UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A NO. 3
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): MAY 20, 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: MAY 20, 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>
1995 1994
ASSETS
Investments
Fixed maturity securities $ 57,557 $ 28,944
available-for-sale, at fair value
Fixed maturity securities 41,648 77,873
held-to-maturity, at amortized 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 11 (1,675)
available-for-sale securities
Total stockholder's equity 16,443 14,250
Total liabilities and stockholder's $113,027 $118,180
equity
</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 - - (1,000) - (1,000)
share)
Net income - - 1,074 - 1,074
Net changes in unrealized
loss on
available-for-sale
securities, net of - - - (1,675) (1,675)
deferred federal income
tax recoverable of $863
Balance at December 31, 1994 2,500 13,351 74 (1,675) 14,250
Dividend to parent ($31 per - - (775) - (775)
share)
Net income - - 1,282 - 1,282
Net changes in unrealized
gain on
available-for-sale - - - 1,686 1,686
securities, net of
deferred federal income
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 636 (136)
payable
Accrued investment income 518 101
Other assets 78 51
Policy liabilities 202 724
Accounts payable, accrued expenses and (105) (129)
other 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 6,685 8,776
held-to-maturity fixed maturity securities
Proceeds from principal repayments and maturities
of 1,989 1,503
available-for-sale fixed maturity securities
Proceeds from sales of available-for-sale fixed 26,371 3,278
maturity securities
Purchase of held-to-maturity fixed maturity (21,136) (12,460)
securities
Purchase of available-for-sale fixed maturity (4,909) -
securities
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.
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 NET
INVESTMENT REALIZED REALIZED INVESTMENT REALIZED REALIZED
INCOME 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
AMORTIZED GROSS GAINS UNREALIZED FAIR
COST LOSSES VALUE
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 $57,541 $446 $430 $57,557
securities available-
for-sale
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 $41,648 $308 $82 $41,874
securities held-to-
maturity
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 $31,482 $1 $2,539 $28,944
securities available-
for-sale
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 $77,873 $1 $5,600 $72,274
securities held-to-
maturity
</TABLE>
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 32,783 32,750
years
Due after five years through ten 12,908 12,867
years
Due after ten years 10,166 10,261
$57,541 $57,557
HELD-TO-MATURITY
Due after one year through five $10,127 $10,092
years
Due after five years through ten 514 522
years
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.
8
<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 - 302
acquisition of the Company
Interest accreted on 221 155
unamortized balance, net
Amortization during the year, 241 742
net
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:
1996 $ (427)
1997 103
1998 225
1999 248
2000 258
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>
9
<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>
Deferred income tax assets:
Deposits and policy $ 1,790 $ 1,247
liabilities
Reserve for guaranty fund 51 40
assessments
Deferred policy acquisition 137 191
costs
Unrealized loss on available- - 863
for-sale securities
Other 104 101
2,082 2,442
Deferred income tax liabilities:
Present value of future (1,511) (1,284)
profits
Unrealized gain on available- (5) -
for-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>
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 FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Fixed maturity securities $57,557 $57,557 $28,945 $ 28,945
available-for-sale
Fixed maturity securities 41,648 41,874 77,873 72,274
held-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.
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.
10
<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.
11
<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 $ 38,682
for sale
Fixed maturity securities held to 60,026
maturity
Policy loans 2,406
Short-term investments 50
Total investments 101,164
Cash 564
Amounts due and recoverable from 947
reinsurers
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.
12
<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 3,436 3,761
annuities and other financial
products
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.
13
<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 (479) (431)
future profits, net
Deferred federal income tax provision (221) 110
(benefit)
Net (gain) loss on sale of (139) 4
investments
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 935 2,195
activities
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 1,684 1,989
available-for-sale debt securities
Proceeds from sales of available-for-sale 18,162 10,903
debt securities
Purchase of held-to-maturity debt (20,250) (9,676)
securities
Purchase of available-for-sale debt (4,749) (4,909)
securities
Change in other investments 1,607 30
Net cash provided by investing 2,277 5,022
activities
Cash flows from financing activities:
Net increase in deposits (3,402) (6,474)
Dividends paid (400) (600)
Net cash used by financing (3,802) (7,074)
activities
Net increase (decrease) in cash and (590) 143
cash 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>
14
<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.
15
<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.
16
<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 - 60,026 (60,026) (1) -
held to 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 15,402 4,954 (4,954) (5) 24,774
9,372 (5)
Excess of acquisition cost over net
assets 2,279 - 282 (6) 2,561
acquired
Deferred federal income taxes 66 326 (392) (10) -
Other assets 8,681 1,397 275 (7) 10,353
Assets held in separate accounts 126,987 - - 126,987
Total assets $506,728 $109,892 $ 2,926 $619,546
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
17
<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 4,826 1,339 3,400 (8) 9,565
expenses
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 3,122 - - 3,122
acquisition cost
Liabilities related to separate 126,987 - - 126,987
accounts
Total liabilities 467,804 93,485 18,608 579,897
Class S Cumulative Convertible
Redeemable 1,722 - - 1,722
Preferred Stock
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 (1,892) (260) 260 (11) (1,892)
available for sale
Foreign currency translation 717 - - 717
adjustment
Retained earnings 2,121 1,564 (1,564) (11) 2,121
Total shareholders' equity 37,202 16,407 (15,682) 37,927
Total liabilities,
redeemable securities and $506,728 $109,892 $ 2,926 $619,546
shareholders' equity
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
18
<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 1,294 - - 1,294
separate accounts
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 10,009 4,813 - 14,822
annuities and other financial
products
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 (314) - - (314)
settlement 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.
19
<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 1,041 - - 1,041
acquired over acquisition
cost
Management fees and similar income
from 1,093 - - 1,093
separate accounts
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 7,645 3,436 - 11,081
annuities and other financial
products
Amortization 1,723 251 (251) (14) 2,330
607 (14)
Other operating expenses 8,851 1,390 - 10,241
Interest expense and financing 430 - 1,119 (15) 1,549
costs
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 2,559 2,099 (2,031) 2,627
dividends
Federal income tax expense (credit) (762) 798 (690) (16) (654)
Income before extraordinary gain on
early
redemption of redeemable preferred 3,321 1,301 (1,341) 3,281
stock and preferred stock
dividends
Income per share before extraordinary
gain
on early redemption of redeemable $ .65 $ .59
preferred stock and preferred
stock dividends
Weighted average number of common and
common equivalent shares 5,299,499 230,000 5,529,499
outstanding (17)
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.
20
<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:
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
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:
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
<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.
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.
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
21
<PAGE>
STANDARD MANAGEMENT CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 + 666 888
3.25%, 8.793%)
Subordinated convertible debt borrowings (PIK 420 560
at 14.0%)
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 $1,119 $1,491
costs
</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.
22
