UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A NO. 4
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): AUGUST 29, 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)
<PAGE>
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 Auditors
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the years ended
December 31, 1995 and 1994
Statements of Stockholder's Equity 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 Operations for the nine months ended
September 30, 1996 and September 30, 1995
Statements 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
Unaudited 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
Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
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: AUGUST 29, 1997 By: RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
Financial Statements
Shelby Life Insurance Company
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Shelby Life Insurance Company
Financial Statements
Years ended December 31, 1995 and 1994
CONTENTS
Report of Independent Auditors.........................................1
Audited Financial Statements
Balance Sheets.........................................................2
Statements of Operations...............................................3
Statements of Stockholder's Equity.....................................4
Statements of Cash Flows...............................................5
Notes to Financial Statements..........................................6
<PAGE>
Report of Independent Auditors
Board of Directors
Shelby Life Insurance Company
We have audited the accompanying balance sheets of Shelby Life Insurance
Company as of December 31, 1995 and 1994, and the related statements of
operations, stockholder's 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 Shelby Life Insurance Company
at 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.
ERNST & YOUNG LLP
Indianapolis, Indiana
May 9, 1997
1
<PAGE>
SHELBY LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31, 1995 and 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
<S> <C> <C> <C>
1995 1994
ASSETS
Investments
Fixed maturity securities available-for-sale, at fair value $ 57,557 $ 28,944
Fixed maturity securities held-to-maturity, at amortized 41,648 77,873
cost
Policy loans 2,268 1,841
Other investments 2,421 550
103,894 109,208
Cash and cash equivalents 1,154 -
Accrued investment income 1,332 1,850
Reinsurance recoverable 950 1,102
Income taxes receivable - 221
Deferred policy acquisition costs, net 483 379
Present value of future profits, net 4,475 4,013
Deferred income taxes 499 1,090
Other assets 240 317
Total assets $113,027 $118,180
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy deposits and liabilities
Annuity and life deposits $ 84,191 $ 92,150
Annuity and life liabilities 10,996 10,794
Accounts payable, accrued expenses
and other liabilities 608 714
Federal income taxes payable 416 -
Payable to parent 373 272
Total liabilities 96,584 103,930
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional paid-in capital 13,351 13,351
Retained earnings 581 74
Unrealized gain (loss) on available-for-sale securities 11 (1,675)
Total stockholder's equity 16,443 14,250
Total liabilities and stockholder's equity $113,027 $118,180
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
<S> <C> <C>
1995 1994
REVENUES
Premium income $ 1,627 $ 1,852
Net investment income 7,950 7,603
Net realized investment gains (loss) 85 (81)
Policy charges 2,375 2,051
Other income 334 383
Total revenues 12,371 11,808
BENEFITS AND EXPENSES
Benefits and claims 2,371 2,487
Interest credited to policies 4,813 5,382
Operating expenses 2,107 2,004
Amortization 1,138 346
Total benefits and expenses 10,429 10,219
Income before federal income taxes 1,942 1,589
Federal income tax expense 660 515
Net income $ 1,282 $ 1,074
Net income per share $ 51.28 $ 42.96
Average number of common shares outstanding 25,000 25,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1995 and 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON AVAILABLE- TOTAL
COMMON PAID-IN RETAINED FOR-SALE STOCKHOLDER'S
STOCK CAPITAL EARNINGS SECURITIES EQUITY
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 2,500 $ 13,049 $- $- $15,549
Additional acquisition costs - 302 - - 302
Dividend to parent ($40 per share)- - (1,000) - (1,000)
Net income - - 1,074 - 1,074
Net changes in unrealized loss on
available-for-sale securities,
net of deferred federal income
tax recoverable of $863 - - - (1,675) (1,675)
Balance at December 31, 1994 2,500 13,351 74 (1,675) 14,250
Dividend to parent ($31 per share)- - (775) - (775)
Net income - - 1,282 - 1,282
Net changes in unrealized gain on
available-for-sale securities,
net of deferred federal income - - - 1,686 1,686
taxes of $868
Balance at December 31, 1995 $ 2,500 $ 13,351 $581 $11 $16,443
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
<S> <C> <C>
1995 1994
OPERATING ACTIVITIES:
Net income $ 1,282 $ 1,074
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of investments, net 1,251 1,456
Amortization of present value of future
profits, net (462) (897)
Deferred federal income tax provision
(benefit) (277) 223
Net realized investment (gain) loss (85) 81
Changes in operating asset and liabilities:
Policy loans (428) (172)
Policy acquisition costs, net (104) (379)
Reinsurance recoverable 152 182
Federal income taxes receivable and payable 636 (136)
Accrued investment income 518 101
Other assets 78 51
Policy liabilities 202 724
Accounts payable, accrued expenses and other (105) (129)
liabilities
Payable to parent 101 272
Net cash provided by operating activities 2,759 2,451
INVESTING ACTIVITIES:
Proceeds from principal repayments and maturities of
held-to-maturity fixed maturity securities 6,685 8,776
Proceeds from principal repayments and maturities of
available-for-sale fixed maturity securities 1,989 1,503
Proceeds from sales of available-for-sale fixed maturity 26,371 3,278
securities
Purchase of held-to-maturity fixed maturity securities (21,136) (12,460)
Purchase of available-for-sale fixed maturity securities (4,909) -
Other investments, net (1,871) (550)
Net cash provided by investing activities 7,129 547
FINANCING ACTIVITIES:
Premiums received on policyholder account balances 5,931 7,932
Return of policyholder account balances (13,890) (12,711)
Dividends paid (775) (1,000)
Net cash used by financing activities (8,734) (5,779)
Net increase (decrease) in cash and cash equivalents 1,154 (2,781)
Cash and cash equivalents at beginning of year - 2,781
Cash and cash equivalents at end of year $ 1,154 $ -
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
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.
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.
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 authorities.
The preparation of financial statements requires management to make various
estimates that affect the reported amounts of assets and liabilities and
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 for $14.8 million in cash. The fair value of the assets acquired was
$123,392 and liabilities assumed totaled $107,843. The acquisition has been
accounted for under the purchase method and accordingly the assets and
liabilities of the Company were recorded at their respective fair values at
December 31, 1993. During 1994, Delta incurred additional amounts associated
with the acquisition totaling $302.
6
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
During 1994, the Company adopted Statement of Financial Accounting Standards
No. 115 (SFAS No. 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES". The adoption of SFAS No. 115 had no material impact. Under SFAS
No. 115 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,
after adjustment for deferred federal income taxes, being accounted for as
changes in stockholder's equity and, accordingly, have no effect on net income.
The Company has no trading account securities.
Mortgage backed securities are issued, secured or guaranteed by the U.S.
Government, government agencies or instrumentalities. 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.
The Company purchases U.S. Government securities under agreement 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 are included in other investments at cost and amounted to
approximately $2,370 at December 31, 1995, which approximate fair value.
Net realized investment gains and losses were determined using the specific
identification method.
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 suggests that
earlier estimates should be revised.
7
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 gross profits of the business in force on December 31, 1993
(the date Delta acquired the Company), net of purchase accounting adjustments
for investments. The PVFP is being amortized on a constant yield basis over
the estimated life of the insurance in force 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. 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 suggests that earlier estimates should be
revised. The portion of PVFP attributable to the purchase accounting
adjustments for 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 and
interest credited to the policy, less withdrawals by the policyholder and
sales, mortality and administrative charges deducted by the Company.
Policy liabilities are computed using the net level premium method and
assumptions as to investment yields, mortality and expenses at the date of
issue. 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.
REINSURANCE
Premiums and benefits and claims are recorded net of reinsurance ceded.
Reinsurance premiums, benefits and claims are accounted for on a basis
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that 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.
OTHER INCOME
Other income is comprised generally of commissions and expense allowances on
reinsurance ceded and is recorded as earned.
8
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS:
Net investment income and realized investment gains and losses by class of
security were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT NET
INCOME REALIZED REALIZED INVESTMENT REALIZED REALIZED
GAINS LOSSES INCOME GAINS LOSSES
Mortgage backed
securities $ 2,340 $ - $ - $1,731 $ - $ -
U.S. Government obligations
827 - - 907 - -
Corporate bonds 3,788 77 - 4,865 - (81)
Other 995 8 - 100 - -
$7,950 $85 $ - $7,603 $ - $
(81)
</TABLE>
The carrying amount of securities and their estimated fair values at December
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995
<S> <C> <C> <C> <C>
ESTIMATED FAIR
AMORTIZED COST GROSS GAINS UNREALIZED VALUE
LOSSES
FIXED MATURITY SECURITIES AVAILABLE-FOR-
SALE
Mortgage backed securities $12,780 $126 $33 $12,873
U.S. Government obligations 4,010 - 13 3,997
Corporate bonds 40,227 311 384 40,154
Foreign government obligations 524 9 - 533
Fixed maturity securities $57,541 $446 $430 $57,557
FIXED MATURITY SECURITIES HELD-TO-MATURITY
Mortgage backed securities $31,007 $298 $46 $31,259
U.S. Government obligations 10,641 10 36 10,615
Fixed maturity securities $41,648 $308 $82 $41,874
1994
FIXED MATURITY SECURITIES AVAILABLE-FOR-
SALE
U.S. Government obligations $265 $ - $10 $255
Corporate bonds 30,668 1 2,489 28,180
Foreign government obligations 549 - 40 509
Fixed maturity securities $31,482 $1 $2,539 $28,944
FIXED MATURITY SECURITIES HELD-TO-MATURITY
Mortgage backed securities $23,864 $1 $1,276 $22,589
U.S. Government obligations 15,083 - 1,179 13,904
Corporate bonds 37,834 - 3,033 34,801
Foreign government obligations 1,092 - 112 980
Fixed maturity securities $77,873 $1 $5,600 $72,274
</TABLE>
9
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED):
During December 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 $48,000 of
investments, originally purchased and classified as held-to-maturity to
available-for-sale recording a net unrealized loss of approximately $91.
The amortized cost and estimated fair value of fixed maturity 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.
<TABLE>
<CAPTION>
ESTIMATED FAIR
AMORTIZED COST VALUE
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $1,684 $1,679
Due after one year through five years 32,783 32,750
Due after five years through ten years 12,908 12,867
Due after ten years 10,166 10,261
$57,541 $57,557
HELD-TO-MATURITY
Due after one year through five years $10,127 $10,092
Due after five years through ten years 514 522
Due after ten years 31,007 31,260
$41,648 $41,874
</TABLE>
Cash, cash equivalents and certain investments of the Company with a carrying
value of approximately $3,097 and $2,847 at December 31, 1995 and 1994,
respectively, were held on deposit with various state regulatory agencies for
the benefit of policyholders, claimants and creditors. The Company had cash
deposits in excess of federally insured amounts of approximately $1,096 at
December 31, 1995.
10
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PRESENT VALUE OF FUTURE PROFITS
As a result of the acquisition of the Company on December 31, 1993 by Delta,
the Company established an asset for the present value of future profits (PVFP)
of insurance purchased utilizing a 15% discount rate.
Progressions of the PVFP for the years ended December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of year $4,013 $2,814
Additional costs associated with
acquisition of the Company - 302
Interest accreted on unamortized 221 155
balance, net
Amortization during the year, net 241 742
Balance at end of year $4,475 $4,013
</TABLE>
The estimated amount of PVFP as of December 31, 1995, based on current
assumptions as to future events on all policies in force, expected to be
amortized during each of the next five years is as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $(427)
1997 103
1998 225
1999 248
2000 258
</TABLE>
5. INCOME TAXES
The components of the federal income tax expense is composed of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current tax provision $937 $292
Deferred tax expense (benefit) (277) 223
$660 $515
</TABLE>
11
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The significant components of the deferred tax assets and liabilities as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
Deferred income tax assets:
Deposits and policy liabilities $ 1,790 $ 1,247
Reserve for guaranty fund 51 40
assessments
Deferred policy acquisition costs 137 191
Unrealized loss on available-for- - 863
sale securities
Other 104 101
2,082 2,442
Deferred income tax liabilities:
Present value of future profits (1,511) (1,284)
Unrealized gain on available-for- (5) -
sale securities
Other (67) (68)
(1,583) (1,352)
Net deferred income tax asset $ 499 $ 1,090
</TABLE>
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 and earnings history. Consequently, no valuation allowance was
deemed necessary.
During 1995, the Company paid cash and received refunds for federal income
taxes of $415 and $114, respectively. During 1994, the Company paid cash for
federal income taxes of $428.
6. 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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Premiums and annuity considerations $1,335 $1,490
Reinsurance ceded 1,062 339
Operating expenses 334 382
</TABLE>
12
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used to estimate the fair value
disclosures for its financial instrument assets and liabilities as of December
31, 1995 and 1994:
FIXED MATURITY SECURITIES
The fair value of fixed maturity 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:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C>
CARRYING VALUE FAIR CARRYING FAIR
VALUE VALUE VALUE
Fixed maturity securities $ 57,557 $ 57,557 $ 28,945 $ 28,945
available-for-sale
Fixed maturity securities held- 41,648 41,874 77,873 72,274
to-maturity
Annuity deposits 60,887 59,504 70,146 68,222
Life deposits 23,304 20,229 22,004 18,685
</TABLE>
8. 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 and $162 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.
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 period of up
to twelve months. During 1995 and 1994, the Company paid approximately $299
and $1,128, 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.
13
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. 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% depending upon the particular contract form.
INVESTMENT PURCHASE COMMITMENTS
At December 31, 1995, the Company has made commitments to purchase
approximately $3,840 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 operations, or cash flows.
10. STATUTORY ACCOUNTING INFORMATION
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.
14
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STATUTORY ACCOUNTING INFORMATION (CONTINUED)
Stockholder's equity as determined in accordance with statutory accounting
practices for the Company was $10,264 and $9,360 at December 31, 1995 and 1994,
respectively. Statutory net income of the Company was $1,661 and $699 for 1995
and 1994, respectively.
Under Tennessee statute, the Company is required to maintain statutory capital
of $1,000 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 $1,661.
11. SUBSEQUENT EVENT
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 ("Standard Life"), a wholly-owned subsidiary of Standard
Management Corporation and the Company was merged into Standard Life. Under
the terms of the agreement, the sales price is comprised of cash of
approximately $16,000, which includes a $3,000 extraordinary dividend from the
Company to Delta, and 250,000 shares of restricted common stock of Standard
Management Corporation.
15
<PAGE>
SHELBY LIFE INSURANCE COMPANY
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
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 loss on securities
available for sale (260)
Retained earnings 1,564
Total stockholder's equity 16,407
Total liabilities and stockholder's equity $109,892
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
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 798 540
Net income 1,301 880
Net income per share $ 52.04 $ 35.20
Weighted average number of common and common
equivalent shares outstanding 25,000 25,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
<S> <C> <C>
September 30,
1996 1995
Cash flows from operating activities: $ 1,301 $ 880
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of investments, net 781 710
Amortization of present value of future (479) (431)
profits, net
Deferred federal income tax provision (benefit) (221) 110
Net (gain) loss on sale of investments (139) 4
Changes in operating assets and liabilities:
Policy loans (137) (283)
Policy acquisitions costs (57) (73)
Reinsurance recoverable 2 1,102
Policy liabilities 302 616
Payable to parent (162) 285
Other (256) (725)
Net cash provided by operating activities 935 2,195
Cash flows from investing activities:
Proceeds from principal repayments and maturities of
held-to- 5,823 6,685
maturity debt securities
Proceeds from principal repayments and maturities of
available-for-sale debt securities 1,684 1,989
Proceeds from sales of available-for-sale debt 18,162 10,903
securities
Purchase of held-to-maturity debt securities (20,250) (9,676)
Purchase of available-for-sale debt securities (4,749) (4,909)
Change in other investments 1,607 30
Net cash provided by investing activities 2,277 5,022
Cash flows from financing activities:
Net increase in deposits (3,402) (6,474)
Dividends paid (400) (600)
Net cash used by financing activities (3,802) (7,074)
Net increase (decrease) in cash and cash (590) 143
equivalents
Cash and cash equivalents, beginning of period 1,154 -
Cash and cash equivalents, end of period $ 564 $ 143
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
SHELBY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited, Dollars in Thousands)
September 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited 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 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, Delta Life and Annuity Company ("Delta"), the parent
company of the 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 ("Standard Life"), a wholly-owned subsidiary of
Standard Management Corporation, and the Company was merged into Standard Life.
Under the terms of the agreement, the sales price is comprised of cash of
$16,000, which includes a $3,000 extraordinary dividend from the Company to
Delta, and 250,000 shares of restricted common stock of Standard Management
Corporation.
19
<PAGE>
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The following unaudited 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 its merger into
Standard Life Insurance Company of Indiana ("Standard Life"), a wholly-owned
subsidiary of Standard Management Corporation ("SMC"), as if it had occurred as
of the balance sheet date. The following unaudited pro forma combined
statements of operations for the year ended December 31, 1995 and the nine
months ended September 30, 1996, are presented as if the transaction had
occurred as of January 1, 1995.
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 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
financial statements of SMC 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 financial statements
of SMC and Shelby Life to account for the merger of Shelby Life into Standard
Life 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 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.
20
<PAGE>
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL
<S> <C> <C> <C> <C>
STATEMENTS
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 (1) $339,004
(1,417) (2)
Equity securities 77 - - 77
Fixed maturity securities held to - 60,026 (60,026) (1) -
maturity
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 (3) 5,275
Amounts due and recoverable from
reinsurers 65,047 947 - 65,994
Deferred policy acquisition costs 17,977 540 (540) (4) 17,977
Present value of future profits 15,027 4,954 (4,954) (5) 24,399
9,372 (5)
Excess of acquisition cost over net assets
acquired 2,279 - 282 (6) 2,561
Deferred federal income taxes 194 326 (392) (10) 128
Other assets 8,681 1,397 275 (7) 10,353
Assets held in separate accounts 126,987 - - 126,987
Total assets $506,481 $109,892 $2,926 $619,299
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
21
<PAGE>
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL
<S> <C> <C> <C> <C>
STATEMENTS
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 (8) 9,565
Obligations under capital lease 753 - - 753
Notes payable 5,671 - 14,100 (9) 19,771
Deferred federal income taxes - - 1,500 (10) 1,108
(392)(10)
Excess of net assets acquired over
acquisition cost 3,122 - - 3,122
Liabilities related to separate 126,987 - - 126,987
accounts
Total liabilities 467,804 93,485 18,608 579,897
Class S Cumulative Convertible Redeemable
Preferred Stock 1,722 - - 1,722
Shareholders' equity:
Common stock 40,997 2,500 (2,500) (11) 40,472
(525) (12)
Additional paid-in capital - 12,603 (12,603) (11) -
Treasury stock (deduction) (4,741) - 1,250 (13) (3,491)
Unrealized gain (loss) on securities
available for sale (1,892) (260) 260 (11) (1,892)
Foreign currency translation 717 - - 717
adjustment
Retained earnings 1,874 1,564 (1,564)(11) 1,874
Total shareholders' equity 36,955 16,407 (15,682) 37,680
Total liabilities, redeemable
securities and shareholders' $506,481 $109,892 $2,926 $619,299
equity
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
22
<PAGE>
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL
<S> <C> <C> <C> <C>
STATEMENTS
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 (1,493) (14) 25,225
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 (1,493) 41,367
Benefits and expenses:
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) (14) 2,972
928 (14)
Other operating expenses 11,034 2,249 - 13,283
Interest expense and financing costs 118 - 1,491 (15) 1,609
Class action litigation and settlement (314) - - (314)
credit
Total benefits and expenses 28,682 10,460 1,353 40,495
Income before federal income taxes 1,556 2,162 (2,846) 872
Federal income tax expense (credit) 243 735 (968) (16) 10
Net income 1,313 1,427 (1,878) 862
Net income per share $ .25 $ .15
Weighted average number of common and
common equivalent shares outstanding 5,345,937 228,000 (17) 5,573,937
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.
23
<PAGE>
STANDARD MANAGEMENT CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL
<S> <C> <C> <C> <C>
STATEMENTS
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) (14) 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
Other income 1,172 405 - 1,577
Total revenues 29,490 8,718 (556) 37,652
Benefits and expenses:
Benefits and claims 8,657 1,542 - 10,199
Interest credited on interest-sensitive
annuities and other financial 7,645 3,436 - 11,081
products
Amortization 1,723 251 (251) (14) 2,330
607 (14)
Other operating expenses 8,851 1,390 - 10,241
Interest expense and financing costs 430 - 1,119 (15) 1,549
Total benefits and expenses 27,306 6,619 1,475 35,400
Income before federal income taxes,
extraordinary gain on early redemption
of redeemable preferred stock and
preferred stock dividends 2,184 2,099 (2,031) 2,252
Federal income tax expense (credit) (890) 798 (690) (16) (782)
Income before extraordinary gain on early
redemption of redeemable preferred stock
and preferred stock dividends 3,074 1,301 (1,341) 3,034
Income per share before extraordinary gain
on early redemption of redeemable
preferred stock and preferred stock $ .61 $ .57
dividends
Weighted average number of common and
common equivalent shares outstanding 5,299,499 230,000 (17) 5,529,499
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
24
<PAGE>
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
(September 30, 1996) $16,407
Dividend paid to former parent of Shelby Life (DLAC) on date of purchase (3,000)
Adjusted book value of net assets acquired 13,407
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) (5,494)
Goodwill (related to acquisition) 282
Deferred federal income taxes (1,500)
Total estimated fair value adjustments 1,243
Total cost to acquire Shelby Life $14,650
</TABLE>
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.
(1) Held to maturity securities have been reclassified as available for sale
securities at the purchase consistent with the intention of new
management.
(2) Shelby Life's fixed maturity securities held to maturity are restated to
estimated fair value.
(3) Amount is net proceeds from borrowings under the revolving line of credit
agreement ("Amended Credit Agreement") and subordinated convertible debt
and the payment made to DLAC for the purchase of Shelby Life.
(4) Deferred policy acquisition costs of Shelby Life has been eliminated
under purchase accounting.
(5) Present value of future profits for business has been recorded from
existing insurance acquired in association with the purchase of Shelby
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:
<circle>The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
<circle>Cost of capital available to fund the acquisition.
<circle>The perceived likelihood of changes in insurance regulations and
tax laws.
<circle>Complexity of the acquired company.
<circle>Prices paid (i.e., discount rates used in determining valuations)
on similar blocks of business sold recently.
25
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
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, 2000,
are as follows:
<TABLE>
<CAPTION>
Year Ending Beginning Net Ending
DECEMBER 31, BALANCE AMORTIZATION BALANCE
<S> <C> <C> <C>
1996 $9,372 $783 $8,589
1997 8,589 629 7,960
1998 7,960 601 7,359
1999 7,359 579 6,780
2000 6,780 596 6,184
</TABLE>
(6) Goodwill acquired in the purchase of Shelby Life is recognized.
(7) Other assets have been increased for the deferred debt issuance costs of
the commitment fees paid for the borrowings on the Amended Credit
Agreement and subordinated convertible debt.
(8) Accounts payable have been increased due to the $3,000 dividend payable
to DLAC at closing and the accrual of estimated acquisition costs
associated with the transaction.
(9) Notes payable are increased to reflect the increased borrowings under the
Amended Credit Agreement and subordinated convertible debt. 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 debt 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.
(10) 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 Shelby Life are netted against the deferred
tax liabilities of SMC.
(11) The Shelby Life historical shareholder's equity and related average
common shares outstanding is eliminated under purchase accounting.
(12) Common stock has been adjusted for 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
($600) and the issuance of SMC Common Stock warrants to Fleet Bank in
connection with the increased line of credit on the Amended Credit
Agreement ($75).
(13) Treasury stock has been decreased to reflect the reissuance of 250,000
shares of SMC Common Stock held in treasury to DLAC.
26
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
(14) 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.
(15) 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 interest expense on the borrowings for the Shelby Life acquisition is
calculated as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
<S> <C> <C>
September 30, 1996 December 31, 1995
Borrowings:
Amended Credit Agreement $10,100 $10,100
Subordinated convertible debt 4,000 4,000
Interest expense:
Amended Credit Agreement borrowings (LIBOR + 3.25%, 666 888
8.793%)
Subordinated convertible debt borrowings (PIK at 14.0%) 420 560
Total interest expense on Borrowings 1,086 1,448
Deferred debt issuance costs:
Amended Credit Agreement borrowings 22 29
Subordinated convertible debt borrowings 11 14
Total deferred debt issuance costs 33 43
Total interest expense and financing costs $1,119 $1,491
</TABLE>
(16) 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.
(17) 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.
27
