obligations under this
Amended and Restated Merger Agreement or on the Business or Condition of SMC.
4.2 Authority. The Board of Directors of SMC has duly and validly approved
this Amended and Restated Merger Agreement and the transactions contemplated
hereby. Except for the approval of the shareholders of SMC, the execution and
delivery of this Amended and Restated Merger Agreement by SMC and the
performance by SMC of its obligations under this Amended and Restated Merger
Agreement have been duly and validly authorized by all necessary corporate
action on the part of SMC. This Amended and Restated Merger Agreement
constitutes a legal, valid, and binding obligation of SMC and is enforceable
against SMC in accordance with its terms, except to the extent that enforcement
may be limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or similar Laws now or hereafter in effect relating to or limiting
creditors' rights generally, and the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court or other similar Person before which
any proceeding therefor may be brought.
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4.3 No Conflicts or Violations. The execution and delivery of this Amended
and Restated Merger Agreement by SMC do not, and the performance by SMC of its
obligations under this Amended and Restated Merger Agreement will not:
(a) subject to obtaining the approvals contemplated by Article IX of
this Amended and Restated Merger Agreement, violate any term or provision
of any Law or any writ, judgment, decree, injunction, or similar order
applicable to SMC;
(b) conflict with or result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default under, any of
the terms, conditions, or provisions of the articles of incorporation or
Bylaws of SMC;
(c) except as disclosed in writing to Savers, result in the creation
or imposition of any Lien upon SMC or any of its Assets and Properties that
individually or in the aggregate with any other Liens has or may reasonably
be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement or on the
ability of SMC to perform its obligations under this Amended and Restated
Merger Agreement;
(d) except as disclosed in writing to Savers, conflict with or result
in a violation or breach of, or constitute (with or without notice or lapse
of time or both) a default under, or give to any person any right of
termination, cancellation, acceleration, or modification in or with respect
to, any Contract to which SMC is a party or by which any of its Assets and
Properties may be bound and as to which any such conflicts, violations,
breaches, defaults, or rights individually or in the aggregate have or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement or on the
ability of SMC to perform its obligations under this Amended and Restated
Merger Agreement; or
(e) require SMC to obtain any consent, approval, or action of, or make
any filing with or give any notice to, any Person except as contemplated in
Articles IX and X of this Amended and Restated Merger Agreement, as
disclosed in writing to Savers, or those which the failure to obtain, make,
or give individually or in the aggregate with other such failures has or
may reasonably be expected to have no material adverse effect on the
validity or enforceability of this Amended and Restated Merger Agreement or
on the ability of SMC to perform its obligations under this Amended and
Restated Merger Agreement.
4.4 Registration Statement and Proxy Statement. None of the information to
be supplied by SMC or SAC for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement will (i) in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading or (ii) in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement and at the time of each
Stockholder Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to SMC, its officers and directors or any of its Subsidiaries shall
occur which is required to be described in the Proxy Statement or the
Registration Statement, such event shall be so described, and an amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of Savers and/or SMC, as appropriate. The
Registration Statement will comply (with respect to SMC and SAC) as to form in
all material respects with the provisions of the Securities Act, and the Proxy
Statement will comply (with respect to SMC and SAC) as to form with the
provisions of the Exchange Act.
4.5 Litigation. There are no actions, suits, investigations, or proceedings
pending against SMC, or (to the best knowledge of SMC) threatened against SMC,
at law or in equity, in, before, or by any Person, that individually or in the
aggregate have or may reasonably be expected to have a material adverse effect
on the validity or enforceability of this Amended and Restated Merger Agreement,
on the ability of SMC to perform its obligations under this Amended and Restated
Merger Agreement or on the Business and Condition of SMC.
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4.6 Capitalization. The authorized capital stock of SMC consists of
20,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of
September 30, 1997, there were issued and outstanding: 5,752,499 shares of
common stock, of which 882,259 shares are in the treasury; stock options to
acquire 1,338,595 shares of common stock of which options to acquire 1,199,399
shares of common stock were exercisable; and warrants to acquire 752,358 shares
of common stock, all of which were exercisable. All outstanding shares of
capital stock of SMC have been duly authorized and validly issued and are fully
paid and nonassessable and free of preemptive rights. Except as set forth in
this Section 4.6, there are outstanding (a) no other shares of capital stock or
other voting securities of SMC, (b) no securities of SMC convertible into or
exchangeable for shares of capital stock or voting securities of SMC and (c) no
other options or other rights to acquire from SMC, and there is no obligation of
SMC to issue, any capital stock, voting securities or securities convertible
into or exchangeable for, or options or warrants to purchase capital stock or
voting securities of SMC (the items in clauses (a), (b) and (c) being referred
to, together with the common stock, collectively as the "SMC Securities").
Except as disclosed in Section 4.6 of the Disclosure Schedule, there are no
outstanding obligations of SMC to repurchase, redeem or otherwise acquire any
SMC Securities.
4.7 Brokers. All negotiations relative to this Amended and Restated Merger
Agreement and the transactions contemplated hereby have been carried out by SMC
directly with Savers, without the intervention of any Person on behalf of SMC in
such manner as to give rise to any valid claim by any Person against Savers, SMC
or the Surviving Corporation for a finder's fee, brokerage commission or similar
payment, except that a fee may be owing to Daiwa Securities America, Inc.
pursuant to its agreement with Savers as disclosed in Section 3.29.
4.8 Disclosure. Neither this Amended and Restated Merger Agreement nor any
certificate furnished by SMC to Savers in connection with this Amended and
Restated Merger Agreement or the transactions contemplated hereby contains any
untrue statement by SMC of material fact or omits to state a material fact by
SMC necessary to make the statements herein or therein not misleading in light
of the circumstances in which they were made.
ARTICLE V
REPRESENTATIONS AND WARRANTIES REGARDING SAC
SMC and SAC jointly and severally represent and warrant to Savers as
follows:
5.1 Organization and Standing. SAC is a corporation duly organized, validly
existing, and in good standing under the Laws of the State of North Carolina and
has full corporate power and authority to enter into this Amended and Restated
Merger Agreement and to perform its obligations under this Amended and Restated
Merger Agreement. SAC was organized solely for the purpose of acquiring Savers
and engaging in the transactions contemplated by this Amended and Restated
Merger Agreement and has not engaged in any business since it was incorporated
which is not in connection with the acquisition of Savers and this Amended and
Restated Merger Agreement.
5.2 Capital Structure. The authorized capital stock of SAC consists of
1,000 shares of common stock, no par value per share, all of which are validly
issued and outstanding, fully paid and nonassessable and are owned by SMC free
and clear of all Liens, claims and encumbrances.
5.3 Authority. The Board of Directors of SAC has duly and validly approved
this Amended and Restated Merger Agreement and the transactions contemplated
hereby. The execution and delivery of this Amended and Restated Merger Agreement
by SAC and the performance by SAC of its obligations under this Amended and
Restated Merger Agreement have been duly and validly authorized by all necessary
corporate action on the part of SAC except stockholder approval. This Amended
and Restated Merger Agreement constitutes a legal, valid and binding obligation
of SAC and is enforceable against SAC in accordance with its terms, except to
the extent that enforcement may be limited by or subject to any bankruptcy,
insolvency, reorganization, moratorium, or similar Laws now or hereafter in
effect relating to or limiting creditors' rights generally, and the remedy of
specific performance and injunctive and other forms of equitable relief are
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subject to certain equitable defenses and to the discretion of the court or
other similar Person before which any proceeding therefor may be brought.
5.4 No Conflicts or Violations. The execution and delivery of this Amended
and Restated Merger Agreement by SAC do not, and the performance by SAC of its
obligations under this Amended and Restated Merger Agreement will not:
(a) subject to obtaining the approvals contemplated by Articles IX and
X of this Amended and Restated Merger Agreement, violate any term or
provision of any Law or any writ, judgment, decree, injunction, or similar
order applicable to SAC;
(b) violate any term or provision of any Law or any writ, judgment,
decree, injunction, or similar order applicable to SAC;
(c) except as disclosed in writing to Savers, result in the creation
or imposition of any Lien upon SAC or any of its Assets and Properties that
individually or in the aggregate with any other Liens has or may reasonably
be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement or on the
ability of SAC to perform its obligations under this Amended and Restated
Merger Agreement;
(d) except as disclosed in writing to Savers, conflict with or result
in a violation or breach of, or constitute (with or without notice or lapse
of time or both) a default under, or give to any person any right of
termination, cancellation, acceleration or modification in or with respect
to, any Contract to which SAC is a party or by which any of its Assets and
Properties may be bound and as to which any such conflicts, violations,
breaches, defaults or rights, individually or in the aggregate, have or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement or on the
ability of SAC to perform its obligations under this Amended and Restated
Merger Agreement; or
(e) require SAC to obtain any consent, approval, or action of, or make
any filing with or give any notice to, any Person except as contemplated in
Articles IX and X of this Amended and Restated Merger Agreement, as
disclosed in writing to Savers, or those which the failure to obtain, make,
or give individually or in the aggregate with other such failures has or
may reasonably be expected to have no material adverse effect on the
validity or enforceability of this Amended and Restated Merger Agreement or
on the ability of SAC to perform its obligations under this Amended and
Restated Merger Agreement.
ARTICLE VI
COVENANTS OF SAVERS
Savers covenants and agrees with SMC and SAC that, at all times before the
Effective Time, Savers will comply with all of the covenants and provisions of
this Article VI, except to the extent SMC may otherwise consent in writing or to
the extent otherwise required or permitted by this Amended and Restated Merger
Agreement.
6.1 Conduct of Business. Savers will conduct its business only in the
ordinary course and consistent with past practices. Without limiting the
generality of the foregoing:
(a) Savers will use all commercially reasonable efforts to (i)
preserve intact Savers' present business organization, reputation, and
policyholder relations; (ii) keep available the services of Savers' present
officers, directors, employees, agents, consultants, and other similar
representatives; (iii) maintain all licenses, qualifications, and
authorizations of Savers to do business in each jurisdiction in which it is
so licensed, qualified, or authorized; (iv) maintain in full force and
effect all Contracts, documents, and arrangements referred to in Section
3.22 hereof, (v) maintain all Assets and Properties of Savers in good
working order and condition, ordinary wear and tear excepted and (vi)
continue all current marketing and selling activities relating to the
business, operations or affairs of Savers.
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(b) Savers will cause the Books and Records of Savers to be maintained
in the usual manner and consistent with past practices and will not permit
a material change in any underwriting, investment, actuarial, financial
reporting, or accounting practices or policies of Savers or in any
assumption underlying such practices or policies, or in any method of
calculating any bad debt, contingency, or other reserve for financial
reporting purposes or for other accounting purposes (including, without
limitation, any practice, policy, assumption, or method relating to or
affecting the determination of Savers' investment income, reserves or other
similar amounts, or operating ratios with respect to expenses, losses, or
lapses).
(c) Savers will: (i) properly prepare and duly and timely file all
reports and all Tax Returns required to be filed with any governmental or
regulatory authorities with respect to the business, operations, or affairs
of Savers; and (ii) duly and fully pay all Taxes indicated by such Tax
Returns or otherwise levied or assessed upon Savers or any of its Assets
and Properties and withhold or collect and pay to the proper taxing
authorities or hold in separate bank accounts for such payment all Taxes
that Savers is required to so withhold or collect and pay, unless such
Taxes are being contested in good faith and, if appropriate, reasonable
reserves therefor have been established and reflected in the Books and
Records of Savers in accordance with GAAP and SAP.
(d) Savers will: (i) cause all reserves and other similar amounts with
respect to insurance and annuity Contracts established or reflected in
Savers' Books and Records to be (A) established and reflected on a basis
consistent with those reserves and other similar amounts and reserving
methods followed by Savers at December 31, 1996 and (B) good, sufficient
and adequate (under generally accepted actuarial principles consistently
applied) to cover the total amount of all reasonably anticipated matured
and unmatured benefits, dividends, losses, claims, expenses, and other
Liabilities of Savers under all insurance and annuity Contracts pursuant to
which Savers has or will have any Liability (including, without limitation,
any Liability arising under or as a result of any reinsurance, coinsurance,
or other similar Contract); and (ii) continue to own assets that qualify as
legal reserve assets under all applicable insurance Laws in an amount at
least equal to the required reserves of Savers and other similar amounts.
(e) Savers will use all commercially reasonable efforts to maintain in
full force and effect substantially the same levels of coverage as the
insurance afforded under the Contracts listed in Section 3.26 of the
Disclosure Schedule. Any and all benefits under such Contracts paid or
payable (whether before or after the effective date of this Amended and
Restated Merger Agreement) with respect to the business, operations,
affairs, or Assets and Properties of Savers will be paid to Savers.
(f) Savers will continue to comply, in all material respects, with all
Laws applicable to its business, operations, or affairs.
(g) Savers will determine its Adjusted Capital and Surplus consistent
with past practices for determining capital and surplus on its SAP
Statements for any interim period and will not take any actions the effect
of which may be to cause the Adjusted Capital and Surplus of the Surviving
Corporation to be less than $7,390,000 immediately after the Effective Time
less all amounts paid by Savers pursuant to Section 2.5(d).
(h) Savers will not enter into any reinsurance Contracts (whether as
the ceding company or the assuming company).
6.2 Financial Statements and Reports. (a) As promptly as practicable after
December 31, 1997, Savers will deliver to SMC a true and complete copy of the
SAP Statement filed by Savers for the year ended December 31, 1997, and for each
quarter thereafter until the Effective Time, prepared in accordance with SAP and
which shall present fairly the financial condition, the Assets and Properties,
and the Liabilities of Savers as of the date thereof and the results of
operations, changes in the capital and surplus account and cash flows of Savers
for and during each of the periods covered thereby.
(b) Savers will promptly deliver to SMC audited financial statements
for the year ended December 31, 1997, and for each quarter thereafter until
the Effective Time unaudited financial statements, prepared in accordance
with GAAP which shall present fairly the financial condition, the Assets
and Properties, and the Liabilities of Savers as of the date thereof and
the results of operations, changes in
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shareholders' equity and cash flows of Savers for and during each of the
periods covered thereby. Such audited statements shall be delivered by
February 28, 1998, and such unaudited statements shall be delivered within
thirty-five (35) days after the date of the end of any such quarter.
(c) As promptly as practicable, Savers will deliver to SMC a true and
complete copy of unaudited financial statements for the month ended
November 30, 1997, and for each month thereafter until the Effective Time,
prepared in accordance with SAP which shall present fairly the financial
condition, the Assets and Properties and the Liabilities of Savers as of
the date thereof and the results of operations, changes in the capital and
surplus account and cash flows of Savers for and during each of the periods
covered thereby.
6.3 Investments. Savers will invest its future cash flow, any cash from
matured and maturing investments, any cash proceeds from the sale of its Assets
and Properties and any cash funds currently held by Savers, exclusively in cash
equivalent assets, short-term investments or fixed maturity securities (all of
which permissible investments shall consist only of United States government
issued or guaranteed securities, commercial paper rated A-I or PI, or bonds
currently rated NAIC 1 or 2 by the Standard Valuation office, except as
otherwise required by Law or except as required to provide cash (in the ordinary
course of business and consistent with past practice) to meet Savers' reasonably
anticipated current obligations or except as consented to or required by SMC.
Savers will take such steps as are necessary to ensure that such investment
Assets that are classified as Non-Admitted Assets under SAP or by the applicable
insurance regulatory authorities for Savers, do not at any time exceed the
respective amounts of Non-Admitted assets for Savers as of December 31, 1996.
6.4 Employee Matters. Except as may be required by Law or as disclosed in
Section 6.4 of the Disclosure Schedule, or except for such representations,
promises, changes, alterations, or amendments that do not and will not result in
any Liability to Savers or SMC, Savers will refrain from directly or indirectly:
(a) making any representation or promise, oral or written, to any
officer, director, employee, agent, consultant or other similar
representative of Savers concerning any Benefit Plan;
(b) making any change to, or amending in any way, the Contracts,
salaries, wages, or other compensation of any officer, director, employee,
agent, consultant or other similar representative of Savers whose annual
compensation exceeds $25,000, other than routine changes or amendments that
(a) are made in the ordinary course of business and consistent with past
practices, (b) do not and will not result in increases of more than five
percent (5%) in the salary, wages or other compensation of any such Person
and (c) do not and will not exceed, in the aggregate, five percent (5%) of
the total salaries, wages and other compensation of all employees of
Savers;
(c) adopting, entering into, amending, altering or terminating,
partially or completely, any Benefit Plan;
(d) adopting, entering into, amending, altering or terminating,
partially or completely, any employment, agency, consultation, or
representation Contract that is, or had it been in existence on the
effective date of this Amended and Restated Merger Agreement would have
been, required to be disclosed in Section 3.22(a) of the Disclosure
Schedule;
(e) approving any general or company-wide pay increases for officers,
directors, employees, agents, consultants, or other similar representatives
of Savers; or
(f) entering into any Contract with any officer, director, employee,
agent, consultant, or other similar representative of Savers that is not
terminable by Savers, without penalty or other Liability, upon not more
than sixty (60) calendar days' notice.
6.5 No Charter Amendments. Savers will not amend its Articles of
Incorporation or Bylaws and will refrain from taking any action with respect to
any such amendment.
6.6 No Issuance of Securities. Except upon the exercise of stock options
outstanding at the date hereof, Savers will refrain from authorizing or issuing
any shares of capital stock or other equity securities of Savers,
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or from entering into any Contract or granting any option, warrant, or right
calling for the authorization or issuance of any such shares or other equity
securities, or creating or issuing any securities directly or indirectly
convertible into or exchangeable for any such shares or other equity securities
or issuing any options, warrants or rights to purchase any such convertible
securities.
6.7 No Dividends. Except for dividends and distributions which have been
approved in writing by SMC and for which any required regulatory approvals have
been received, Savers will refrain from declaring, setting aside or paying any
dividend or other distribution in respect of its capital stock and from directly
or indirectly redeeming, purchasing, or otherwise acquiring any of its capital
stock or any interest in or right to acquire any such stock.
6.8 No Disposal of Property. Except as set forth in Section 6.8 of the
Disclosure Schedule or as expressly provided in this Amended and Restated Merger
Agreement, Savers will not (a) dispose of any of its Assets and Properties or
permit any of its Assets and Properties to be subjected to any Liens, except to
the extent any such disposition or any such Lien is made or incurred in the
ordinary course of the business and consistent with past practices, (b) sell any
part of its insurance products, operations or business to any third party (other
than sales of insurance products in the ordinary course of business consistent
with past practices pursuant to Section 6.1(a)), (c) enter into any Contracts
obligating Savers to administer the insurance operations of any Person other
than any Affiliate, (d) enter into any Contracts permitting any Person other
than any Affiliate of Savers to administer Savers' insurance operations or (e)
enter into or assume any Contract, if doing so could involve a loss, cost,
expense or commitment in excess of $10,000 unless in the ordinary course of
business and consistent with past practices.
6.9 No Breach or Default. Savers will not violate or breach, and will not
take or fail to take any action that (with or without notice or lapse of time or
both) would constitute a violation, breach or default in any way under any term
or provision of any Contract to which it is a party or by which any of its
Assets and Properties is or may be bound.
6.10 No Indebtedness. Savers will not create, incur, assume, guarantee or
otherwise become liable for, and will not cancel, pay, agree to cancel or pay,
or otherwise provide for a complete or partial discharge in advance of a
scheduled payment date with respect to, any Liability, and will not waive any
right to receive any direct or indirect payment or other benefit under any
Liability owing to it.
6.11 No Acquisitions. Savers will not (a) merge, consolidate or otherwise
combine or agree to merge, consolidate or otherwise combine with any other
Person, (b) acquire or agree to acquire blocks of business of, or all or
substantially all the Assets and Properties or capital stock or other equity
securities of any other Person or (c) otherwise acquire or agree to acquire
control or ownership of any other Person.
6.12 Intercompany Liabilities. At least five Business Days before the
Effective Time, Savers will deliver to SMC a true and complete list and
description of all Liabilities between Savers and any Affiliate of Savers to be
outstanding at the Effective Time. Savers will not enter into any Contract or,
except as required by any Contract disclosed in Section 3.22(g) of the
Disclosure Schedule, engage in any transaction with any of its Affiliates.
6.13 Tax Matters. Savers will refrain (a) from making, filing or entering
into any election, consent or agreement described in Section 3.15(e) or Section
3.15(f) with respect to Savers or any of its Assets and Properties and (b) from
amending or cancelling any reinsurance or coinsurance Contract.
6.14 Notice and Cure. Savers will notify SMC promptly in writing of, and
contemporaneously will provide SMC with true and complete copies of any and all
information or documents relating to, and will use all commercially reasonable
efforts to cure before the Effective Time, any event, transaction or
circumstance occurring after the date of this Amended and Restated Merger
Agreement that causes or will cause any covenant or agreement of Savers under
this Amended and Restated Merger Agreement to be breached, or that renders or
will render untrue any representation or warranty of Savers contained in this
Amended and Restated Merger Agreement as if the same were made on or as of the
date of such event, transaction or circumstance. Savers also will use all
commercially reasonable efforts to cure, before the Effective Time, any
violation or breach of any representation, warranty, covenant or agreement made
by it in this Amended and
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Restated Merger Agreement, whether occurring or arising before or after the date
of this Amended and Restated Merger Agreement.
ARTICLE VII
COVENANTS OF SMC
SMC covenants and agrees with Savers that, at all times before the
Effective Time, SMC will comply with all covenants and provisions of this
Article VII, except to the extent Savers may otherwise consent in writing or to
the extent otherwise required or permitted by this Amended and Restated Merger
Agreement.
7.1 Notice and Cure. SMC will notify Savers promptly in writing of, and
contemporaneously will provide Savers with true and complete copies of any and
all information or documents relating to, and will use all commercially
reasonable efforts to cure before the Effective Time, any event, transaction or
circumstance occurring after the date of this Amended and Restated Merger
Agreement that causes or will cause any covenant or agreement of SMC under this
Amended and Restated Merger Agreement to be breached, or that renders or will
render untrue any representation or warranty of SMC contained in this Amended
and Restated Merger Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. SMC also will use all commercially
reasonable efforts to cure, before the Effective Time, any violation or breach
of any representation, warranty, covenant or agreement made by it in this
Amended and Restated Merger Agreement, whether occurring or arising before or
after the date of this Amended and Restated Merger Agreement.
7.2 Form A Filing. Within thirty (30) days of the execution of this Amended
and Restated Merger Agreement, SMC will file an Amended Form A with the North
Carolina Department of Insurance relating to the proposed Merger.
7.3 Jerry E. Francis to be Appointed a Director. Immediately following the
Effective Time, Jerry E. Francis shall be appointed to the Board of Directors of
SMC.
7.4 Notice of Material Changes. SMC shall promptly advise Savers orally and
in writing of any change or event having, or which would reasonably be expected
to have, a material adverse effect on the Business or Condition of SMC.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Stockholder Approval.
(a) Savers shall call a meeting of its stockholders (the "Savers
Stockholder Meeting") for the purpose of voting upon the Merger and shall
use its best efforts to obtain stockholder approval of the Merger. The
Savers Stockholder Meeting shall beheld as soon as practicable following
the date upon which the Registration Statement becomes effective, and
Savers will, through its Board of Directors, recommend to its stockholders
the approval of the Merger and not rescind its declaration that the Merger
is advisable. At the Savers Stockholder Meeting, all shares of Savers
Common Stock held by each officer and each director of Savers, shall be
voted in favor of this Amended and Restated Merger Agreement. The vote
required for the adoption of this Amended and Restated Merger Agreement
shall be the affirmative vote of the holders of a majority of the
outstanding shares of Savers Common Stock as required by the NCBCA. No
officer and director of Savers shall, prior to the Effective Time, sell,
transfer, assign or otherwise dispose of any shares of Savers Common Stock.
(b) SMC shall promptly call a meeting of its stockholders (the "SMC
Stockholder Meeting" and, together with Savers Stockholder Meeting, the
"Stockholder Meetings") for the purpose of voting upon the issuance of SMC
Common Stock in connection with the Merger and shall use its best efforts
to obtain stockholder approval of such issuance. The SMC Stockholder
Meeting shall be on the date
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following the Savers Stockholder Meeting or, if such date is not
practicable, on the closest date practicable.
8.2 Registration Statement and Proxy Statement. SMC shall prepare and file
with the SEC as soon as practicable the Registration Statement and shall use all
reasonable efforts to have the Registration Statement declared effective by the
SEC as soon as practicable. Savers and SMC shall prepare and file with the SEC
as soon as practicable the Proxy Statement. SMC shall also take any action
required to be taken under state securities or "Blue Sky" laws in connection
with the issuance of the SMC Common Stock pursuant to the Merger. Savers shall
furnish SMC all information concerning Savers and the holders of Savers Common
Stock required for use in the Registration Statement, and Savers shall take such
other actions as SMC may reasonably request in connection with the preparation
of such Registration Statement and the actions to be taken by SMC pursuant to
this Section 8.2. Savers and SMC shall each furnish to the other all information
concerning itself and its subsidiaries required for use in the Proxy Statement,
and shall take such other action as the other party may reasonably request in
connection with the preparation of the Proxy Statement.
8.3 Stock Exchange Listing. SMC shall use its best efforts to list on the
NASDAQ National Market, upon official notice of issuance, the shares of SMC
Common Stock to be issued in connection with the Merger.
8.4 Reasonable Efforts. Upon the terms and subject to the conditions set
forth in this Amended and Restated Merger Agreement, each of the parties agrees
to use all reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Merger and the other
transactions contemplated by this Amended and Restated Merger Agreement,
including (a) obtaining of all necessary actions or non-actions, waivers,
consents and approvals from Governmental Entities and making of all necessary
registrations and filings and taking of all reasonable steps as may be necessary
to obtain an approval or waiver from, or to avoid an action or proceeding by any
Governmental Entity, including but not limited to any filing under the
Improvements Act and any required approvals of the insurance regulatory
authorities in the State of North Carolina and the State of Indiana, (b)
obtaining of all necessary consents, approvals or waivers from third parties,
(c) defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Amended and Restated Merger Agreement or the
consummation of the transactions contemplated hereby, including seeking to have
any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed, (d) providing such other information
and communications to such Governmental Entities as the other party or such
Governmental Entities may reasonably request, (e) cooperate with the other party
in obtaining, as promptly as practicable, all actions of Governmental Entities
referred to above and (d) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by this
Amended and Restated Merger Agreement. Notwithstanding anything to the contrary
in this Section 8.4, Savers shall not commit to any divestiture transaction
without SMC's prior consent.
8.5 State Takeover Laws. If any "fair price" or "control share acquisition"
statute or other similar statute or regulation shall become applicable to the
transactions contemplated hereby, the members of the Board of Directors of
Savers shall use their best efforts to grant such approvals and take such
actions as are necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to minimize the effects of such statute or regulations on the
transactions contemplated hereby.
8.6 Improvements Act Filings. SMC and Savers shall promptly, if required,
make their respective amended filings, and shall thereafter promptly make any
required submissions, under the Improvements Act with respect to the Merger.
Each of SMC, SAC and Savers will use its best efforts to cause the satisfaction
of the waiting period under the Improvements Act. SMC and Savers will furnish to
each other such necessary information and reasonable assistance as may be
requested in connection with their respective preparation of necessary filings
or submissions to any governmental agency, including, without limitation, any
filings necessary under the provisions of the Improvements Act. Savers and SMC
will supply each other with copies of all correspondence, filings or
communications (or memoranda setting forth the substance thereof) between
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either of them or their respective representatives and the Federal Trade
Commission, the Antitrust Division of the United States Department of Justice or
any other governmental agency or authority or members of their respective staffs
with respect to this Amended and Restated Merger Agreement or the transactions
contemplated hereby.
8.7 Financial Statements. Savers shall use reasonable efforts to assist SMC
in obtaining the services of D.E. Gatewood and Company and any required consent
to the use of their report regarding audited financial statements of Savers as
of the Effective Time in such form that they can be used in connection with
SMC's required filings with the Securities and Exchange Commission. The fees and
expenses of D.E. Gatewood and Company and all other costs and expenses
associated with the preparation of such audited financial statements shall be
paid by Savers.
8.8 Certain Notices. Each party shall give prompt written notice to the
other of (i) the occurrence, or failure to occur, of any event which occurrence
or failure would cause any representation or warranty of Savers contained in
this Amended and Restated Merger Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time or that
will result in the failure to satisfy any of the conditions specified in
Articles IX, X or XI and (ii) any failure of Savers or SMC, as the case may be,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder or under any other agreement or instrument
contemplated hereby.
ARTICLE IX
CONDITIONS OF BOTH PARTIES
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
9.1 Stockholder Approval. The Merger shall have been approved by the
requisite vote of the holders of Savers Common Stock, and the issuance of shares
of SMC Common Stock in connection with the Merger shall have been approved by
the requisite vote of the holders of SMC Common Stock.
9.2 NASDAQ Listing. The SMC Common Stock issuable in the Merger shall have
been authorized for listing on the NASDAQ National Market, upon official notice
of issuance.
9.3 Regulatory Approvals. All regulatory approvals necessary to
consummation of the Merger shall have been obtained or relevant waiting periods
shall have expired.
9.4 Registration Statement. The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and remain in effect. All necessary state securities or "Blue
Sky" authorizations shall have been received.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF SMC AND SAC
The obligations of SMC and SAC hereunder are subject to the fulfillment, at
or before the Effective Time, of each of the following conditions (all or any of
which may be waived in whole or in part by SMC):
10.1 Representations and Warranties. The representations and warranties
made by Savers in this Amended and Restated Merger Agreement and the statements
of Savers contained in the Disclosure Schedule shall be true as of the effective
date of this Amended and Restated Merger Agreement, the certifications given
pursuant to Section 10.3 shall be true as of the date given, and all of such
representations, warranties, certifications and statements shall be true at the
Effective Time as though such representations, warranties, certifications and
statements were made at the Effective Time.
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10.2 Performance. Savers shall have performed and complied with all
agreements, covenants, obligations, and conditions required by this Amended and
Restated Merger Agreement to be so performed or complied with by Savers at or
before the Effective Time.
10.3 Certificates of Officer of Savers. Savers shall have delivered to SMC
a certificate, dated the Effective Time in the form of Exhibit C hereto and
executed by the chief executive officer or chief financial officer of Savers,
certifying (with respect to Savers) as to the fulfillment of the conditions set
forth in Article IX and this Article X. In addition, Savers shall have delivered
to SMC a certificate, dated the Effective Time and executed by the secretary or
any assistant secretary of Savers, certifying that Savers has duly and validly
taken all corporate action necessary to authorize its execution and delivery of
this Amended and Restated Merger Agreement and its performance of its
obligations under this Amended and Restated Merger Agreement and that the
resolutions (true and complete copies of which shall be attached to the
certificate) of the Board of Directors and the stockholders of Savers with
respect to this Amended and Restated Merger Agreement and the transactions
contemplated hereby have been duly and validly adopted and are in full force and
effect.
10.4 No Injunction. There shall not be in effect at the Effective Time any
writ, judgment, injunction, decree or similar order of any court or similar
Person restraining, enjoining or otherwise preventing consummation of any of the
transactions contemplated by this Amended and Restated Merger Agreement.
10.5 No Proceeding or Litigation. There shall not be instituted, pending or
(to the best knowledge of SMC or Savers) threatened any action, suit,
investigation, or other proceeding in, before, or by any court, governmental or
regulatory authority or other Person to restrain, enjoin or otherwise prevent
consummation of any of the transactions contemplated by this Amended and
Restated Merger Agreement or to recover any Damages or obtain other relief as a
result of this Amended and Restated Merger Agreement or any of the transactions
contemplated hereby or as a result of any Contract entered into in connection
with or as a condition precedent to the consummation hereof, which action, suit,
investigation or other proceeding may, in the reasonable opinion of SMC, result
in a decision, ruling or finding that individually or in the aggregate has or
may reasonably be expected to have a material adverse effect on the validity or
enforceability of this Amended and Restated Merger Agreement, on the ability of
Savers or SMC to perform its respective obligations under this Amended and
Restated Merger Agreement or on the Business or Condition of SMC or Savers.
There shall not be in effect at the Effective Time any voluntary or involuntary
bankruptcy, receivership, conservatorship or similar proceeding with respect to
Savers.
10.6 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals, and waivers of every Person disclosed pursuant to
Sections 3.5 and 10.10 and necessary to permit SMC to perform its obligations
under this Amended and Restated Merger Agreement and to consummate the
transactions contemplated hereby (including, without limitation, any requisite
action of the insurance regulatory authorities in the State of North Carolina
and the State of Indiana, in each case without the abrogation or diminishment of
Savers's authority or license or the imposition of significant restrictions upon
the transactions contemplated hereby) shall have been obtained and shall be in
full force and effect, and Savers shall have obtained all consents, approvals,
authorizations and clearances referred to in Article IX, and SMC shall have
received evidence satisfactory to it of the receipt of such consents, approvals,
authorizations and clearances.
10.7 No Adverse Change. Since December 31, 1996, there shall not have been,
occurred, or arisen any change in, or any event (including, without limitation,
any damage, destruction or loss, whether or not covered by insurance), condition
or state of facts of any character that individually or in the aggregate has or
may reasonably be expected to have a material adverse effect on the Business or
Condition of Savers.
10.8 Opinion of Counsel. Savers shall have delivered to SMC the opinion,
dated the Effective Time, of Womble Carlyle Sandridge & Rice, PLLC, counsel to
Savers, to the effect set forth in Exhibit D hereto.
10.9 Approval by Fleet and Conseco. Fleet National Bank of Connecticut and
Conseco, Inc. shall have consented to the consummation of the transactions
contemplated under this Amended and Restated Merger Agreement and one or both of
them have agreed to loan SMC the sum of $4,000,000 upon terms and conditions
satisfactory to SMC.
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10.10 Consulting Agreement. The Consulting Agreement by and between Savers
and Jerry D. Stoltz, Sr. shall have been executed and delivered in substantially
the form of Exhibit G hereto.
10.11 Lockup Agreements. All holders of 5% or more of Saver's issued and
outstanding capital stock and each officer of Savers shall have executed and
delivered Lockup Agreements with SMC substantially in the form of Exhibit H
hereto.
10.12 Dissenters' Rights. Holders of not more than 5% of Savers Common
Stock outstanding immediately prior to the Effective Time shall be eligible to
exercise appraisal rights under Section 55-13-01, et seq., of the NCBCA.
10.13 SMC Stockholders Approval. The Stockholders of SMC shall have
approved the Amended and Restated Merger Agreement and the issuance of SMC
Common Stock.
10.14 Savers Adjusted Capital and Surplus. The Adjusted Capital and Surplus
of the Surviving Corporation, calculated as provided in Exhibit B hereto, shall
not be less than $7,390,000 immediately after the Effective Time.
10.15 Savers Stockholders Approval. The Stockholders of Savers shall have
approved the Amended and Restated Merger Agreement.
ARTICLE XI
CONDITIONS TO OBLIGATIONS OF SAVERS
The obligations of Savers hereunder are subject to the fulfillment, at or
before the Effective Time, of each of the following conditions (all or any of
which may be waived in whole or in part by Savers).
11.1 Representations and Warranties. The representations and warranties
made by SMC and SAC in this Amended and Restated Merger Agreement shall be true
as of the effective date of this Amended and Restated Merger Agreement and shall
be true at the Effective Time as though such representations and warranties were
made at the Effective Time.
11.2 Performance. SMC and SAC shall have performed and complied with all
agreements, covenants, obligations, and conditions required by this Amended and
Restated Merger Agreement to be so performed or complied with by SMC and SAC at
or before the Effective Time.
11.3 Officers' Certificates. SMC shall have delivered to Savers a
certificate, dated the Effective Time in the form of Exhibit E hereto and
executed by the chief executive officer or the chief financial officer of SMC,
certifying with respect to SMC as to the fulfillment of the conditions set forth
in Article IX and this Article XI. In addition, SMC shall have delivered to
Savers a certificate, dated the Effective Time and executed by the secretary or
any assistant secretary of SMC certifying that SMC has duly and validly taken
all corporate action necessary to authorize its execution and delivery of this
Amended and Restated Merger Agreement and its performance of its obligations
under this Amended and Restated Merger Agreement and that the resolutions (true
and complete copies of which shall be attached to the certificate) of the Board
of Directors and the stockholders of SMC with respect to this Amended and
Restated Merger Agreement and the transactions contemplated hereby have been
duly and validly adopted and are in full force and effect.
11.4 No Injunction. There shall not be in effect at the Effective Time any
writ, judgment, injunction, decree or similar order of any court or similar
Person restraining, enjoining or otherwise preventing consummation of any of the
transactions contemplated by this Amended and Restated Merger Agreement.
11.5 No Proceeding or Litigation. There shall not be instituted, pending or
(to the best knowledge of SMC or of Savers) threatened any action, suit,
investigation or other proceeding in, before, or by any court, governmental or
regulatory authority or other Person to restrain, enjoin, or otherwise prevent
consummation of any of the transactions contemplated by this Amended and
Restated Merger Agreement or to recover any Damages or obtain other relief as a
result of this Amended and Restated Merger Agreement or any of the transactions
contemplated hereby or as a result of any Contract entered into in connection
with or as a
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condition precedent to the consummation hereof, which action, suit,
investigation or other proceeding may, in the reasonable opinion of Savers,
result in a decision, ruling or finding that individually or in the aggregate
has or may reasonably be expected to have a material adverse effect on the
validity or enforceability of this Amended and Restated Merger Agreement or on
the ability of SMC or Savers to perform its obligations under this Amended and
Restated Merger Agreement.
11.6 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals, and waivers of every Person disclosed pursuant to
Section 3.5 and necessary to permit Savers to perform its obligations under this
Amended and Restated Merger Agreement and to consummate the transactions
contemplated hereby shall have been obtained and shall be in full force and
effect, and SMC shall have obtained all consents, approvals, authorizations and
clearances referred to in Article IX and Section 10 and Savers shall have
received evidence satisfactory to it of the receipt of such consents, approvals,
authorizations and clearances.
11.7 Opinion of Counsel. SMC shall have delivered to Savers the opinion,
dated the Effective Time, of Stephen M. Coons, counsel to SMC, to the effect set
forth in Exhibit F hereto.
11.8 Tax-Free Reorganization. The Merger shall qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code, in the opinion
of Womble Carlyle Sandridge & Rice.
ARTICLE XII
SURVIVAL OF PROVISIONS; REMEDIES
12.1 Survival. The representations, warranties, covenants, and agreements
respectively made by Savers, SMC and SAC in this Amended and Restated Merger
Agreement, in the Disclosure Schedule or in any certificate respectively
delivered by Savers, SMC or SAC pursuant hereto will survive the Merger for a
period of 25 months following the Effective Time.
12.2 Available Remedies. Each party expressly agrees that, consistent with
its intention and agreement to be bound by the terms of this Amended and
Restated Merger Agreement and to consummate the transactions contemplated
hereby, subject only to the performance or satisfaction of precedent conditions
or of precedent requirements imposed upon another party hereto, the remedy of
specific performance shall be available to a nonbreaching and non-defaulting
party to enforce performance of this Amended and Restated Merger Agreement by a
breaching or defaulting party, including, without limitation, to require the
consummation of the Merger.
ARTICLE XIII
TERMINATION
13.1 Termination. This Amended and Restated Merger Agreement may be
terminated, and the transaction contemplated hereby may be abandoned, at any
time prior to the Effective Time, whether before or after any approval by the
stockholders of Savers or SMC:
(a) by mutual written consent of SMC and Savers;
(b) by SMC if (i) Savers shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Amended
and Restated Merger Agreement required to be complied with by Savers prior
to the date of such termination, which failure to comply has not been cured
within five Business Days following receipt by Savers of notice of such
failure to comply, (ii) the stockholders of Savers shall have failed to
approve the Merger at the Savers Stockholder Meeting, provided that, at the
time of such termination, SMC has not breached any of its covenants set
forth in Articles VII or VIII; or (iii) the stockholders of SMC shall have
failed to approve the issuance of the SMC Common Stock at the SMC
Stockholder Meeting provided that at the time of such termination SMC has
not breached any of its covenants set forth in Articles VII or VII.
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(c) by Savers if (i) SMC or SAC shall have failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement required to be complied with by SMC or SAC prior to the date of
such termination, which failure to comply has not been cured within five
Business Days following receipt by SMC of notice of such failure to comply,
(ii) the stockholders of Savers shall have failed to approve the Merger at
the Savers Stockholder Meeting provided that at the time of such
termination, Savers has not breached any of its covenants set forth in
Articles VI or VIII, or (iii) the stockholders of SMC shall have failed to
approve the issuance of the SMC Common Stock at the SMC Stockholders
Meeting, provided that, at the time of such termination, Savers has not
breached any of its covenants set forth in Articles VI or VIII.
(d) by either SMC or Savers if (i) the Merger has not been effected on
or prior to the close of business on April 30, 1998; provided, however,
that the right to terminate this Amended and Restated Merger Agreement
pursuant to this clause shall not be available to any party whose failure
to fulfill any obligation of this Amended and Restated Merger Agreement has
been the cause of, or resulted in, the failure of the Merger to have
occurred on or prior to the aforesaid date, or (ii) any court of competent
jurisdiction or any governmental, administrative or regulatory authority,
agency or body shall have issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise prohibiting
the transactions contemplated by this Amended and Restated Merger Agreement
and such order, decree, ruling or other action shall have become final and
nonappealable.
(e) by either SMC or Savers if there has been (i) a material breach by
the other of any representation or warranty that is not qualified as to
materiality or (ii) a breach by the other of any representation or warranty
that is qualified as to materiality, in each case which breach has not been
cured within five Business Days following receipt by the breaching party of
notice of the breach.
(f) by SMC, (i) if the Board of Directors of Savers shall not have
recommended, or shall have resolved not to recommend, or shall have
modified or withdrawn its recommendation of the Merger or declaration that
the Merger is advisable or (ii) if the Board of Directors of Savers shall
have recommended, or shall have resolved to recommend, to the stockholders
of Savers any takeover proposal or offer of any other Person.
13.2 Effect of Termination. If this Amended and Restated Merger Agreement
is validly terminated pursuant to Section 13.1, this Amended and Restated Merger
Agreement will forthwith become null and void, and there will be no Liability on
the part of Savers or SMC (or any of their respective officers, directors,
employees, agents, consultants or other representatives), except that the
provisions relating to confidentiality in Section 14.5 will continue to apply
following any such termination; provided, however, that notwithstanding anything
in this Section to the contrary, no party electing to terminate this Amended and
Restated Merger Agreement pursuant to Section 13.1 will be relieved of any
Liability for Damages that the electing party may have to the other party by
reason of the electing party's breach of this Amended and Restated Merger
Agreement (or any representation, warranty, covenant or agreement included
herein).
13.3 Certain Payments. Notwithstanding any provision in this Amended and
Restated Merger Agreement to the contrary, (x) if this Amended and Restated
Merger Agreement is terminated pursuant to Sections 13.1(b)(i), 13.1(c)(i) or
13.1(e) on the grounds that the other party has failed to proceed in good faith,
the party terminating this Amended and Restated Merger Agreement shall be
entitled to reimbursement from the other party hereto upon demand for all
out-of-pocket fees and expenses incurred or paid by or on behalf of the
terminating party or any of its Affiliates in connection with this Amended and
Restated Merger Agreement or the consummation of the Merger, including, but not
limited to, all fees and expenses of counsel, investment banking firms,
accountants, printers, experts and consultants to the terminating party or any
of its Affiliates; provided, however, that the other party hereto shall not be
obligated to make payments pursuant to this clause (x) in excess of $800,000 in
the aggregate; and (y)(i) if the Board of Directors of Savers fails to make a
favorable recommendation or withdraws, amends or modifies its favorable
recommendation to its stockholders of this Amended and Restated Merger Agreement
and the Merger and (ii) on or prior to twelve months after the event described
in clause (y)(i) above, a Third Party Acquisition Event (as defined below)
occurs, Savers shall promptly, but in no event later than the second Business
Day following the later to occur
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of the events referred to in clauses (i) and (ii), pay to SMC (without prejudice
to any other rights of SMC against Savers) a fee of $500,000 in cash (inclusive
of expenses). In the event that Savers is obligated to make any payment under
clause (y) of this paragraph, it shall be relieved of its obligations, if any,
under clause (x). For purposes of clause (x) above, a refusal by any party to
perform any of its obligations hereunder based upon a failure of one or more
conditions to such obligations shall constitute a breach of Section 8.4 if such
condition may be waived by such party and if such a wavier is unreasonably
withheld by such party. A "Third Party Acquisition Event" means any of the
following events: (A) any Person or group of Persons, other than SMC or its
Affiliates, acquires or becomes the beneficial owner of 25% or more of the
outstanding shares of Savers Common Stock; (B) any new group is formed which
beneficially owns 25% or more of the outstanding shares of Savers Common Stock
(other than a group which includes or may reasonably be deemed to include SMC or
any of its Affiliates); (C) any Person or group of Persons (other than SMC or
its Affiliates) shall have commenced a tender or exchange offer for 25% or more
of the then outstanding shares of Savers Common Stock or publicly proposed any
bona fide merger, consolidation or acquisition of all or substantially all the
assets of Savers or other similar business combination involving Savers; (D)
Savers enters into an agreement, including, without limitation, an agreement in
principle, providing for a merger or other business combination involving Savers
or the acquisition of a substantial interest in, or a substantial portion of the
assets, business or operations of Savers (other than the transactions
contemplated by this Amended and Restated Merger Agreement); (E) any Person or
group of Persons (other than SMC or its Affiliates) is granted any option or
right, conditional or otherwise, to acquire or otherwise become the beneficial
owner of shares of Savers Common Stock, which, together with all shares of
Savers Common Stock beneficially owned by such Person or group of Persons,
results or would result in such Person or group of Persons being the beneficial
owner of 25% or more of the outstanding shares of Savers Common Stock. For
purposes of this Section 13.3, the terms "group" and "beneficial owner" shall be
defined by reference to Section 13(d) of the Exchange Act.
ARTICLE XIV
MISCELLANEOUS
14.1 Notices. All notices and other communications under this Amended and
Restated Merger Agreement must be in writing and will be deemed to have been
duly given if delivered, telecopied or mailed, by certified mail, return receipt
requested, first class postage prepaid, to the parties at the following
addresses:
If to Savers, to:
Savers Life Insurance Company
8064 North Point Boulevard
Winston Salem, North Carolina 27106
Attention: Jerry D. Stoltz, Sr., President
Telecopy: (910) 759-3999
With a copy to:
Womble Carlyle Sandridge & Rice, PLLC
200 West Second Street
Winston Salem, North Carolina 27101
Attention: Zeb E. Barnhardt, Jr., Esq.
Telecopy: (910) 733-8372
If to SMC or SAC, to:
Standard Management Corporation
9100 Keystone Crossing, #600
Indianapolis, Indiana 46240
Attention: Ronald D. Hunter, Chairman & CEO
Telecopy: (317)574-6227
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With a copy to:
Stephen M. Coons, Esq.
9100 Keystone Crossing, #600
Indianapolis, Indiana 46240
Telecopy: (317) 574-6227
All notices and other communications required or permitted under this Amended
and Restated Merger Agreement that are addressed as provided in this Article XIV
will, if delivered personally, be deemed given upon delivery, will, if delivered
by telecopy, be deemed delivered when confirmed and will, if delivered by mail
in the manner described above, be deemed given on the third Business Day after
the day it is deposited in a regular depository of the United States mail. Any
party from time to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new address, but no such
notice will be deemed to have been given until it is actually received by the
party sought to be charged with the contents thereof.
14.2 Entire Agreement. Except for documents executed by Savers, SMC and SAC
pursuant hereto, this Amended and Restated Merger Agreement supersedes all prior
discussions and agreements between the parties with respect to the subject
matter of this Amended and Restated Merger Agreement, and this Amended and
Restated Merger Agreement (including the exhibits thereto, the Disclosure
Schedule and other Contracts and documents delivered in connection herewith)
contains the sole and entire agreement between the parties hereto with respect
to the subject matter hereof.
14.3 Expenses. Except as otherwise expressly provided in this Amended and
Restated Merger Agreement, each of Savers, SMC and SAC will pay its own costs
and expenses in connection with this Amended and Restated Merger Agreement and
the transactions contemplated hereby.
14.4 Public Announcements. At all times at or before the Effective Time,
Savers and SMC will each consult with the other before issuing or making any
reports, statements, or releases to the public with respect to this Amended and
Restated Merger Agreement or the transactions contemplated hereby and will use
good faith efforts to agree on the text of a joint public report, statement or
release or will use good faith efforts to obtain the other party's approval of
the text of any public report, statement, or release to be made solely on behalf
of a party. If Savers and SMC are unable to agree on or approve any such public
report, statement or release and such report, statement or release is, in the
opinion of legal counsel to a party, required by Law or may be appropriate in
order to discharge such party's disclosure obligations, then such party may make
or issue the legally required report, statement or release. Any such report,
statement, or release approved or permitted to be made pursuant to this Section
14.4 may be disclosed or otherwise provided by Savers or SMC to any Person,
including without limitation to any employee or customer of either party hereto
and to any governmental or regulatory authority.
14.5 Confidentiality. Each of Savers and SMC will hold, and will cause its
respective officers, directors, employees, agents, consultants and other
representatives to hold, in strict confidence, unless compelled to disclose by
judicial or administrative process (including, without limitation, in connection
with obtaining the necessary approval of insurance regulatory authorities) or by
other requirements of Law, all confidential documents and confidential
information concerning the other party furnished to it by the other party or
such other party's officers, directors, employees, agents, consultants or
representatives in connection with this Amended and Restated Merger Agreement or
the transactions contemplated hereby, except to the extent that such documents
or information can be shown to have been (a) previously lawfully known by the
party receiving such documents or information, (b) in the public domain through
no fault of such receiving party or (c) later acquired by the receiving party
from other sources not themselves bound by, and in breach of, a confidentiality
agreement. Neither Savers nor SMC will disclose or otherwise provide any such
confidential documents or confidential information to any other Person, except
to SMC's lenders and investors and to either party's respective auditors,
actuaries, attorneys, financial advisors and other consultants and advisors who
need such documents or information in connection with this Amended and Restated
Merger Agreement.
14.6 Waiver Any term or condition of this Amended and Restated Merger
Agreement may be waived at any time by the party that is entitled to the benefit
thereof. Such waiver must be in writing and must be
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executed by the chief executive officer or the chief operating officer of such
party. A waiver on one occasion will not be deemed to be a waiver of the same or
any other breach on a future occasion. All remedies, either under this Amended
and Restated Merger Agreement, or by Law or otherwise afforded, will be
cumulative and not alternative.
14.7 Amendment This Amended and Restated Merger Agreement may be modified
or amended only by a writing duly executed by or on behalf of Savers, SMC and
SAC.
14.8 Counterparts. This Amended and Restated Merger Agreement may be
executed simultaneously in any number of counterparts, each of which will be
deemed an original, but all of which will constitute one and the same
instrument.
14.9 No Third Party Beneficiary The terms and provisions of this Amended
and Restated Merger Agreement are intended solely for the benefit of Savers and
SMC, and their respective successors or assigns, and it is not the intention of
the parties to confer third-party beneficiary rights upon any other Person.
14.10 Governing Law THIS AMENDED AND RESTATED MERGER AGREEMENT WILL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NORTH CAROLINA (EXCLUSIVE OF CONFLICTS OF LAW PRINCIPLES) .
14.11 Binding Effect This Amended and Restated Merger Agreement is binding
upon and will inure to the benefit of the parties and their respective
successors and assigns.
14.12 Assignment Except as otherwise provided herein, this Amended and
Restated Merger Agreement or any right hereunder or part hereof may not be
assigned by any party hereto without the prior written consent of the other
parties hereto.
14.13 Headings, etc The headings used in this Amended and Restated Merger
Agreement have been inserted for convenience and do not constitute matter to be
construed or interpreted in connection with this Amended and Restated Merger
Agreement.
14.14 Invalid Provisions. If any provision of this Amended and Restated
Merger Agreement is held to be illegal, invalid or unenforceable under any
present or future Law, and if the rights or obligations of Savers, SMC or SAC
under this Amended and Restated Merger Agreement will not be materially and
adversely affected thereby, (a) such provision will be fully severable; (b) this
Amended and Restated Merger Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof;
(c) the remaining provisions of this Amended and Restated Merger Agreement will
remain in full force and effect and will not be affected by the illegal, invalid
or unenforceable provision or by its severance herefrom; and (d) in lieu of such
illegal, invalid or unenforceable provision, there will be added automatically
as a part of this Amended and Restated Merger Agreement a legal, valid and
enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible.
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IN WITNESS WHEREOF, this Amended and Restated Merger Agreement has been
duly executed and delivered by the parties hereto, effective as of the date
first written above.
STANDARD ACQUISITION CORPORATION
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
SAVERS LIFE INSURANCE COMPANY
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
STANDARD MANAGEMENT CORPORATION
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
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EXHIBIT A
DEFINITIONS OF TERMS
"Adjusted Capital and Surplus" as of any date shall mean Savers' statutory
capital and surplus as of such date, adjusted pursuant to the Formula set forth
on Exhibit B hereto and determined based on SAP consistently applied throughout
the specified period and in the immediately prior comparable period.
"Affiliate" shall mean any Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by, or is under common control
with the Person specified.
"Amended and Restated Merger Agreement" shall mean this Amended and
Restated Merger Agreement, together with the exhibits and the Disclosure
Schedule attached hereto, and the Contracts and other documents to be executed
and delivered by Savers pursuant hereto.
"Annual Statement" shall mean any annual statement of Savers filed with or
submitted to the insurance regulatory authority in the State of North Carolina
on forms prescribed or permitted by such authority.
"Articles of Merger" has the meaning set forth in Section 2.2.
"Assets and Properties" shall mean all assets or properties of every kind,
nature, character, and description (whether real, personal, or mixed whether
tangible or intangible, whether absolute, accrued, contingent, fixed, or
otherwise, and wherever situated) as now operated, owned, or leased by a
specified Person, including without limitation cash, cash equivalents,
securities, accounts and notes receivable, real estate, equipment, furniture,
fixtures, insurance or annuities in force, goodwill, and going-concern value.
"Average Trading Price" shall have the meaning set forth in Section 2.6.
"AVR" shall mean the asset valuation reserve required to be established and
maintained by Savers at any particular date, calculated in accordance with SAP.
"Benefit Plans" shall mean all Employee Pension Benefit Plans, all Employee
Welfare Benefit Plans, all stock bonus, stock ownership, stock option, Merger,
stock appreciation rights, phantom stock, and other stock plans (whether
qualified or nonqualified), and all other pension, welfare, severance,
retirement, bonus, deferred compensation, incentive compensation, insurance
(whether life, accident and health, or other and whether key man, group, workers
compensation, or other), profit sharing, disability, thrift, day care, legal
services, leave of absence, layoff, and supplemental or excess benefit plans,
and all other benefit Contracts, arrangements, or procedures having the effect
of a plan, in each case existing on or before the Effective Time under which
Savers is or may hereafter become obligated in any manner (including without
limitation obligations to make contributions or other payments) and which cover
some or all of the present or former officers, directors, employees, agents,
consultants, or other similar representatives providing services to or for
Savers; provided, however, that such term shall not include (a) routine
employment policies and procedures developed and applied in the ordinary course
of business and consistent with past practice, including without limitation sick
leave, vacation, and holiday policies, and (b) directors and officers liability
insurance.
"Books and Records" shall mean all accounting, financial reporting, Tax,
business, marketing, corporate, and other files, documents, instruments, papers,
books, and records of a specified Person, including without limitation financial
statements, budgets, projections, ledgers, journals, deeds, titles, policies,
manuals, minute books, stock certificates and books, stock transfer ledgers,
Contracts, franchises, permits, agency lists, policyholder lists, supplier
lists, reports, computer files, retrieval programs, operating data or plans, and
environmental studies or plans.
"Business Day" shall mean a day other than Saturday, Sunday, or any day on
which the principal commercial banks located in the City of Indianapolis are
authorized or obligated to close under the Laws of the State of Indiana.
"Business or Condition" shall mean the organization, existence, authority,
capitalization, business, licenses, condition (financial or otherwise), cash
flow, management, sales force, solvency, prospects, SAP and
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GAAP results of operations, insurance or annuities in force, SAP capital and
surplus, Mandatory Securities Valuation Reserve, Liabilities, or Assets and
Properties of a specified Person.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section Section 9601 et seq., any amendments thereto,
any successor statutes, and any regulations promulgated thereunder.
"Certificate" has the meaning set forth in Section 2.8.
"Closing" has the meaning set forth in Section 2.18.
"Code" shall mean the Internal Revenue Code of 1986, as amended (including
without limitation any successor code), and the rules and regulations
promulgated thereunder.
"Constituent Corporations" has the meaning set forth in the Preamble.
"Contaminant" means any waste, pollutant, hazardous or toxic substance or
waste, petroleum, petroleum-based substance or waste, special waste, or any
constituent of any such substance or waste.
"Contract" shall mean any agreement, lease, sublease, license, sublicense,
promissory note, evidence of indebtedness, insurance policy, annuity,
reinsurance agreement, reinsurance treaty, or other contract or commitment
(whether written or oral).
"Damages" shall mean any and all monetary damages, Liabilities, fines,
fees, penalties, interest obligations, deficiencies, losses, and expenses
(including without limitation punitive, treble, or other exemplary or extra
contractual damages, amounts paid in settlement, interest, court costs, costs of
investigation, fees and expenses of attorneys, accountants, actuaries, and other
experts, and other expenses of litigation or of any claim, default, or
assessment).
"Disclosure Schedule" shall mean the bound record, dated the effective date
of the Amended and Restated Merger Agreement, furnished by Savers to SMC, and
containing all lists, descriptions, exceptions, and other information and
materials as are required to be included therein pursuant to the Amended and
Restated Merger Agreement.
"Dissenting Shares" has the meaning set forth in Section 2.14.
"Effective Time" has the meaning set forth in Section 2.2.
"Election" has the meaning set forth in Section 2.7.
"Election Date" has the meaning set forth in Section 2.7.
"Employee Pension Benefit Plan" shall mean each employee pension benefit
plan (whether or not insured), as defined in Section 3(2) of ERISA, which is or
was in existence on or before the Effective Time and to which Savers is or may
hereafter become obligated in any manner as an employer.
"Employee Welfare Benefit Plan" shall mean each employee welfare benefit
plan (whether or not insured), as defined in Section 3(1) of ERISA, which is or
was in existence on or before the Effective Time and to which Savers is or may
hereafter become obligated in any manner as an employer.
"Environmental Encumbrance" means an Encumbrance in favor of any
Governmental Body for (i) any liability under any Environmental Law, or (ii)
damages arising from, or costs incurred by such Governmental Body in response
to, a Release or threatened Release of a Contaminant into the environment.
"Environmental Law" means all Requirements of Laws derived from or relating
to all federal, state and local laws or regulations relating to or addressing
the environment, health or safety, including but not limited to CERCLA, OSHA and
RCRA and any state equivalent thereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended (including without limitation any successor act), and the rules and
regulations promulgated thereunder.
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"ERISA Affiliate" shall mean any Person under common control (as defined in
Section 414 of the Code) with Savers.
"Excess Shares" has the meaning set forth in Section 2.10.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
(together with the rules and regulations promulgated thereunder).
"Exchange Agent" has the meaning set forth in Section 2.8.
"Exchange Fund" has the meaning set forth in Section 2.8.
"Expenses" means any and all expenses incurred in connection with
investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including, without
limitation, court filing fees, court costs, arbitration fees or costs, witness
fees, and reasonable fees and disbursements of legal counsel, investigators,
expert witnesses, consultants, accountants and other professionals).
"Financial Statements" has the meaning set forth in Section 3.11.
"Form of Election" has the meaning set forth in Section 2.7.
"Formula" shall have the meaning set forth in Exhibit B.
"Fractional Securities Fund" shall have the meaning set forth in Section
2.10.
"GAAP" shall mean generally accepted accounting principles, consistently
applied throughout the specified period and in the immediately prior comparable
period.
"Governmental Entity" means any foreign, federal, state, local or other
governmental authority or regulatory entity.
"Governmental Permits" means Seller owns, holds or possesses all licenses,
franchises, permits, privileges, immunities, approvals and other authorizations
from a Governmental Body.
"Improvements Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
"IMR" shall mean the interest maintenance reserve required to be
established and maintained by Savers at any particular date, calculated in
accordance with SAP.
"IRS" shall mean the United States Internal Revenue Service or any
successor agency.
"Law or Laws" shall mean all laws, statutes, ordinances, regulations, and
other pronouncements having the effect of law in the United States of America,
any foreign country, or any domestic or foreign state, province, commonwealth,
city, country, municipality, territory, protectorate, possession, court,
tribunal, agency, government, department, commission, arbitrator, board, bureau,
or instrumentality thereof.
"Liability or Liabilities" shall mean all debts, obligations, and other
liabilities of a Person (whether absolute, accrued, contingent, fixed, or
otherwise, or whether due or to become due).
"Lien" shall mean any mortgage, pledge, assessment, security interest,
lease, sublease, lien, adverse claim, levy, charge, or other encumbrance of any
kind, or any conditional sale Contract, title retention Contract, or other
Contract to give or to refrain from giving any of the foregoing.
"NAIC" shall mean the National Association of Insurance Commissioners.
"NCBCA" has the meaning set forth in Section 2.1.
"Non-Admitted Assets" shall mean any assets of the Company required to be
reported as "assets not admitted" on Exhibit 13 of any Annual Statement or
Quarterly Statement filed by Savers.
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C. Section
Section 651 et seq., any amendment thereto, any successor statute, and any
regulations promulgated thereunder.
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"Owned Real Property" has the meaning set forth in Section 3.20.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
under ERISA.
"Person" means any natural person, corporation, general partnership,
limited partnership, proprietorship, trust, union, association, court, tribunal,
agency, government, department, commission, self-regulatory organization,
arbitrator, board, bureau, instrumentality, or other entity, enterprise,
authority, or business organization.
"Proxy Statement" has the meaning set forth in Section 3.9.
"Quarterly Statement" shall mean any quarterly statement of Savers filed
with or submitted to the insurance regulatory authority in the State of North
Carolina on forms prescribed or permitted by such authority.
"RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C. sec.sec.
6901 et seq., and any successor statute, and any regulations promulgated
thereunder.
"Registration Statement" has the meaning set forth in Section 3.9.
"Release" means release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant
into the indoor or outdoor environment or into or out of any Property of Savers,
including the movement of Contaminants through or in the air, soil, surface
water, groundwater or Property of Savers.
"Requirements of Law" means any foreign, federal, state and local laws,
statutes, regulations, rules, codes or ordinances enacted, adopted, issued or
promulgated by any Governmental Body (including, without limitation, those
pertaining to electrical, building, zoning, environmental and occupational
safety and health requirements) or common law.
"SAC" has the meaning set forth in the Preamble.
"SAP" shall mean the accounting practices required or permitted by the
National Association of Insurance Commissioners and the insurance regulatory
authority in the State of North Carolina, consistently applied throughout the
specified period and in the immediately prior comparable period.
"SAP Statements" shall mean the Annual Statements, Quarterly Statements,
and other financial statements and presentations of Savers prepared in
accordance with SAP and delivered to SMC pursuant to of Sections 3.7, 3.11 and
6.2.
"Savers" has the meaning set forth in the Preamble.
"Savers Agreement" has the meaning set forth in Section 3.22.
"Savers Common Stock" shall have the meaning ascribed to it in this Amended
and Restated Merger Agreement.
"Savers Stockholders Meeting" has the meaning as set forth in Section 8.1.
"Savers Stock Option" has the meaning set forth in Section 8.4.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended (together
with the rules and regulations promulgated thereunder).
"SMC" shall mean Standard Management Corporation.
"SMC Common Stock" shall have the meaning ascribed to it in the Preamble of
this Amended and Restated Merger Agreement.
"SMC Securities" has the meaning set forth in Section 4.6.
"SMC Stockholders Meeting" has the meaning set forth in Section 8.1.
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"Standard Valuation Office" shall mean the financial instruments rating
entity for the NAIC.
"Stockholder Meetings" has the meaning set forth in Section 8.1.
"Surviving Corporation" has the meaning set forth in Section 2.1.
"Taxes" shall mean all taxes, charges, fees, levies, or other similar
assessments or Liabilities, including without limitation income, gross receipts,
ad valorem, premium, excise, real property, personal property, windfall profit,
sales, use, transfer, licensing, withholding, employment, payroll, Phase III,
and franchise taxes imposed by the United States of America or any state, local,
or foreign government, or any subdivision agency, or other similar Person of the
United States or any such government; and such term shall include any interest,
fines, penalties, assessments, or additions to tax resulting from, attributable
to, or incurred in connection with any such tax or any contest or dispute
thereof.
"Tax Returns" shall mean any report, return, or other information required
to be supplied to a taxing authority in connection with Taxes.
"Third Party Acquisition Event" has the meaning set forth in Section 13.3.
"Work Papers" shall mean all summaries, calculations, compilations and
similar written documentation derived from the accounts of Savers and used or
prepared by accountants in the process of computing Adjusted Capital and
Surplus.
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ANNEX B
ARTICLE 13.
DISSENTERS' RIGHTS.
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
SECTION 55-13-01. DEFINITIONS. IN THIS ARTICLE:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and
in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate currently
paid by the corporation on its principal bank loans, if any, but not less
than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SECTION 55-13-02. RIGHT TO DISSENT.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger under G.S. 55-11-04) is a party
unless (i) approval by the shareholders of that corporation is not required
under G.S. 55-11-03(g) or (ii) such shares are then redeemable by the
corporation at a price not greater than the cash to be received in exchange
for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in
cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
the shares; (iii) alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities; (iv) excludes or limits
the right of the shares to vote on any matter, or to cumulate votes; (v)
reduces the number of shares owned by the shareholder to a
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fraction of a share if the fractional share so created is to be acquired
for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or (ii) held by at least 2,000 record shareholders,
unless in either case:
(1) The articles of incorporation of the corporation issuing the
shares provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which,
at the record date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which the plan of merger or
share exchange is to be acted on, were either listed subject to notice
of issuance on a national securities exchange or held of record by at
least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in
sub-subdivisions a. and b. of this subdivision.
SECTION 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder.
SECTIONS 55-13-04 TO 55-13-19: RESERVED FOR FUTURE CODIFICATION PURPOSES.
Part 2. Procedure for Exercise of Dissenters' Rights.
SECTION 55-13-20. NOTICE OF DISSENTERS' RIGHTS.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to
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assert dissenters' rights that the action was taken and send them the
dissenters' notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
SECTION 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this Article.
SECTION 55-13-22. DISSENTERS' NOTICE.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
SECTION 55-13-23. DUTY TO DEMAND PAYMENT.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
SECTION 55-13-24. SHARE RESTRICTIONS.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
SECTION 55-13-25. PAYMENT.
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment must be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of
offer of payment, an income statement for that year, a statement of cash
flows for that year, and the latest available interim financial statements,
if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
SECTION 55-13-26. FAILURE TO TAKE ACTION.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
SECTION 55-13-27. RESERVED FOR FUTURE CODIFICATION PURPOSES.
SECTION 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S OFFER
OR FAILURE TO PERFORM.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of the amount in excess of the payment by the corporation under G.S. 55-13-25
for the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation made payment for his
shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment.
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SECTION 55-13-29: RESERVED FOR FUTURE CODIFICATION PURPOSES.
Part 3. Judicial Appraisal of Shares
SECTION 55-13-30. COURT ACTION.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 and petition the court to determine the fair
value of the shares and accrued interest. A dissenter who takes no action within
the 60-day period shall be deemed to have withdrawn his dissent and demand for
payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The parties are entitled to the same discovery
rights as parties in other civil proceedings. However, in a proceeding by a
dissenter in a public corporation, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SECTION 55-13-31. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall assess
the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Indiana Business Corporation Law permits an Indiana corporation to
indemnify its directors and officers from liability for their conduct if such
conduct was made in good faith with the reasonable belief that such conduct was
in the corporation's best interest. If the individual was not acting in his or
her official capacity with the corporation, then indemnification is permitted
for good faith conduct made with the reasonable belief that such conduct was at
least not opposed to the best interest of the corporation. Unless limited by its
articles of incorporation, a corporation must indemnify a director or officer,
who is wholly successful in the defense of any proceeding to which the director
or officer is a party by virtue of being a director or officer of the
corporation, against reasonable expenses incurred in connection with the
proceeding. Indemnification can be made in advance of the final disposition of a
proceeding if certain procedural requirements are met. An Indiana corporation is
permitted to purchase and maintain insurance on behalf of directors and officers
against liability asserted against them in that capacity or arising from an
individual's status as a director or officer, whether or not the corporation
would have power to indemnify the individual against the same liability under
the Indiana Business Corporation Law. In addition, the stockholders of a
corporation may approve the inclusion of other or additional indemnification
provisions in the articles of incorporation or by-laws.
The Articles of Incorporation of SMC provide for the indemnification of
directors and officers against reasonable expenses actually incurred, except in
relation to any action in which it is finally adjudged that the director or
officer is liable for willful misconduct or recklessness in the performance of
corporate duties. In addition, indemnification is permitted for amounts paid by
directors or officers upon judgement and the reasonable costs of settlement of
any such action, if a majority of a disinterested committee of the SMC Board
determines that such payment or settlement is in the interest of the SMC and
that the director or officer to be reimbursed did not engage in any act
constituting willful misconduct or recklessness in the performance of corporate
duties.
The Bylaws of SMC provide for indemnification of directors and officers to
the fullest extent available under then applicable law.
SMC has entered into separate indemnification agreements with some of its
directors that may require SMC, among other things, to indemnify them against
certain liabilities that may arise by reason of their status of service as
directors, to the maximum extent permitted under the Indiana Business
Corporation Law. Standard Life has entered into separate indemnification
agreements with each of its directors and each of the directors of SMC, which
agreements require Standard Life, among other things, to indemnify such
directors against certain liabilities that may arise by reason of their status
or service as directors to the maximum extent permitted under Indiana law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of Exhibits included as part of this
Registration Statement. Items marked with an asterisk are filed herewith.
<TABLE>
<S> <C>
*2.1 Amended and Restated Agreement and Plan of Merger dated as
of December 9, 1997 among SMC, Standard Acquisition
Corporation ("SAC") and Savers Life (included in Annex A to
the Proxy Statement/Prospectus). Schedules to the Agreement
and Plan of Merger are omitted pursuant to Item 601(b)(2) of
Regulation S-K. SMC hereby agrees to furnish copies of such
Schedules to the SEC upon request.
3.1 Amended and Restated Articles of Incorporation of SMC, as
amended (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31,
1995).
</TABLE>
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3.2 Amended and Restated Bylaws of SMC, as amended (incorporated
by reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370) as filed with the Commission on
January 27, 1993 and to Exhibit 3 of SMC's Quarterly Report
on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1994).
4.1 Form of Senior Note Agreement Warrant (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.2 Form of Oppbridge Partners Warrant (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.3 Registration Rights Agreement, dated as of May 3, 1990 among
SMC, Howard T. Cohn and Joseph J. Piazza and the first
amendment thereto, dated June 4, 1990 (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.4 Amended and Restated Registration Rights Agreement dated as
of November 8, 1996 by and between SMC and Fleet National
Bank (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended September
30, 1996).
4.5 Form of Fleet National Bank Warrant (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1996).
4.6 Form of President's Club Warrant (incorporated by reference
to SMC's Annual Report on Form 10-K (File No. 0-20882) for
the year ended December 31, 1995).
4.7 Registration Rights Agreement dated as of November 8, 1996
by and between SMC and Great American Reserve Insurance
Company ("Great American Reserve") (incorporated by
reference to SMC's Quarterly Report on Form No. 0-20882) for
the quarter ended September 30, 1996.
4.8 Form of Sand Brothers & Company, Ltd. Warrant (incorporated
by reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1996).
*5. Opinion of Stephen M. Coons regarding the legality of the
securities being registered.
*8. Opinion of Womble Carlyle Sandridge & Rice, PLLC regarding
certain federal income tax consequences of the Merger.
9. Voting Trust Agreement dated as of November 8, 1996 among
Delta Life and Annuity Company, Messrs. Ronald D. Hunter and
Allen O. Jones, Jr., as Voting Trustees, and SMC
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.1 Amended Advisory Agreement, dated as of August 1, 1991,
between SMC and Conseco Capital Management, Inc., as
amended, April 17, 1995 (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1995).
10.2 Second Amended and Restated Employment Contract by and
between SMC and Ronald D. Hunter, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
10.3 Second Amended and Restated Employment Contract by and
between SMC and Edward T. Stahl, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
10.4 Second Amended and Restated Employment contract by and
between SMC and Raymond J. Ohlson, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
10.5 First Amended and Restated Employment Contract by and
between SMC and Stephen M. Coons dated and effective, April
3, 1995 (incorporated by reference to SMC's Quarterly Report
on Form 10-Q (File No. 0-20882) for the quarter ended June
30, 1995).
10.6 Indemnification Agreement between SMC and Stephen M. Coons
and Coons & Saint, dated August 1, 1991 (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
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10.7 Lease by and between Standard Life and WRC Properties, Inc.,
dated February 27, 1991 (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No.
33-53370)).
10.8 Management Service Agreement between Standard Life and SMC
dated August 1, 1992, as amended on January 1, 1997
(incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1996).
10.9 Agreement for Assumption Reinsurance between the National
Organization Of Life and Health Insurance Guaranty
Associations and Standard Life, concerning, The Midwest Life
Insurance Company In Liquidation effective June 1, 1992
(incorporated by reference to SMC's Registration Statement
on Form S-1 (Registration No. 33-53370)).
10.10 Reinsurance Agreement between Standard Life and The
Mercantile and General Reinsurance Company Limited effective
May 1, 1975 (incorporated by reference to SMC's Registration
Statement on Form S-1 (Registration No. 33-53370)).
10.11 Reinsurance Agreement between Firstmark Standard Life
Insurance Company and The Mercantile and General Reinsurance
Company of America effective February 1, 1984 (incorporated
by reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
10.12 Reinsurance Contract between First International and
Standard Life dated July 10, 1992 (incorporated by reference
to SMC's Registration Statement on Form S-1 (Registration
No. 33-53370)).
10.13 Amended Reinsurance Agreement between Standard Life and
Winterthur Life Re Insurance Company effective January 1,
1995 (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31,
1995).
10.14 Management Service Agreement between Premier Life
(Luxembourg) and SMC dated September 30, 1994 (incorporated
by reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1994).
10.15 Assignment of Management Contract dated October 2, 1995 of
Management Contract dated January 1, 1987 between DNC and
Dixie National Life to Standard Life (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.16 Indemnity Reinsurance Agreement between Dixie National Life
and Crown Life Insurance Company dated and effective
September 30, 1992, and Amendment No. 1 as amended October
29, 1992; Amendment No. 2 as amended December 9, 1992;
Amendment No. 3 as amended February 11, 1993; Amendment No.
4 as amended June 29, 1993; Amendment No. 5 as amended
November 17, 1994; Amendment No. 6 as amended December 31,
1996 (the Agreement and Amendment Nos. 1 through 5 are
incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1995, and Amendment No. 6 is incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
10.17 Automatic Indemnity Reinsurance Agreement between the First
International and The Guardian Insurance & Annuity Company,
Inc. dated and effective January 1, 1996 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.18 Indemnity Retrocession Agreement the ("Guardian Indemnity
Retrocession Agreement") between The Guardian Insurance &
Annuity Company, Inc. and Standard Life dated and effective
January 1, 1996 (incorporated by reference to SMC's Annual
Report on Form 10-K (File No. 2-20882) for the year ended
December 31, 1995).
10.19 Automatic Indemnity Reinsurance Agreement between The
Guardian Insurance & Annuity Company, Inc. and Standard Life
dated and effective January 1, 1996 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.20 Administrative Services Agreement between First
International and Standard Life dated and effective March
18, 1996 (incorporated by reference to SMC's Annual Report
on Form 10-K (File No. 0-20882) for the year ended December
31, 1995).
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10.21 Amended and Restated Revolving Line of Credit Agreement
dated as of November 8, 1996 between SMC and Fleet National
Bank (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended September
30, 1996).
10.22 Note Agreement dated as of November 8, 1996 between SMC and
Fleet National Bank in the amount of $16,000,000
(incorporated by reference to SMC's Quarterly Report on Form
10-Q (File No. 0-20882) for the quarter ended September 30,
1996).
10.23 Amended and Restated Pledge Agreement dated as of November
8, 1996 between SMC and Fleet National Bank (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1996).
10.24 Revised Service Contract Agreement dated as of October 16,
1995 and effective January 1, 1995 between Standard Life and
Standard Marketing (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1995).
10.25 Amended and Restated Note Agreement dated as of November 8,
1996, as amended and restated on June 30, 1997, by and
between SMC and Great American Reserve in the amount of
$4,371,573 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1997).
10.26 Amended and Restated Senior Subordinated Convertible Note
dated as of November 8, 1996, as amended and restated on
June 30, 1997, by and between SMC and Great American Reserve
in the amount of $4,371,573 (incorporated by reference to
SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1997).
10.27 Surplus Debenture dated as of November 8, 1996 by and
between SMC and Standard Life in the amount of $13,000,000
(incorporated by reference to SMC's Quarterly Report on Form
10-Q (File No. 0-20882) for the quarter ended September 30,
1996).
10.28 Portfolio Indemnify Reinsurance Agreement between Dixie
National Life and Cologne Life Reinsurance Company dated and
effective December 31, 1996 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
10.29 Note Agreement dated as of June 30, 1997 between SMC,
Capitol American Life Insurance Company and Transport Life
Insurance Company in the amount of $5,628,427 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended June 30, 1997).
10.30 Senior Subordinated Convertible Note dated as of June 30,
1997 between SMC and Capitol American Life Insurance Company
in the amount of $3,628,427 (incorporated by reference to
SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1997).
10.31 Senior Subordinated Convertible Notes dated as of June 30,
1997 between SMC and Transport Life Insurance Company in the
amount of $2,000,000 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1997).
10.32 Coinsurance Agreement effective as of July 1, 1997 by and
between Savers Life and World Insurance Company
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.33 Amendment I to the Guardian Indemnity Retrocession Agreement
effective as of January 1, 1996 by and between The Guardian
Insurance and Annuity Company and Standard Life
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.34 Promissory Note from Ronald D. Hunter to SMC in the amount
of $775,500 executed October 28, 1997 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1997).
11. Statement regarding computation of per share earnings
(incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1996).
21. List of Subsidiaries of SMC (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
II-4
<PAGE> 283
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of KPMG Audit.
*23.3 Consent of D.E. Gatewood and Company.
23.4 Consent of Stephen M. Coons (included in Exhibit 5).
23.5 Consent of Womble Carlyle Sandridge & Rice, PLLC (included
in Exhibit 8).
*24. Powers of Attorney.
*99.1 Form of Proxy to be mailed to the stockholders of SMC.
*99.2 Form of Proxy to be mailed to the stockholders of Savers
Life.
*99.3 Form of Election to be mailed to the stockholders of Savers
Life.
- -------------------------
* Items marked with an asterisk are filed herewith.
(b) The financial statement schedules required to be included pursuant to
this Item are not included herein because they are not applicable or the
required information is shown in the financial information included or
incorporated by reference herein.
(c) Not applicable.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13 (a) or 15 (d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15 (d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 284
(c) (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145 (c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10 (a) (3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 285
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Indianapolis, State of Indiana, on December 22, 1997.
STANDARD MANAGEMENT CORPORATION
By: RONALD D. HUNTER
------------------------------------
Ronald D. Hunter
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
RONALD D. HUNTER Chairman, President and December 22, 1997
- ----------------------------------------------------- Chief Executive Officer
Ronald D. Hunter
* Executive Vice President, December 22, 1997
- ----------------------------------------------------- Chief Financial Officer,
Paul B. Pheffer Treasurer and Director
(Principal Financial
Officer)
* Senior Vice President -- December 22, 1997
- ----------------------------------------------------- Finance (Principal
Gerald R. Hochgesang Accounting Officer)
* Director December 22, 1997
- -----------------------------------------------------
Raymond J. Ohlson
* Director December 22, 1997
- -----------------------------------------------------
Edward T. Stahl
* Director December 22, 1997
- -----------------------------------------------------
Stephen M. Coons
* Director December 22, 1997
- -----------------------------------------------------
Martial R. Knieser
* Director December 22, 1997
- -----------------------------------------------------
Ramesh H. Bhat
* Director December 22, 1997
- -----------------------------------------------------
James C. Lanshe
* Director December 22, 1997
- -----------------------------------------------------
Robert A. Borns
</TABLE>
*By: RONALD D. HUNTER
-------------------------------
Ronald D. Hunter
Attorney-in-Fact
II-7
<PAGE> 286
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*2.1 Amended and Restated Agreement and Plan of Merger dated as
of December 9, 1997 among SMC, Standard Acquisition
Corporation ("SAC") and Savers Life (included in Annex A to
the Proxy Statement/Prospectus). Schedules to the Agreement
and Plan of Merger are omitted pursuant to Item 601(b)(2) of
Regulation S-K. SMC hereby agrees to furnish copies of such
Schedules to the SEC upon request.
3.1 Amended and Restated Articles of Incorporation of SMC, as
amended (incorporated by reference to SMC's Annual Report on
Form 10-K (File No. 0-20882) for the year ended December 31,
1995).
3.2 Amended and Restated Bylaws of SMC, as amended (incorporated
by reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370) as filed with the Commission on
January 27, 1993 and to Exhibit 3 of SMC's Quarterly Report
on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1994).
4.1 Form of Senior Note Agreement Warrant (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.2 Form of Oppbridge Partners Warrant (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.3 Registration Rights Agreement, dated as of May 3, 1990 among
SMC, Howard T. Cohn and Joseph J. Piazza and the first
amendment thereto, dated June 4, 1990 (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
4.4 Amended and Restated Registration Rights Agreement dated as
of November 8, 1996 by and between SMC and Fleet National
Bank (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended September
30, 1996).
4.5 Form of Fleet National Bank Warrant (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1996).
4.6 Form of President's Club Warrant (incorporated by reference
to SMC's Annual Report on Form 10-K (File No. 0-20882) for
the year ended December 31, 1995).
4.7 Registration Rights Agreement dated as of November 8, 1996
by and between SMC and Great American Reserve Insurance
Company ("Great American Reserve") (incorporated by
reference to SMC's Quarterly Report on Form No. 0-20882) for
the quarter ended September 30, 1996.
4.8 Form of Sand Brothers & Company, Ltd. Warrant (incorporated
by reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1996).
*5. Opinion of Stephen M. Coons regarding the legality of the
securities being registered.
*8. Opinion of Womble Carlyle Sandridge & Rice, PLLC regarding
certain federal income tax consequences of the Merger.
9. Voting Trust Agreement dated as of November 8, 1996 among
Delta Life and Annuity Company, Messrs. Ronald D. Hunter and
Allen O. Jones, Jr., as Voting Trustees, and SMC
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.1 Amended Advisory Agreement, dated as of August 1, 1991,
between SMC and Conseco Capital Management, Inc., as
amended, April 17, 1995 (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1995).
10.2 Second Amended and Restated Employment Contract by and
between SMC and Ronald D. Hunter, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
10.3 Second Amended and Restated Employment Contract by and
between SMC and Edward T. Stahl, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
</TABLE>
<PAGE> 287
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.4 Second Amended and Restated Employment contract by and
between SMC and Raymond J. Ohlson, dated and effective, as
amended, April 3, 1995 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1995).
10.5 First Amended and Restated Employment Contract by and
between SMC and Stephen M. Coons dated and effective, April
3, 1995 (incorporated by reference to SMC's Quarterly Report
on Form 10-Q (File No. 0-20882) for the quarter ended June
30, 1995).
10.6 Indemnification Agreement between SMC and Stephen M. Coons
and Coons & Saint, dated August 1, 1991 (incorporated by
reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
10.7 Lease by and between Standard Life and WRC Properties, Inc.,
dated February 27, 1991 (incorporated by reference to SMC's
Registration Statement on Form S-1 (Registration No.
33-53370)).
10.8 Management Service Agreement between Standard Life and SMC
dated August 1, 1992, as amended on January 1, 1997
(incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1996).
10.9 Agreement for Assumption Reinsurance between the National
Organization Of Life and Health Insurance Guaranty
Associations and Standard Life, concerning, The Midwest Life
Insurance Company In Liquidation effective June 1, 1992
(incorporated by reference to SMC's Registration Statement
on Form S-1 (Registration No. 33-53370)).
10.10 Reinsurance Agreement between Standard Life and The
Mercantile and General Reinsurance Company Limited effective
May 1, 1975 (incorporated by reference to SMC's Registration
Statement on Form S-1 (Registration No. 33-53370)).
10.11 Reinsurance Agreement between Firstmark Standard Life
Insurance Company and The Mercantile and General Reinsurance
Company of America effective February 1, 1984 (incorporated
by reference to SMC's Registration Statement on Form S-1
(Registration No. 33-53370)).
10.12 Reinsurance Contract between First International and
Standard Life dated July 10, 1992 (incorporated by reference
to SMC's Registration Statement on Form S-1 (Registration
No. 33-53370)).
10.13 Renewal Promissory Note from Ronald D. Hunter to SMC in the
amount of $337,854 executed December 31, 1996 and due
December 31, 2001 (incorporated by reference to SMC's Annual
Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1996).
10.14 Management Service Agreement between Premier Life
(Luxembourg) and SMC dated September 30, 1994 (incorporated
by reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1994).
10.15 Assignment of Management Contract dated October 2, 1995 of
Management Contract dated January 1, 1987 between DNC and
Dixie National Life to Standard Life (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.16 Indemnity Reinsurance Agreement between Dixie National Life
and Crown Life Insurance Company dated and effective
September 30, 1992, and Amendment No. 1 as amended October
29, 1992; Amendment No. 2 as amended December 9, 1992;
Amendment No. 3 as amended February 11, 1993; Amendment No.
4 as amended June 29, 1993; Amendment No. 5 as amended
November 17, 1994; Amendment No. 6 as amended December 31,
1996 (the Agreement and Amendment Nos. 1 through 5 are
incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1995, and Amendment No. 6 is incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
</TABLE>
<PAGE> 288
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.17 Automatic Indemnity Reinsurance Agreement between the First
International and The Guardian Insurance & Annuity Company,
Inc. dated and effective January 1, 1996 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.18 Indemnity Retrocession Agreement the ("Guardian Indemnity
Retrocession Agreement") between The Guardian Insurance &
Annuity Company, Inc. and Standard Life dated and effective
January 1, 1996 (incorporated by reference to SMC's Annual
Report on Form 10-K (File No. 2-20882) for the year ended
December 31, 1995).
10.19 Automatic Indemnity Reinsurance Agreement between The
Guardian Insurance & Annuity Company, Inc. and Standard Life
dated and effective January 1, 1996 (incorporated by
reference to SMC's Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1995).
10.20 Administrative Services Agreement between First
International and Standard Life dated and effective March
18, 1996 (incorporated by reference to SMC's Annual Report
on Form 10-K (File No. 0-20882) for the year ended December
31, 1995).
10.21 Amended and Restated Revolving Line of Credit Agreement
dated as of November 8, 1996 between SMC and Fleet National
Bank (incorporated by reference to SMC's Quarterly Report on
Form 10-Q (File No. 0-20882) for the quarter ended September
30, 1996).
10.22 Note Agreement dated as of November 8, 1996 between SMC and
Fleet National Bank in the amount of $16,000,000
(incorporated by reference to SMC's Quarterly Report on Form
10-Q (File No. 0-20882) for the quarter ended September 30,
1996).
10.23 Amended and Restated Pledge Agreement dated as of November
8, 1996 between SMC and Fleet National Bank (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1996).
10.24 Revised Service Contract Agreement dated as of October 16,
1995 and effective January 1, 1995 between Standard Life and
Standard Marketing (incorporated by reference to SMC's
Annual Report on Form 10-K (File No. 0-20882) for the year
ended December 31, 1995).
10.25 Amended and Restated Note Agreement dated as of November 8,
1996, as amended and restated on June 30, 1997, by and
between SMC and Great American Reserve in the amount of
$4,371,573 (incorporated by reference to SMC's Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
June 30, 1997).
10.26 Amended and Restated Senior Subordinated Convertible Note
dated as of November 8, 1996, as amended and restated on
June 30, 1997, by and between SMC and Great American Reserve
in the amount of $4,371,573 (incorporated by reference to
SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1997).
10.27 Surplus Debenture dated as of November 8, 1996 by and
between SMC and Standard Life in the amount of $13,000,000
(incorporated by reference to SMC's Quarterly Report on Form
10-Q (File No. 0-20882) for the quarter ended September 30,
1996).
10.28 Portfolio Indemnify Reinsurance Agreement between Dixie
National Life and Cologne Life Reinsurance Company dated and
effective December 31, 1996 (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
10.29 Note Agreement dated as of June 30, 1997 between SMC,
Capitol American Life Insurance Company and Transport Life
Insurance Company in the amount of $5,628,427 (incorporated
by reference to SMC's Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended June 30, 1997).
10.30 Senior Subordinated Convertible Note dated as of June 30,
1997 between SMC and Capitol American Life Insurance Company
in the amount of $3,628,427 (incorporated by reference to
SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1997).
</TABLE>
<PAGE> 289
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.31 Senior Subordinated Convertible Notes dated as of June 30,
1997 between SMC and Transport Life Insurance Company in the
amount of $2,000,000 (incorporated by reference to SMC's
Quarterly Report on Form 10-Q (File No. 0-20882) for the
quarter ended June 30, 1997).
10.32 Coinsurance Agreement effective as of July 1, 1997 by and
between Savers Life and World Insurance Company
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.33 Amendment I to the Guardian Indemnity Retrocession Agreement
effective as of January 1, 1996 by and between The Guardian
Insurance and Annuity Company and Standard Life
(incorporated by reference to SMC's Registration Statement
on Form S-4 (Registration No. 333-35447)).
10.34 Promissory Note from Ronald D. Hunter to SMC in the amount
of $775,500 executed October 28, 1997 (incorporated by
reference to SMC's Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 1997).
11. Statement regarding computation of per share earnings
(incorporated by reference to SMC's Annual Report on Form
10-K (File No. 0-20882) for the year ended December 31,
1996).
21. List of Subsidiaries of SMC (incorporated by reference to
SMC's Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of KPMG Audit.
*23.3 Consent of D.E. Gatewood and Company.
23.4 Consent of Stephen M. Coons (included in Exhibit 5).
23.5 Consent of Womble Carlyle Sandridge & Rice, PLLC (included
in Exhibit 8).
*24. Powers of Attorney.
*99.1 Form of Proxy to be mailed to the stockholders of SMC.
*99.2 Form of Proxy to be mailed to the stockholders of Savers
Life.
*99.3 Form of Election to be mailed to the stockholders of Savers
Life.
</TABLE>
- -------------------------
* Items marked with an asterisk are filed herewith.
<PAGE> 1
EXHIBIT 5
December 22, 1997
Standard Management Corporation
9100 Keystone Crossing
Indianapolis, Indiana 46240
Re: Registration of $14,740,503 maximum aggregate value of Shares of Common
Stock
Ladies and Gentlemen:
I have acted as counsel to Standard Management Corporation, an Indiana
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), of the Company's registration
statement on Form S-4 (the "Registration Statement") relating to the
registration of $14,740,503 maximum aggregate value of shares of common stock,
without par value, of the Company ("Company Common Stock") to be issued pursuant
to the terms of the Amended and Restated Agreement and Plan of Merger dated as
of December 9, 1997 (the "Merger Agreement"), among the Company, Standard
Acquisition Corporation, a North Carolina corporation and a wholly-owned
subsidiary of the Company ("Sub"), and Savers Life Insurance Company, a North
Carolina domestic stock insurance company ("Savers Life"), which provides for
the merger (the "Merger") of Sub with and into Savers Life, with Savers life
surviving as a wholly-owned subsidiary of the Company. Subject to the terms and
conditions of the Merger Agreement, each share of Common Stock, no par value
("Savers Life Common Stock"), of Savers Life held immediately prior to the
Effective Time (as defined in the Merger Agreement) of the Merger will be
converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers
Life Common Stock may elect to receive the $1.50 per share portion of the merger
consideration in the form of additional shares of SMC Common Stock.
For the purpose of rendering the opinions expressed below, I have reviewed
the Merger Agreement, the Registration Statement and the Exhibits to the latter.
I have also examined the originals, or copies of originals certified or
otherwise identified to my satisfaction, of the corporate records of the Company
and of such other agreements, documents, instruments and certificates of public
officials, officers and representatives of the Company and other persons, have
examined such questions of law and have satisfied myself as to such matters of
fact as I have deemed relevant and necessary as a basis for the opinions
expressed below. I have assumed the authenticity of all documents submitted to
me as originals, the genuineness of all signatures, the legal capacity of all
natural persons and the conformity with the original documents of any copies
thereof submitted to me for my examination.
Based on the foregoing, it is my opinion that:
1. The Company is duly incorporated and validly existing under the laws of
the State of Indiana.
2. Each share of Company Common Stock issued as consideration for the
Merger (the "Merger Shares") will be legally issued, fully paid and
non-assessable when: (i) the Registration Statement, as finally amended, shall
have become effective under the Securities Act; and (ii) the Merger shall have
become effective under the North Carolina Business Corporation Act (the
"NCBCA").
The foregoing opinions are limited to the federal laws of the United States
of America and the Indiana Business Corporation Law. I express no opinion as to
the application of the securities or blue sky laws of the various states to the
issuance or sale of the Merger Shares.
I hereby consent to the filling of this opinion as an Exhibit to the
Registration Statement and to all references to me included in or made part of
the Registration Statement.
Very truly yours,
/s/ Stephen M. Coons
--------------------------------
<PAGE> 1
EXHIBIT 8
December 22, 1997
Savers Life Insurance Company
8064 North Point Boulevard
Winston-Salem, NC 27106
RE: Certain federal income tax consequences of Merger provided for in
the Amended and Restated Agreement and Plan of Merger among
Standard Management Corporation ("SMC"), Standard Acquisition
Corporation ("SAC") and Savers Life Insurance Company ("Savers
Life") dated as of December 9, 1997 (the "Merger Agreement");
capitalized terms herein have the meanings defined in the
Agreement
Ladies and Gentlemen:
You have requested our opinion concerning certain federal income tax
consequences of the proposed Merger. We have acted as your counsel in connection
with the Merger in which SAC, a North Carolina corporation, will merge into
Savers Life, a North Carolina domestic stock insurance company, pursuant to
North Carolina law. In the Merger, each outstanding share of Savers Life Common
Stock (the only class outstanding) is to be converted into 1.2 shares of SMC
Common Stock plus $1.50. Each holder of Savers Life Common Stock may elect to
receive the $1.50 per share portion of the merger consideration in the form of
additional shares of SMC Common Stock. Cash will be paid in lieu of issuance of
fractional shares. Savers Life stockholders are entitled by state law to dissent
to the Merger.
In giving this opinion we have reviewed, and with your permission we rely
upon the facts contained in, the Merger Agreement, the Registration Statement on
Form S-4 filed by SMC under the Securities Act of 1933 relating to the shares of
SMC Common Stock to be issued in the Merger and to which this opinion is
attached as an exhibit ("the S-4"), and Tax Certificates dated December 22, 1997
(the "Tax Certificates") in which officers of Savers Life and officers of SMC
make certain representations on behalf of Savers Life, SMC and SAC regarding the
Merger. We also have reviewed such other documents as we have considered
necessary and appropriate.
In giving this opinion we have made certain assumptions, with your
permission. We have assumed that the statements in the Tax Certificates are true
as of the date of this opinion, and that any representation or statement made
"to the best of knowledge" or similarly qualified is correct without such
qualification. As to all matters in which a person or entity has represented
that such person or entity either is not a party to, or does not have, or is not
aware of, any plan or intention, understanding or agreement, we have assumed
that there is in fact no such plan, intention, understanding or agreement. We
also assume that (a) the Merger will be consummated in accordance with the
Merger Agreement, (b) SMC's only outstanding stock (as that term is used in
sec.368 of the Internal Revenue Code) is the SMC Common Stock and (c) that at
least eighty percent (80%) of the merger consideration is paid in SMC Common
Stock.
Based on the foregoing, and subject to the limitations herein, we are of
the opinion that under existing law, upon consummation of the Merger in
accordance with the Merger Agreement, for federal income tax purposes:
(1) The Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code.
(2) No gain or loss will be recognized by SMC, Savers Life or SAC due
to consummation of the Merger by the exchange of SMC Common Stock and cash
for Savers Life Common Stock upon the merger of SAC into Savers Life.
(3) No gain or loss will be recognized by the stockholders of Savers
Life upon the receipt of SMC Common Stock (including any fractional share
interest to which they may be entitled) solely in exchange for their shares
of Savers Life Common Stock.
<PAGE> 2
We express no opinion as to the laws of any jurisdiction other than the
United States of America. Further, our opinion is limited to the specific
conclusions set forth above, and no other opinions are expressed or implied. The
opinions stated with respect to shares of Savers Life Common Stock do not apply
to any stock rights, warrants or options to acquire Savers Life Common Stock.
The opinions stated as to Savers Life stockholders are general in nature and do
not necessarily apply to any particular Savers Life stockholder, and, for
example, may not apply to stockholders who are corporations, trusts, dealers in
securities, financial institutions, insurance companies, tax exempt
organizations; or to persons who are not United States citizens or resident
aliens or domestic entities (partnerships or trusts), subject to the alternative
minimum tax (to the extent that tax affects the tax consequences), or are
subject to the "golden parachute" provisions of the Code (to the extent that tax
affects the tax consequences); or to stockholders who acquired Savers Life
Common Stock pursuant to employee stock options or otherwise as compensation if
such shares are subject to any restriction related to employment, who do not
hold their shares as capital assets, or who hold their shares as part of a
"straddle" or "conversion transaction."
This opinion represents our best legal judgment, but it has no binding
effect or official status of any kind. Changes to the Code, regulations, the
rulings thereunder, or changes by the courts in the interpretation of the
authorities relied upon, may be applied retroactively and may affect the
opinions expressed herein. Any material defect in any assumption or
representation on which we have relied would adversely affect our opinions.
We hereby consent to the filing of this opinion as an Exhibit to the S-4
and to all references to our firm included in or made a part of the S-4. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
WOMBLE CARLYLE SANDRIDGE & RICE,
a Professional Limited Liability
Company
Zeb E. Barnhardt, Jr.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm included under the caption
"Experts" and to the use of our report dated March 18, 1997, except for Note 20,
as to which the date is August 21, 1997, included in the Joint Proxy
Statement/Prospectus that is contained in the Registration Statement on Form S-4
of Standard Management Corporation for the registration of shares of its common
stock.
Ernst & Young LLP
Indianapolis, Indiana
December 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report included in the Joint Proxy
Statement/Prospectus that is contained in the Registration Statement on Form S-4
of Standard Management Corporation and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG AUDIT
Luxembourg
December 23, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 7, 1997, with respect to the financial
statements of Savers Life Insurance Company, included in the Joint Proxy
Statement/Prospectus that is contained in this Registration Statement on Form
S-4 of Standard Management Corporation for the registration of shares of its
common stock.
D. E. GATEWOOD AND COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
Winston-Salem, North Carolina
December 19, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons whose
signature appear immediately below, does hereby constitute and appoint Ronald D.
Hunter and Stephen M. Coons, each with full power to act alone, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign on behalf of the undersigned a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the registration under the
Securities Act of the shares of Common Stock, without par value, of Standard
Management Corporation, an Indiana corporation (the "Company"), to be issued
pursuant to the terms of the Amended and Restated Agreement and Plan of Merger
dated as of December 9, 1997 (the "Merger Agreement"), among the Company,
Standard Acquisition Corporation, a North Carolina corporation and a
wholly-owned subsidiary of the Company ("Sub"), and Savers Life Insurance
Company, a North Carolina domestic stock insurance company ("Savers Life"),
which provides for the merger of Sub with and into Savers Life with Savers Life
surviving as a wholly-owned subsidiary of the Company, and to execute any and
all amendments to the Registration Statement, whether filed prior or subsequent
to the time the Registration Statement becomes effective, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as the undersigned might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agent, or his substitute
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of December
1997.
<TABLE>
<C> <C>
/s/ Ronald D. Hunter /s/ Paul B. Pheffer
- ----------------------------------------------------- -----------------------------------------------------
Ronald D. Hunter Paul B. Pheffer
/s/ Gerald R. Hochgesang /s/ Raymond J. Ohlson
- ----------------------------------------------------- -----------------------------------------------------
Gerald R. Hochgesang Raymond J. Ohlson
/s/ Edward T. Stahl /s/ Stephen M. Coons
- ----------------------------------------------------- -----------------------------------------------------
Edward T. Stahl Stephen M. Coons
/s/ Martial R. Knieser /s/ Ramesh H. Bhat
- ----------------------------------------------------- -----------------------------------------------------
Martial R. Knieser Ramesh H. Bhat
/s/ James C. Lanshe /s/ Robert A. Borns
- ----------------------------------------------------- -----------------------------------------------------
James C. Lanshe Robert A. Borns
</TABLE>
<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
PROXY STANDARD MANAGEMENT CORPORATION PROXY
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD , 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Standard Management Corporation ( "SMC")
does hereby acknowledge receipt of Notice of said Special Meeting and the
accompanying Proxy Statement/Prospectus and does hereby constitute and appoint
Ronald D. Hunter and Stephen M. Coons, or either of them, with full power of
substitution, to vote all shares of Common Stock of SMC that the undersigned is
entitled to vote, as fully as the undersigned could do if personally present, at
the Special Meeting of Stockholders of SMC, to be held on ,
local time, at the Woodland Country Club, 100 Woodland Lane, Carmel, Indiana,
and at any adjournment or postponement thereof, as follows:
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE COMMON STOCK ISSUANCE (AS DEFINED BELOW) IN PROPOSAL 1. IF OTHER
BUSINESS IS PRESENTED AT SAID MEETING, THIS PROXY WILL BE VOTED ON THOSE MATTERS
IN ACCORDANCE WITH THE BEST JUDGMENT OF THE NAMED PROXIES.
PLEASE MARK BOX M or [X]
1. Proposal to approve the issuance of SMC Common Stock (the "Common Stock
Issuance") in connection with the acquisition by SMC of Savers Life Insurance
Company:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
You are urged to mark, sign, date and return your proxy without delay in
the return envelope provided for that purpose, which requires no postage if
mailed in the United States.
Dated: , 1998
- --------------------------------------
Signature
- --------------------------------------
Signature if held jointly
When signing the proxy, please take care to have the signature conform to the
stockholder's name as it appears on this side of the proxy. If shares are
registered in the names of two or more persons, each person should sign.
Executors, administrators, trustees and guardians should so indicate when
signing. Corporations and partnerships should sign in their full corporate or
partnership names by a duly authorized person.
<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 23, 1997
EXHIBIT 99.2
PROXY SAVERS LIFE INSURANCE COMPANY PROXY
8064 NORTH POINT BOULEVARD
WINSTON-SALEM, NORTH CAROLINA 27106
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
, 1998
The undersigned stockholder of Savers Life Insurance Company ("Savers Life")
does hereby acknowledge receipt of Notice of said Special Meeting and the
accompanying Proxy Statement/Prospectus and hereby appoints Jerry D. Stoltz,
Sr., and William G. White, Jr., and either of them, with full power of
substitution, proxies to vote the shares of Savers Life Common Stock that the
undersigned could vote if personally present at the Special Meeting of
Stockholders of Savers Life to be held on , at a.m.,
local time, and at any adjournment or postponement thereof:
(1) To approve the Amended and Restated Agreement and Plan of Merger, dated
as of December 9, 1997, among Standard Management Corporation ("SMC"), Standard
Acquisition Corporation, a wholly-owned subsidiary of SMC ("SAC"), and Savers
Life, pursuant to which SAC would merge with and into Savers Life, all as
described in detail in the accompanying Proxy Statement/Prospectus dated
, 1998.
[ ] VOTE FOR [ ] VOTE AGAINST [ ] ABSTAIN
(2) To vote, in the discretion of said proxies, upon such other business as
may properly come before the meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED AS
SPECIFIED BY THE STOCKHOLDER.
If no choice is indicated above with respect to a matter where a ballot is
provided, this proxy will be voted FOR such matter.
DATED: , 1998
--------------------------------------
(Signature)
--------------------------------------
(Signature)
Please date and sign exactly as name
appears hereon. If more than one name
appears, each person should sign.
Please add Social Security number or
Zip Code, if not shown, and change of
address, if any.
--------------------------------------
--------------------------------------
--------------------------------------
<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED DECEMBER 27, 1997
EXHIBIT 99.3
FORM OF ELECTION
PLEASE FOLLOW CAREFULLY THE INSTRUCTIONS ON THE REVERSE SIDE
IMPORTANT: HOLDERS OF SAVERS LIFE COMMON STOCK WHO WISH TO RECEIVE SHARES OF SMC
COMMON STOCK IN LIEU OF THE $1.50 PER SHARE CASH PAYMENT CONTEMPLATED BY SECTION
2.5(C)(I) OF MERGER AGREEMENT MUST PROPERLY COMPLETE AND RETURN THIS FORM OF
ELECTION BY 5:00 P.M., LOCAL TIME, ON , 1998. HOLDERS OF SAVERS
LIFE COMMON STOCK WHO DO NOT WISH TO RECEIVE SHARES OF SMC COMMON STOCK IN LIEU
OF THE $1.50 PER SHARE CASH PAYMENT DO NOT NEED TO RETURN THIS FORM OF ELECTION.
Dear Sirs:
The undersigned, in accordance with Section 2.6 of the Amended and Restated
Agreement and Plan of Merger dated as of December 9, 1997 (the "Merger
Agreement"), among Standard Management Corporation ("SMC"), Standard Acquisition
Corporation ("SAC") and Savers Life Insurance Company ("Savers Life"), hereby
elects to receive shares of Common Stock, without par value, of SMC ("SMC Common
Stock") in lieu of cash that the undersigned would otherwise be entitled to
receive pursuant to Section 2.5(c)(i) of the Merger Agreement with respect to
the shares of Common Stock, no par value, of Savers Life ("Savers Life Common
Stock") set forth in column 3 of Box A. The undersigned acknowledges that
Section 2.6 of the Merger Agreement provides that the number of shares of SMC
Common Stock to be received with respect to each share of Savers Life Common
Stock to which this Form of Election applies, rounded to the nearest hundredth
of a share, will be determined by dividing $1.50 by the average of the closing
trading prices, as reported by The Nasdaq National Market, of SMC Common Stock
for the ten consecutive trading days ending on the fifth day prior to the Savers
Stockholder Meeting (as defined in the Merger Agreement).
BOX A: ELECTION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Name and Address of Holder of Record as Shown on Records of Savers Life
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Certificate(s) Owned
(attach separate schedule if necessary)
- --------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3
Number of Shares of Savers
Number of Shares of Savers Life Common Stock with
Life Common Stock respect to which this Form
Certificate Number(s) Represented By Certificate of Election Applies
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Totals ,
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
In order to be effective, this Form of Election must be properly completed
and returned by 5:00 p.m., local time, on , 1998 to:
SAVERS LIFE INSURANCE COMPANY
8064 NORTH POINT BOULEVARD
WINSTON-SALEM, NORTH CAROLINA 27106
ATTENTION: PATRICIA G. LANDY
THIS FORM OF ELECTION MAY BE RETURNED, TOGETHER WITH A PROXY CARD, IN THE
ENCLOSED BUSINESS REPLY ENVELOPE.
The undersigned understands and agrees that the acceptance and delivery of
any Form of Election by Savers Life (or any other authorized person) will not of
itself create any right to receive SMC Common Stock in exchange for the Savers
Life Common Stock subject to any Form of Election and that such right will arise
only upon the Effective Time of the Merger (as defined in the Merger Agreement)
and only to the extent provided in the Merger Agreement. The undersigned further
understands and agrees that the election made on this form shall be irrevocable
unless it is properly revised or withdrawn in accordance with Instructions 4 or
5 to this form.
Dated: , 1998
IGN 5/8
- --------------------------------------
HERE
- --------------------------------------
(Signature(s) of Holder(s)
Telephone Number ( )
(Include Area Code)
(Must be signed by registered
holder(s) exactly as name(s) appear on
the certificates as Indicated in Box
A, or by person(s) authorized to
become registered holder(s). See
Instruction 2.)
<PAGE> 3
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THIS FORM OF ELECTION
RETURN DATE: EACH HOLDER OF RECORD OF SAVERS LIFE COMMON STOCK SHALL HAVE
THE RIGHT TO MAKE AN ELECTION REQUEST BY SUBMITTING THE FORM OF ELECTION,
TOGETHER WITH ANY ITEMS REQUIRED BY INSTRUCTION 3 BELOW TO SAVERS LIFE BY 5:00
P.M., LOCAL TIME, ON , 1998.
1. DELIVERY OF FORM OF ELECTION. This Form of Election should be completed
and signed by the holder or holders of record of the Savers Life Common Stock.
This Form of Election, completely filled in and signed, together with any other
documents required by Instruction 3 should be delivered by hand or sent by mail
to Savers Life at the address set forth on the reverse side. The method of
delivery of all documents is at the option and risk of the stockholder, but if
delivery is by mail, registered mail with return receipt requested, properly
insured, is recommended. For your convenience a return envelope is enclosed. DO
NOT SEND CERTIFICATES FOR SAVERS LIFE COMMON STOCK WITH THE FORM OF ELECTION.
2. SIGNATURES. This Form of Election must be signed by or on behalf of the
holder(s) of record of the certificates. In the case of joint tenants, both
should sign. If the certificates for the Savers Life Common Stock deposited are
registered in different forms of the name of any person signing this Form of
Election (e.g., "John Smith" on one certificate and "J. Smith" on another), it
will be necessary for such person either to sign this Form of Election in each
way in which the certificates are registered or to sign as many Forms of
Election as there are different registrations. When signing as agent, attorney,
administrator, executor, guardian, trustee, or in any other fiduciary or
representative capacity, or as an officer of a corporation on behalf of the
corporation, please give full title as such.
3. SUPPORTING EVIDENCE. In case any Form of Election is executed by an
agent, attorney, administrator, executor, guardian, trustee, or in any other
fiduciary or representative capacity, or by an officer of a corporation on
behalf of the corporation, there should be submitted with the Form of Election,
documentary evidence of appointment and authority to act in such capacity
(including court orders and corporate resolutions where necessary), as well as
evidence of the authority of the person making such execution to assign, sell or
transfer shares. Such documentary evidence of authority must be in form
satisfactory to Savers Life.
4. MODIFICATION OF ELECTION. The holder of any of the Savers Life Common
Stock listed on this Form of Election may at any time prior to 5:00 p.m., local
time, on , 1998 revise the request made on this Form of
Election by submitting a new, subsequently dated, Form of Election identical to
this Form of Election (i) containing the new election request and (ii) signed
and completed in accordance with the Instructions on this Form of Election.
5. WITHDRAWAL OF ELECTION. The holder of the shares of Savers Life Common
Stock listed on this Form of Election may at any time prior to 5:00 p.m., local
time, on , 1998 withdraw his election by written notice to
Savers Life at the address set forth herein.
6. MISCELLANEOUS. Neither SMC nor Savers Life shall be under any duty to
give notification of defects in any Form of Election, nor shall either SMC or
Savers Life incur any liability for failure to give such notification. SMC shall
have the absolute right to reject any and all Forms of Election not in proper
form or to waive any irregularities in any Form of Election. The terms and
conditions of the Merger Agreement shall be deemed to be incorporated herein by
reference and to form part of the terms and conditions of any election request
made on this Form of Election.
7. ADDITIONAL COPIES. Additional copies of the Form of Election may be
obtained from Savers Life.
In order to be effective, this Form of Election and accompanying items must
be submitted to Savers Life at its address as set forth herein prior to 5:00
p.m., local time, on , 1998.
DO NOT SEND CERTIFICATES FOR SHARES OF SAVERS LIFE COMMON STOCK
WITH THIS FORM OF ELECTION.
