SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934
Date of Report (Date of the earliest event reported): May 22, 1998 (March
12, 1998)
STANDARD MANAGEMENT CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 0-20882 NO. 35-1773567
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
9100 Keystone Crossing, Indianapolis, Indiana 46240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 574-6200
N/A
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements are filed as part of this report:
(a) Audited Financial Statements of Savers Life Insurance Company:
Independent Auditor's report
Balance Sheets as of December 31, 1997 and 1996
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended
December 31, 1997, 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 December 31, 1997
(Unaudited)
Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 (Unaudited)
Notes to Pro Forma Combined Financial Statements (Unaudited)
<PAGE>
Board of Directors and Stockholders
Savers Life Insurance Company
Winston-Salem, North Carolina
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Savers Life Insurance
Company as of December 31, 1997 and 1996, and the related statements of
stockholders' equity, income, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Savers Life Insurance Company
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
D.E. Gatewood and Company
CERTIFIED PUBLIC ACCOUNTANTS
Winston-Salem, North Carolina
February 26, 1998, except for
Note 17, as to which the date
is March 3, 1998
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Investments:
Certificates of deposit $25,377 $30,495
Debt securities, held for investment,
at amortized cost (fair value $1,030 and $16,050) 1,037 17,442
Debt securities, available for sale, at fair value
(amortized cost $20,504 and $7,992) 20,564 7,585
Preferred stocks, market (cost $133 and $133) 50 50
Common stocks, market (cost $2,507 and $2,737) 3,787 3,241
Mortgage loans - secured 5,221 6,760
Real estate (less accumulated depreciation of $64 and $52) 2,403 2,414
TOTAL INVESTMENTS $58,439 $67,987
Cash and cash equivalents 10,721 6,702
Accrued investment income 597 721
Accounts receivable 140 55
Refundable income taxes 2 298
Deferred income taxes 1,397 1,088
Reinsurance receivables 268 296
Equipment, at cost, less accumulated depreciation of $407 and $407 68 115
Deferred acquisition cost, net of amortization 1,284 3,962
Other assets 5 5
TOTAL ASSETS $72,921 $81,229
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Policy Liabilities:
<S> <C> <C>
Future policy benefits - annuities $45,171 $47,342
Future policy benefits - life 3,151 3,267
Unearned premiums and health benefit reserves 2,953 3,808
Claim liability 6,513 10,455
Accrued expenses 407 779
TOTAL LIABILITIES $58,195 $65,651
Stockholders' Equity:
Capital stock - no par value-stated value $1 per share:
20,000,000 shares authorized; Issued and outstanding: $1,780 $1,780
1,779,908 shares
Additional paid-in capital 1,823 1,823
Retained earnings:
Appropriated 1,401 1,365
Unappropriated 8,892 10,597
Net unrealized investment gains 830 13
TOTAL STOCKHOLDERS' EQUITY $14,726 $15,578
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $72,921 $81,229
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Capital Stock:
Balance at beginning of year $1,780 $3,552 $3,572
Change in stated value -- (1,776) --
Capital stock purchased-stated value -- -- (45)
Stated value of common stock issued -- 4 25
Balance at end of year $1,780 $1,780 $3,552
Additional Paid-In Capital:
Balance at beginning of year $1,823 $33 --
Change in stated value -- 1,776 --
Exercise of stock options -- 14 33
Balance at end of year $1,823 $1,823 $33
Retained Earnings:
Appropriated:
Balance at beginning of year $1,365 $823 $325
Change in asset valuation reserve 36 542 498
Balance at end of year $1,401 $1,365 $823
Unappropriated:
Balance at beginning of year $10,597 $12,830 $12,468
Net income (loss) (1,669) (1,692) 961
Capital stock purchased in excess of -- -- (101)
stated value
Transfer of asset valuation reserve (36) (541) (498)
Balance at end of year $8,892 $10,597 $12,830
Net unrealized investment gains (losses):
Balance at beginning of year $13 $12 $(584)
Net changes in unrealized capital gains 817 1 596
Balance at end of year $830 $13 $12
TOTAL STOCKHOLDERS' EQUITY $14,726 $15,578 $17,250
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Premium considerations -
Life and health $36,058 $47,855 $49,946
Policy charges 254 275 295
Investment income, net of expenses
(1997 - $270; 1996 - $266; 1995 - $221) 4,394 4,569 4,851
Fees from Keyport and other income 2,183 1,041 1,665
Realized investment gains 158 170 387
$43,047 $53,910 $57,144
BENEFITS AND EXPENSES:
Increase (decrease) in future policy
benefits - life and health $78 $(700) $(2,069)
Annuity benefits 136 287 170
Claims expenses 29,162 38,748 38,748
Interest credited on interest-sensitive
annuities and universal life policies 2,472 2,543 2,787
Commissions expenses 6,492 8,248 9,058
General expenses 2,940 3,194 3,326
Insurance taxes, licenses and fees
excluding income taxes 1,137 1,391 1,495
Decrease in deferred acquisition costs 2,939 3,057 2,552
$45,356 $56,768 $56,067
INCOME (LOSS) BEFORE INCOME TAXES $(2,309) $(2,858) $1,077
INCOME TAXES:
Current $97 $(86) $464
Deferred (737) (1,080) (348)
$(640) $(1,166) $116
NET INCOME (LOSS) $(1,669) $(1,692) $961
NET INCOME (LOSS) PER SHARE:
Net income (loss) $ (.94) $ (.95) $ .54
Net income (loss) - assuming dilution $ (.94) $ (.95) $ .53
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,669) $(1,692) $961
Adjustments to reconcile net income to net cash
used by operating activities:
Amortization of deferred acquisition
costs and depreciation $3,011 $3,131 $2,647
Deferred income taxes (737) (1,080) (348)
(Gain) loss on sale of fixed assets 6 (2) --
Loss on sale of investments (158) (170) (387)
Accrual of bond discount/amortization of 188 249 231
premium
(Increase) decrease in assets:
Unincorporated joint venture -- -- 9
Accrued investment income 124 (38) 86
Income tax receivables 296 (298) 10
Reinsurance receivables 28 62 (65)
Deferred acquisition costs (261) (342) (1,567)
Other assets -- (1) 35
Accounts receivables (85) 208 339
Increase (decrease) in liabilities:
Policy liabilities (2,287) (49) (1,737)
Unearned premiums and health benefit reserves (855) (864) (2,208)
Claims liability (3,942) 345 2,114
Accrued expenses (372) (53) (499)
Current income tax -- (177) 177
TOTAL ADJUSTMENTS $(5,044) $921 $(1,163)
NET CASH USED BY OPERATING ACTIVITIES $(6,713) $(771) $(202)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchase of fixed assets $(11) $(61) $(21)
Sale of fixed assets 3 3 --
Sales of fixed maturities available for sale and 19,948 18,575 20,119
equity securities
Purchase of fixed maturities available for sale and (15,869) (19,429) (17,170)
equity securities
Purchase of certificates of deposit (40,893) (47,033) (38,714)
Proceeds from matured certificates of deposit 46,011 40,221 39,977
Mortgage loans disbursed (6,123) (8,085) (7,951)
Principal collected on mortgage loans 7,234 8,259 6,327
Real estate purchased (20) -- (42)
Real estate sold 452 -- --
Net cash provided (used) by investing activities $10,732 $(7,550) $2,525
FINANCING ACTIVITIES
Proceeds from exercise of stock options -- $18 $58
Capital stock purchased -- -- (146)
Net cash provided (used) by financing activities -- $18 $(88)
Net increase (decrease) in cash and cash equivalents $4,019 $(8,303) $2,235
Cash and cash equivalents at beginning of year 6,702 15,005 12,770
Cash and cash equivalents at end of year $10,721 $6,702 $15,005
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $3 $9 $4
Income taxes $(199) $389 $277
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Savers Life Insurance Company (the "Company")
provides life, accident and health insurance services in North Carolina,
South Carolina, Virginia and Florida.
The accompanying financial statements are presented on the basis of
generally accepted accounting principles (GAAP) which vary in certain
respects from reporting practices prescribed or permitted by state
insurance regulatory authorities and include the following policies:
INVESTMENTS - Cash on deposit in savings and loan associations and banks
(including certificates of deposit) is stated at cost, which is market
value. The Company classifies investments in debt securities in two
categories: held for investment and available for sale. Debt securities
which the Company has the positive intent and ability to hold to maturity
are classified as held for investment and are carried at amortized cost,
net of write-downs for other than temporary declines in value. Debt
securities which might be sold prior to maturity are classified as
available for sale and carried at fair value.
Available for sale debt securities are written down (as realized losses)
to fair value as the new cost basis for other than temporary declines in
value. Unrealized gains and losses, related to available for sale debt
securities, are reflected in stockholders' equity. Unrealized gains and
losses on common and preferred stocks carried at market value are also
reflected in stockholders' equity. Provisions for impairments that are
other than temporary are included in net realized capital gains and
losses. Common and preferred stocks are shown at market value. Realized
investment gains and losses are determined by specific identification and
are presented as a separate component of net income.
Mortgage loans are shown at their unpaid balances, net of allowances for
uncollectible amounts, and are secured by deeds of trust on real estate.
Allowances for uncollectible loans are estimates based on management's
judgment, but there were no allowances for uncollectible amounts at
December 31, 1997 and 1996. Mortgage loan interest rates are adjusted
periodically based on the prime lending rate. Interest income on impaired
loans is recognized when received. Two real estate properties were
acquired through foreclosure. One of these properties was acquired and
sold during 1997. The book value of the remaining property at December
31, 1997 was $45,000. Investment real estate consisting of undeveloped
land held for sale is carried at fair value less estimated selling costs.
A property held for the production of income and also partially occupied
by the Company is carried at depreciated cost plus capital additions.
The accumulated depreciation for real estate was $64,000 and $52,000 at
December 31, 1997 and 1996, respectively. Depreciation is calculated
using the straight-line method based on a useful life of 39 years.
RECOGNITION OF INCOME AND RELATED COSTS - Premiums on life insurance are
reported as revenue when due. Fees on annuities are reported as earned
when due. Expenses are reported in a manner which results in the
recognition of profits over the life of the contracts. Benefits and
expenses are associated with premiums by means of the provisions for
future policy benefits, unearned premiums and amortization of policy
acquisition costs.
Investment income is accrued and recognized as earned.
EQUIPMENT - Equipment is stated at cost; depreciation is calculated
using an accelerated method for assets acquired after 1980 and the
straight-line method for assets acquired prior to 1981. The depreciation
provision is based on the estimated useful lives of the assets
(automobiles - 5 years; office equipment and furniture - 5 to 10 years).
DEFERRED POLICY ACQUISITION COSTS - Certain costs of acquiring
insurance business are deferred. These costs, all of which vary with and
are primarily related to the production of new business, consist
principally of commissions, certain expenses of underwriting and issuing
contracts and certain agency expenses. Deferred policy acquisition costs
for traditional life business are amortized over the premium-paying
periods of the related policies in proportion to the ratio of the annual
premium revenue to the total anticipated premium revenue. Deferred
policy acquisition costs for other lines of business are generally
amortized over the life of the contract or at a constant rate based on
the estimated gross profits expected to be realized. These costs and the
amortization periods are the estimates of management based on the
expected period of benefit from the costs incurred.
Deferred policy acquisition costs would be written off to the extent that
it is determined that future policy premiums and investment income or
gross profits would not be adequate to cover related losses and expenses.
Due to the unprofitability of the major medical product line, no costs
associated with this line were deferred during 1997 and 1996. Deferred
policy acquisition costs relating to the major medical product line
remaining from prior years were amortized over an 18-month period
beginning in 1996 and ending June 30, 1997. Deferred acquisition costs
relating to Medicare supplement policies of a type no longer offered by
the Company were written off in 1996.
INCOME TAXES - Income tax provisions are based on earnings reported in
the financial statements. Deferred income taxes relate principally to
the deferred acquisition costs and the liability for future policy
benefits.
CLAIMS PAYABLE - The Company establishes provisions for claims in the
process of review and for claims incurred but not reported. These
provisions are estimates of the ultimate cost of incurred claims based on
historical payment patterns using actuarial techniques. Claims payable
were $6,513,000 and $10,455,000 at December 31, 1997 and 1996,
respectively.
NET INCOME PER SHARE - Earnings per share amounts and earnings per share-
assuming dilution amounts are computed using certain assumptions about
issuance of common stock and net income available to common stockholders
as follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Net Income Per Share
(Loss) Shares Amount
<S> <C> <C> <C>
1997:
Basic EPS $(1,669) 1,779,908 $ (.94)
Diluted EPS $(1,669) 1,779,908 $ (.94)
1996:
Basic EPS $(1,692) 1,779,908 $ (.95)
Diluted EPS $(1,692) 1,779,908 $ (.95)
1995:
Basic EPS $961 1,779,747 $ .54
Effect of Diluted Securities:
Stock Options -- 17,689 --
Diluted EPS $961 1,797,436 $ .53
</TABLE>
Options to purchase 62,974, 64,299 and 74,748 shares were outstanding at
December 31, 1997, 1996 and 1995, respectively. These options were not
included in the computation of diluted EPS for 1997 and 1996 because they
would be antidilutive in years with a net loss.
APPROPRIATED RETAINED EARNINGS - Appropriated retained earnings have
been computed according to a statutory formula specified by regulations
to provide for possible losses on securities.
USE OF ESTIMATES - The preparation of financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from reported results using those estimates.
RECLASSIFICATION - Certain 1996 and 1995 amounts have been reclassified
to conform with classifications in 1997. The reclassification had no
effect on net income.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
ACCOUNTING CHANGES
EARNINGS PER SHARE - Effective for the year ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, which requires dual presentation of earnings per share amounts.
Basic earnings per share are calculated using only the weighted average
number of shares of common stock outstanding for the year. Diluted
earnings per share reflects the potential dilution that could occur if
options were exercised and resulted in the issuance of common stock that
would share in the earnings of the Company. Earnings per share amounts
were restated for 1996 and 1995 as follows:
<TABLE>
<CAPTION>
Previously Reported As Restated
<S> <C> <C> <C> <C>
Primary Fully Diluted Basic Diluted
EPS EPS EPS EPS
1996 $ (.94) $ (.94) $ (.95) $ (.95)
1995 $ .53 $ .53 $ .54 $ .53
</TABLE>
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - As of January 1,
1995, the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure". In accordance
with these standards, a loan is considered impaired when it is probable
that the Company will be unable to collect amounts due according to the
contractual terms of the loan agreement. For impaired loans, a specific
impairment reserve would be established for the difference between the
recorded investment in the mortgage loan and the fair value of the
collateral. Adoption of these standards had no impact on 1995 net income.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES -
Effective for the year ended December 31, 1994, the Company adopted SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", which requires the classification of debt securities into
three categories and equity securities into two categories. The
cumulative effect of this change increased the carrying value of bonds by
$11,000 at January 1, 1994, thus increasing stockholders' equity by
$11,000.
NOTE 2: POLICY LIABILITIES
The Company markets life, accident and health, single premium deferred
and immediate annuity policies. The single premium deferred annuity
permits the policyholder to make additional premium payments to the
Company. The amount of such additional premium payments may be varied at
the policyholder's discretion, but may not be less than $0.5, and
premiums may be withdrawn upon request as provided in the annuity
contract. The actual interest rate guaranteed by the Company is
determined by the Company's directors at the beginning of each policy
year. The Company guarantees that the rate for future contract periods
will not be less than as stated in the annuity contract.
Liabilities for future policy benefits on life insurance are provided on
the net level premium valuation method based on estimated future
investment yield and mortality with interest rates ranging from 4.2% to
5.0%. Mortality assumptions are drawn from the 1980 Commissioners
Standard Ordinary Mortality tables, and there are no withdrawal
assumptions used in computing the future policy benefits on life
insurance. Since the reserves are based on estimates, the ultimate
liability may be more or less than such reserves. The effects of changes
in such estimated reserves are included in the results of operations in
the period in which the estimates are changed.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3: INCOME TAXES
Income tax expense (benefit) consists of (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current taxes (benefits):
Income - federal taxes $70 $(115) $398
Realized capital gains 27 29 66
$97 $(86) $464
Deferred taxes (benefits):
Income - federal taxes (737) (1,080) (348)
TOTAL $(640) $(1,166) $116
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Net unrealized capital losses $-- $469
AMT tax credit carryovers 435 411
Deferred policy acquisition costs 2,400 1,567
Total gross assets $2,835 $2,447
Less valuation allowance 435 881
Assets net of valuation $2,400 $1,566
Deferred tax liabilities:
Insurance reserves $575 $478
Net unrealized capital gains 428 --
Total liabilities $1,003 $478
Net deferred tax asset $1,397 $1,088
</TABLE>
Net unrealized capital gains and losses are presented in stockholders'
equity net of deferred taxes. Due to the uncertainty of future capital
gains, valuation allowances were established of $-0- and $469,000
December 31, 1997 and 1996, respectively. Valuation allowances have also
been established for AMT tax credit carryovers in the amounts of $435,000
and $411,000 for the years ended December 31, 1997 and 1996,
respectively. These allowances for the AMT tax credit carryovers are
estimates and have been established because management believes it is
uncertain that the AMT tax credits, which apply only against the
Company's regular tax liability, can be utilized in the future.
The effective income tax rate for 1997, 1996 and 1995 was approximately
20%. These amounts vary from those computed by applying the current
federal income tax rate of 34% to income before income taxes. The
principal differences result from special life insurance company tax
deductions and the federal surtax exemption.
For years beginning after December 31, 1983, the Tax Reform Act passed by
Congress changed the tax laws concerning life insurance companies. Under
the new law, certain timing differences relating to deferred taxes cease
to exist.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
As required by the Revenue Reconciliation Act of 1990, the Company
changed its method of reporting policy acquisition costs for federal
income tax purposes. The 1990 Act required that the deduction for policy
acquisition costs be determined based on prescribed percentages of annual
net premiums, and spreads the deduction over a five-year period.
Prior to January 1, 1984, life insurance companies were taxed on the
lesser of taxable investment income or gain from operations (as defined
by the Internal Revenue Code) plus one-half of any excess of the gain
from operations over taxable investment income. One-half of the excess
of gain from operations over taxable investment income, an amount which
is not currently subject to taxation, plus special deductions allowed in
computing the gain from operations, was set aside in a special memorandum
tax account designated "policyholders' surplus account."
The accumulated amount of income subject to current taxation, less the
tax thereon, was set aside in another special memorandum tax account
designated "stockholders' surplus account." At December 31, 1997 and
1996, respectively, the Company, on a tax basis, had balances of
$18,000,000 and $17,845,000 in its stockholders' surplus account and
$72,000 in its policyholders' surplus account for both years.
NOTE 4: STATUTORY ACCOUNTING RECONCILIATION
Following are reconciliations of net earnings and stockholders' equity on
the statutory basis to the GAAP basis (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net losses - statutory basis $(38) $(582) $(639)
Decrease in deferred acquisition costs (2,678) (2,715) (985)
Adjustment to claim liabilities -- (250) --
Adjustment to health reserves 270 717 2,125
Adjustment to health premiums 65 19 (84)
Interest Maintenance Reserve (25) 39 196
Deferred income taxes 737 1,080 348
NET INCOME (LOSS) - GAAP BASIS $(1,669) $(1,692) $961
Stockholders' equity - statutory basis $7,134 $6,340 $6,934
Additions:
Deferred acquisition costs 1,284 3,962 6,677
Deferred income taxes 1,397 1,088 2
Non-admitted assets 43 69 51
Adjustment to health reserves 1,986 1,716 1,249
Asset valuation reserve 1,401 1,364 823
Interest Maintenance Reserve 1,421 1,446 1,406
Unrealized gains (losses) on marketable securities 60 (407) 108
STOCKHOLDERS' EQUITY - GAAP BASIS $14,726 $15,578 $17,250
</TABLE>
Under applicable laws and regulations, cash dividends to stockholders are
limited to the extent of statutory operating profits and realized capital
gains.
The Company files financial statements prepared in accordance with
statutory accounting practices prescribed or permitted by domestic
insurance regulatory authorities. The principal differences between
statutory financial statements and financial statements prepared in
accordance with GAAP are that statutory financial statements do not
reflect deferred policy acquisition costs and deferred income taxes, most
bonds are carried at amortized cost and reinsurance assets and
liabilities are presented net of reinsurance. The Company's use of
permitted statutory accounting practices does not have a significant
impact on statutory surplus.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Statutory capital and surplus are subject to certain restrictions imposed
by state insurance departments as to minimum levels and payments of
dividends. The minimum levels of capital and surplus required by the
North Carolina Department of Insurance are $1,200,000 and $300,000,
respectively. The Company may pay dividends without prior approval of
the North Carolina Department of Insurance if the dividends and all other
dividends and distributions within the past twelve months do not exceed
the lesser of statutory basis net gain from operations or 10% of
statutory capital and surplus. Due to the Company's statutory net losses
in 1997, 1996 and 1995, no dividends are allowed to be paid without prior
approval of the North Carolina Department of Insurance.
NOTE 5: CAPITAL STRUCTURE AND STOCKHOLDERS' EQUITY
At December 31, 1997 the Company has 1,779,908 shares of no par common
stock issued and outstanding. Common shares are voting and dividends are
paid at the discretion of the Board of Directors.
The Company purchased -0-, -0- and 22,457 shares of its own capital stock
in 1997, 1996 and 1995, respectively, reducing the outstanding shares. On
August 26, 1996, the Board of Directors adopted a resolution changing the
stated value of the Company's stock from $2.00 per share to $1.00 per
share. The resolution resulted in the reduction of the capital stock
account by $1,776,000 and the increase of the gross paid-in surplus by
$1,776,000 in 1996.
NOTE 6: STOCK OPTIONS
On February 25, 1982, the Company's Board of Directors amended the 1980
employee incentive stock option plan to qualify as an incentive stock
option plan for all key employees, under which 189,000 shares of the
Company's authorized but unissued common stock were reserved for possible
issuance. The grant to any one individual could not exceed 20% of the
shares covered by the plan. The option price is the greater of $1.00 per
share or the fair market value on the date of grant, as determined by the
Board of Directors. Options expired ten years after the grant date.
This plan expired January 21, 1990.
On April 25, 1984, the Company's stockholders approved an additional
employee incentive stock option plan under which 75,600 shares of the
Company's common stock were reserved for issuance to key employees.
Options under this plan expire ten years after the date the option is
granted. This plan expired April 24, 1994. On May 22, 1995, the
Company's stockholders approved an additional incentive stock option plan
under which 50,000 shares of the Company's common stock were reserved for
issuance to key employees. Options under this plan expire ten years
after the date the option is granted. This plan expires March 5, 2005.
Under the plans, as originally issued, options could be exercised over
the option period in the following amounts: none during the first year,
twenty-five percent of the total shares in the second year and twenty-
five percent of the total in each of the following three years, and in
any year prior to expiration an amount equal to options exercisable in
prior years but unexercised. However, the Company's Board of Directors
adopted a resolution on December 22, 1996, whereby all outstanding
options to purchase shares of the Company's common stock were declared to
be fully vested as of that date. Certain options would have expired on
August 18, 1997 unless sooner exercised. The Company's Board of
Directors amended the terms under which these options were granted and
extended their expiration date to March 31, 1998.
The option price is equal to the fair market value on the date of grant
for all plan options outstanding December 31, 1997, as follows (dollars
in thousands, except per share):
Number of
<TABLE>
<CAPTION>
DATE OF GRANT SHARES PRICE TOTAL
<S> <C> <C> <C>
August 19, 1987 6,600 $ 5.33 $ 35
November 22, 1988 12,600 5.00 63
November 28, 1989 9,375 4.80 45
May 24, 1991 10,000 5.20 52
March 15, 1993 8,749 5.60 49
August 18, 1995 15,650 6.50 102
$62,974 $346
</TABLE>
The following is a summary of plan options outstanding at December 31,
1997, all of which are exercisable:
Weighted
Actual and Average
Weighted Remaining
Average Contractual
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER LIFE
<C> <C> <C>
$ 5.33 6,600 .25 years
5.00 12,600 .89 years
4.80 9,375 1.91 years
5.20 10,000 3.40 years
5.60 8,749 5.20 years
6.50 15,650 7.63 years
</TABLE>
In addition to the plan options, 37,500 nonqualified options were granted
to the owner of an insurance agency in 1992. At the end of 1997, 5,000 of
these options had been exercised, and 32,500 were exercisable at an
option price of $5.60 per share. The total option price was $182,000, and
the fair market value was $329,000.
The Company is a party to an Agreement and Plan of Merger subject to
approval by the Company's stockholders, the stockholders of Standard
Management Corporation (SMC), the North Carolina Department of Insurance
and other regulatory authorities. The Company's stockholders will have
the opportunity to consider the Merger Agreement at a special meeting to
be held in March, 1998. If the Merger Agreement is approved and the
merger becomes effective, each stock option that is outstanding
immediately prior to the effective time will be converted into the right
to receive cash in an amount equal to the difference between 1.2 times
the average trading price of SMC stock plus $1.50 per option share and
the per share exercise price for such stock option. At December 31,
1997, the amount of the payment would be $294,000.
NOTE 7: INVESTMENTS
Debt securities at December 31 were as follows (in thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1997
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $1,037 $-- $7 $1,030
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $16,564 $88 $28 $16,624
Other corporate securities 3,940 -- -- 3,940
Total available for sale $20,504 $88 $28 $20,564
TOTAL DEBT SECURITIES $21,541 $88 $35 $21,594
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1996
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $17,442 $10 $1,402 $16,050
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $7,388 $4 $422 $6,970
Other corporate securities 604 11 -- 615
Total available for sale $7,992 $15 $422 $7,585
TOTAL DEBT SECURITIES $25,434 $25 $1,824 $23,635
</TABLE>
The amortized cost and estimated market value of debt securities, by
contractual maturity at December 31, 1997, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
COST MARKET VALUE
<S> <C> <C>>
Due in one year or less $ 82 $ 82
Due after one year through five years 503 507
Due after five years through ten years 55 55
Due after ten years 20,901 20,950
$21,541 $21,594
</TABLE>
Investments in "available for sale equity securities" were as follows (in
thousands):
Gross Gross
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
1997
Equity securities $2,640 $1,402 $205 $3,837
1996
Equity securities $2,870 $655 $234 $3,291
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
The changes during 1997 in amounts affecting net unrealized gains and losses
included in the separate component of stockholders' equity are as follows (in
thousands)
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized Gains (Losses)
<S> <C> <C> <C>
Debt Equity Total
Net unrealized gains (losses) on securities
available for sale as of January 1, 1997 $(408) 421 $13
Changes during the year ended December 31,
1997:
Transfer of securities previously
classified 27 -- 27
as held
to
maturity
Increase in stated amount of securities 441 777 1,218
Subtotal $60 $1,198 $1,258
Deferred federal income taxes $20 $408 $428
Net unrealized gains on securities
available for sale as of December 31, 1997 $40 $790 $830
</TABLE>
Various bonds with a par value of $16,000,000 amortized cost of $16,423,000
and fair value of $16,450,000 which were previously classified as held to
maturity, were transferred into the available for sale category in 1997.
Included in these amounts are bonds with par value, cost and fair value of
$1,000,000 which were called at par. All of the bonds were transferred in
anticipation of the merger with SMC and the necessity to maintain the
combined enterprises interest rate position.
NOTE 8: REINSURANCE
As part of its ongoing business, the Company seeks to limit its exposure to
losses by ceding reinsurance to other insurance enterprises under excess
coverage and coinsurance contracts. The Company retains a maximum of $20 of
coverage per individual life contract.
Amounts paid or deemed to have been paid for reinsurance contracts are
recorded as reinsurance receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account
for the underlying policies.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the financial condition
of its reinsurers and monitors concentrations of credit risk arising from
similar geographic regions, activities or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurers'
insolvencies.
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Direct premiums and amounts assessed
against policyholders $40,515 $48,968 $51,207
Reinsurance assumed -- -- --
Reinsurance ceded 4,456 1,113 1,261
Net premiums and amounts earned $36,059 $47,855 $49,946
</TABLE>
NOTE 9: EMPLOYEE RETIREMENT PLAN
During 1988, the Company initiated a 401(k) Profit Sharing Plan for the
benefit of eligible employees and their beneficiaries.Employees who have
completed one year of service and have reached their 21st birthday are
eligible under the plan. Participants are entitled to 100% benefits upon
retirement or death. If participants are terminated, they are entitled to
receive the vested percentage of their account balance.
Participants may defer up to 15% of their compensation annually, subject to
dollar limits set by law. The Company matches the employees' salary
reduction 100%. In applying the matching contribution, only salary
reductions up to 5% of base compensation are considered. The Company's
funding policy is to contribute annually no more than the maximum amount
that can be deducted for federal income tax purposes. The amount of
expense for contributions to the 401(k) plan for the years 1997, 1996 and
1995 was $43,000, $39,000 and $39,000 respectively. At December 31, 1997
(the most recent actuarial valuation date), the plan's accumulated benefit
obligation was $508,000 including vested benefits of $496,000 and the fair
market value of plan assets was $508,000.
NOTE 10: CONCENTRATIONS OF CREDIT RISK
The Company is required by SFAS No. 105, "Disclosure of Information About
Financial Instruments With Off-Balance-Sheet Risk and Financial Instruments
With Concentrations of Credit Risk", to disclose significant concentrations
of credit risk regardless of the degree of such risk. Financial
instruments that potentially subject the Company to concentration of credit
risk consist primarily of cash, cash equivalents and mortgage loans
receivable. Since the Company's inception, it has been management's policy
to place its cash on deposit and certificates of deposit with a diversified
group of high credit quality financial institutions. At December 31, 1997,
the Company had accounts with approximately 200 such institutions with a
higher concentration of institutions in North Carolina and South Carolina.
Although, as of December 31, 1997, there were amounts in some of those
financial institutions that exceed the insured deposit coverage, management
does not believe any significant credit risk relating to cash deposits
exists as of December 31, 1997.
Mortgage loans consist of long-term notes secured by real estate in North
Carolina and South Carolina and construction loans to several construction
companies located mainly in the Piedmont of North Carolina. The Company
had long term notes of approximately $999,000 and $1,331,000 at December
31, 1997 and 1996, respectively. The Company had construction loans of
approximately $4,222,000 and $5,424,000 at December 31, 1997 and 1996,
respectively. Construction loans that exceed 1% of total assets were
$1,547,000 and $2,130,000 at December 31, 1997 and 1996, respectively. To
reduce credit risk, all construction loans are monitored on a continuing
basis, secured by the property being built and limited to a maximum
percentage of the fair market value.
NOTE 11: OPERATING LEASES
The Company is the lessor of a portion of its home office building under
operating leases expiring in various years through 2000. The leased
property (including land) has a carrying value of $1,285,000 net of
accumulated depreciation of $76,000. These leases have been accounted for
under the operating method, which recognizes the lease revenue as earned
over the life of the lease.
Minimum future rentals to be received on non-cancelable leases as of
December 31, 1997, for each of the next five years and in the aggregate are
(in thousands):
YEAR ENDING 12/31 AMOUNT
1998 $76
1999 47
2000 18
2001 --
2002 --
Thereafter --
TOTAL MINIMUM FUTURE RENTALS $141
NOTE 12: LIABILITY FOR UNPAID CLAIMS
Activity in the liability for unpaid claims is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Beginning of year $10,455 $10,110 $7,996
Reinsurance recoverable 42 99 30
$10,413 $10,011 $7,966
Claims incurred $35,605 $43,204 $44,063
Claims paid (net of reinsurance) 39,505 42,802 42,018
$(3,900) $402 $2,045
Balance at December 31 $6,513 $10,413 $10,011
Plus reinsurance receivables -- 42 99
$6,513 $10,455 $10,110
</TABLE>
During 1995, the Company changed its estimate of health claims liability.
This change was the result of management's underestimation of the major
medical claims backlog. The effect of this change was to decrease net
income before taxes for 1995 by $1,951,000 ($1.09 per share). During
1996, the Company changed its estimate of health claims liability. This
change in estimate was the result of an accumulation of claims due to the
pending changes with certain preferred provider organizations. The
effect of this change was to decrease net income before taxes for 1996 by
$1,197,000 ($0.67 per share).
NOTE 13: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C> <C>
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Cash and cash equivalents
(including short-term $10,721 $10,721 $6,702 $6,702
investments)
Certificates of deposit 25,377 25,377 30,496 30,496
Debt securities 21,601 21,594 25,027 23,634
Equity securities 3,837 3,837 3,291 3,291
Mortgage loans 5,221 5,221 6,760 6,760
Liabilities:
Future policy benefits - annuities 45,171 45,291 47,342 47,466
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial
instrument, such as estimates of timing and amount of expected future
cash flows. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument, nor do they consider the
tax impact of the realization of unrealized gains or losses. In some
cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following valuation methods and assumptions were used by the Company
in estimating the fair value of the above financial instruments:
SHORT-TERM INSTRUMENTS - Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are
not available, the carrying amounts reported in the balance sheets
approximate fair value. Short-term instruments have a maturity date of
three months or less.
CERTIFICATES OF DEPOSIT - Fair values are based on purchase price of
certificates and prevailing rates of interest. The certificates of
deposit typically have very short maturity periods (six months or less)
or variable interest rates. Fair values are approximated by carrying
values due to the short-term nature of the instruments.
DEBT AND EQUITY SECURITIES - Fair values are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are estimated by using quoted
market prices for similar securities or discounted cash flow methods.
MORTGAGE LOANS - Fair values are estimated by discounting expected
mortgage loan cash flows at market rates, which reflect the rates at
which similar loans would be made to similar borrowers. The rates
reflect management's assessment of the credit quality and the remaining
duration of the loans. The loans have variable interest rates, which are
linked to the prime rate. Estimated fair values for mortgage loans are
not materially different from carrying value.
FUTURE POLICY BENEFITS - ANNUITIES - The majority of these investment
contract liabilities are made up of deferred annuity policies with
adjustable interest rates. All deferred policies have guaranteed minimum
rates of interest, but the guaranteed rates are lower than current market
rates. Because of the short-term adjustability of the interest rates,
fair value is approximated by carrying value for deferred annuities.
Other contract deposit funds, which make up about 7% of these investment
contract liabilities, are immediate annuities, which pay a fixed monthly
amount for a fixed period. Fair value of these liabilities is estimated
by discounting cash flows at interest rates currently being offered by
the Company for similar contracts.
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS - Commitments to extend credit are legally binding agreements
to lend monies at a specified interest rate and within a specified time
period. Risk arises from the potential inability of parties to perform
under the terms of the contracts and from interest rate fluctuations. The
Company's exposure to credit risk is reduced by the existence of
conditions within the commitment agreements that release the Company from
its obligations in the event of a material adverse change in the counter
party's financial condition. At December 31, 1997 and 1996, the Company
had $6,459,000 and $7,491,000, respectively, in total construction loan
commitments to general contractors. At December 31, 1997 and 1996, the
Company had outstanding loan commitments of approximately $2,053,000 and
$2,067,000, respectively.
LITIGATION - The Company is continuously involved in a number of lawsuits
arising, for the most part, in the ordinary course of its business
operations. The Company is usually defending claims brought against it
relating to policy coverage and exclusions. The Company has not
established a provision for losses relating to several lawsuits in which
the Company is a defendant. The total amount of damages sought in these
lawsuits is approximately $255,000. The Company estimated its liability
in these suits at $89,000 which has been accrued as claim liability.
While the ultimate outcome of the litigation cannot be determined at this
time, management believes that there is only a remote possibility that
this litigation will result in judgments for additional amounts material
to the financial condition of the Company. Materiality is calculated as
5% of pre-tax gain or loss.
<PAGE>
SAVERS LIFE INSURANCE COMPANY
WINSTON-SALEM, NORTH CAROLINA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15: PENDING MERGER
The Company is a party to an Amended and Restated Agreement and Plan of
Merger, dated December 9, 1997, pursuant to which, subject to approval by
the Company's stockholders, the stockholders of SMC, the North Carolina
Department of Insurance and other regulatory authorities, the Company
will become a wholly-owned subsidiary of Standard Management Corporation
("SMC") an Indiana insurance holding company. The Company's Board Of
Directors has unanimously approved the Merger Agreement and has
recommended that the Company's stockholders approve it at a special
meeting to be held in March of 1998. If the Merger Agreement is approved
and the merger becomes effective, stockholders of the Company will be
entitled to receive $1.50 cash and 1.2 shares of SMC common stock for
each share of the Company's common stock owned by them immediately prior
to effectiveness of the merger. Stockholders may elect to receive stock
in lieu of cash portion of the merger consideration.
NOTE 16: SAVERS MARKETING CORPORATION
On April 1, 1997, the Company filed Articles of Incorporation with the
Secretary of the State of North Carolina to form a wholly-owned entity
"Savers Marketing Corporation", a North Carolina corporation.
The purposes of the corporation are: (I) to market life, accident and
health insurance and sell annuities; (ii) acquire, own, improve, lease,
mortgage, encumber, pledge and otherwise invest and deal in real and
personal property of every sort, kind and description; and, (iii) to
engage in any lawful act or activity for which a corporation may be
organized under Chapter 55 of the General Statutes of North Carolina.
Savers Marketing Corporation is authorized to issue 100,000 shares of
common stock with a par value of $1.00 per share. The Corporation had
issued and outstanding 1,000 shares for a capital of $1,000 at December
31, 1997. Savers Marketing Corporation has, from inception, been dormant
and not an operating company. Accordingly, this corporation is carried
on the financial statements of the Company as an investment with a cost
of $1,000 which is its fair market value at December 31, 1997.
NOTE 17: SUBSEQUENT EVENTS
At a special meeting on March 3, 1998, the shareholders of the Company
approved the merger as discussed in Note 15.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statements of operations for
the year ended December 31, 1997 are presented as if the transfer of the major
medical product line from Savers Life Insurance Company ("Savers Life") to
World Insurance Company ("World") through a coinsurance agreement, whereby
World assumed, through coinsurance effective July 1, 1997, 100% of the product
line, and (ii) the acquisition of Savers Life by Standard Management
Corporation ("SMC") had occurred as of January 1, 1997. The following
unaudited pro forma combined balance sheet as of December 31, 1997, gives
effect to the acquisition of Savers Life by SMC as if it had occurred as of the
balance sheet date.
The unaudited pro forma combined financial statements do not purport to
represent what SMC and subsidiaries (the "Company") balance sheet or results of
operations actually would have been had the transfer of the major medical
product line from Savers Life to World through a coinsurance agreement, whereby
World assumed, through coinsurance effective July 1, 1997, 100% of the product
line, and the acquisition of Savers Life by SMC in fact occurred on the dates
indicated, or to project the Company's balance sheet or results of operations
for any future date or period. The unaudited pro forma combined financial
statements should be read in conjunction with the accompanying notes thereto
and the separate historical consolidated financial statements of the Company
and Savers Life as of and for the year ended December 31, 1997.
The pro forma adjustments and combined amounts are provided for
informational purposes only, the Company's consolidated financial statements
reflect the effects of the acquisition of Savers Life by SMC only from the date
such transaction occurred. The acquisition of Savers Life occurred on March
12, 1998, with an effective date of March 31, 1998. Savers Life transferred
the major medical product line of Savers Life to World through a coinsurance
agreement, under which World assumed, through coinsurance effective July 1,
1997, 100% of the product line. Savers Life ceased writing any new business in
this product line on June 30, 1997. In October 1997, all of the policies in
this product line were transferred to World as direct insurance policies of
World. The pro forma adjustments are applied to the historical consolidated
financial statements of the Company and Savers Life to account for the
acquisition of Savers Life by SMC under the purchase method of accounting in
accordance with APB No. 16. Under this method of accounting, the total
purchase cost has been allocated to Savers Life's assets and liabilities based
on their estimated relative fair values. These allocations are subject to
valuations as of the date of the transaction based on appraisals and other
studies, which are not yet completed. Accordingly, the final allocations will
be different from the amounts reflected herein. Any purchase price adjustments
will be made within one year from the acquisition date and are not expected to
be material to the unaudited pro forma combined financial statements taken as a
whole. The unaudited pro forma combined financial statements, however, reflect
management's best estimate based on currently available information.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
RELATED TO
TRANSFER SAVERS PRO FORMA
OF LIFE ADJUSTMENTS
HISTORICAL FINANCIAL MAJOR AFTER RELATING
STATEMENTS MEDICAL TRANSFER OF TO THE
SAVERS PRODUCT MAJOR MEDICAL SAVERS PRO FORMA
SMC LIFE LINE (1) PRODUCT LINE LIFE COMBINED
ACQUISITION
(Audited) (Audited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premium income $7,100 $36,058 $(8,039) $28,019 $ -- $35,119
Net investment income 29,516 4,394 (300) 4,094 78 (2) 33,688
Net realized investment gains 396 158 (7) 151 -- 547
Policy charges 5,512 254 -- 254 -- 5,766
Amortization of excess of net
assets 1,388 -- -- -- -- 1,388
acquired over acquisition cost
Fees from separate accounts 1,779 -- -- -- -- 1,779
Other income 1,178 2,183 (626) 1,557 -- 2,735
Total revenues 46,869 43,047 (8,972) 34,075 78 81,022
Benefits and expenses:
Benefits and claims 9,098 29,376 (7,657) 21,719 -- 30,817
Interest credited on interest-
sensitive 16,281 2,472 -- 2,472 -- 18,753
annuities and other financial
products
Amortization 3,248 2,939 (2,399) 540 (540)(3) 4,125
877 (3)
Other operating expenses 12,599 10,569 (2,985) 7,584 -- 20,183
Interest expense and financing 2,381 -- -- -- 370 (4) 2,751
costs
Total benefits and expenses 43,607 45,356 (13,041) 32,315 707 76,629
Income (loss) before federal income
taxes 3,262 (2,309) 4,069 1,760 (629) 4,393
and preferred stock dividends
Federal income tax expense (credit) 617 (640) 1,383 743 (196)(5) 1,164
Net income (loss) $2,645 $(1,669) $2,686 $1,017 $(433) $3,229
Net income per share $ .54 $ .45
Weighted average common shares 4,948,302 2,225,720 (6) 7,174,022
outstanding
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
<PAGE>
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL FINANCIAL ADJUSTMENTS
STATEMENTS RELATING TO
THE
<S> <C> <C> <C> <C>
SAVERS SAVERS LIFE PRO FORMA
SMC LIFE ACQUISITION COMBINED
ASSETS (Audited) (Audited)
Investments:
Securities available for sale:
Fixed maturity securities $372,576 $20,614 $1,037 (7) $394,220
(7) (8)
Equity securities 52 3,787 -- 3,839
Fixed maturity securities held to -- 1,037 (1,037) (7) --
maturity
Mortgage loans on real estate 375 5,221 -- 5,596
Policy loans 9,495 -- -- 9,495
Real estate 2,163 2,403 -- 4,566
Other invested assets 779 -- -- 779
Short-term investments 13,342 25,377 -- 38,719
Total investments 398,782 58,439 (7) 457,214
Cash 4,165 10,721 1,204 (9) 16,090
Accrued investment income 6,512 597 -- 7,109
Amounts due and recoverable from 61,596 268 -- 61,864
reinsurers
Deferred policy acquisition costs 21,435 1,284 (1,284) (10) 21,435
Present value of future profits 20,537 -- 7,400 (11) 27,937
Excess of acquisition cost over net
assets 2,445 -- 1,610 (12) 4,055
acquired
Deferred federal income taxes -- 1,397 (1,397) (16) --
Other assets 5,456 215 (962) (13) 4,709
Assets held in separate accounts 148,064 -- -- 148,064
Total assets $668,992 $72,921 $6,564 $748,477
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance policy liabilities $439,390 $57,788 $-- $497,178
Accountspayable and accrued 6,208 407 1,134 (14) 7,749
expenses
Obligations under capital lease 141 -- -- 141
Notes payable 26,000 -- 4,000 (15) 30,000
Deferred federal income taxes 4,488 -- 1,103 (16) 5,591
Excess of net assets acquired over
acquisition cost 1,388 -- -- 1,388
Liabilities related to separate 148,064 -- -- 148,064
accounts
Total liabilities 625,679 58,195 6,237 690,111
Shareholders' equity:
Common stock 40,646 3,603 (3,603) (17) 55,699
15,053 (18)
Treasury stock (deduction) (4,572) -- -- (4,572)
Unrealized gain on securities
available for sale 2,171 830 (830) 2,171
Foreign currency translation (473) -- -- (473)
adjustment
Retained earnings 5,541 10,293 (10,293) 5,541
Total shareholders' equity 43,313 14,726 327 58,366
Total liabilities and $668,992 $72,921 $6,564 $748,477
shareholders' equity
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE TRANSFER OF THE MAJOR MEDICAL PRODUCT LINE OF
SAVERS LIFE
Savers Life and World agreed to the transfer of the major medical product
line of Savers Life to World through a coinsurance agreement, whereby World
assumed, through coinsurance effective July 1, 1997, 100% of the product line.
Savers Life ceased writing any new business in this product line on June 30,
1997. For the period from July 1, 1997 to September 30, 1997, the premiums,
claims, commissions and premium taxes were direct business of Savers Life and
subsequently ceded 100% to World. Savers Life was paid $50,000 per month to
administer this block of business between July 1, 1997 and September 30, 1997.
This coinsurance agreement was in effect from July 1, 1997 until September 30,
1997 to allow World the time needed to develop a system to administer this
block of business on a direct basis. In October 1997, all of the policies in
this product line were transferred to World as direct insurance policies of
World. Savers Life has agreed to share in the claims experience of this
product line for the period from July 1, 1997 through December 31, 1997 to the
extent that the loss ratio for such period does not equal 75%. The loss ratio
is calculated by dividing incurred claims by earned premiums. If the loss
ratio for the period is greater than 75%, Savers Life will be required to
reimburse World in cash for 50% of the amount by which the actual loss ratio
exceeds 75%. If the loss ratio for the period is less than 75%, World will be
required to reimburse Savers Life in cash for 50% of the amount by which the
actual loss ratio is less than 75%. As a result of the agreement with World,
Savers Life wrote off all remaining deferred acquisition costs associated with
the major medical product line, resulting in a $1,752,000 charge against income
in the second quarter of 1997. In September 1997, Savers Life transferred
assets $4,850,000 and liabilities of $4,928,000 to World.
(1) The selected pro forma combined statement of operations financial
data is adjusted to eliminate the results of operations for the
major medical product line to give effect to the transfer of the
major medical product line as of January 1, 1997.
TRANSACTIONS RELATING TO THE SAVERS LIFE ACQUISITION
In the acquisition of Savers Life, each share of Savers Life Common Stock
held immediately prior to March 12, 1998 (1,779,908 shares of Savers Life
Common Stock) were converted into 1.2 shares of SMC Common Stock plus $1.50.
Each holder of Savers Life Common Stock had the election to receive the $1.50
per share portion of the merger consideration in cash or in the form of
additional shares of SMC Common Stock. 1,412,980 holders of Savers Life Common
Stock elected to receive 1.50 per share cash consideration in lieu of electing
to receive shares of SMC Common Stock. SMC issued 2,225,720 shares of SMC
Common Stock with a value of approximately $15,023,000 and paid $2,027,000 in
cash to acquire Savers Life
In addition, SMC is expected to incur costs relating to the acquisition
of Savers Life (including legal, accounting and other fees) of approximately
$1,500,000.
The cost to acquire Savers Life is allocated as follows (amounts in
thousands):
Book value of net assets acquired on March 12, 1998 $14,726
Costs incurred by Savers Life prior to March 12, 1998 (1,395)
13,331
Increase (decrease) in Savers Life net asset value to reflect
estimated fair value and asset reclassifications at March 12, 1998
Fixed maturity securities available for sale 1,030
Fixed maturity securities held to maturity (1,037)
Present value of future profits (related to acquisition) 7,400
Deferred policy acquisition costs (historical) (1,284)
Goodwill (related to acquisition) 1,610
Deferred federal income taxes (2,500)
Total estimated fair value adjustm 5,219
Total cost to acquire Savers Life $ 18,550
Adjustments to the pro forma combined statement of operations to give
effect to the acquisition of Savers Life as of January 1, 1997 are summarized
below.
(2) Net investment income is increased for the investment income earned
on the amount of borrowings pursuant to an Amended Revolving Line
of Credit Agreement with a bank (the "Amended Credit Agreement")
that exceed the cash payment to Savers Life stockholders that
increase existing working capital.
(3) Amortization of deferred acquisition costs recorded by Savers Life
prior to the purchase has been eliminated and replaced with the
amortization of the present value of the future profits as a result
of the transaction. The amount of present value of future profits
resulting from the transaction is being amortized on a constant
yield basis over the estimated life of insurance in force at the
date of acquisition in proportion to the emergence of profits over
a period of 20 years, except for the Medicare supplement product
line which is being amortized over a period of 10 years, with
interest equal to the interest rate credited to the underlying
policies. No future value has been assigned to the major medical
product line. Amortization of goodwill acquired in the transaction
is recognized over a 30-year period on a straight-line basis.
(4) Interest expense and financing costs is increased to reflect the
increase in borrowings under the Amended Credit Agreement and
amortization of deferred debt issuance costs associated with the
purchase of Savers Life.
(5) 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.
(6) Weighted average common shares outstanding are increased to reflect
the SMC Common Stock shares issued in the acquisition of Savers
Life.
Adjustments to the pro forma combined balance sheet to give effect to the
acquisition of Savers Life as of December 31, 1997, are summarized below.
(7) Held to maturity securities have been reclassified as available for
sale securities at the purchase date consistent with the intention
of new management.
(8)) Savers Life's fixed maturity securities held to maturity are
restated to estimated fair value.
(9) Amount is proceeds from borrowings under the Amended Credit
Agreement less payments made to Savers Life shareholders for the
purchase of Savers Life and less certain costs incurred by Savers
Life in connection with the acquisition of Savers Life prior to
closing.
(10) Deferred policy acquisition costs of Savers Life have been
eliminated under purchase accounting.
(11) Present value of future profits for business has been recorded for
existing insurance acquired with the purchase of Savers Life. The
15 percent discount rate used to determine such value is the rate
of return required by SMC to invest in the business being acquired.
In determining such rate of return, the following factors are
considered:
<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.
<PAGE>
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, 2002, are as follows:
YEAR ENDING BEGINNING NET ENDING
DECEMBER 31, BALANCE AMORTIZATION BALANCE
1998 $7,400 $823 $6,577
1999 6,577 720 5,857
2000 5,857 630 5,227
2001 5,227 552 4,675
2002 4,675 485 4,190
(12) Goodwill acquired in the purchase of Savers Life is recognized.
(13) 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 decreased for acquisition costs incurred and
capitalized by SMC associated with the transaction.
(14) Accounts payable have been increased due to the accrual of
estimated acquisition costs associated with the transaction.
(15) Notes payable are increased to reflect the increased borrowings
under the Amended Credit Agreement for the acquisition of Savers
Life. The Amended Credit Agreement provides for SMC to borrow up
to $20,000,000 in the form of a seven year reducing revolving loan
arrangement. Interest on the borrowings under the Amended Credit
Agreement is determined, at the option of SMC, to be: (i) a
fluctuating rate of interest to the corporate base rate announced
by the bank from time to time plus 1% per annum, or (ii) a rate at
LIBOR plus 3.25%. At December 31, 1997, SMC had borrowed
$16,000,000 under the Amended Credit Agreement at a weighted
average interest rate of 9.069%. SMC increased borrowings under
the Amended Credit Agreement by $4,000,000 for the acquisition of
Savers Life at an interest rate of 8.969%.
(16) Deferred tax liabilities have been recorded, primarily for the
actuarially determined present value of future profits from
existing insurance, and the reclassification of the deferred tax
assets of Savers Life as deferred tax liabilities.
(17) The Savers Life historical shareholders' equity and related
weighted average common shares outstanding are eliminated under
purchase accounting.
(18) Common stock has been increased to reflect the issuance of the SMC
Common Stock in the acquisition of Savers Life and the issuance of
SMC Common Stock warrants to a bank in connection with the
increased line of credit on the Amended Credit Agreement.
<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 22, 1998 By: /S/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board, President and
Chief Executive Officer
