UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-1
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): APRIL 10, 1997
(NOVEMBER 8, 1996)
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
0-20882 No. 35-1773567
(Commission file number) (IRS employer identification no.)
9100 Keystone Crossing
Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
(317) 574-6200
(Telephone)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements are filed as part of this report:
(a) Audited Financial Statements of Shelby Life Insurance Company:
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Income for the years ended
December 31, 1995 and 1994
Statements of Cash Flows for the years ended
December 31, 1995 and 1994
Notes to Financial Statements
Unaudited Interim Financial Statements of Shelby Life Insurance
Company
Balance Sheet as of September 30, 1996
Statements of Income for the nine months ended
September 30, 1996 and September 30, 1995
Statement of Cash Flows for the nine months ended
September 30, 1996 and 1995
Notes to Financial Statements
(b) Pro Forma Financial Information:
Standard Management Corporation
Pro Forma Combined Financial Statements (Unaudited)
Pro Forma Combined Balance Sheet as of September 30, 1996
(Unaudited)
Pro Forma Combined Statement of Operations for the nine months
ended September 30, 1996 (Unaudited)
Pro Forma Combined Statement of Operations for the year ended
December 31, 1995 (Unaudited)
Notes to Pro Forma Combined Financial Statements (Unaudited)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
STANDARD MANAGEMENT CORPORATION
(Registrant)
Date: APRIL 10, 1997 By: /S/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
SHELBY LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Balance Sheets
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Investments:
Debt securities available-for-sale, at $ 57,556,880 $ 28,944,618
fair value
Debt securities held-to-maturity, at 41,647,602 77,872,761
amortized cost
Policy loans 2,268,534 1,840,890
Other investments 2,420,916 550,000
103,893,932 109,208,269
Cash and cash equivalents 1,154,269 -
Accrued investment income 1,331,813 1,850,254
Reinsurance recoverable 949,637 1,101,964
Income taxes receivable - 220,832
Deferred policy acquisition costs, net 483,018 378,895
Present value of future profits, net 4,475,083 4,012,857
Deferred income taxes 499,000 1,090,000
Other assets 240,444 317,185
Total assets $113,027,196 $118,180,256
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy deposits and liabilities:
Annuity and life deposits $ 84,191,283 $ 92,149,921
Annuity and life liabilities 10,996,561 10,794,212
Accounts payable, accrued expenses and other 607,954 713,952
liabilities
Federal income taxes payable 415,628 -
Payable to parent 373,025 271,903
Total liabilities 96,584,451 103,929,988
Commitments and contingencies (Note 12)
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500,000 2,500,000
Additional paid-in capital 13,351,000 13,351,000
Retained earnings 580,915 74,074
Net unrealized holding gain (loss) on available-for-
sale securities, net
of tax liability (benefit) of $5,000 and
$(863,000) in 1995
and 1994, respectively 10,830 (1,674,806)
Total stockholders' equity 16,442,745 14,250,268
Total liabilities and stockholders' equity $113,027,196 $118,180,256
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
REVENUES 1995 1994
<S> <C> <C>
Premium income $1,627,541 $1,851,879
Net investment income 7,950,287 7,603,188
Realized investment gains (loss), net 84,705 (80,751)
Policy charges 2,374,615 2,051,454
Other income 334,046 382,110
Total revenues 12,371,194 11,807,880
POLICY BENEFITS AND EXPENSES
Policy benefits and expenses 2,371,044 2,486,783
Interest credited to policies 4,812,545 5,382,361
Operating expenses 2,106,858 2,003,616
Amortization 1,138,446 346,216
Total policy benefits and expenses 10,428,893 10,218,976
Income before provision for income taxes 1,942,301 1,588,904
Provision for income taxes 660,460 514,830
Net income $1,281,841 $1,074,074
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Statements of Stockholders' Equity
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Net Unrealized
Holding Gain
Additional Paid- (Loss) On Total
Common In Retained EARNINGS Available-For-SALE Stockholders'
STOCK CAPITAL SECURITIES EQUITY
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 2,500,000 13,048,958 - - 15,548,952
Additional acquisition costs 302,048 302,048
Dividend to parent ($40 per $(1,000,000) (1,000,000)
share)
Net income 1,074,074 1,074,074
Net changes in unrealized
holding
loss on available-
for-sale securities, $(1,674,806) (1,674,806)
net of taxes of
$863,000
Balances at December 31, 1994 25,000,000 13,351,000 74,074 (1,674,806) 14,250,268
Dividend to parent ($31 per (775,000) (775,000)
share)
Net income 1,281,841 1,281,841
Net changes in unrealized
holding
gain on available-
for-sale securities, 1,685,636 1,685,636
net of taxes of
$868,000
Balances at December 31, 1995 $ 2,500,000 13,351,000 580,915 10,830 16,442,745
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities: $ 1,281,841 $ 1,074,074
Net income
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of investments, 1,251,486 1,456,197
net
Amortization of present value (462,226) (897,183)
of future profits, net
Deferred federal income tax (277,000) 223,000
provision (benefit)
Net (gain) loss on sale of (84,705) 80,751
investments
Changes in operating assets
and liabilities:
Other investments (1,870,916) (550,000)
Policy loans (427,644) (171,850)
Policy acquisitions (104,123) (378,895)
costs
Reinsurance 152,327 182,610
recoverable
Federal income 636,460 (135,920)
taxes receivable
and payable
Accrued investment 518,441 100,804
income
Other assets 76,741 51,385
Policy liabilities 202,349 724,012
Accounts payable,
accrued expenses (105,998) (129,488)
and other
liabilities
Payable to parent 101,122 271,903
Net cash provided by 888,155 1,901,400
operating activities
Cash flows from investing activities:
Proceeds from principal
repayments and maturities of 6,685,199 8,775,974
held-to-
maturity debt securities
Proceeds from principal
repayments and maturities of 1,988,981 1,503,433
available-
for-sale debt securities
Proceeds from sales of 26,370,443 3,278,265
available-for-sale debt
securities
Purchase of held-to-maturity (21,135,616) (12,460,688)
debt securities
Purchase of available-for- (4,909,255) -
sale debt securities
Net cash provided by 8,999,752 1,096,984
investing activities
Cash flows from financing activities:
Net increase in deposits (7,958,638) (4,779,168)
Dividends paid (775,000) (1,000,000)
Net cash used by financing (8,733,638) (5,779,168)
activities
Net increase (decrease) in 1,154,269 (2,780,784)
cash and cash equivalents
Cash and cash equivalents, beginning of - 2,780,784
year
Cash and cash equivalents, end of year $ 1,154,269 $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements
1. ORGANIZATION, BASIS OF PRESENTATION AND NATURE OF OPERATIONS:
ORGANIZATION
Shelby Life Insurance Company (the Company) is a wholly-owned
subsidiary of Delta Life and Annuity Company (Delta). Delta,
a Tennessee corporation, is a wholly-owned subsidiary of
Delta Life Corporation (DLC), a Delaware corporation.
During 1995, the Company received approval for
redomestication to Tennessee. Accordingly, the Company is
chartered and licensed in the State of Tennessee and is
licensed in various other states. Prior to 1995, the Company
was chartered and licensed in the State of Ohio as The Shelby
Life Insurance Company of Shelby, Ohio.
BASIS OF PRESENTATION
The accompanying financial statements of the Company are
prepared on the basis of generally accepted accounting
principles. Such accounting principles differ from statutory
reporting practices used by insurance companies in reporting
to state regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make various estimates that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and
liabilities, as well as the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
Effective December 31, 1993, Delta acquired all of the common
stock of the Company. The fair value of the assets acquired
was $123.2 million and liabilities assumed totaled $107.7
million. The acquisition has been accounted for under the
purchase method. During 1994 Delta incurred additional
amounts associated with the acquisition totaling $302,048.
NATURE OF OPERATIONS
The Company markets individual life insurance, annuities and
investment products to its policyholders, primarily in the
eastern half of the United States. Its products are
distributed through independent agents and brokers.
The operating results of companies in the insurance industry
have historically been subject to significant fluctuations
due to competition, economic conditions, interest rates,
investment performance, maintenance of insurance ratings,
regulation and taxation, and other factors.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENTS
During 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES". Under
the statement the Company's investments have been classified
as held-to-maturity and available-for-sale. Securities
classified into the held-to-maturity category are accounted
for at cost, adjusted for amortization of premiums and
discounts and, when necessary, declines in value considered
to be other than temporary. It is management's intention to
hold securities classified as held-to-maturity under all
reasonably foreseeable conditions. Securities in the
available-for-sale category are carried at market value, with
changes in the market value being accounted for as changes in
stockholder's equity. The Company has no trading account
securities.
POLICY LOANS
Policy loans are recorded at cost. As policy loans have no
stated maturity and are often repaid by account withdrawals
or surrenders, it is not practical to estimate their fair
values.
REVERSE REPURCHASE AGREEMENTS
The Company purchases U.S. Government securities under
agreements to resell within one to five days. Due to the
short-term nature of the agreements, the Company does not
take possession of such securities. Reverse repurchase
agreements, which are recorded at cost which approximates
fair value, are included in other investments and amounted
to approximately $2,370,000 at December 31, 1995.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments,
other than reverse repurchase agreements, purchased with a
remaining maturity of three months or less to be cash
equivalents.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs (principally commissions incurred
at policy issuance, premium taxes and certain sales, issue
and underwriting expenses) associated with new annuity and
life business are deferred when incurred. The deferred
costs related to traditional life insurance are amortized
over the premium payment period using assumptions consistent
with those used in estimating reserves. Deferred costs
related to annuities and interest sensitive products accrue
interest and are amortized at a constant rate based on the
present value of the estimated gross profits expected to be
realized over the life of the contracts. Estimates of
expected gross profit are evaluated periodically, and the
total amortization recorded to date is adjusted by a charge
or credit to current amortization if actual experience or
other evidence suggest that earlier estimates should be
revised.
<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 over the life
of the business in proportion to estimated gross profits for
the deferred annuities and universal life business and
estimates of future premiums for the traditional life
business. Estimates of expected gross profit are evaluated
periodically, and the total amortization recorded to date is
adjusted by a charge or credit to current amortization if
actual experience or other evidence suggest that earlier
estimates should be revised. The portion of PVFP
attributable to the purchase accounting adjustments of
investments at the purchase date is being amortized over the
average remaining term of the investments purchased and is
included in investment income.
REVENUE AND POLICY LIABILITIES
Premiums received on annuity and life deposits are recorded
as deposits into the policyholders' account balance. Revenue
related to these contracts consists of earnings from the
invested deposits and applicable mortality, withdrawal and
administrative charges. These deposits consist of the
policyholders' account balances plus amounts deposited by the
policyholders, interest credited to the policy, and less
withdrawals by the policyholder, sales, mortality and
administrative charges deducted by the Company.
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
Reinsurance premiums, claims and claim adjustment expenses
are accounted for on a basis consistent with those used in
accounting for the original policies issued and the terms of
the reinsurance contracts.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES
Deferred income taxes are recognized for the expected future
tax consequences attributable to differences between the
financial statements and their respective tax beses.
Additionally, deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
POLICY CHARGES
Policy charges are comprised generally of policy fees and
withdrawal penalties and are recorded as earned.
OTHER INCOME
Other income is comprised generally of commissions and
expense allowances on reinsurance ceded and is recorded as
earned.
CONCENTRATION OF RISK
The Company had cash deposits in excess of federally insured
amounts of approximately $1,096,000 at December 31, 1995.
3. RECONCILIATION WITH STATUTORY REPORTING PRACTICES:
Financial statements prepared in conformity with generally
accepted accounting principles differ in some respects from
the statutory accounting practices prescribed or permitted by
insurance regulatory authorities. The most significant
differences are as follows: (a) acquisition costs of
obtaining new business are deferred and amortized over the
approximate life of the policies rather than charged to
operations as incurred; (b) benefit liabilities are computed
using a net level method and are based on realistic estimates
of expected mortality, interest, and withdrawals as adjusted
to provide for possible unfavorable deviation from such
assumptions, (c) deferred income taxes are provided for
temporary differences between financial and taxable earnings;
(d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to stockholders' equity; (e) certain
items are reported as assets rather than being charged
directly to surplus (referred to as nonadmitted items); (f)
certain items of interest income, principally accrual of bond
discounts, are amortized differently; and (g) valuation
differences on debt securities.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
3. RECONCILIATION WITH STATUTORY REPORTING PRACTICES, CONTINUED:
The reconciliations of net income and stockholder's equity
prepared in conformity with statutory reporting practices to
that reported in the accompanying financial statements are as
follows (in 000's):
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
1995 1994 1995 1994
In conformity with statutory $1,661 $ 699 $10,264 $9,360
reporting practices
Additions (deductions) by
adjustment:
Deferred policy acquisition 104 379 483 379
costs, net
Present value of future 462 897 4,475 4,013
profits, net
Policy liabilities and accruals (1,006) (411) (2,739) (3,690)
Deferred income taxes 277 (223) 499 1,090
Asset Valuation Reserve - - 950 956
Interest Maintenance Reserve (224) (173) 1,192 676
Nonadmitted items - - 99 124
Valuation differences on debt - - 1,785 (394)
securities
Net unrealized gains and losses - - (11) 1,675
on investments
Realized investment gains 84 (81) - -
(losses)
Other adjustments, net (76) (13) (554) 61
In conformity with generally $1,282 $1,074 $16,443 $ 14,250
accepted accounting principles
</TABLE>
4. INVESTMENT OPERATIONS:
Net investment income and realized
gains and losses by class of security
were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net Net
Investment Realized Realized Investment Realized Realized
Income Gains Losses Income Gains Losses
Mortgage backed $2,340,314 $1,731,010
securities
U.S. Government 827,268 906,945
obligations
Corporate bonds 3,788,280 $76,432 4,865,154 $(80,751)
Other 8,273
994,425 100,079
$7,950,287 $84,705 $ - $7,603,188 $ - $(80,751)
</TABLE>
These securities yield interest at
rates that range from 6% to 10% and pay
interest on terms that range primarily
from one to six months.
Mortgage backed securities are issued,
secured or guaranteed by the U.S.
Government, government agencies or
instrumentalities.
Realized gains and losses on sales of
investments were determined using the
specific identification method.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
4. INVESTMENT OPERATIONS, CONTINUED:
The carrying amount of securities and
their approximate fair values at
December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1995
<S> <C> <C> <C> <C>
Amortized Gross Unrealized Estimated Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE:
Mortgage backed securities $12,780,424 $125,557 $(33,328) $12,872,653
U.S. Government obligations 4,009,869 (12,867) 3,997,002
Corporate bonds 40,227,321 311,275 (383,821) 40,154,775
Foreign government obligations 523,436 9,014 532,450
$57,541,050 $445,846 $(430,016) $57,556,880
HELD-TO-MATURITY:
Mortgage backed securities $31,007,188 $298,182 $(46,028) $31,259,342
U.S. Government obligations 10,640,414 10,129 (36,358) 10,614,185
$41,647,602 $308,311 $(82,386) $41,873,527
1994
Amortized Gross Unrealized Estimated Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE:
U.S. Government obligations $ 265,453 $ (9,908) $ 255,545
Corporate bonds 30,668,319 $1,276 (2,488,997) 28,180,598
Foreign government obligations 548,652 (40,177) 508,475
$ 31,482,424 $1,276 $(2,539,082) $28,944,618
HELD-TO-MATURITY:
Mortgage backed securities $ 23,863,797 $1,106 $(1,276,469) $22,588,434
U.S. Government obligations 15,082,571 (1,178,205) 13,904,366
Corporate bonds 37,834,091 (3,032,974) 34,801,117
Foreign government obligations 1,092,302 (112,602) 979,700
$ 77,872,761 $1,106 $(5,600,250) $72,273,617
</TABLE>
During December of 1995, and in accordance
with the provisions allowed by the
Financial Accounting Standards Boards,
SPECIAL REPORT - A GUIDE TO IMPLEMENTATION
OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES,
the Company reclassified approximately $48
million of investments, originally
purchased and classified as held-to-
maturity to available-for-sale recording a
net unrealized loss of approximately
$91,000.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
4. INVESTMENT OPERATIONS, CONTINUED:
The amortized cost and estimated fair
value of debt securities available-
for-sale and held-to-maturity at
December 31, 1995, by contractual
maturity, are shown below. Expected
maturities will differ from
contractual maturities because
borrowers may have the right to prepay
obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
<S> <C> <C>
AMORTIZED FAIR
COST VALUE
Available-for-sale:
Due in one year or less $ 1,683,700 $ 1,679,160
Due after one year through 32,783,001 32,749,737
five years
Due after five years through 12,968,572 12,866,909
ten years
Due after ten years 10,165,777 10,261,074
$ 57,541,050 $ 57,556,880
Held-to-maturity:
Due after one year through $ 10,126,666 $ 10,092,470
five years
Due after five years through 513,748 521,715
ten years
Due after ten years 31,007,188 31,259,342
$ 41,647,602 $ 41,873,527
</TABLE>
Cash, cash equivalents and
certain investments of the
Company with a carrying
value of approximately
$3,097,000 and $2,847,000 at
December 31, 1995 and 1994,
respectively, were held on
deposit with various state
regulatory agencies for the
benefit of policyholders,
claimants and creditors.
5. PRESENT VALUE OF FUTURE PROFITS:
As a result of the
acquisition of the Company
on December 31, 1993 by
Delta, the Company
established a discounted
asset for the present value
of future profits (PVFP) of
insurance purchased.
Progression of the PVFP for
the years ended December 31,
1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance at beginning of year $4,012,857 $2,813,626
Additional costs associated with -- 302,048
acquisition
Amortization 462,226 897,183
Balance at end of year $4,475,083 $4,012,857
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
5. PRESENT VALUE OF FUTURE PROFITS, CONTINUED:
The estimated amount of
PVFP as of December 31,
1995 expected to be
amortized during each of
the next five years is as
follows:
1996 $ (426,940)
1997 103,021
1998 224,590
1999 247,532
2000 258,243
Thereafter 4,068,637
$ 4,475,083
6. INCOME TAXES:
The provision
(benefit) for income
taxes is composed of
the following:
1995 1994
Federal :
Current $ 937,460 $ 291,830
Deferred (277,000) 223,000
$ 660,460 $ 514,830
The components of
the deferred tax
assets and
liabilities as of
December 31, 1995
and 1994 are as
follows (in 000's):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Deposits and policy liabilities $ 1,790 $ 1,247
Reserve for guaranty fund assessments 51 40
Deferred policy acquisition costs 137 191
Net unrealized loss on available-for-sale - 863
securities
Other 104 101
2,082 2,442
Deferred tax liabilities:
Present value of future profits (1,511) (1,284)
Net unrealized gain on available-for-sale (5) -
securities
Other (67) (68)
(1,583) (1,352)
Net deferred tax asset $ 499 $ 1,090
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
6. INCOME TAXES, CONTINUED:
Management believes that
realization of the above
deferred tax assets is more
likely than not primarily
due to the reversal of
existing taxable temporary
differences as well as a strong
earnings history. Consequently,
no valuation allowance was deemed
necessary.
7. REINSURANCE:
In the ordinary course of
business, the Company cedes
reinsurance to other insurers
under various contracts that cover
individual risks or entire
classes of business.
These arrangements limit the
risk arising from large policies.
The Company retains a maximum of
$100,000 of coverage per individual
life. Reinsurance contracts do not
relieve the Company from its obligation
to policyholders. A contingent liability
exists for reinsurance ceded which
would become a liability of the Company in
the event that any reinsurer is unable
to meet its obligations under the
reinsurance agreements.
As of December 31, 1995 and 1994
and for the years then ended, the
approximate impact on the financial
statements due to all ceded reinsurance
agreements in force during the
year was as follows:
1995 1994
Premium income $ 1,335,000 $ 1,490,000
Reinsurance ceded 1,062,000 339,000
Underwriting, acquisition and
insurance expenses 334,000 382,000
8. SUPPLEMENTAL CASH FLOWS INFORMATION:
During 1995, the Company paid cash
and received refunds for income taxes
of $414,656 and $113,656, respectively.
During 1994, the Company paid cash
for income taxes of $427,750.
9. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the
balance sheet for other investments, cash
and cash equivalents, accrued investment
income, ceded reserves and claims, accounts
payable, accrued expenses and other liabilities,
and amounts payable to parent approximate
fair value due to the short-term nature
of these instruments.
The following methods and assumptions were
used to estimate the fair value of
each class of financial instrument in which
it is possible to estimate that value and
fair value does not approximate carrying
value.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
9. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
INVESTMENTS
The fair value of debt securities are determined
primarily by reference to a pricing service
or the dealer market.
ANNUITY AND LIFE DEPOSITS
The fair value of these contracts is estimated as the
policyholder's net cash surrender value which the
policyholder may withdraw at their option.
The carrying value and fair value of these instruments
is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Debt securities available-for-sale $57,556,880 $57,556,880 $28,944,618 $ 28,944,618
Debt securities held-to-maturity 41,873,527 77,872,761 72,273,617 41,647,602
Annuity deposits 59,504,315 70,146,340 68,221,601 60,887,315
Life deposits 20,228,968 22,003,581 18,684,636 23,303,968
</TABLE>
10.PROFIT SHARING PLAN:
The Company's employees participate in DLC's
discretionary profit sharing plan under which
up to ten percent of an employee's compensation
may be contributed in any calendar year
for employees with at least one year of service.
In addition, employees may contribute up to
five percent of their compensation. During
1995 the Company contributed approximately
$5,600 to the profit sharing plan.
11.RELATED PARTY TRANSACTIONS:
The Company is party to an agreement with DLC
whereby DLC provides investment advisory services
for a fee of 15 basis points per annum on invested
assets. This fee, which is charged to net investment
income, amounted to approximately $151,000 and
$162,000 in 1995 and 1994, respectively.
During 1994,the Company entered into a management agreement
with DLC. Pursuant to the agreement, Delta will provide
certain management services to the Company for a fee
of 75 basis points on statutory premiums received plus
10 basis points of the Company's net admitted assets
at the end of each quarter. However, no fees were charged
under this agreement in 1995 or 1994.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
11. RELATED PARTY TRANSACTIONS, CONTINUED:
Effective December 31, 1993, Delta entered into
a service agreement with the former parent on
behalf of the Company whereby certain operations
of the Company would continue to be performed
by the former parent for a period of up to
twelve months. During 1995 and 1994, the Company
paid approximately $299,030 and $1,128,000, respectively,
as reimbursement fees to the former parent. The agreement
was terminated April 17, 1995. Various operating expenses
and costs are allocated to the Company by Delta.
These amounts are reflected in the payable to parent balances
at December 31, 1995 and 1994.
12. COMMITMENTS AND CONTINGENCIES:
GUARANTEED RATES
The Company assumes investment risk on contracts it issues
by guaranteeing the principal value of policyholders' accounts
plus a minimum interest rate. The guaranteed interest rates
are set on the anniversary date of the contract and range
from 4% to 7.5% depending upon the particular contract form.
INVESTMENT PURCHASE COMMITMENTS
At December 31, 1995, the Company has made commitments to
purchase approximately $3,840,000 of mortgage backed securities
at a rate of 6.5%.
GUARANTY FUND
Under insurance guaranty fund laws, in most states,insurance
companies doing business therein can be assessed up to prescribed
limits for policyholder losses incurred by insolvent companies.
The Company does not believe such assessments will be materially
different from amounts already provided for in the financial
statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an
insurer's own financial strength.
LITIGATION
A number of civil jury verdicts have been returned against
life insurers in the areas in which the Company does business
involving a variety of matters. Some of the lawsuits have
resulted in substantial judgments and punitive damages.
The Company, like other life insurers, from time to time is
involved in such litigation. To date, no such lawsuit has
resulted in the award of any significant amount of damages
against the Company. Although the outcome of any litigation
cannot be predicted with certainty, the Company is not aware
of any litigation that will have a material adverse effect
on the Company's financial position, results of operation, or
cash flows.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
12.COMMITMENTS AND CONTINGENCIES, CONTINUED:
STATUTORY CAPITAL AND SURPLUS
Under Tennessee statute, the Company is required to
maintain statutory capital and surplus amounts of
$2,000,000 at December 31, 1995 and 1994. As a
Tennessee domiciled insurance company, the Company
is subject to certain regulatory restrictions on
the payment of dividends. The maximum dividend
which may be paid during 1996 without prior consent
is $1,660,855.
13.SUBSEQUENT EVENT:
During February of 1996, the Company declared dividends
of $13 per share and totaling $325,000.
On November 8, 1996, Delta closed on a stock purchase agreement
for the sale of all of the outstanding common stock of the
Company to Standard Life Insurance Company of Indiana, a wholly-
owned subsidiary of Standard Management Corporation. Under the
terms of the agreement, the sales price is comprised of cash
and an extraordinary dividend totaling approximately $16 million
and 250,000 shares of restricted common stock of Standard Management
Corporation.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
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
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 SHAREHOLDERS' 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 gain (loss) on
securities (260)
available for sale
Retained earnings (deficit) 1,564
Total shareholders' equity 16,407
Total liabilities and shareholders' $109,892
equity
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
SHELBY LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
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 (credit) 798 540
Net income 1,301 880
Net income $52.04 $35.20
Weighted average number of common and
common equivalent shares
outstanding 25,000 25,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
SHELBY LIFE INSURANCE COMPANY
Statement of Cash Flows
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $1,301 $880
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 935 2,195
operating 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 available- 1,684 1,989
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 (590) 143
and cash equivalents
Cash and cash equivalents, beginning of year 1,154 -
Cash and cash equivalents, end of period $564 $143
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
Shelby Life Insurance Company
Notes to Financial Statements
(Dollars in Thousands, Unaudited)
September 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. Such principles were applied on a basis consistent
with those reflected in the Shelby Life Insurance Company (the Company)
financial statements for the year ended December 31, 1995. However,
certain reclassifications have been made in the 1995 financial statements
to conform with the 1996 presentation.
The results of operations for the interim periods shown in this report
are not necessarily indicative of the results that may be expected for the
fiscal year. This is particularly true in the life insurance industry,
where mortality results in interim periods can vary substantially from such
results over a longer period. In the opinion of management, the
information contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of such
operations. All such adjustments are of a normal recurring nature.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could
change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's financial
statements for the year ended December 31, 1995.
2 . SUBSEQUENT EVENT
On November 8, 1996, the Company closed on a stock purchase agreement for
the sale of all of the outstanding common stock of the Company to Standard
Life Insurance Company of Indiana, a wholly-owned subsidiary of Standard
Management Corporation. Under the terms of the agreement, the sales price
is comprised of cash of $16,000 and 250,000 shares of restricted common
stock of Standard Management Corporation.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
Background Information
The following pro forma combined balance sheet as of September 30, 1996
gives effect to the acquisition of Shelby Life Insurance Company ("Shelby
Life") from Delta Life and Annuity Company ("DLAC"), and the merger of
Shelby Life into Standard Life Insurance Company of Indiana ("Standard
Life"), a wholly-owned subsidiary of Standard Management Corporation
("Standard Management"), as if it had occurred as of the balance sheet
date. The merger of Shelby Life was consummated pursuant to an Agreement
and Plan of Merger dated July 18, 1996 previously filed with the Securities
and Exchange Commission on November 14, 1996. The pro forma combined
statements of operations for the year ended December 31, 1995, and nine
months ended September 30, 1996, are presented as if the transaction had
occurred as of January 1, 1995.
The pro forma combined financial statements do not purport to represent
what Standard Management Corporation's ("Standard Management") financial
position or results of operations actually would have been had the
transaction in fact occurred on the dates indicated, or to project Standard
Management's financial position or results of operations for any future
date or period. The pro forma financial statements should be read in
conjunction with the accompanying notes thereto and the separate historical
consolidated financial statements of Standard Management and Shelby Life as
of and for the nine months ended September 30, 1996, and as of and for the
year ended December 31, 1995.
The pro forma adjustments are applied to the historical consolidated
financial statements of Standard Management and Shelby Life to account for
the transaction under the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16 ("APB No.16"). Under this
method of accounting, the total purchase cost has been allocated to Shelby
Life's assets and liabilities based on their estimated relative fair
values. These allocations are subject to valuations as of the date of the
transaction based on appraisals and other studies, which are not yet
completed. Accordingly, the final allocations will be different from the
amounts reflected herein. Any purchase price adjustments will be made
within one year from the acquisition date and are not expected to be
material to the pro forma combined financial statements taken as a whole.
The pro forma combined financial statements, however, reflect management's
best estimate based on currently available information.
The total acquisition cost to purchase Shelby Life is comprised of the
following:
Cash payment, provided by senior debt of
$10,000 and the balance in subordinated
convertible debt $13,000
Restricted SMC Common Stock 1,250
14,250
Acquisition costs and other liabilities
directly related to the acquisition 400
TOTAL PURCHASE PRICE $14,650
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL Reclassifications
<S> <C> <C> <C> <C>
STATEMENTS and
STANDARD SHELBY Pro Forma PRO FORMA
MANAGEMENT LIFE ADJUSTMENTS COMBINED
ASSETS:
Investments:
Securities available for
sale:
Fixed maturity securities $241,713 $ 38,682 $60,026 (B) $339,004
(1,417) (C)
Equity securities 77 - - 77
Fixed maturity securities - 60,026 (60,026) (B) -
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 (D) 5,275
Amounts due and recoverable from
reinsurers 65,047 947 - 65,994
Deferred policy acquisition costs 17,977 540 (540) (E) 17,977
Present value of future profits 15,402 4,954 (4,954) (F) 24,774
9,372 (F)
Excess of acquisition cost over net
assets acquired 2,279 - 873 (G) 3,152
Deferred federal income taxes 66 326 (874) (K) -
482 (C)
Other assets 8,681 1,397 260 (H) 10,338
Assets held in separate accounts 126,987 - - 126,987
Total assets $506,728 $109,892 $3,502 $620,122
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL Reclassifications
<S> <C> <C> <C> <C>
STATEMENTS and
STANDARD SHELBY Pro Forma PRO FORMA
MANAGEMENT LIFE ADJUSTMENTS COMBINED
LIABILITIES, REDEEMABLE SECURITIES
AND SHAREHOLDERS' EQUITY
Liabilities:
Policy reserves $326,445 $92,146 $- $418,591
Accounts payable and accrued 4,826 1,339 3,400 (H) 9,565
expenses
Obligations under capital lease 753 - - 753
Notes payable 5,671 - 14,100 (J) 19,771
Deferred federal income taxes - - 2,558 (J) 1,684
(874) (K)
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 19,184 580,473
Class S Cumulative Convertible
Redeemable 1,722 - - 1,722
Preferred Stock
Shareholders' equity:
Preferred stock - - - -
Common stock 40,997 2,500 (2,500) (L) 40,472
(525) (M)
Additional paid-in capital - 12,603 (12,603) (L) -
Treasury stock (deduction) (4,741) - 1,250 (N) (3,491)
Unrealized gain (loss) on (935) (C) (1,892)
securities (1,892) (260) 1,195 (B)
available for sale
Foreign currency translation 717 - - (K) 717
adjustment
Retained earnings (deficit) 2,121 1,564 (1,564) (K) 2,121
Total shareholders' equity 37,202 16,407 (15,682) 37,927
Total liabilities,
redeemable securities and $506,728 $109,892 $ 3,502 $620,122
shareholders' equity
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL Reclassifications
<S> <C> <C> <C> <C>
STATEMENTS and
STANDARD SHELBY Pro Forma PRO FORMA
MANAGEMENT LIFE ADJUSTMENTS COMBINED
Revenues:
Premium income $5,504 $1,628 $- $7,132
Net investment income 18,517 8,201 (1,675) (P) 25,043
Net realized investment gains 688 85 - 773
Policy charges 2,467 2,375 - 4,842
Amortization of excess of net assets
acquired over acquisition cost 1,388 - - 1,388
Management fees and similar income
from 1,294 - - 1,294
separate accounts
Other income 380 333 - 713
Total revenues 30,238 12,622 (1,675) 41,185
Benefits and expenses:
Class action litigation and
settlement costs (314) - - (314)
(credit)
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) (P) 3,002
958 (P)
Other operating expenses 11,034 2,249 (828) (Q) 12,455
Interest expense and financing costs 118 - 1,491 (R) 1,609
Total benefits and expenses 28,682 10,460 555 39,697
Income before federal income taxes 1,556 2,162 (2,230) 1,488
Federal income tax expense (credit) 243 735 (758) (S) 220
Net income 1,313 1,427 (1,472) 1,268
Net income per share $.25 $57.08 $7.25 $ .23
Weighted average number of common and
common equivalent shares 5,345,937 25,000 203,000 (T) 5,573,937
outstanding
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
STANDARD MANAGEMENT CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL FINANCIAL Reclassifications
<S> <C> <C> <C> <C>
STATEMENTS and
STANDARD SHELBY Pro Forma PRO FORMA
MANAGEMENT LIFE ADJUSTMENTS COMBINED
Revenues:
Premium income $8,418 $1,163 $ - $9,581
Net investment income 14,371 5,462 (556) (P) 19,277
Net realized investment gains 677 139 - 816
Gain on disposal of subsidiaries 886 - - 886
Policy charges 1,832 1,549 - 3,381
Amortization of excess of net
assets 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) (P) 2,392
669 (P)
Other operating expenses 8,851 1,390 (621) (Q) 9,620
Interest expense and financing 430 - 1,119 (R) 1,549
costs
Total benefits and expenses 27,306 6,619 916 34,841
Income before federal income taxes,
extraordinary gain on early
redemption of preferred stock and
preferred stock dividends 2,559 2,099 (1,472) 3,186
Federal income tax expense (credit) (762) 798 (500) (S) (464)
Income before extraordinary gain on
early redemption of preferred stock
and preferred stock dividends 3,321 1,301 (971) 3,650
Income before extraordinary gain on
early redemption of preferred stock
and preferred stock dividends
per share $.65 $52.04 $(4.74) $.66
Weighted average number of common and
common equivalent shares outstanding 5,299,499 25,000 205,000 (S) 5,529,499
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS.
<PAGE>
SHELBY LIFE INSURANCE COMPANY
Notes to Financial Statements, Continued
STANDARD MANAGEMENT CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
(A) Shelby Life's financial statement captions have been reclassified to
conform with Standard Management's classifications.
Adjustments to the pro forma combined balance sheet to give effect to the
purchase of Shelby Life as of September 30, 1996, are summarized below.
(B) Held to maturity securities have been reclassified as available for
sale securities at the purchase consistent with the intention of new
management.
(C) Shelby Life's fixed maturity securities held to maturity are restated
to estimated fair value, and related deferred federal income taxes and
unrealized gain (loss) on securities are recorded.
(D) Amount is net proceeds from borrowings and payment made to DLAC for
the purchase of Shelby Life.
(E) Deferred policy acquisition costs of Shelby Life has been eliminated
under purchase accounting.
(F) Present value of future profits for business previously acquired
by Shelby Life has been eliminated under purchase accounting and
replaced with the present value of future profits from existing
insurance acquired in association with the purchase of Shelby
Life. Present value of future profits has been actuarially
determined using a 15 percent discount rate.
(G) Goodwill acquired in the purchase of Shelby Life is recognized.
(H) Other assets have been increased for the deferred debt issuance costs
of the commitment fees paid for the borrowings on the revolving line
of credit agreement ("Amended Credit Agreement") and subordinated
convertible debt and the issuance of SMC Common Stock warrants in
connection with the Amended Credit Agreement. Other assets have also
been decreased by the additional amount of agents' balances deemed to
be uncollectible.
(I) Accounts payable has been increased due to the $3,000 dividend
payable to DLAC at closing and the accrual of estimated
acquisition costs associated with the transaction.
(J) Notes payable are increased to reflect the increased borrowings
under the Amended Credit Agreement and subordinated convertible
debt.
(K) Deferred tax liabilities have been recorded primarily for the
actuarially determined present value of future profits from
existing insurance, and net deferred tax assets have been
reclassified to offset the net pro forma deferred tax liability.
STANDARD MANAGEMENT CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(L) The Shelby Life historical shareholders' equity and related average
shares outstanding is eliminated under purchase accounting.
(M) Common stock has been adjusted for the repurchase of SMC Common Stock
warrants issued to Conseco ($600) and the issuance of SMC Common Stock
warrants to Fleet Bank in connection with the Amended Credit Agreement
($75).
(N) Treasury stock has been decreased to reflect the reissuance of 250,000
shares of SMC Common Stock held in treasury to DLAC.
Adjustments to the pro forma combined statement of operations to give
effect to the purchase of Shelby Life as of January 1, 1995 are summarized
below.
(P) Amortization of deferred acquisition costs and present value of
future profits recorded by Shelby Life prior to the purchase has
been eliminated and replaced with the amortization of the present
value of the future profits as a result of the transaction. The
amount resulting from the transaction is being amortized over 20
years with interest equal to the liability rate. Amortization of
goodwill acquired in the transaction is recognized over a 20-year
period on a straight-line basis.
(Q) Operating expenses were reduced for the cost savings realized by
planned reductions in total employees, professional fees and other
costs. The plans have either been implemented or are in process of
being implemented.
(R) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and the
subordinated convertible debt and amortization of deferred debt
issuance costs associated with the Amended Credit Agreement.
(S) Federal income tax expense has been adjusted to reflect the
income tax effects of the pro forma adjustments, based on SMC's
tax rate of 34 percent.
(T) Average common shares outstanding are increased to reflect the
restricted SMC Common Stock shares issued to DLAC, the repurchase of
SMC Common Stock warrants issued to an unaffiliated insurer and the
issuance of SMC Common Stock warrants in connection with the Amended
Credit Agreement.
