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Previous: STANDARD MANAGEMENT CORP, 8-K, 1997-01-24 |
Next: STATE OF WISCONSIN INVESTMENT BOARD, SC 13G/A, 1997-01-24 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Date of Report (Date of the earliest event reported): January 24, 1997
(November 8, 1996)
Standard Management Corporation (Exact name of registrant as
specified in its charter)
0-20882 No. 35-1773567
(Commission file number) (IRS employer identification no.)
9100 Keystone Crossing
Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Telephone)
Item 7. Financial Statements and Exhibits.
The following financial statements are filed as part of this report:
(a) Audited Financial Statements of Shelby Life Insurance Company:
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Income for the years ended December 31, 1995
and 1994
Statements of Cash Flows for the years ended December 31,
1995 and 1994
Notes to Financial Statements
Unaudited Interim Financial Statements of Shelby Life Insurance
Company
Balance Sheet as of September 30, 1996
Statements of Income for the nine months ended September 30,
1996 and September 30, 1995
Statement of Cash Flows for the nine months ended September
30, 1996 and 1995
Notes to Financial Statements
(b) Pro Forma Financial Information:
Standard Management Corporation
Pro Forma Combined Financial Statements (Unaudited)
Pro Forma Combined Balance Sheet as of September 30, 1996
(Unaudited)
Pro Forma Combined Statement of Operations for the nine
months ended
September 30, 1996 (Unaudited)
Pro Forma Combined Statement of Operations for the year
ended
December 31, 1995 (Unaudited)
Notes to Pro Forma Combined Financial Statements (Unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the
undersigned hereunto duly authorized.
STANDARD MANAGEMENT CORPORATION
(Registrant)
Date: January 24, 1997 By: /s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board,
President and Chief
Executive Officer
SHELBY LIFE INSURANCE COMPANY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Report of Independent Accountants
Board of Directors
Shelby Life Insurance Company
We have audited the accompanying balance sheets of the Shelby Life
Insurance
Company (the Company) as of December 31, 1995 and 1994, and the
related
statements of income, stockholders' equity, and cash flows for the
years then
ended. 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
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 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 the Shelby Life
Insurance
Company as of December 31, 1995 and 1994 and the results of its
operations and
its cash flows for the years then ended in conformity with generally
accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Memphis,
Tennessee
September 18, 1996,
except for Note 13
as to which the date is
November 8, 1996
Shelby Life Insurance Company
Balance Sheets
December 31, 1995 and 1994
ASSETS
1995
1994
Inve stm ent s:
Debt secur iti es ava ila ble -fo r-s ale , at fair value
$
57556880
$
28944618
Debt secur iti es hel d-t o-m atu rit y, at amo rti zed cost
41647602
77872761
Poli cy loa ns
2268534
1840890
Othe r inve stm ent s
2420916
550000
103893932
109208269
Cash and cash equiv ale nts
1154269
-
Accrue d inve stm ent incom e
1331813
1850254
Rein sur anc e reco ver abl e
949637
1101964
Inco me tax es rec eiv abl e
-
220832
Deferr ed pol icy acqui sit ion costs , net
483018
378895
Pres ent value of futur e prof its , net
4475083
4012857
Defe rre d inco me tax es
499,000
1090000
Othe r asse ts
240444
317185
Tota l asse ts
$
113027196
$
118180256
LIABILITIES AND STOCKHOLDER'S EQUITY
Poli cy dep osi ts and liabi lit ies :
Annui ty and life dep osi ts
$
84191283
$
92149921
Annu ity and life liabi lit ies
10996561
10794212
Acco unt s paya ble , accr ued expen ses and othe r liab ili tie s
607954
713952
F ede ral incom e taxe s paya ble
415628
-
Paya ble to paren t
373025
271903
Tota l liab ili tie s
96584451
103929988
Comm itm ent s and con tin gen cie s (Not e 12)
Comm on sto ck, $100 par value , 25,0 00 sha res autho riz ed,
issue d
and outs tan din g
2500000
2500000
Addi tio nal paid-in cap ita l
13351000
13351000
Reta ine d earn ing s
580915
74074
Net unr eal ize d hold ing gain (lo ss) on avail abl e-f or-sal e
secu rit
ies , net
of tax liabi lit y (ben efi t) of $5, 000 and $(86 3,0 00) in 1995
and 1994, respe cti vel y
10830
-1674806
Tota l stoc kho lde rs' equit y
16442745
14250268
Tota l liab ili tie s and sto ckh old er' s equi ty
$
113027196
$
118180256
The accompanying notes are an integral part of the financial statements.
Shelby Life Insurance Company Statements of Income for the years ended
December 31, 1995 and 1994
REVENUES
1995
1994
Premiu m inco me
$
1627541
$
1851879
Net inv est men t inco me
7950287
7603188
Real ize d inve stm ent gains (loss ), net
84705
-80751
Poli cy cha rge s
2374615
2051454
Othe r inco me
334046
382110
Tota l reve nue s
12371194
11807880
POLICY BENEFITS AND EXPENSES
Policy benef its and expe nse s
2371044
2486783
Inte res t cred ite d to poli cie s
4812545
5382361
Unde rwr iti ng, acqui sit ion and insu ran ce exp ens es
2106858
2003616
Oper ati ng exp ens es
1138446
346216
Tota l poli cy ben efi ts and expen ses
10428893
10218976
Inco me bef ore provi sio n for inc ome taxes
1942301
1588904
Prov isi on for incom e taxe s
660460
514830
Net inc ome
$
1281841
$
1074074
The accompanying notes are an integral part of the financial
statements.
Shelby Life Insurance Company Statements of Stockholders'
Equity for the years ended December 31, 1995 and 1994
Net
Unrealized
Holding
Gain
(Loss)
Additional
On
Available-
Total
Common
Paid-In
Retained
For-Sale
Stockholders'
Stock
Capital
Earnings
Securities
Equity
Bal an ce s at Jan ua ry 1, 19
94
$
2500000
$
13048952
-
-
$
15548952
Add it io na l ac qu is it io n co
st s
302048
302048
Div id en d to par en t ($ 40
per sha re )
$
-1000000
-1000000
Net in co me
1074074
1074074
Net cha ng es in un re al iz
ed hol di ng
loss on av ai la bl e-fo r-sa
le
secu ri ti es , ne t of tax es
of $8 63 ,0 00
$
-1674806
-1674806
Bala nc es at De ce mb er 31,
199 4
2500000
13351000
74074
-1674806
14250268
Div id en d to par en t ($ 31
per sha re )
-775000
-775000
Net in co me
1281841
1281841
Net cha ng es in un re al iz
ed hol di ng
gain on av ai la bl e-fo r-sa
le
secu ri ti es , ne t of tax es
of $8 68 ,0 00
1685636
1685636
Bala nc es at De ce mb er 31,
199 5
$
2500000
$
13351000
$
580915
$
10830
$
16442745
The accompanying notes are an integral part of the financial
statements.
Shelby Life Insurance Company Statements of Cash Flows for the years ended
December 31, 1995 and 1994
1995
1994
Cash flows from ope rat ing activ iti es:
Net incom e
$
1281841
$
1074074
Adju stm ent s to reco nci le net incom e to net cas h prov ide d
by opera tin g acti vit ies :
Amort iza tio n of inve stm ent s, net
1251486
1456197
Amor tiz ati on of pre sen t valu e of futu re pro fit s, net
-462226
-897183
Defe rre d fede ral incom e tax pro vis ion (bene fit )
-277000
223000
Net (ga in) loss on sal e of inve stm ent s
-84705
80751
Chan ges in opera tin g asse ts and liabi lit ies :
Ot her inves tme nts
-1870916
-550000
P oli cy loa ns
-427644
-171850
Poli cy acq uis iti on cos ts
-104123
-378895
R ein sur anc e reco ver abl e
152327
182610
Fede ral incom e taxe s rece iva ble and paya ble
636460
-135920
Accr ued inves tme nt inc ome
518441
100804
Othe r asse ts
76741
51385
P oli cy lia bil iti es
202349
724012
Acco unt s paya ble , accr ued expen ses and othe r liab ili tie s
-105998
-129488
P aya ble to paren t
101122
271903
Net cas h prov ide d by oper ati ng act ivi tie s
888155
1901400
Cash flows from inv est ing activ iti es:
Procee ds fro m prin cip al rep aym ent s and mat uri tie s of
held-to-mat uri ty deb t secu rit ies
6685199
8775974
Proc eed s from princ ipa l repa yme nts and matu rit ies of
availa ble -fo r-s ale debt sec uri tie s
1988981
1503433
Proc eed s from sales of avail abl e-f or-sal e debt
secur iti es
26370443
3278265
Purc has e of held -to -ma tur ity debt sec uri tie s
-21135616
-12460688
Purch ase of avail abl e-f or-sal e debt secur iti es
-4909255
-
Net cas h prov ide d by inve sti ng act ivi tie s
8999752
1096984
Cash flows from fin anc ing activ iti es:
Net incre ase in depos its
-7958638
-4779168
Divi den ds pai d
-775000
-1000000
Net cas h used by finan cin g acti vit ies
-8733638
-5779168
Net inc rea se (de cre ase ) in cash and cash equiv ale nts
1154269
-2780784
Cash and cash equiv ale nts , begi nni ng of yea r
-
2780784
Cash and cash equiv ale nts , end of yea r
$ 1154269
$ -
The accompanying notes are an integral part of the financial statements.
<PAGE>
Shelby Life Insurance Company Notes to Financial Statements
1. organization, Basis of Presentation and Nature of Operations:
Organization
Shelby Life Insurance Company (the Company) is a wholly-owned
subsidiary
of Delta Life and Annuity Company (Delta). Delta, a Tennessee
corporation, is a wholly-owned subsidiary of Delta Life
Corporation (DLC),
a Delaware corporation. During 1995, the Company received
approval for
redomestication to Tennessee. Accordingly, the Company is
chartered and
licensed in the State of Tennessee and is licensed in various
other
states. Prior to 1995, the Company was chartered and licensed
in the
State of Ohio as The Shelby Life Insurance Company of Shelby,
Ohio. Basis
of Presentation
The accompanying financial statements of the Company are
prepared on the
basis of generally accepted accounting principles. Such
accounting
principles differ from statutory reporting practices used by
insurance
companies in reporting to state regulatory authorities. The
preparation of
financial statements in conformity with generally accepted
accounting
principles requires management to make various estimates that
affect the
reported amounts of assets and liabilities, disclosures of
contingent
assets and liabilities, as well as the reported amounts of
revenues and
expenses. Actual results could differ from those estimates.
Effective
December 31, 1993, Delta acquired all of the common stock of
the Company.
The fair value of the assets acquired was $123.2 million and
liabilities
assumed totaled $107.7 million. The acquisition has been
accounted for
under the purchase method. During 1994 Delta incurred
additional amounts
associated with the acquisition totaling $302,048. Nature of
Operations
The Company markets individual life insurance, annuities and
investment
products to its policyholders, primarily in the eastern half of the United
States. Its products are distributed through independent agents and
brokers. The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance
of insurance ratings, regulation and taxation, and other factors. 2.
summary of Significant Accounting Policies: Investments
During 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt
and Equity Securities". Under the statement the Company's investments
have been classified as held-to-maturity and available-for-sale.
Securities classified into the held-to-maturity category are accounted for
at cost, adjusted for amortization of premiums and discounts and, when
necessary, declines in value considered to be other than temporary. It is
management's intention to hold securities classified as held-to-maturity
under all reasonably foreseeable conditions. Securities in the
available-for-sale category are carried at market value, with changes in
the market value being accounted for as changes in stockholders' equity.
The Company has no trading account securities. Policy Loans
Policy loans are recorded at cost. As policy loans have no stated
maturity and are often repaid by account withdrawals or surrenders, it is
not practical to estimate their fair values. Reverse Repurchase Agreements
The Company purchases U.S. Government securities under agreements to
resell within one to five days. Due to the short-term nature of the
agreements, the Company does not take possession of such securities.
Reverse repurchase agreements, which are recorded at cost which
approximates fair value, are included in other investments and amounted to
approximately $2,370,000 at December 31, 1995.
Cash Equivalents
The Company considers all highly liquid debt instruments, other than
reverse repurchase agreements, purchased with a remaining maturity of
three months or less to be cash equivalents. Deferred Policy Acquisition
Costs
Policy acquisition costs (principally commissions incurred at policy
issuance, premium taxes and certain sales, issue and underwriting
expenses) associated with new annuity and life business are deferred when
incurred. The deferred costs related to traditional life insurance are
amortized over the premium payment period using assumptions consistent
with those used in estimating reserves. Deferred costs related to
annuities and interest sensitive products accrue interest and are
amortized at a constant rate based on the present value of the estimated
gross profits expected to be realized over the life of the contracts.
Estimates of expected gross profit are evaluated periodically, and the
total amortization recorded to date is adjusted by a charge or credit to
current amortization if actual experience or other evidence suggest that
earlier estimates should be revised. Amortization related to deferred
policy acquisition costs are included in operating expenses.
2. summary of Significant Accounting Policies, continued: Present
Value of Future Profits
The present value of future profits (PVFP) represents the present value of
the anticipated annual profits of the business in force on December 31,
1993 (the date Delta acquired the Company), net of purchase accounting
adjustments. The PVFP is being amortized over the life of the business in
proportion to estimated gross profits for the deferred annuities and
universal life business and estimates of future premiums for the
traditional life business. The amortization is included in operating
expenses. Estimates of expected gross profit are evaluated periodically,
and the total amortization recorded to date is adjusted by a charge or
credit to current amortization if actual experience or other evidence
suggest that earlier estimates should be revised. The portion of PVFP
attributable to the purchase accounting adjustments of investments at the
purchase date is being amortized over the average remaining term of the
investments purchased and is included in investment income.
Revenue and Policy Liabilities
Premiums received on annuity and life deposits are recorded as
deposits into the policyholder's account balance. Revenue related to
these contracts consists of earnings from the invested deposits and
applicable mortality, withdrawal and administrative charges. These
deposits consist of the policyholders' account balances plus amounts
deposited by the policyholders, interest credited to the policy, and
less withdrawals by the policyholder, sales, mortality and
administrative charges deducted by the Company. Premiums on annuity
policy liabilities are recognized as revenue when received. Policy
liabilities are computed using the net level premium method and
assumptions as to investment yields, mortality and expenses at the
date of issue.
Reinsurance
Reinsurance premiums, claims and claim adjustment expenses are accounted
for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.
2. summary of Significant Accounting Policies, continued: Income
Taxes
Deferred income taxes are recognized for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Additionally, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. Policy Charges
Policy charges are comprised generally of policy fees and withdrawal
penalties and are recorded as earned.
Other Income
Other income is comprised generally of commissions and expense allowances
on reinsurance ceded and is recorded as earned.
Concentration of Risk
The Company had cash deposits in excess of federally insured amounts of
approximately $1,096,000 at December 31, 1995.
3. Reconciliation With Statutory Reporting Practices: Financial
statements prepared in conformity with generally accepted accounting
principles differ in some respects from the statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The most
significant differences are as follows: (a) acquisition costs of obtaining
new business are deferred and amortized over the approximate life of the
policies rather than charged to operations as incurred; (b) benefit
liabilities are computed using a net level method and are based on
realistic estimates of expected mortality, interest, and withdrawals as
adjusted to provide for possible unfavorable deviation from such
assumptions, (c) deferred income taxes are provided for temporary
differences between financial and taxable earnings; (d) the Asset
Valuation Reserve and Interest Maintenance Reserve are restored to
stockholders' equity; (e) certain items are reported as assets rather than
being charged directly to surplus (referred to as nonadmitted items); (f)
certain items of interest income, principally accrual of bond discounts,
are amortized differently; and (g) valuation differences on debt
securities.
3. Reconciliation With Statutory Reporting Practices, continued: The
reconciliations of net income and stockholders' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying financial statements are as follows (in 000's):
Net Income
Stockholders' Equity
1995
1994
1995
1994
In co nf or mi ty wit h st at ut or y re po rt in g pr ac ti ce s
$
1661
$
699
$
10264
$
9360
Add it io ns (de du ct io ns ) by adj us tm en t:
De fe rr ed pol ic y ac qu is it io n co st s, net
104
379
483
379
Pre se nt val ue of fu tu re pro fi ts , ne t
462
897
4475
4013
Pol ic y li ab il it ie s an d ac cr ua ls
-1006
-411
-2739
-3690
De fe rr ed inc om e ta xe s
277
-223
499
1090
Ass et Val ua ti on Res er ve
-
-
950
956
Int er es t Ma in te na nc e Re se rv e
-224
-173
1192
676
Non ad mi tt ed ite ms
-
-
99
124
Val ua ti on dif fe re nc es on de bt sec ur it ie s
-
-
1785
-394
Net unr ea li ze d ga in s an d lo ss es on in ve st me nt s
-
-
-11
1675
Rea li ze d in ve st me nt gai ns (lo ss es )
84
-81
-
-
Oth er adj us tm en ts , ne t
-76
-13
-554
61
In co nf or mi ty wit h ge ne ra ll y ac ce pt ed acc ou nt in g pr in
ci pl es
$
1282
$
1074
$
16443
$
14250
4. Investment Operations:
Net investment income and realized gains and losses by class of security
were as follows:
1995
1994
Net
Net
Investment
Realized
Realized
Investment
Realized
Realized
Income
Gains
Losses
Income
Gains
Gains
Losses
Mor tg ag
e ba ck ed
securities
$
2340314
$
1731010
U.S . Go ve rn me nt
obligations
827268
906945
Cor po ra
te bon ds
3788280
$
76432
4865154
$
-80751
Oth er
994425
8273
100079
$
7950287
$
84705
$
-
$
7603188
$
-
$
-80751
These securities yield interest at rates that range from 6% to 10% and pay
interest on terms that range primarily from one to six months.
Mortgage backed securities are issued, secured or guaranteed by the U.S.
Government, government agencies or instrumentalities. Realized gains and
losses on sales of investments were determined using the specific
identification method.
4. investment Operations, continued: The carrying amount of
securities and their approximate fair values at December 31, 1995 and 1994
were as follows:
1995
Estimated
Amortized
Gross Unrealized
Fair
Avail abl e-f or-Sal e:
Cost
Gains
Losses
Value
Mortga ge bac ked secur iti
es
$
12780424
$
125557
$
-33328
$
12872653
U.S. Gover nme nt obl iga tio
ns
4009869
-12867
3997002
Corpor ate bonds
40227321
311275
-383821
40154775
Fore ign gover nme nt obl
iga tio ns
523436
9014
532450
$
57541050
$
445846
$
-430016
$
57556880
Held -to -ma tur ity :
Mortg age backe d secu rit
ies
$
31007188
$
298182
$
-46028
$
31259342
U.S. Gover nme nt obl iga tio
ns
10640414
10129
-36358
10614185
$
41647602
$
308311
$
-82386
$
41873527
1994
Estimated
Amortized
Gross Unrealized
Fair
Avail abl e-f or-Sal e:
Cost
Gains
Losses
Value
U.S. Gove rnm ent oblig ati
ons
$
265453
$
-9908
$
255545
Corp ora te bon ds
30668319
$
1276
-2488997
28180598
Fore ign gover nme nt obl
iga tio ns
548652
-40177
508475
$
31482424
$
1276
$
-2539082
$
28944618
Held -to -ma tur ity :
Mortg age backe d secu rit
ies
$
23863797
$
1106
$
-1276469
$
22588434
U.S. Gover nme nt obl iga tio
ns
15082571
-1178205
13904366
Corpo rat e bond s
37834091
-3032974
34801117
Foreig n gove rnm ent oblig
ati ons
1092302
-112602
979700
$
77872761
$
1106
$
-5600250
$
72273617
During December of 1995, and in accordance with the provisions allowed by the
Financial Accounting Standards Boards, Special Report - A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, the Company reclassified approximately $48 million of
investments, originally purchased and classified as held-to- maturity to
available-for-sale recording a net unrealized loss of approximately $91,000.
4. investment Operations, continued: The amortized cost and
estimated fair value of debt securities available-for-sale and
held-to-maturity at December 31, 1995, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
Estimated
Amortized
Fair
Cost
Value
Ava il ab le -f or -s al e:
Due in one yea r or les s
$
1683700
$
1679160
Due aft er one yea r th ro ug h fi ve yea rs
32783001
32749737
Due aft er fiv e ye ar s th ro ug h te n ye ar s
12908572
12866909
Due aft er ten yea rs
10165777
10261074
$
57541050
$
57556880
Hel d-to -m at ur it y:
Due af te r on e ye ar thr ou gh fiv e ye ar s
$
10126666
$
10092470
Due aft er fiv e ye ar s th ro ug h te n ye ar s
513748
521715
Due aft er ten yea rs
31007188
31259342
$
41647602
$
41873527
Cash, cash equivalents and certain investments of the Company with a carrying
value of approximately $3,097,000 and $2,847,000 at December 31, 1995 and 1994,
respectively, were held on deposit with various state regulatory agencies for
the benefit of policyholders, claimants and creditors.
5. present Value of Future Profits: As a result of the acquisition of the
Company on December 31, 1993 by Delta, the Company established a
discounted asset for the present value of future profits (PVFP) of
insurance purchased.
Progression of the PVFP for the years ended December 31, 1995 and 1994 are
as follows:
1995
1994
Bala nce at begin nin g of year
$
4012857
$
2813626
Addi tio nal costs assoc iat ed wit h acqu isi tio n
302048
Amor tiz ati on
462226
897183
Bala nce at end of year
$
4475083
$
4012857
5. present Value of Future Profits, continued: The estimated amount
of PVFP as of December 31, 1995 expected to be amortized during each of
the next five years is as follows:
1996
$
-426940
1997
103021
1998
224590
1999
247532
2000
258243
Ther eaf ter
4068637
$
4475083
6. income Taxes:
The provision (benefit) for income taxes is composed of the following:
1995
1994
Fede ral :
Curre nt
$
937460
$
291830
Defe rre d
-277000
223000
$
660460
$
514830
The components of the deferred tax assets and liabilities as of December 31,
1995 and 1994 are as follows (in 000's):
1995
1994
Defer red tax asse ts:
Deposi ts and polic y liab ili tie s
$
1790
$
1247
Rese rve for guar ant y fund asses sme nts
51
40
Defe rre d poli cy acq uis iti on cos ts
137
191
Net unrea liz ed los s on avai lab le-for -sa le sec uri tie s
-
863
Othe r
104
101
2082
2442
Defe rre d tax lia bil iti es:
Presen t valu e of futu re pro fit s
-1511
-1284
Net unr eal ize d gain on avail abl e-f or-sal e secu rit ies
-5
-
Othe r
-67
-68
-1583
-1352
Net defe rre d tax ass et
$
499
$
1090
6. income Taxes, Continued:
Management believes that realization of the above deferred tax assets is
more likely than not primarily due to the reversal of existing taxable
temporary differences as well as a strong earnings history. Consequently,
no valuation allowance was deemed necessary.
7. reinsurance:
In the ordinary course of business, the Company cedes reinsurance to other
insurers under various contracts that cover individual risks or entire
classes of business. These arrangements limit the risk arising from large
policies. The Company retains a maximum of $100,000 of coverage per
individual life. Reinsurance contracts do not relieve the Company from
its obligation to policyholders. A contingent liability exists for
reinsurance ceded which would become a liability of the Company in the
event that any reinsurer is unable to meet its obligations under the
reinsurance agreements. As of December 31, 1995 and 1994 and for the years
then ended, the approximate impact on the financial statements due to all
ceded reinsurance agreements in force during the year was as follows:
1995
1994
Premium income
$
1335000
$
1490000
Reinsur ance ceded
1062000
339000
U nderwr iting, acquisition and
insurance expens es
334000
382000
8. supplemental Cash Flows Information: During 1995, the Company
paid cash and received refunds for income taxes of $414,656 and $113,656,
respectively. During 1994, the Company paid cash for income taxes of
$427,750.
9. Estimated Fair Values of Financial Instruments: The carrying amounts
reported in the balance sheet for other investments, cash and cash
equivalents, accrued investment income, ceded reserves and claims,
accounts payable, accrued expenses and other liabilities, and amounts
payable to parent approximate fair value due to the short-term nature of
these instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instrument in which it
is possible to estimate that value and fair value does not approximate
carrying value.
9. Estimated Fair Values of Financial Instruments, continued:
Investments
The fair value of debt securities are determined primarily by reference to
a pricing service or the dealer market.
Annuity and Life Deposits
The fair value of these contracts is estimated as the policyholder's net
cash surrender value which the policyholder may withdraw at their option.
The carrying value and fair value of these instruments is as follows:
1995
1994
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
Deb t se cu ri ti es ava il ab le -f or -s al e
$
57556880
$
57556880
$
28944618
$
28944618
Debt sec ur it ie s he ld -t o-ma tu ri ty
41647602
41873527
77872761
72273617
Annu it y de po si ts
60887315
59504315
70146340
68221601
Lif e de po si ts
23303968
20228968
22003581
18684636
10. Profit Sharing Plan:
The Company's employees participate in DLC's discretionary profit sharing
plan under which up to ten percent of an employee's compensation may be
contributed in any calendar year for employees with at least one year of
service. In addition, employees may contribute up to five percent of
their compensation. During 1995 the Company contributed approximately
$5,600 to the profit sharing plan.
11. Related Party Transactions:
The Company is party to an agreement with DLC whereby DLC provides
investment advisory services for a fee of 15 basis points per annum on
invested assets. This fee, which is charged to net investment income,
amounted to approximately $151,000 and $162,000 in 1995 and 1994,
respectively.
During 1994, the Company entered into a management agreement with DLC.
Pursuant to the agreement, Delta will provide certain management services
to the Company for a fee of 75 basis points on statutory premiums received
plus 10 basis points of the Company's net admitted assets at the end of
each quarter. However, no fees were charged under this agreement in 1995
or 1994.
11. Related Party Transactions, continued: Effective December 31, 1993,
Delta entered into a service agreement with the former parent on behalf of
the Company whereby certain operations of the Company would continue to be
performed by the former parent for a period of up to twelve months.
During 1995 and 1994, the Company paid approximately $299,030 and
$1,128,000, respectively, as reimbursement fees to the former parent. The
agreement was terminated April 17, 1995. Various operating expenses and
costs are allocated to the Company by Delta. These amounts are reflected
in the payable to parent balances at December 31, 1995 and 1994.
12. commitments and Contingencies:
Guaranteed Rates
The Company assumes investment risk on contracts it issues by guaranteeing
the principal value of policyholders' accounts plus a minimum interest
rate. The guaranteed interest rates are set on the anniversary date of
the contract and range from 4% to 7.5% depending upon the particular
contract form.
Investment Purchase Commitments
At December 31, 1995, the Company has made commitments to purchase
approximately $3,840,000 of mortgage backed securities at a rate of 6.5%.
Guaranty Fund
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. The Company does not
believe such assessments will be materially different from amounts already
provided for in the financial statements. Most of these laws do provide,
however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
Litigation
A number of civil jury verdicts have been returned against life insurers
in the areas in which the Company does business involving a variety of
matters. Some of the lawsuits have resulted in substantial judgments and
punitive damages. The Company, like other life insurers, from time to
time is involved in such litigation. To date, no such lawsuit has
resulted in the award of any significant amount of damages against the
Company. Although the outcome of any litigation cannot be predicted with
certainty, the Company is not aware of any litigation that will have a
material adverse effect on the Company's financial position, results of
operation, or cash flows.
12. commitments and Contingencies, Continued: Statutory Capital and
Surplus
Under Tennessee statute, the Company is required to maintain statutory
capital and surplus amounts of $2,000,000 at December 31, 1995 and 1994.
As a Tennessee domiciled insurance company, the Company is subject to
certain regulatory restrictions on the payment of dividends. The maximum
dividend which may be paid during 1996 without prior consent is
$1,660,855.
13. subsequent Event:
During February of 1996, the Company declared dividends of $13 per share
and totaling $325,000.
On November 8, 1996, Delta closed on a stock purchase agreement for the
sale of all of the outstanding common stock of the Company to Standard
Life Insurance Company of Indiana, a wholly-owned subsidiary of Standard
Management Corporation. Under the terms of the agreement, the sales price
is comprised of cash and an extraordinary dividend totaling approximately
$16 million and 250,000 shares of restricted common stock of Standard
Management Corporation.
SHELBY LIFE INSURANCE COMPANY
BALANCE SHEET September 30, 1996 (Unaudited, Dollars in Thousands)
September 30,
1996
ASSETS:
Investments:
Fixed maturity securities available for sale
$ 38,682
Fixed maturity securities held to maturity 60,026
Policy loans
2,406
Short-term investments
50
Total investments
101,164
Cash
564
Amounts due and recoverable from
reinsurers
947
Deferred policy acquisition costs
540
Present value of future profits
4,954
Deferred federal income taxes
326
Other assets
1,397
Total assets
$109,892
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Policy reserves
$92,146
Accounts payable and accrued expenses
1,339
Total liabilities
93,485
Shareholders' equity:
Common stock
2,500
Additional paid-in capital
12,603
Unrealized gain (loss) on securities available for sale
(260)
Retained earnings (deficit)
1,564
Total shareholders' equity
16,407
Total liabilities and shareholders' equity $109,892
See accompanying notes to financial statements.
SHELBY LIFE
INSURANCE COMPANY
STATEMENTS OF INCOME Nine Months Ended
September 30, 1996 and 1995 (Unaudited, Dollars in Thousands,
Except Per Share Amounts)
Nine Months Ended
September 30,
1996
1995
Revenues:
Premium income
$ 1,163
$ 1,400
Net investment income
5,462
5,608
Net realized investment gains
139
(4)
Policy charges
1,549
1,804
Other income
405
428
Total revenues
8,718
9,236
Benefits and expenses:
Benefits and claims
1,542
1,872
Interest credited on interest-sensitive annuities and other financial
products
3,436
3,761
Amortization
251
464
Other operating expense
1,390
1,719
Total benefits and expenses
6,619
7,816
Income before federal income taxes
2,099
1,420
Federal income tax expense (credit)
798
540
Net income
1,301
880
Net income
$ 52.04
$ 35.20
Weighted average number of common and common equivalent shares outstanding
25,000
25,000
See accompanying notes to financial statements.
<PAGE>
Shelby Life Insurance Company
Notes to Financial Statements (Dollars in Thousands,
Unaudited)
September 30, 1996
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.
Such principles were applied on a basis consistent with those reflected in the
Shelby Life Insurance Company (the Company) financial statements for the year
ended December 31, 1995. However, certain reclassifications have been made in
the 1995 financial statements to conform with the 1996 presentation.
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.
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the 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.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's financial statements for the year
ended December 31, 1995.
2 . Subsequent Event
On November 8, 1996, the Company closed on a stock purchase agreement for the
sale of all of the outstanding common stock of the Company to Standard Life
Insurance Company of Indiana, a wholly-owned subsidiary of Standard Management
Corporation. Under the terms of the agreement, the sales price is comprised of
cash of $16,000 and 250,000 shares of restricted
common stock of Standard Management Corporation.
<PAGE>
Standard Management Corporation
Pro Forma Combined Financial Statements Dollars in Thousands, Except Per
Share Amounts (Unaudited)
Background Information
The following pro forma combined balance sheet as of September 30, 1996 gives
effect to the acquisition of Shelby Life Insurance Company ("Shelby Life") from
Delta Life and Annuity Company ("DLAC"), and the merger of Shelby Life into
Standard Life Insurance Company of Indiana ("Standard Life"), a wholly-owned
subsidiary of Standard Management Corporation ("Standard Management"), as if it
had occurred as of the balance sheet date. The merger of Shelby Life was
consummated pursuant to an Agreement and Plan of Merger dated July 18, 1996
previously filed with the Securities and Exchange Commission on November 14,
1996. The pro forma combined statements of operations for the year ended
December 31, 1995, and nine months ended September 30, 1996, are presented as
if the transaction had occurred as of January 1, 1995.
The pro forma combined financial statements do not purport to represent what
Standard Management Corporation's ("Standard Management") financial position or
results of operations actually would have been had the transaction in fact
occurred on the dates indicated, or to project Standard Management's financial
position or results of operations for any future date or period. The pro forma
financial statements should be read in conjunction with the accompanying notes
thereto and the separate historical consolidated financial statements of
Standard Management and Shelby Life as of and for the nine months ended
September 30, 1996, and as of and for the year ended December 31, 1995.
The pro forma adjustments are applied to the historical consolidated
financial statements of Standard Management and Shelby Life to account for the
transaction under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16 ("APB No.16"). Under this method of
accounting, the total purchase cost has been allocated to Shelby 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 pro forma combined financial
statements taken as a whole. The pro forma combined financial statements,
however, reflect management's best estimate based on currently available
information.
The total acquisition cost to purchase Shelby Life is comprised of the
following:
Cash payment, provided by senior debt of $10,000 and the balance in
subordinated
convertible debt $13,000
Restricted SMC Common Stock 1,250
14,250
Acquisition costs and other liabilities
directly related to the acquisition 400
TOTAL PURCHASE PRICE $14,650
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED BALANCE SHEET September 30, 1996 (Dollars in Thousands,
Unaudited)
Historical Financial
Reclassifications
Statements
and
Standard
Shelby
Pro Forma
Pro Forma
Management
Life
Adjustments
Combined
ASSETS:
Investments:
Securities available for sale:
Fixed maturity securities
$241,713
$ 38,682
$60,026 (B)
(1,417) (C)
$339,004
Equity securities
77
77
Fixed maturity securities held to
maturity
60,026
(60,026) (B)
Mortgage loans on real estate
3,016
3,016
Policy loans
7,498
2,406
9,904
Real estate
547
547
Other invested assets
957
957
Short-term investments
12,070
50
12,120
Total investments
265,878
101,164
(1,417)
365,625
Cash
4,411
564
300 (D)
5,275
Amounts due and recoverable from
reinsurers
65,047
947
65,994
Deferred policy acquisition costs
17,977
540
(540) (E)
17,977
Present value of future profits
15,402
4,954
(4,954) (F)
9,372 (F)
24,774
Excess of acquisition cost over net assets acquired
2,279
873 (G)
3,152
Deferred federal income taxes
66
326
(874) (K)
482 (C)
Other assets
8,681
1,397
260 (H)
10,338
Assets held in separate accounts
126,987
126,987
Total assets
$506,728
$109,892
$ 3,502
$620,122
See accompanying notes to pro forma combined financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED BALANCE SHEET (Continued) September 30, 1996 (Dollars in
Thousands, Unaudited)
Historical Financial
Reclassifications
Statements
and
Standard
Shelby
Pro Forma
Pro Forma
Management
Life
Adjustments
Combined
LIABILITIES, REDEEMABLE
SECURITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Policy reserves
$326,445
$92,146
$
$418,591
Accounts payable and accrued expenses 4,826
1,339
3,400 (H) 9,565
Obligations under capital lease
753
753
Notes payable
5,671
14,100 (J)
19,771
Deferred federal income taxes
2,558 (J)
(874) (K)
1,684
Excess of net assets acquired over
acquisition cost
3,122
3,122
Liabilities related to separate accounts 126,987
126,987
Total liabilities
467,804
93,485
19,184
580,473
Class S Cumulative Convertible
Redeemable
Preferred Stock
1,722
1,722
Shareholders' equity:
Preferred stock
Common stock
40,997
2,500
(2,500) (L)
(525) (M)
40,472
Additional paid-in capital
12,603
(12,603) (L)
Treasury stock (deduction)
(4,741)
1,250 (N)
(3,491)
Unrealized gain (loss) on securities available for sale
(1,892)
(260)
(935) (C)
1,195 (B)
(1,892)
Foreign currency translation adjustment 717
(K)
717
Retained earnings (deficit)
2,121
1,564
(1,564) (K)
2,121
Total shareholders' equity
37,202
16,407
(15,682)
37,927
Total liabilities, redeemable
securities and shareholders' equity
$506,728
$109,892
$ 3,502
$620,122
See accompanying notes to pro forma combined financial statements. STANDARD
MANAGEMENT
CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended
December 31, 1995 (Dollars in Thousands, Except Per Share
Amounts, Unaudited)
Historical Financial
Reclassifications
Statements
and
Standard
Shelby
Pro Forma
Pro Forma
Management
Life
Adjustments
Combined
Revenues:
Premium income
$ 5,504
$ 1,628
$
$ 7,132
Net investment income
18,517
8,201
(1,675) (P)
25,043
Net realized investment gains
688
85
773
Policy charges
2,467
2,375
4,842
Amortization of excess of net assets
acquired over acquisition cost
1,388
1,388
Management fees and similar income
from
separate accounts
1,294
1,294
Other income
380
333
713
Total revenues
30,238
12,622
(1,675)
41,185
Benefits and expenses:
Class action litigation and settlement costs
(credit)
(314)
(314)
Benefits and claims
5,791
2,332
8,123
Interest credited on interest-sensitive annuities and other financial
products
10,009
4,813
14,822
Amortization
2,044
1,066
(1,066) (P)
958 (P)
3,002
Other operating expenses
11,034
2,249
(828) (Q)
12,455
Interest expense and financing costs
118
1,491 (R)
1,609
Total benefits and expenses
28,682
10,460
555
39,697
Income before federal income taxes
1,556
2,162
(2,230)
1,488
Federal income tax expense (credit)
243
735
(758) (S)
220
Net income
1,313
1,427
(1,472)
1,268
Net income per share
$ .25
$ 57.08
$ 7.25
$ .23
Weighted average number of common and common equivalent shares outstanding
5,345,937
25,000
203,000 (T)
5,573,937
See accompanying notes to pro forma combined financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS Nine Months
Ended September 30, 1996 (Dollars in Thousands, Except Per
Share Amounts, Unaudited)
Historical Financial
Reclassifications
Statements
and
Standard
Shelby
Pro Forma
Pro Forma
Management
Life
Adjustments
Combined
Revenues:
Premium income
$ 8,418
$ 1,163
$
$ 9,581
Net investment income
14,371
5,462
(556) (P)
19,277
Net realized investment gains
677
139
816
Gain on disposal of subsidiaries
886
886
Policy charges
1,832
1,549
3,381
Amortization of excess of net assets
acquired over acquisition cost
1,041
1,041
Management fees and similar income
from
separate accounts
1,093
1,093
Administration fee income
682
682
Other income
865
405
1,270
Total revenues
29,865
8,718
(556)
38,027
Benefits and expenses:
Benefits and claims
8,657
1,542
10,199
Interest credited on interest-sensitive annuities and other financial
products
7,645
3,436
11,081
Amortization
1,723
251
(251) (P)
669 (P)
2,392
Other operating expenses
8,851
1,390
(621) (Q)
9,620
Interest expense and financing costs
430
1,119 (R)
1,549
Total benefits and expenses
27,306
6,619
916
34,841
Income before federal income taxes,
extraordinary gain on early redemption of preferred stock and preferred
stock dividends
2,559
2,099
(1,472)
3,186
Federal income tax expense (credit)
(762)
798
(500) (S)
(464)
Income before extraordinary gain on early redemption of preferred stock and
preferred stock dividends
3,321
1,301
(971)
3,650
Income before extraordinary gain on early redemption of preferred stock and
preferred stock dividends per share
$ .65
$ 52.04
$ (4.74)
$ .66
Weighted average number of common and common equivalent shares outstanding
5,299,499
25,000
205,000 (S)
5,529,499
See accompanying notes to pro forma combined financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION
Notes to Pro Forma Combined Financial Statements (Dollars in
Thousands, Except
Per Share Amounts, Unaudited)
(A) Shelby Life's financial statement captions have been reclassified
to
conform with Standard Management's classifications.
Adjustments to the pro forma combined balance sheet to give effect
to the
purchase of Shelby Life as of September 30, 1996, are summarized
below.
(B) Held to maturity securities have been reclassified as available
for sale
securities at the purchase consistent with the intention of new
management.
(C) Shelby Life's fixed maturity securities held to maturity are
restated to
estimated fair value, and related deferred federal income
taxes and
unrealized gain (loss) on securities are recorded.
(D) Amount is net proceeds from borrowings and payment made to
DLAC for the
purchase of Shelby Life.
(E) Deferred policy acquisition costs of Shelby Life has been
eliminated under
purchase accounting.
(F) Present value of future profits for business previously
acquired by
Shelby Life has been eliminated under purchase accounting
and replaced
with the present value of future profits from existing
insurance
acquired in association with the purchase of Shelby Life.
Present value
of future profits has been actuarially determined using a
15 percent
discount rate.
(G) Goodwill acquired in the purchase of Shelby Life is recognized.
(H) Other assets have been increased for the deferred debt issuance
costs of
the commitment fees paid for the borrowings on the revolving
line of credit
agreement ("Amended Credit Agreement") and subordinated
convertible debt
and the issuance of SMC Common Stock warrants in connection
with the
Amended Credit Agreement. Other assets have also been decreased
by the
additional amount of agents' balances deemed to be uncollectible.
(I) Accounts payable has been increased due to the $3,000
dividend payable
to DLAC at closing and the accrual of estimated
acquisition costs
associated with the transaction.
(J) Notes payable are increased to reflect the increased
borrowings under
the Amended Credit Agreement and subordinated convertible
debt.
(K) Deferred tax liabilities have been recorded primarily for the
actuarially determined present value of future profits from
existing
insurance, and net deferred tax assets have been reclassified
to offset
the net pro forma deferred tax liability.
STANDARD MANAGEMENT CORPORATION
Notes to Pro Forma Combined Financial Statements (Continued)
(L) The Shelby Life historical shareholders' equity and related
average shares
outstanding is eliminated under purchase accounting.
(M) Common stock has been adjusted for the repurchase of SMC Common
Stock
warrants issued to Conseco ($600) and the issuance of SMC Common
Stock
warrants to Fleet Bank in connection with the Amended Credit
Agreement
($75).
(N) Treasury stock has been decreased to reflect the reissuance of
250,000
shares of SMC Common Stock held in treasury to DLAC.
Adjustments to the pro forma combined statement of operations to give
effect to
the purchase of Shelby Life as of January 1, 1995 are summarized
below.
(P) 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
resulting
from the transaction is being amortized over 20 years with
interest
equal to the liability rate. Amortization of goodwill acquired
in the
transaction is recognized over a 20-year period on a
straight-line
basis.
(Q) Operating expenses were reduced for the cost savings realized by
planned
reductions in total employees, professional fees and other costs.
The
plans have either been implemented or are in process of being
implemented.
(R) 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.
(S) 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.
(T) Average common shares outstanding are increased to reflect the
restricted
SMC Common Stock shares issued to DLAC, the repurchase of SMC
Common Stock
warrants issued to an unaffiliated insurer and the issuance of
SMC Common
Stock warrants in connection with the Amended Credit Agreement.
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