-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LlSjGxuq0DiuXvd6bMv/5jxVSKBBLRDV/zeSPnTu0iGYPIXTDWkzKNXbBj8WOOnJ OxufKH17yV0UdnoerKS0Vw== 0000853971-99-000004.txt : 19990331 0000853971-99-000004.hdr.sgml : 19990331 ACCESSION NUMBER: 0000853971-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD MANAGEMENT CORP CENTRAL INDEX KEY: 0000853971 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 351773567 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20882 FILM NUMBER: 99577411 BUSINESS ADDRESS: STREET 1: 9100 KEYSTONE CROSSING STE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46240 BUSINESS PHONE: 3175746200 MAIL ADDRESS: STREET 1: 9100 KEYSTONE CROSSING STREET 2: SUITE 600 CITY: INDIANAPOLIS STATE: IN ZIP: 46207 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-20882 STANDARD MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) Indiana 35-1773567 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 9100 Keystone Crossing, Indianapolis, Indiana 46240 (317) 574-6200 (Address of principal executive offices) (Telephone) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 15, 1999 as reported on The Nasdaq Stock Market, was approximately $42.3 million. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 1999, Registrant had outstanding 7,581,265 shares of Common Stock. Documents Incorporated by Reference: Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. PART I AS USED IN THIS REPORT, UNLESS THE CONTEXT OTHERWISE CLEARLY REQUIRES, "SMC", OR THE "COMPANY" REFERS TO STANDARD MANAGEMENT CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES AND "STANDARD MANAGEMENT" REFERS TO STANDARD MANAGEMENT CORPORATION ON AN UNCONSOLIDATED BASIS. ALL FINANCIAL INFORMATION CONTAINED IN THIS REPORT IS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") UNLESS OTHERWISE SPECIFIED. ITEM 1. BUSINESS OF SMC SMC is an international financial services holding company that directly and through its subsidiaries develops, markets and administers profitable life insurance, annuities and unit-linked in force business and products. A primary component of SMC's growth relates to the acquisition of selected insurance companies and in force life insurance and annuity businesses. Since 1993, the Company has acquired 5 insurance companies. See "Acquisition Strategy and Recent Acquisitions" for related information. Through its insurance subsidiaries, the Company's operating strategy is to develop profitable products, enhance marketing distribution channels and consolidate and streamline management and administrative functions of acquired companies. OPERATING SEGMENTS The Company conducts and manages its business through the following operating segments reflecting the geographical locations of principal insurance subsidiaries: DOMESTIC OPERATIONS includes the following insurance subsidiaries at December 31, 1998: Standard Life Insurance Company of Indiana ("Standard Life"), SMC's principal insurance subsidiary, was organized in 1934 as an Indiana domiciled life insurer. It is licensed to write new business or service existing business in the District of Columbia and all states except New York and New Jersey. Standard Life offers flexible premium deferred annuities ("FPDAs"), equity-indexed annuities, whole and universal life insurance and critical illness products. Standard Life also generates cash flow and income from closed blocks of in force life insurance and annuities. At December 31, 1998, Standard Life's statutory assets were $572.6 million and the aggregate of its statutory capital and surplus, asset valuation reserve ("AVR") and interest maintenance reserve ("IMR") (its "adjusted statutory capital") was $61.9 million. The ratio of adjusted statutory capital to its total statutory assets was 10.8% at December 31, 1998. Standard Life has a rating of "B+" ("Very Good, Secure") by the rating agency, A.M. Best Company, Inc. ("A.M. Best"). Dixie National Life Insurance Company ("Dixie Life"), a 99.4% owned subsidiary of Standard Life, was organized in 1965 as a Mississippi domiciled life insurer. Dixie Life is licensed in 22 states and markets a variety of life insurance products throughout the mid-south offering primarily "burial expense" policies. At December 31, 1998, Dixie Life's statutory assets were $35.6 million, the adjusted statutory capital was $4.0 million and the ratio of its adjusted statutory capital to its statutory assets was 11.2%. Dixie Life has a rating of "B " ("Adequate") by A.M. Best. Standard Marketing Corporation ("Standard Marketing") is a wholesale distributor of life insurance and annuity products. Through its network of managing general agents and independent agents, Standard Marketing distributes life insurance and annuity products for Standard Life and Dixie Life and for a select group of unaffiliated insurance companies. Standard Marketing earns override commission income from the sale of these products. Savers Marketing Corporation ("Savers Marketing") is the prior marketing distributor of Savers Life Insurance Company ("Savers Life"). Refer to "Acquisition Strategy and Recent Acquisitions". Savers Marketing markets Standard Life's products through financial institutions and independent agents. Savers Marketing also receives administrative, marketing and commission fees for services provided to unaffiliated companies. INTERNATIONAL OPERATIONS includes the following holding company and its two wholly-owned insurance subsidiaries at December 31, 1998: Standard Management International S.A., a wholly-owned subsidiary of SMC, is a holding company organized under Luxembourg law with its registered office in Luxembourg. At December 31, 1998, Standard Management International, S.A. and its subsidiaries ("SMI") had $205.5 million in assets with policies in force in over 80 countries. The majority of its business is unit-linked assurance products with a range of policyholder directed investment choices coupled with a small death benefit, sold through its subsidiaries. Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") primarily offers standard unit-linked products throughout the European Union. At December 31, 1998 it had statutory capital and surplus of $6.8 million. Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)") primarily offers tax deferred unit-linked products in niche markets throughout the world. At December 31, 1998 it had statutory capital and surplus of $2.1 million. ACQUISITION STRATEGY AND RECENT ACQUISITIONS A principal component of SMC's strategy is to grow through the acquisition of life insurance companies and blocks of in force life insurance and annuities. SMC regularly investigates acquisition opportunities in the life insurance industry that complement or are otherwise strategically consistent with its existing business. Any decision to acquire a block of business or an insurance company will depend on a favorable evaluation of various factors. SMC believes that availability of blocks of business in the marketplace will continue in response to ongoing industry consolidation, risk-based capital requirements and other regulatory and rating agency concerns. In addition, SMC plans to market annuity and life insurance products directly as it has done in the past. SMC currently has no plans or commitments to acquire any specific insurance business or other material assets. SMC has the information systems and administrative capabilities necessary to add additional blocks of business without a proportional increase in operating expenses. In addition, SMC has developed management techniques for reducing or eliminating the expenses of the companies it acquires through the consolidation of their operations with those of SMC. Such techniques include reduction or elimination of overhead, including the acquired company's management, staff and home office, elimination of marketing expenses and, where appropriate, the substitution of Standard Marketing's network for the acquired company's current distribution system, and the conversion of the acquired company's data processing operations to SMC's system. SMC typically acquires companies or blocks of business through the purchase or exchange of shares. This method is also used for assumption reinsurance transactions. SMC's acquisitions may be subject to certain regulatory approvals, policyholder consents and stockholder approval. The following is a list of SMC's most recent acquisitions and the terms under which they were purchased: On November 8, 1996, Standard Life acquired through merger Shelby Life Insurance Company ("Shelby Life") from Delta Life and Annuity Corporation ("DLAC"), a life insurance company located in Memphis, Tennessee (the "Shelby Merger"). The purchase price was approximately $14.7 million, including $13.0 million in cash, 250,000 shares of restricted Common Stock (valued at $1.3 million) and acquisition costs of $.4 million. Financing for the Shelby Merger was provided by $10.0 million from an Amended Revolving Line of Credit Agreement (the "Amended Credit Agreement") and $4.0 million in subordinated convertible debt. On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers Life"). Each of the 1,779,908 shares of Savers Life Common Stock outstanding was converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life Common Stock could elect to receive the $1.50 per share portion of the merger consideration in the form of additional shares of SMC Common Stock. SMC issued approximately 2.2 million shares with a value of approximately $14.9 million, paid $2.2 million in cash and $1.5 million in acquisition costs for an aggregate purchase price of $18.6 million. SMC increased the Amended Credit Agreement to $20.0 million as a result of the Savers Life acquisition. The acquisition of Savers Life included its wholly-owned subsidiary Savers Marketing. On October 30, 1998, SMC acquired Midwestern National Life Insurance Company of Ohio, ("Midwestern Life"). SMC issued 696,453 shares of its common stock valued at $4.6 million, increased its bank debt by $6.0 million on restructured terms by increasing the Amended Credit Agreement to $26.0 million, and paid $2.9 million in cash and $.6 million of acquisition costs for an aggregate purchase price of $14.1 million to acquire Midwestern Life. The acquisitions of Shelby Life, Savers Life and Midwestern Life were accounted for using the purchase method of accounting and accordingly, SMC's consolidated financial statements include the results of operations of the acquired companies from the effective dates of their respective acquisitions. Shelby Life was merged into Standard Life, effective November 8, 1996, while Savers Life and Midwestern Life were merged into Standard Life effective December 31, 1998. As a result of these mergers, Standard Life remained as the surviving entity. Under purchase accounting, SMC allocated the total purchase price of the assets and liabilities acquired, based on a determination of their fair values and recorded the excess of acquisition cost over net assets acquired as goodwill, which will be amortized on a straight-line basis over 20 - - 30 years. MARKETING DOMESTIC MARKETING GENERAL: Standard Marketing was organized as a wholesale distribution system to provide a lower cost alternative to the traditional captive agency force. Standard Marketing and Savers Marketing have established a network of approximately 20,000 independent general agents. These agents distribute a full line of life insurance and annuity products issued by Standard Life and Dixie Life and a select group of unaffiliated insurance carriers that Standard Marketing represents. As part of its normal recruiting, Standard Marketing selectively recruits new agents from those formerly associated with companies acquired by SMC. SMC believes that both agents and policy owners value the service provided by SMC. Standard Marketing and Savers Marketing i) assist agents in submitting and processing policy applications, ii) help ensure that issuing insurers pay commissions on a timely basis (commissions are paid within 24 hours subsequent to receipt of policyholder's deposit), iii) assist with licensing applications, iv) provide marketing support for its agents, and v) can introduce agents to lead services. STANDARD MARKETING agents offer a full portfolio of life insurance and annuity products that Standard Marketing has selected on the basis of their competitive position and likely consumer acceptance. Such portfolio includes FPDAs, equity- indexed annuities, whole and universal life insurance and critical illness products issued by Standard Life and Dixie Life, for which Standard Marketing is the exclusive distributor, and life insurance products issued by selected unaffiliated insurers. Standard Marketing receives override commissions on sales by its agents, which are in addition to the commissions paid to Standard Marketing's independent agents. The availability of override commissions provides an economic incentive to Standard Marketing to recruit agents who produce business. Standard Marketing's relationships with these companies are non-exclusive and are terminable by either party upon 30 days notice. Standard Marketing regularly evaluates the products its agents offer to determine whether products or insurers should be added to, or deleted from, the Standard Marketing portfolio. SMC does not insure any of the policies and contracts Standard Marketing's agents sell for unaffiliated insurers. Each general agent operates his own agency and is responsible for all expenses of the agency. The general agents are compensated directly by the issuing insurance companies, which perform all policy issuance, underwriting and accounting functions. SMC is not dependent on any one agent or agency for any substantial amount of its business. No single agent accounted for more than 6% of Standard Life's annual sales in 1998, and the top twenty individual agents accounted for approximately 42% of Standard Life's volume in 1998. At December 31, 1998, approximately 66% of Standard Marketing's independent agents were located in Florida, Indiana, California, Ohio, Texas, North Carolina, Illinois, Missouri and Georgia, with the balance distributed across the country. SMC is attempting to increase the number and geographic diversity of its agents. In 1997, SMC began writing significant amounts of business in California and the mid-south due to Standard Marketing's expansion efforts. SMC does not have exclusive agency agreements with its agents and management believes most of these agents sell products similar to those sold by SMC for other insurance companies. This could result in a sales decline if SMC's products were to become relatively less competitive. Standard Life's 1998 FPDA and equity indexed annuity sales increased partially due to an aggressive marketing campaign targeted to high volume sales agents and marketing companies. Also contributing to the increase in premiums was the continued development of Standard Life's distribution system through marketing support from Standard Marketing along with an aggressive program aimed at retention of key producers and expanded geographical concentration. SAVERS MARKETING distributes through financial institutions and independent general agents. Savers Marketing has approximately 4,000 active brokers and is not dependent on any one broker or agency for any substantial amount of its business. Each broker operates independently and is responsible for all of his or her expenses. Savers Marketing employs three Regional Managers, who are responsible for personally initiating and maintaining direct communications with brokers and are responsible for the recruitment and training of all new brokers. Savers Marketing also entered into a three-year marketing and administrative contract with QualChoice of North Carolina ("QualChoice") effective October 1, 1998 whereby Savers Marketing is the distribution system for the small group product offered by QualChoice. QualChoice is an HMO in a twenty-county area in the northwestern part of North Carolina offering HMO insurance coverage. Savers Marketing is compensated for this effort with a marketing fee, administrative fee and commission reimbursement for the use of its brokers. Prior to the agreement with Savers Marketing, QualChoice was under an agreement with Savers Life that commenced in 1996. INTERNATIONAL MARKETING PREMIER LIFE (LUXEMBOURG) AND PREMIER LIFE (BERMUDA), produced aggregate new premium deposits of approximately $43 million, $22 million and $17 million during 1998, 1997 and 1996, respectively. The increases in 1997 and 1998 relate to renewed marketing efforts in certain European countries, particularly in Sweden, Belgium and Italy. The countries within the European Union have been the main contributor to these sales. Although SMC expects this to be the case in the future, it plans to increase marketing efforts in other parts of the world as well. Although SMI anticipates as part of its long term plan to grow significantly through internal sales, acquisitions of other European insurance companies may be considered. It has designed and launched new single and regular premium products in recent years. It is also in discussions with a number of companies to form alliances to produce tailored products for their markets. It is currently the intention that Premier Life (Luxembourg) will write business within the European Union and Premier Life (Bermuda) will write international business elsewhere in the world. The market for SMI's products is considered to be medium to high net worth individuals who typically have in excess of $75,000 to invest in a single premium policy and medium to high earners who have in excess of $3,000 per annum to invest in a regular premium savings product. The above individuals would come from a combination of expatriates, residents of European Union countries and from other targeted areas. The expatriate and European insurance markets are well established and highly competitive with a large number of domestic and international groups operating in, or going into, the same markets as SMI. SMI's products are distributed via independent agents who have established connections with these targeted individuals. SMI is striving to develop into an entrepreneurial-intermediary oriented organization committed to building long term relationships with high quality distributors, thereby creating a niche position. SMI places the same emphasis as SMC's U.S. insurance companies on a high level of service to intermediaries and policyholders while striving to achieve low overhead costs. PRODUCTS SMC primarily markets FPDAs, equity indexed annuities, whole life, universal and interest-sensitive life insurance policies and unit-linked policies. The following table sets forth the amounts and percentages of net premiums received by SMC from currently marketed products for the years ended December 31, 1998, 1997 and 1996, respectively (in thousands). Because GAAP generally excludes annuity and unit-linked products deposits, and premiums from universal and interest-sensitive life insurance from premium income, and thus does not fully reflect SMC's cash flow from new business, the premium information contained in the following table is reported using statutory accounting principles which includes the aforementioned items.
Year Ended December 31, 1998 1997 1996 Amount % Amount % Amount % Currently marketed products: FPDAs $60,086 45.8 $41,066 55.5 $37,322 58.7 Unit-linked products 42,536 32.5 21,954 29.7 16,902 26.6 Equity-indexed annuities 16,858 12.9 -- -- -- -- Universal and 5,816 4.4 5,836 7.9 5,384 8.5 interest-sensitive life Whole life 3,282 2.5 2,349 3.2 2,546 4.0 Single premium immediate annuities 2,545 1.9 2,704 3.7 1,423 2.2 $131,123 100.0 $73,909 100.0 $63,577 100.0
Annuity sales increased in 1998 primarily due to the introduction of new products and an increase in the agency base achieved through the recruitment of high volume agents. Also attributable to the annuity sales increase were larger managing general agencies and continued expansion of geographical concentration. The increase in deposits from unit linked products in 1998 is primarily due to a continuation of marketing efforts in certain European countries, particularly in Sweden, Belgium and Italy. CURRENTLY MARKETED PRODUCTS The individual annuity business is a growing segment of the savings and retirement industry, which increased in sales from $1 billion in 1970 to more than $54 billion in 1990. The individual annuity market, which is one of SMC's primary targets, comprises 61% of those sales. As the 76 million baby boomers born from 1946 through 1964 grow older, demand for insurance products is expected to grow. SMC believes that those seeking adequate retirement incomes will become less dependent on Social Security and their employers' retirement programs and more dependent upon their own financial resources. Annuities currently enjoy an advantage over certain other saving mechanisms because the annuity buyer receives a tax-deferred accrual of interest on his investment during the accumulation period. SMI's products are sold primarily in Western Europe. SMC's gross sales percentages by U.S. geographical region are summarized as follows: STATE 1998 1997 1996 Indiana 17% 21% 18% Ohio 15 10 16 North Carolina 10 4 4 Arizona 9 -- -- Florida 8 10 14 Hawaii 7 -- -- California 5 11 11 Nevada 3 2 2 Texas 3 4 4 All other states {(1)} 23 38 31 Total 100% 100% 100% (1) No other state had gross sales greater than 6%. STANDARD LIFE PRODUCTS FLEXIBLE PREMIUM DEFERRED ANNUITIES ("FPDA"s) provide for an initial deposit by an annuitant and optional additional deposits, the time and amount of which are at the discretion of the annuitant. Standard Life credits the account of the annuitant with earnings at interest rates that are revised periodically by Standard Life until the maturity date. This accumulated value is tax deferred. Revisions to interest rates on FPDAs are restricted by an initial crediting rate guaranteed for a specific period of time and a minimum crediting rate guaranteed for the term of the FPDA. At maturity, the annuitant can elect a lump sum cash payment of the accumulated value or one of the various payout options available. Standard Life's FPDAs also provide for penalty-free partial withdrawals of up to 10% annually of the accumulation value after the annuitant has held the FPDA for more than 12 months. In addition, the annuitant may surrender the FPDA at any time before the maturity date and receive the accumulated value, less any surrender charge then in effect for that contract. To protect holders of FPDAs from a sharp reduction in the credited interest rate after a FPDA is issued, Standard Life permits the FPDA holder of certain annuities to surrender the annuity during a specified period without incurring a surrender charge if the renewal crediting rate is below a stated level. This stated level of interest is referred to as the "bail-out rate" and is typically below the original crediting rate, but above the minimum guaranteed crediting rate. As of January 1, 1999, the crediting rates available on Standard Life's currently marketed FPDAs ranged from 4.8% to 11.0%, with new issues having an interest rate with a one year guarantee period. After the initial period, the crediting rate may be changed periodically, subject to minimum guaranteed rates from 3.0% to 4.0%. As of January 1, 1999, interest crediting rates after the initial guarantee period ranged from 3.5% to 5.9%. The surrender charge is initially 7% or 15% of the contract value depending on the product and decreases over the applicable surrender charge period of five to thirteen years. As of January 1, 1999, the bail out rate for Standard Life's FPDAs was 4.5%; most currently marketed products carry a bail out rate for only the first two years after issuance. As of December 31, 1998, Standard Life had 8,962 currently marketed FPDA contracts in force. EQUITY-INDEXED FPDAS. In response to consumers' desire for alternative investment products with returns linked to those of common stocks, Standard Life introduced an equity-indexed FPDA product in May 1998. This product accounted for $16.9 million of the total premiums collected in 1998. The annuity's contract value is equal to the premium paid increased for returns based upon a percentage (the "participation rate") of the change in the S&P 500 Index during each year of its term, subject to a minimum guaranteed value. The Company has the discretionary ability to annually change the participation rate (which currently ranges from 65% to 70% plus a first-year "bonus"). The minimum guaranteed values are equal to 85% of first year and 90% of renewal premiums collected for FPDAs, plus interest credited at an annual rate of 3%. The annuity provides for penalty-free withdrawals of up to 10% in each year after the first year of the annuity's term. Other withdrawals from the product are subject to a surrender charge of 10% in the first year, declining each year, to zero over a 9 year period. The Company purchases Standard & Poor's 500 Index Call Options (the "S&P 500 Call Options") to hedge potential increases to policyholder benefits resulting from increases in the S&P 500 Index to which the product's return is linked. As of December 31, 1998, Standard Life had 617 equity-indexed contracts. UNIVERSAL LIFE. Single premium universal life ("SPUL") policies provide for an initial deposit (flexible premium universal life ("FPUL") for periodic deposits), credit interest to account values and charge the account values for mortality and administrative costs. As of January 1, 1999, the current interest rate on new sales of SPULs and FPULs was 5.5% with a guaranteed interest rate of 3.4%. As of December 31, 1998, Standard Life had 78 and 496 SPUL and FPUL policies in force, respectively. SINGLE PREMIUM IMMEDIATE ANNUITIES. Standard Life offers a single premium immediate annuity ("SPIA") whereby an annuitant purchases an immediate annuity with a one-time premium deposit at the time of issuance. Standard Life begins a payout stream shortly after the time of issuance consisting of principal value plus accumulated interest credited to such annuity. This product credits interest based on an investment portfolio earned rate assumption. As of December 31, 1998, Standard Life had 764 SPIA contracts in force. WHOLE LIFE INSURANCE. Standard Life offers two types of non-participating whole life policies: one in face amounts up to $10,000 (which is only issued upon conversion of other policies) and the other in face amounts up to $50,000. Whole life insurance products involve fixed premium payments made over time, with the stated death benefit paid in full upon the death of the insured. The whole life policy combines the death benefit with a forced savings plan. Premiums remain level over the life of the policy, with the policyholder prefunding during the early years of coverage when risk of death is low. Over time, whole life policies begin to accrue a cash value which can be made available to the policyholder net of taxes and withdrawal penalties. As of December 31, 1998, Standard Life had 630 currently marketed whole life policies in force. DIXIE LIFE PRODUCTS Life insurance policies sold by Dixie Life in the final expense, or burial market include fixed premium interest sensitive policies that provide for increasing death benefits, as well as traditional whole life policies. These policies are designed to cover expenses such as funeral, last illness, monument and cemetery lot. The policies provide for a death benefit, generally not in excess of $10,000, and a level premium payment. The products include a cash value which may be borrowed by the policyholder. Dixie Life's policies sold in other markets include interest sensitive and traditional whole life policies and forms of term policies. The interest sensitive whole life policies have a guaranteed interest rate of 5.5% on products marketed as of January 1, 1999. The interest sensitive and whole life policies include cash values which may be borrowed by the policyholder. Dixie Life issues policies on both a participating and non-participating basis. As of December 31, 1998, Dixie Life had 597 and 22,195 individual annuities and life policies in force, respectively. Effective January 1, 1999, SMC has decided not to sell new business through Dixie Life. SMI PRODUCTS UNIT-LINKED POLICIES. SMI currently writes unit-linked life products, which are similar to U.S. produced variable life products. Separate account assets and liabilities are maintained primarily for the exclusive benefits of universal life contracts and investment contracts of which the majority represents unit-linked business, where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses within the separate accounts accrue directly to the policyholders. The fees received by SMI for administrative and contract holder maintenance services performed for these separate accounts are included in SMC's statement of operations. In the past, SMI also wrote investment contracts and universal life policies and to a lesser extent, traditional life policies. The investment contracts are mainly short-term single premium endowments or temporary annuities under which fixed benefits are paid to the policyholder. The terms of these contracts are such that SMC has relatively small morbidity or mortality risk. The universal life contracts are mainly regular premium and single premium endowment. The benefits payable to the policyholders are directly linked to the investment performance of the underlying assets. CLOSED BLOCKS SMC also generates cash flow and income from its closed blocks of in force life insurance and annuities. Closed blocks are blocks of in force life insurance and annuities that are not currently being marketed by SMC. The closed block designation does not have legal or regulatory significance and there are no restrictions on the assets or future profits of closed blocks. The premiums received on the closed blocks were primarily from the ordinary and universal life business. This decline in premium income is expected as a result of policy lapses, surrenders and expiries from closed blocks of business. ANNUITIES. SMC's closed blocks of deferred annuities consist primarily of FPDAs and a small amount of single premium deferred annuities ("SPDAs") which, unlike FPDAs, do not provide for additional deposits. As of January 1, 1999, these deferred annuities had crediting rates ranging from 3.5% to 5.5% and guaranteed minimum crediting rates ranging from 3.0% to 5.5%. The crediting rate may be changed periodically. The contract owner is permitted to withdraw all or part of the accumulation value. SMC's closed blocks of annuities include payout annuities. Payout annuities consist of those annuities the benefits of which are being paid out over a specified time period. Payout annuities cannot be terminated by surrender or withdrawal. SMC's crediting rates on payout annuities range from 3.0% to 6.5% and cannot be changed. At December 31, 1998, SMC had 10,993 annuity contracts in force for closed blocks. ORDINARY LIFE. The ordinary life policies included in SMC's closed blocks are composed primarily of fixed premium, cash value whole life products. In addition, they include annually renewable term policies as well as five, ten and fifteen year level premium term policies. At December 31, 1998, SMC had 41,868 ordinary life policies in force for closed blocks. UNIVERSAL LIFE. Certain closed blocks include universal life business. For this business, SMC credits deposits and interest to account values and charges the account values for mortality and administrative costs. At December 31, 1998, SMC had 6,724 universal life policies in force for the closed block of business. PRODUCT PROFITABILITY The profitability of the life insurance and annuity products depend to a significant degree on the maintenance of profit margins between investment results from invested assets and interest credited on insurance and annuity products. During 1998, such margins increased as a result of decreased crediting rates on insurance and annuity products. Refer to "Investments" in Item 1 of this report. The long-term profitability of insurance products depends on the accuracy of the actuarial assumptions that underlie the pricing of such products. Actuarial calculations for such insurance products, and the ultimate profitability of such products, are based on four major factors: (i) persistency, (ii) mortality (iii) return on cash invested by the insurer during the life of the policy and (iv) expenses of acquiring and administering the policies. The average expected remaining life of Standard Life's ordinary life business in force at December 31, 1998 was 9.4 years. This calculation was determined based upon SMC's actuarial models and assumptions as to expected persistency and mortality. Persistency is the extent to which insurance policies sold are maintained by the insured. The persistency of life insurance and annuity products is a critical element of their profitability. However, a surrender charge often applies in the early contract years and declines to zero over time. Policyholders sometimes do not pay premiums, thus causing their policies to lapse. For the years 1998, 1997 and 1996 Standard Life experienced total policy lapses of 6.1%, 6.5% and 6.3% of total policies in force at December 31 of each year, respectively. The American Council of Life Insurance 1998 Fact Book reported industry life insurance voluntary termination rates in 1997 of 14.9% for policies in force less than two years, 4.4% for policies in force for two years or more and 6.1% for all policies in force. OPERATIONS SMC emphasizes a high level of service to agents and policyholders and strives to achieve low overhead costs. SMC's principal administrative departments are its financial, policyholder services and management information services ("MIS") departments. The financial department provides accounting, budgeting, tax, investment, financial reporting and actuarial services and establishes cost control systems for SMC. The policyholder services department reviews policy applications, issues and administers policies and authorizes disbursements related to claims and surrenders. The MIS department oversees and administers SMC's information processing systems. SMC's administrative departments in the United States use a common integrated system that permits efficiency and cost control. SMC's MIS system serviced approximately 192,000 active and inactive policies at December 31, 1998 and is continually being improved to provide for growth from acquisitions and sales. SMI's administrative and MIS departments in Luxembourg are an autonomous unit from the systems in the United States. SMC is in the process of improving the MIS systems of SMI and integrating them with the U.S. systems. INVESTMENTS Investment activities are an integral part of SMC's business as the investment income of SMC's insurance subsidiaries is an important part of its total revenues. Profitability is significantly affected by spreads between rates credited on insurance liabilities and interest earned on invested assets. Substantially all credited rates on FPDAs may be changed at least annually. For the year ended December 31, 1998, the weighted average interest rate credited on SMC's interest-sensitive liability portfolio, excluding liabilities related to separate accounts, was approximately 5.25% per annum, and the weighted average net yield of SMC's investment portfolio for the year ended December 31, 1998 was 7.48% for an average interest spread of 223 basis points at December 31, 1998, compared to 206 basis points at December 31, 1997. The increase in the average interest spread includes i) lower crediting rates on new and existing FPDA business in order to meet targeted pricing spreads, offset by, ii) deposits from FPDA sales being invested at interest rates lower than the current portfolio rate due to a general decline in interest rates during 1998. Increases or decreases in interest rates could increase or decrease the average interest rate spread between investment yields and interest rates credited on insurance liabilities, which in turn could have a beneficial or adverse effect on the future profitability of SMC. Sales of fixed maturity securities that result in investment gains may also tend to decrease future average interest rate spreads. State insurance laws and regulations prescribe the types of permitted investments and limit their concentration in certain classes of investments. SMC balances the duration of its invested assets with the expected duration of benefit payments arising from insurance liabilities. The "duration" of a security is the time-weighted present value of the security's cash flows and is used to measure a security's price sensitivity to changes in market interest rates. The adjusted modified duration of fixed maturities and short-term investments for its U.S. insurance subsidiaries was 5.6 years at December 31, 1998 and December 31, 1997. SMC's investment strategy is guided by strategic objectives established by the Investment Committee of the Board of Directors. SMC's major investment objectives are to: (i) ensure adequate safety of investments and protect and enhance capital; (ii) maximize after-tax return on investments; (iii) match the anticipated duration of investments with the anticipated duration of policy liabilities; and (iv) provide sufficient liquidity to meet cash requirements with minimum sacrifice of investment yield. Consistent with its strategy, SMC invests primarily in securities of the U.S. government and its agencies, investment grade utilities and corporate debt securities and collateralized mortgage obligations ("CMOs"). When opportunities arise below investment grade securities may be purchased, however, protection against default risk is a primary consideration. SMC has determined it will not invest more than 7% of its bond portfolio in below investment grade securities. The following table sets forth the quality of SMC's fixed maturity securities as of December 31, 1998, classified in accordance with the ratings assigned by the National Association of Insurance Commissioners ("NAIC"): Percent of Fixed NAIC RATING (1) MATURITY SECURITIES 1 51 2 44 Investment Grade 95 3-4 5 5-6................................... -- Below Investment Grade 5 Total fixed maturity securities 100% (1) The NAIC assigns securities quality ratings and uniform book values called "NAIC Designations," which are used by insurers when preparing their annual statements. The NAIC assigns ratings to publicly traded and privately-placed securities. The ratings assigned by the NAIC range from Class 1 to Class 6, with a rating in Class 1 being of the highest quality. Conseco Capital Management Inc. ("CCM"), a wholly owned subsidiary of Conseco, Inc., manages SMC's invested assets (other than mortgage loans, policy loans, real estate and other invested assets), subject to the direction of SMC's Investment Committee. In 1998, a quarterly fee equal to .035% of the total market value of the assets under management as of the end of each quarter was paid to CCM for its investment advisory services. Approximately 12% of SMC's fixed maturity securities at December 31, 1998 is comprised of mortgage-backed securities which include CMOs and mortgage-backed pass-through securities. Approximately 8% of the book value of mortgage-backed securities in SMC's portfolio is backed by the full faith and credit of the U.S. government as to the full amount of both principal and interest and 85% are backed by an agency of the U.S. government (although not by the full faith and credit of the U.S. government). SMC closely monitors the market value of all investments within its mortgage-backed portfolio. The following table summarizes SMC's mortgage-backed securities at December 31, 1998 (in thousands):
Estimated Avg. % of % of Avg. Life Term Amortized Fixed Fair Fixed of to Final Cost Maturities Value Maturities Investment Maturity (In Years) (In Years) Agency CMOs: Planned and target amortization $39,465 7.2% $39,629 7.2% 5.7 19.9 classes Sequential and support classes 21 -- 20 -- 0.1 22.0 Total 39,486 7.2 39,649 7.2 5.8 19.9 Non-agency CMOs: Sequential classes 4,891 .9 4,930 .9 4.4 10.9 Total CMOs 44,377 8.1 44,579 8.1 5.7 18.9 Agency mortgage-backed pass-through securities 22,344 4.1 22,546 4.1 2.4 15.2 Total mortgage- $66,721 12.2% $67,125 12.2% 4.6 17.7 backed securities
The market values for SMC's mortgage-backed securities were determined from broker-dealer markets, internally developed methods and nationally recognized statistical rating organizations. Certain mortgage-backed securities are subject to significant prepayment risk, since, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investment which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. SMC has addressed this risk of prepayment risk by investing 59% of its mortgage-backed investment portfolio in planned and target amortization classes. These investments are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to investors in other tranches ("support classes"). Mortgage-backed pass-through securities, "sequential" and support class CMOs, which comprised the remaining 41% of the book value of SMC's mortgage-backed securities at December 31, 1998, are more sensitive to this prepayment risk. SEPARATE ACCOUNTS Separate account assets and liabilities are maintained primarily for universal life contracts of which the majority represents unit-linked business where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to such policyholders. UNDERWRITING Premiums charged on insurance products are based in part on assumptions about the incidence and timing of insurance claims. SMC has adopted and follows underwriting procedures for both its whole life and universal life insurance policies. To implement these procedures, SMC employs a professional underwriting staff. All underwriting decisions are made in SMC's home office. To the extent that an applicant does not meet SMC's underwriting standards for issuance of a policy at the standard risk classifications, SMC may rate or decline the application. Underwriting with respect to FPDAs is minimal. No underwriting procedures are applied to Standard Life's $10,000 conversion policy or SMI's unit-linked business. Traditional underwriting procedures are not applied to policies acquired in blocks. In these cases, SMC reviews the mortality experience for recent years and compares actual experience to that assumed in the actuarial projections for the acquired policies. RESERVES In accordance with applicable insurance laws, SMC's insurance subsidiaries have established and carry as liabilities in their statutory financial statements, actuarially determined reserves to satisfy their respective annuity contract and life insurance policy obligations. Reserves, together with premiums to be received on outstanding policies and interest thereon at certain assumed rates, are calculated to be sufficient to satisfy policy and contract obligations. The actuarial factors used in determining such reserves are based on statutorily prescribed mortality tables and interest rates. The reserves in the consolidated financial statements in this report are calculated based on GAAP and differ from those specified by the laws of the various states and recorded in the statutory financial statements of SMC's insurance subsidiaries. These differences arise from the use of different mortality tables and interest rate assumptions, the introduction of lapse assumptions into the reserve calculation and the use of the net level premium reserve method on all insurance business. See note 1 to the consolidated financial statements for reserve assumptions under GAAP. To determine policy benefit reserves for its life insurance and annuity products, SMC performs periodic studies to compare current experience for mortality, interest and lapse rates with projected experience used in calculating the reserves. Differences are reflected currently in earnings for each period. SMC historically has not experienced significant adverse deviations from its assumptions. REINSURANCE Consistent with the general practice of the life insurance industry, SMC has reinsured portions of the coverage provided by its insurance products with other insurance companies under agreements of indemnity reinsurance. The policy risk retention limit on the life of any one individual does not exceed $150,000. Indemnity reinsurance agreements are intended to limit a life insurer's maximum loss on a particular risk or to obtain a greater diversification of risk. Indemnity reinsurance does not discharge the primary liability of the original insurer to the insured, but it is the practice of insurers for statutory accounting purposes (subject to certain limitations of state insurance statutes) to account for risks which have been reinsured with other approved companies, to the extent of the reinsurance, as though they are not risks for which the original insurer is liable. However, under Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" these amounts are added back to policy reserves and recorded as amounts due from reinsurers. Reinsurance ceded on life insurance policies to unaffiliated companies by SMC in 1998, 1997 and 1996 represented 48.9%, 51.9% and 57.6%, respectively, of gross combined individual life insurance in force at the end of such years. Reinsurance assumed in the normal course from unaffiliated companies by SMC in 1998, 1997 and 1996 represented .02% for all three years of net combined individual life insurance in force excluding reinsurance from The Guardian Insurance and Annuity Company, Inc. ("GIAC"), a subsidiary of The Guardian Group, New York, NY. The following is reinsurance ceded information for in force life insurance policies at December 31, 1998 (in thousands):
% of Total Face Value of Reinsurance Reinsurance INSURANCE COMPANY LIFE POLICIES CEDED RECOVERABLE Lincoln National Life 385,183 31.3% 2,546 Insurance Company Swiss Re Life and Health 163,306 13.3% 848 Security Life of Denver 147,718 12.0% 990
Reinsured life insurance in force at December 31, 1998 is ceded to insurers rated "A" or better by A.M. Best. SMC historically has not experienced any material losses in collection of reinsurance receivables. Commencing January 1, 1995, SMC began to reinsure a portion of its annuity business. The primary purposes of the reinsurance agreement were to limit the net loss arising from large risks, maintain SMC's exposure to loss within capital resources and provide additional capacity for future growth. Furthermore, these reinsurance agreements have allowed SMC to write volumes of business that it would not otherwise have been able to write due to restrictions based on its ratio of surplus to liabilities as determined by regulatory authorities in the State of Florida. By reinsuring a portion of the annuity business, the liability growth is slowed, thereby avoiding the erosion of surplus that can occur in periods of increasing sales. If SMC's ratio of surplus to liabilities falls below 4%, the State of Florida could prohibit SMC from writing new business in Florida. SMC's largest annuity reinsurer at December 31, 1998, Winterthur Life Re Insurance Company ("Winterthur"), represented $33.7 million, or 56.4% of total reinsurance recoverable, $6.6 million of premium deposits ceded in 1998 and is rated "A" ("Excellent") by A.M. Best. From January 1, 1996 to March 31, 1996, Standard Life ceded a 50% quota-share portion of its annuity business. Effective April 1, 1996, Standard Life reduced it to 25% and effective October 1, 1998, discontinued ceding its annuity business. This reduction was possible since the surplus strain experienced by Standard Life was not as great as originally anticipated. Winterthur limits dividends and other transfers by Standard Life to SMC or affiliated companies if adjusted surplus is less than 5.5% of admitted assets or $31.5 million at December 31, 1998. On March 18, 1996, Standard Life completed the sale of First International to GIAC and received proceeds of $10.4 million including $1.5 million for the charter and licenses. Standard Life realized a net pretax gain of $1.0 million and a tax benefit of $1.4 million on the sale. First International, Standard Life and GIAC have entered into a series of reinsurance and other agreements that include provisions for Standard Life to administer First International policies in force at the date of sale, and for Standard Life to continue to receive the profit stream from certain First International policies in force effective January 1, 1996. Effective January 1, 1996, GIAC entered into a modified coinsurance indemnity reinsurance agreement with Standard Life with respect to Blocks I (ordinary life policies issued in New York and New Jersey) and II (ordinary life policies not issued in New York and New Jersey). Pursuant to this agreement, Standard Life administers the policies in both Block I and Block II. Under the terms of the agreement, Standard Life assumed approximately $18.8 million of reserves for Block I and Block II from GIAC as of January 1, 1996. During 1996, Standard Life incurred and paid experience rating refunds to GIAC on Block I for profits earned in excess of specified amounts. These refunds were calculated and paid on a quarterly basis. As a result, the economic risks and benefits associated with Block I remained with GIAC. Effective January 1, 1997, GIAC and Standard Life agreed to terminate the Block I agreement. Savers Life issued and marketed medicare supplement policies in 1998 including the time period from March 12, 1998, the acquisition date of Savers Life, through July 1, 1998, when the medicare supplement business was sold. In connection with the sale of the Medicare supplement business, Savers Life received an initial statutory ceding allowance of $4.2 million which was offset by a reserve reduction of $1.6 million and write off of present value of future profits of $2.6 million and resulted in no gain or loss for GAAP. Under the terms of the reinsurance agreement, Savers Life will administer the Medicare supplement business through September 1, 1999 and will receive administration fee income as a result of this transaction. The consummation of this transaction resulted in the Company exiting from the Medicare supplement business it acquired with the Savers Life acquisition. In order to write an increasing amount of new business while continuing to meet the statutory requirements of the states in which it conducts its insurance operations, it has been necessary for Dixie Life to utilize various forms of surplus relief. The principal source of surplus relief has been financial reinsurance agreements, which for GAAP purposes are treated as financing arrangements, but for statutory accounting purposes provide reserve reductions that, in equal amount, increase statutory surplus. Dixie Life has a financial reinsurance agreement that entitles it to a reduction of $.9 million to its statutory reserves at December 31, 1998, with the amount of the reduction decreasing each quarter by the amount of profit generated to Dixie Life by the underlying block of business. COMPETITION The life insurance industry is highly competitive and consists of a large number of both stock and mutual insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines and larger staffs than those possessed by SMC. There are approximately 2,000 life insurance companies in the United States which may offer insurance products similar to those marketed by SMC. Competition within the life insurance industry occurs on the basis of, among other things, i) product features such as price and interest rates, ii) perceived financial stability of the insurer, iii) policyholder service, iv) name recognition and v) ratings assigned by insurance rating organizations. Additionally, when SMC bids on companies it wishes to acquire, it typically is in competition with other entities. SMC must also compete with other insurers to attract and retain the allegiance of agents. SMC believes it has been successful in attracting and retaining agents because it has been able to offer a competitive package of innovative products, competitive commission structures, prompt policy issuance and responsive policyholder service. Because most annuity business written by life companies is through agents, management believes that competition centers more on the strength of the agent relationship rather than on the identity of the insurer. Competition also is encountered from the expanding number of banks, securities brokerage firms and other financial intermediaries which are marketing insurance products and which offer competing products such as savings accounts and securities. In the case of banks, these insurance products are sold for non-affiliate insurance companies in return for a sales fee. A change in legislation may increase interest on the part of banks to begin selling annuities or to expand their existing efforts to sell annuities. The decision could result in a partial shift in the distribution of annuities from insurance agents to national banks, which could have a negative impact in the Company's sales. The Company began distributing annuities through financial institutions as a result of the acquisition of Savers Marketing in March 1998. The unit-linked life insurance market in Europe is highly competitive and consists of many companies domiciled in the United Kingdom and its offshore centers, as well as many companies in Luxembourg and Ireland which sell products similar to those of SMI. SMI is able to develop its share of a competitive market by developing strong relationships with high-quality independent intermediaries and by continual innovation in the design of niche market products. Financial institutions, school districts, marketing companies, agents who market insurance products and policyholders use the ratings of an insurer as one factor in determining which insurer's annuity to market or purchase. Standard Life and Dixie Life have a rating of "B+" and "B", respectively by A.M. Best. A rating of "B+" is assigned by A.M. Best to companies which, in their opinion, have achieved very good overall performance when compared to the standards established by A.M. Best, and have a good ability to meet their obligations to policyholders over a long period of time. A rating of "B" is assigned by A.M. Best to companies which, in their opinion, have achieved good overall performance when compared to the standards established by A.M. Best. According to A.M. Best, these companies generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competence of its management. A.M. Best's ratings are based upon factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. Generally, rating agencies base their ratings on information furnished to them by the issuer and on their own investigations, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in the judgment of the rating agency, circumstances so warrant. Although a higher rating by A.M. Best or another insurance rating organization could have a favorable effect on Standard Life and Dixie Life's business, management believes that Standard Life and Dixie Life are able to compete on the basis of their competitive crediting rates, asset quality, strong relations with their independent agents and the quality of service to their policyholders. FEDERAL INCOME TAXATION The life insurance and annuity products marketed and issued by Standard Life and Dixie Life generally provide the policyholder with an income tax advantage, as compared to other saving investments such as certificates of deposit and bonds, in that income taxation on the increase in value of the product is deferred until receipt by the policyholder. With other savings investments, the increase in value is taxed as earned. Life insurance benefits, which accrue prior to the death of the policyholder, and annuity benefits are generally not taxable until paid and life insurance death benefits are generally exempt from income tax. The tax advantage for life insurance and annuity products is provided in the Internal Revenue Code ("IRC"), and is generally followed in all states and other United States taxing jurisdictions. Accordingly, it is subject to change by Congress and the legislatures of the respective taxing jurisdictions. SMC, Standard Marketing and other U.S. non-insurance subsidiaries file a consolidated return for federal income tax purposes. Beginning in 1997, Standard Life and Dixie Life were eligible to file a life/life consolidated return. As such, Standard Life and Dixie Life filed a life/life consolidated return for 1997 and plan to file a consolidated return for 1998. As of December 31, 1998, SMC, Standard Marketing and other U.S. non-insurance subsidiaries had consolidated net operating loss carryforwards of approximately $9.4 million for tax return purposes which expire from 2005 to 2012. At December 31, 1998, the Standard Life consolidated return had tax return net operating loss carryforwards of approximately $4.1 million, which expire in 2010 and 2018. As a result of the change in ownership of Midwestern Life, $1.1 million of these loss carryforwards are subject to an annual limitation of $.7 million. These carryforwards will be available to reduce the taxable income of the Standard Life consolidated return. The change in ownership of Savers Life and Midwestern Life will not result in additional limitations on the use of the loss carryforwards available to Standard Life. Standard Management International is a Luxembourg holding company which is currently exempt from Luxembourg income tax. Premier Life (Bermuda) is exempt from income tax until March 2016 pursuant to a decree from the Minister of Finance. Premier Life (Luxembourg) is subject to Luxembourg income taxation (statutory corporate rate of 37.45%) and a capital tax of approximately 1% of its net equity. At December 31, 1998, Premier Life (Luxembourg) had accumulated corporate income tax loss carryforwards of approximately $2.6 million, all of which may be carried forward indefinitely. To the extent that such income is taxable under U.S. law, it will be included in SMC's consolidated return. INFLATION The primary direct effect on SMC of inflation is the increase in operating expenses. A large portion of SMC's operating expenses consists of salaries which are subject to wage increases at least partly affected by the rate of inflation. SMC attempts to minimize the impact of inflation on operating expenses through programs to improve productivity. The rate of inflation also has an indirect effect on SMC. To the extent that the government's economic policy to control the level of inflation results in changes in interest rates, SMC's new sales of insurance products and investment income are affected. Changes in the level of interest rates also have an effect on interest spreads, as investment earnings are reinvested. FOREIGN OPERATIONS AND CURRENCY RISK SMI policyholders invest in assets denominated in a broad range of currencies. Policyholders effectively bear the currency risk, if any, as these investments are matched by policyholder separate account liabilities. Therefore, their investment and currency risk is limited to premiums they have paid. Policyholders are not permitted to invest directly into options, futures and derivatives. SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. The assets and liabilities of this portfolio and the reserves are continually matched by the company and at regular intervals by the independent actuary. In addition, Premier Life (Luxembourg's) stockholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge its translation risk because its stockholder's equity will remain in Luxembourg francs for the foreseeable future and no significant realized foreign exchange gains or losses are anticipated. At December 31, 1998, there is an immaterial unrealized loss from foreign currency translation. Due to the nature of unit-linked products issued by SMI, which represent over 94% of the SMI portfolio, the investment risk rests with the policyholder. Investment risk for SMI exists where investment decisions are made with respect to the remaining traditional business and for the assets backing certain actuarial and regulatory reserves. The investments underlying these liabilities mostly represent short term investments and fixed maturity securities which are normally bought and/or disposed of only on the advice of independent consulting actuaries who perform an annual exercise comparing anticipated cash flows on the insurance portfolio with the cash flows from the fixed maturity securities. Any resulting material foreign currency mismatches are then covered by buying and/or selling the securities as appropriate. REGULATORY FACTORS SMC's insurance subsidiaries are subject to significant regulation by the insurance regulatory authorities in the jurisdictions in which they are domiciled and the insurance regulatory bodies in the other jurisdictions in which they are licensed to sell insurance. The purpose of such regulation is primarily to ensure the financial stability of insurance companies and to provide safeguards for policyholders rather than to protect the interest of stockholders. The insurance laws of various jurisdictions establish regulatory agencies with broad administrative powers relating to i) the licensing of insurers and their agents, ii) the regulation of trade practices, iii) management agreements, iv) the types of permitted investments and maximum concentration, v) deposits of securities, vi) the form and content of financial statements, vii) premiums charged by insurance companies, viii) sales literature and insurance policies, ix) accounting practices and the maintenance of specified reserves, and x) capital and surplus. SMC's insurance subsidiaries are required to file detailed periodic financial reports with supervisory agencies in certain jurisdictions. Most states have also enacted legislation regulating insurance holding company activities including acquisitions, extraordinary dividends, terms of surplus debentures, terms of affiliate transactions and other related matters. The insurance holding company laws and regulations vary by state, but generally require an insurance holding company and its insurance company subsidiaries licensed to do business in the state to register and file certain reports with the regulatory authorities, including information concerning capital structure, ownership, financial condition, certain intercompany transactions and general business operations. State holding company laws also require prior notice or regulatory agency approval of certain material intercompany transfers of assets within the holding company structure. Recently a number of state regulators have considered or have enacted legislation proposing that change, and in many cases increase, the authority of state agencies to regulate insurance companies and holding companies. For additional information on state laws regulating insurance company subsidiaries, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources", and Note 13 to the Company's consolidated financial statements. Under Indiana insurance law, Standard Life may not enter into certain transactions, including management agreements and service contracts, with members of its insurance holding company system, including Standard Management, unless Standard Life has notified the Indiana Department of Insurance of its intention to enter into such transactions and the Indiana Department of Insurance has not disapproved of them within the period specified by Indiana law. Among other things, such transactions are subject to the requirement that their terms and charges or fees for services performed be fair and reasonable. The Indiana insurance laws and regulations require that the statutory surplus of Standard Life following any dividend or distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. The Indiana Department of Insurance may bring an action to enjoin or rescind the payment of a dividend or distribution by Standard Life that would cause its statutory surplus to be unreasonable or inadequate under this standard. Most states, including Indiana, require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of the outstanding shares of an insurance holding company whose insurance subsidiary is incorporated in the state. The request for approval must be accompanied by detailed information concerning the acquiring parties and the plan of acquisition. The acquisition of 10% of such shares is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes. However, in many states the insurance authorities may find that "control" in fact does or does not exist in circumstances in which a person owns or controls either a lesser or a greater amount of securities. In some instances many state regulatory authorities require deposits of assets for the protection of policyholders either in those states or for all policyholders. At December 31, 1998, securities representing approximately 4% of the book value of SMC's U.S. insurance subsidiaries' invested assets were on deposit with various state treasurers or custodians. Such deposits must consist of securities that comply with the standards that the particular state has established. Assets of SMI of $6.5 million at December 31, 1998 were held by a custodian bank approved by the Luxembourg regulatory authorities to comply with local insurance laws. In recent years, the NAIC and state insurance regulators have reexamined existing laws and regulations and their application to insurance companies. This reexamination has focused on i) insurance company investment and solvency issues, ii) risk-based capital guidelines, iii) assumption reinsurance, iv) interpretations of existing laws, v) the development of new laws, vi) the interpretation of nonstatutory guidelines, vii) the standardization of statutory accounting rules and viii) the circumstances under which dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws on specific topics such as holding company regulations and the definition of extraordinary dividends. It is not possible to predict the future impact of changing state regulation on the operations of SMC. The NAIC, as well as Indiana and Mississippi have each adopted Risk-Based Capital ("RBC") requirements for life and health insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. State insurance regulators use the RBC requirements as regulatory tools only, which aid in the identification of insurance companies that could potentially lack sufficient capital. Regulatory compliance is determined by a ratio (the "RBC Ratio") of the company's regulatory total adjusted capital to its authorized control level RBC. The two components of the RBC Ratio are defined by the NAIC. The RBC ratios which require corrective action as follows: LEVEL RBC RATIO CORRECTIVE ACTION Company Action 1.5 - 2 Company is required to submit a plan to improve its RBC Ratio Regulatory Action 1 - 1.5 Regulators will order corrective actions Authorized Control 0.7 - 1 Regulators are authorized to take control of the company Mandatory Control less than 0.7 Regulators must take over the company At December 31, 1998, the RBC Ratios of Standard Life and Dixie Life were both at least two and a half times greater than the levels at which company action is required. If these RBC Ratios should decline in the future, those subsidiaries might be subject to increased regulatory supervision and decreased ability to pay dividends, management fees and surplus debenture interest to SMC. On the basis of annual statutory statements filed with state regulators, the NAIC calculates twelve financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A "usual range" of results for each ratio is used as a benchmark. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments to which we have responded. Such inquiries did not lead to any restrictions affecting the Company's operations. SMC attempts to manage its assets and liabilities so that income and principal payments received from investments are adequate to meet the cash flow requirements of its policyholder liabilities. The cash flows of SMC's liabilities are affected by actual maturities, surrender experience and credited interest rates. SMC periodically performs cash flow studies under various interest rate scenarios to evaluate the adequacy of expected cash flows from its assets to meet the expected cash requirements of its liabilities. SMC utilizes these studies to determine if it is necessary to lengthen or shorten the average life and duration of its investment portfolio. Because of the significant uncertainties involved in the estimation of asset and liability cash flows, there can be no assurance that SMC will be able to effectively manage the relationship between its asset and liability cash flows. The statutory filings of SMC's insurance subsidiaries require classifications of investments and the establishment of an Asset Valuation Reserve ("AVR"), designed to stabilize a company's statutory surplus against fluctuations in the market value of stocks and bonds, according to regulations prescribed by the NAIC. The AVR consists of two main components: a "default component" to provide for future credit-related losses on fixed income investments and an "equity component" to provide for losses on all types of equity investments, including real estate. The NAIC requires an additional reserve, called the Interest Maintenance Reserve ("IMR"), which consists of the portion of realized capital gains and losses from the sale of fixed income securities attributable to changes in interest rates. The IMR is required to be amortized against earnings on a basis reflecting the remaining period to maturity of the fixed income securities sold. These regulations affect the ability of SMC's insurance subsidiaries to reflect future investment gains and losses in current period statutory earnings and surplus. The amounts related to AVR and IMR for the insurance subsidiaries at December 31, 1998 are summarized as follows (in thousands): Maximum AVR AVR IMR Standard Life...........$3,987 $5,605 $14,246 Dixie Life.................252 308 155 The annual addition to the AVR for 1998 is 20% of the maximum reserve over the accumulated balance. If the calculated reserve with current year additions exceeds the maximum reserve amount, the reserve is reduced to the maximum amount. For the year ended December 31, 1998, SMC's U.S. subsidiaries each made the required contribution to the AVR. Most jurisdictions require insurance companies to participate in guaranty funds designed to cover claims against insolvent insurers. Insurers authorized to transact business in these jurisdictions are generally subject to assessments based on annual direct premiums written in that jurisdiction to pay such claims, if any. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future state premium taxes. The incurrence and amount of such assessments have increased in recent years and may increase further in future years. The likelihood and amount of all future assessments cannot be reasonably estimated and are beyond the control of SMC. As part of their routine regulatory oversight process, approximately once every three to five years state insurance departments conduct periodic detailed examinations ("Examinations") of the books, records and accounts of insurance companies domiciled in their states. Standard Life underwent an Examination during 1996 for the five-year period ended December 31, 1995 and Dixie Life underwent an examination during 1998 for the five-year period ended December 31, 1997. The final examination reports issued by the Indiana and Mississippi Departments of Insurance did not raise significant issues. The federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and federal taxation, do affect the insurance business. In addition, legislation has been introduced from time to time in recent years which, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. Congressional initiatives have been introduced which are directed at repeal of the McCarran-Ferguson Act (which exempts the "business of insurance" from most federal laws to the extent it is subject to state regulation), and judicial decisions have been issued which narrow the definition of "business of insurance" for McCarran-Ferguson Act purposes. Current and proposed federal measures may also significantly affect the insurance industry including removal of barriers preventing banks from engaging in the insurance business. EMPLOYEES As of March 15, 1999, SMC had 141 employees which were comprised of the following: Standard Life - 96 employees, SMI - 17 employees (9 of whom are covered by a collective bargaining agreement), Standard Marketing - 10 employees, Standard Management - 10 employees and Savers Marketing - 8 employees. SMC believes that its future success will depend, in part, on its ability to continue to attract and retain highly-skilled technical, marketing, support and management personnel. Management believes that it has excellent relations with its employees. ITEM 2. PROPERTIES DOMESTIC OPERATIONS. SMC leases approximately 31,000 square feet in an office building located at 9100 Keystone Crossing, Indianapolis, Indiana, under the terms of a lease which expires on June 1, 2001. SMC entered into a lease on March 31, 1997, for approximately 16,000 square feet in a warehouse located at 2525 North Shadeland, Indianapolis, Indiana, under the terms of a lease which expires on September 30, 1999. Dixie Life leased approximately 1,000 square feet in an office complex located at 855 South Pear Orchard Road, Suite 305, Ridgeland, Mississippi, under the terms of a lease which expired on December 31, 1998. Dixie Life leases an office service area located at 1060 East County Line Road, Ridgeland, Mississippi, under the terms of a lease that expires on June 30, 1999. Savers Marketing leases approximately 11,500 square feet in an office building located at 8064 North Point Boulevard, Winston-Salem, North Carolina, under the terms of a lease that expires on September 30, 2001. INTERNATIONAL OPERATIONS. SMI entered into a lease on November 17, 1997 for approximately 4,500 square feet in an office building located at 13A, rue de Bitbourg, L-1273 Luxembourg, Grand Duchy of Luxembourg, under the terms of a lease which expires on November 16, 2003. ITEM 3. LEGAL PROCEEDINGS John J. Quinn resigned as an officer and director of SMC effective April 15, 1997. On June 19, 1997, Mr. Quinn commenced an action in the Superior Court of Marion County, Indiana, against SMC claiming that his employment agreement contained a provision to the effect that, following a termination of his employment with SMC under certain circumstances, Mr. Quinn would be entitled to receive a lump sum payment equal to the amount determined by multiplying the number of shares of SMC Common Stock subject to unexercised stock options previously granted by SMC to Mr. Quinn on the date of termination, whether or not such options were then exercisable, by the highest per share fair market value of the SMC Common Stock on any day during the six-month period ending on the date of termination. Upon payment of such amount, such unexercised stock options would be deemed to have been surrendered and canceled. Mr. Quinn further claims that his employment agreement contained an additional provision that he would be entitled to receive a lump sum payment equal to two years of annual salary, following termination of employment. Mr. Quinn has asserted to SMC that he is entitled to a lump sum termination payment of $1.7 million, and liquidated damages not exceeding $3.3 million, by virtue of his voluntarily leaving SMC's employment. SMC disputes Mr. Quinn's claims. SMC filed its Answer and Counterclaim against Mr. Quinn on September 11, 1997. SMC's investigation since the action was filed revealed a basis for the termination of Mr. Quinn's employment for cause relative to after-acquired evidence. On October 14, 1997, the Board of Directors of SMC terminated Mr. Quinn for cause effective March 15, 1997. Such termination will also be argued by SMC as a complete defense to all claims asserted by Mr. Quinn. The ultimate outcome of the action cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the consolidated financial statements. Management believes that the conclusion of such litigation will not have a material adverse effect on SMC's consolidated financial condition. In addition, SMC is involved in various legal proceedings in the normal course of business. In most cases, such proceedings involve claims under insurance policies or other contracts of SMC. The outcomes of these legal proceedings are not expected to have a material adverse effect on the consolidated financial position, liquidity, or future results of operations of SMC based on SMC's current understanding of the relevant facts and law. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Company's Annual Meeting of Stockholders held on June 10, 1998, the following individuals were elected to the Board of Directors: Shares For Shares Withheld John J. Dillon 6,054,707 90,508 Jerry E. Francis 6,039,211 106,004 Ronald D. Hunter 6,052,182 93,033 Edward T. Stahl 6,051,558 93,657 A total of 6,145,215 shares were present in person or by proxy at the Annual Meeting of Stockholders. EXECUTIVE OFFICERS The following table sets forth information concerning each of SMC's executive officers: NAME AGE POSITION Ronald D. Hunter 47 Chairman of the Board, Chief Executive Officer and President Raymond J. Ohlson 48 Executive Vice President and Chief Marketing Officer Paul B. Pheffer 47 Executive Vice President, Chief Financial Officer and Treasurer Stephen M. Coons 57 Executive Vice President, General Counsel and Secretary Edward T. Stahl 52 Executive Vice President and Chief Administrative Officer RONALD D. HUNTER Mr. Hunter has been the Chairman of the Board, Chief Executive Officer and President of SMC since its formation in June 1989 and the Chairman of the Board and Chief Executive Officer of Standard Life since December 1987. Previously, Mr. Hunter held several management and sales positions in the life insurance industry with a number of companies including Conseco, Inc. (1981-1986), Aetna Life & Casualty Company (1978-1981), United Home Life Insurance Company (1975-1977) and Prudential Life Insurance Company (1972-1975). RAYMOND J. OHLSON Mr. Ohlson has served as Executive Vice President and director of SMC since December 1993. He has served as President and director of Standard Marketing since August 1991. Since June 1993, Mr. Ohlson has served as President of Standard Life. Mr. Ohlson entered the life insurance business in 1971. While still in college, Mr. Ohlson qualified for the Million Dollar Round Table and is now a life member. He earned his CLU designation in 1980. Mr. Ohlson owned and operated Ohlson & Associates, an independent insurance marketing organization, from 1984 to April 1994, when the assets of Ohlson & Associates were acquired by Standard Marketing. PAUL ("PETE") B. PHEFFER Mr. Pheffer has been Executive Vice President, Chief Financial Officer and Treasurer of SMC since May 1997 and director of SMC since June 1997. Prior to joining SMC, Mr. Pheffer was Senior Vice President -- Chief Financial Officer and Treasurer of Jackson National Life Insurance Company from 1994 to 1996 and prior to that was Senior Vice President -- Chief Financial Officer at Kemper Life Insurance Companies from 1992 to 1994. Mr. Pheffer, a CPA, received his MBA from the University of Chicago in 1988. STEPHEN M. COONS Mr. Coons has been a director of SMC since August 1989. Mr. Coons has been General Counsel and Executive Vice President of SMC since March 1993 and has been Secretary of SMC since March 1994. He was of counsel to the law firm of Coons, Maddox & Koeller from March 1993 to December 1996. Prior to March 1993, Mr. Coons was a partner with the law firm of Coons & Saint. He has been practicing law for 28 years. Mr. Coons served as Indiana Securities Commissioner from 1978 to 1983. EDWARD T. STAHL Mr. Stahl has been an Executive Vice President of SMC since its formation, has been a director of SMC from July 1989 and was appointed Chief Administrative Officer in November 1998. Mr. Stahl was Secretary of SMC from June 1989 to March 1994. Mr. Stahl was President and Chief Operations Officer of Standard Life from May 1988 to June 1993. He has been a director of Standard Life since December 1987, and Executive Vice President and Secretary since June 1993. Mr. Stahl has served in various capacities in the insurance industry since 1966. He earned his FLMI designation in 1981, and is a member of several insurance associations. PART II ITEM 5. MARKET FOR SMC COMMON STOCK AND RELATED STOCKHOLDER MATTERS SMC Common Stock trades on NASDAQ under the symbol "SMAN." The following table sets forth, for the periods indicated, the range of the high and low sales prices of SMC Common Stock as reported by NASDAQ. SMC has never paid dividends on its Common Stock. At the close of business on March 15, 1999 there were approximately 3,046 holders of record of the outstanding shares of SMC Common Stock. Although SMC Common Stock is traded on Nasdaq, no assurance can be given as to the future price of or the markets for the stock. SMC COMMON STOCK HIGH LOW 1997 Quarter ended March 31, 1997 6.250 4.875 Quarter ended June 30, 1997 6.000 4.625 Quarter ended September 30, 1997 7.875 5.688 Quarter ended December 31, 1997 8.375 6.500 1998 Quarter ended March 31, 1998 7.500 6.125 Quarter ended June 30, 1998 7.625 7.000 Quarter ended September 30, 1998 7.563 6.625 Quarter ended December 31, 1998 7.000 6.000 ITEM 6. SMC SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following historical financial data of SMC was derived from its audited consolidated financial statements. This historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the SMC Consolidated Financial Statements and related Notes.
Year Ended December 31 1998 1997 1996 1995 1994 STATEMENT OF OPERATIONS DATA: Premium income $14,479 (d) $7,100 $10,468 (c) $5,504 $4,565 Investment activity: Net investment income 34,580 29,516 20,871 18,517 16,057 Net realized investment gains 353 396 1,302 688 558 Total revenues 62,870 46,611 40,205 30,238 26,518 Interest expense and financing 2,955 2,381 805 118 47 costs Total benefits and expenses 56,559 43,349 36,670 (c) 28,682 30,032 Income (loss) before income taxes, extraordinary gain (charge) and cumulative effect of change in 6,311 3,262 3,535 1,556 (3,514) accounting principle Income (loss) before extraordinary gain (charge) and cumulative effect 4,681 2,645 4,265 1,313 (3,436) of change in accounting principle Net income (loss) 4,681 2,645 4,767 1,313 (3,436) Operating income (a) 4,448 2,384 1,174 461 293 PER SHARE DATA: Income (loss) per share before extraordinary gain (charge) and cumulative $.68 $.54 $.88 $.25 $(.62) effect of change in accounting principle Net income (loss) .68 .54 .98 .25 (.62) Net income (loss), assuming .62 .48 .91 .25 (.61) dilution Operating income (a) .65 .49 .24 .09 .05 Operating income, assuming .58 .43 .21 .09 .05 dilution (a) Weighted average common shares outstanding, assuming dilution 9,363,763 5,591,217 5,549,057 5,345,937 5,663,187 Book value per common share $8.64 $8.88 $7.95 $7.73 $4.27 Book value per common share excluding unrealized gain (loss) on $8.43 $8.44 $8.09 $7.23 $6.81 securities available for sale Common shares outstanding 7,641,454 4,876,490 5,024,270 5,205,425 5,291,455 BALANCE SHEET DATA (at year end): Invested assets $592,123 $398,782 $370,138 $280,597 $224,926 Assets held in separate accounts 190,246 148,064 128,546 122,705 94,301 Total assets 956,150 668,992 628,413 479,598 373,524 Long-term debt, notes payable and capital lease obligations 35,000 26,141 20,697 4,191 695 Series A preferred stock 6,530 -- -- -- -- Class S preferred stock -- -- 1,757 -- -- Shareholders' equity 66,042 43,313 39,919 40,242 22,610 Shareholders' equity, excluding unrealized gain (loss) on 64,382 41,142 40,665 37,660 36,021 securities available for sale Ratio of debt to total 33% 38% 33% 9% 3% capitalization (b)
NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Comparison of consolidated financial information is significantly affected by the acquisitions of Dixie Life on October 2, 1995, Shelby Life on November 8, 1996, Savers Life on March 12, 1998, Midwestern Life on October 30, 1998 and on the disposal of First International on March 18, 1996. Refer to the notes to the consolidated financial statements in this report for a description of business combinations. (a)Operating income represents income before extraordinary gains (charge), excluding net realized investment gains (less income taxes relating to such gains), gain on disposal of subsidiary and class action litigation and settlements. (b)Total capitalization is the sum of SMC's debt (long term debt, notes payable and capital lease obligations), redeemable preferred stock and shareholders' equity. (c)Includes recapture of premiums ceded and an increase in benefits due to an increase in reserves of $4.2 million due to the termination and recapture of a reinsurance agreement with National Mutual Life Insurance Company. (d)Includes medicare supplement premiums of $6.0 million related to the Savers Life acquisition. This business was sold effective July 1, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights the principal factors affecting the results of operations and the significant changes in balance sheet items of SMC on a consolidated basis for the periods listed, as well as SMC's liquidity and capital resources. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements, related Notes and selected historical financial data. FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information contained in this Annual Report on Form 10-K or any document incorporated by reference herein relative to markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to: (1) general economic conditions and other factors, including prevailing interest rate levels, stock market performance and health care inflation, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse rate and profitability of the Company's policies; (2) the Company's ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives; (3) customer response to new products, distribution channels and marketing initiatives; (4) mortality, morbidity, usage of health care services and other factors which may affect the profitability of the Company's insurance products; (5) changes in the Federal income tax laws and regulation which may affect the relative tax advantages of some of the Company's products; (6) increasing competition in the sale of the Company's products; (7) regulatory changes or actions, including those relating to regulation of financial services affecting bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products, and health care regulation affecting the Company's supplemental health insurance products; (8) the availability and terms of future acquisitions; and (9) the risk factors or uncertainties listed from time to time in any document incorporated by reference herein. GENERAL SMC acquired Shelby Life on November 8, 1996, Savers Life on March 12, 1998 and Midwestern Life on October 30, 1998. These acquisitions were accounted for using the purchase method of accounting. Therefore, these subsidiaries are included in the SMC Consolidated Financial Statements commencing with their respective acquisition effective dates. PRODUCT PROFITABILITY. Margins on life insurance and annuity products are affected by interest rate fluctuations. Rising interest rates would result in a decline in the market value of assets. However, as there are positive cash flows from renewal premiums, investment income and maturities of existing assets, the need for early disposition of investment assets to meet operating cash flow requirements would be unlikely. Rising interest rates would also result in available cash flows from maturities being invested at higher interest rates, which would help support a gradual increase in new business and renewal interest rates on interest-sensitive products. A sharp, sudden rise in the interest rate environment without a concurrent increase in crediting rates could result in higher surrenders, particularly for annuities. The effect of surrenders would be to reduce earnings over the long term. Earnings in the period of the surrender could increase or decrease depending on whether surrender charges were applicable and whether such charges differed from the write-off of related deferred acquisition costs or present value of future profits. When interest rates fall, SMC generally attempts to adjust the credited interest rates subject to competitive pressures. Although SMC believes that such strategies will continue to permit it to achieve a positive spread, a significant decline in the yield on SMC's investments could adversely affect the results of operations and financial condition of SMC. PURCHASED INSURANCE BUSINESS. In accordance with industry practice, when SMC purchases additional insurance business, it assigns a portion of the purchase price, called the present value of future profits, to the right to receive future cash flows arising from existing insurance policies. This asset is recorded when the business is purchased at the value of projected future cash flows on existing policies, less a discount to present value. As future cash flows emerge, they are treated as a recovery of this asset. Therefore, if cash flows emerging from the purchased or recaptured business during a period exactly equal the projections, they are offset by that period's amortization of the cost of the policies purchased. In that event, the only income statement effect from the purchased business is the realization of the discount that was initially deducted from the asset to reflect its present value. Changes in the future annual amortization of this asset are not expected to have a significant effect on the results of operations, because the amount of amortization is expected to be equal to the profits emerging from the purchased policies, net of interest on the unrecovered present value of future profits balance. This asset is amortized over the expected life of the related policies purchased. Present value of future profits is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains. In selecting the interest rate to calculate the discounted present value of the projected future profits, SMC uses the risk rate of return it needs to earn in order to invest in the business being acquired or recaptured. In determining this required risk rate of return, SMC considers the following factors: The magnitude of the risks associated with each of the actuarial assumptions used in determining expected future cash flows (as described above). The cost of the capital required to fund the acquisition or recapture. The likelihood of changes in projected future cash flows that might occur if there are changes in insurance regulations and tax laws. The acquired company's compatibility with other SMC activities that may favorably affect future cash flows. The complexity of the acquired company or recaptured business. Recent prices (i.e., discount rates used in determining valuations) paid by others to acquire or recapture similar blocks of business. The discount rate selected may affect subsequent earnings in those instances where the purchase price of the policies exceeds the value of net assets acquired (including the value of future profits discounted at the selected interest rate). Selection of a lower (or higher) discount rate will increase (or decrease) the portion of the purchase price assigned to the present value of future cash flows and will result in an offsetting decrease (or increase) in the amount of the purchase price assigned to goodwill. The effect on subsequent earnings caused by this variation in purchase price allocation will depend on the characteristics of the policies purchased. For products where the profits emerge at relatively constant levels over an extended period of time (for example, most of SMC's immediate and deferred annuities), use of a lower rate may result in an increase in reported earnings in the early years after an acquisition followed by a decrease in earnings in later years. For products where profits emerge over a shorter period of time or in amounts that decrease over the life of the product (for example, ordinary and term life products), selection of a lower rate will generally result in a decrease in reported earnings in the early years after an acquisition followed by an increase in reported earnings in later years. For SMC, the majority of the cost of policies purchased relates to ordinary life products and the balance to deferred annuity products. The percentage of future expected net amortization of the beginning balance of the present value of future profits before the effect of net unrealized gains and losses, based on the present value of future profits at December 31, 1998 and current assumptions as to future events on all policies in force, will be between 6% and 9% in each of the years 1999 through 2003. SMC used a 13% discount rate to calculate the present value of future profits on business of the Savers Life and Midwestern Life acquisitions. Each is being amortized over 20 years based on the mix of their respective annuity and life business. For more information related to Purchased Insurance Business refer to Note 4 to the Consolidated Financial Statements. PRODUCED INSURANCE BUSINESS. Insurance products generate two types of profit streams: (i) from the excess of investment income earned over that credited to the policyholder and (ii) from the excess of premiums received over costs incurred for policy issuance, administration and mortality. Costs incurred in issuing new policies are deferred and recorded as deferred acquisition costs ("DAC"), which are amortized using present value techniques so that profits are realized in proportion to premium revenue for certain products and estimated gross profits for certain other products. Profits from all of these elements are recognized over the lives of the policies; no profits are recorded at the time the policies are issued. Amortization of DAC was $2.7 million, $1.5 million and $1.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in current year amortization expense resulted primarily from increased amortization of DAC as gross profits from business sold in recent years began to emerge. DAC is generally amortized over the expected lives of the policies, a period of approximately 20 years, in a constant relationship to the present value of estimated future gross profits. Interest is being accreted at the projected crediting rate on the policies, 7% during year one, 6.5% in year two, 5.5% in year three and 5% thereafter. DAC is increased for the estimated effect of realizing unrealized investment losses and decreased for the estimated effect of realizing unrealized investment gains. The offset to these amounts is recorded directly to shareholders' equity, net of taxes. Future expected amortization of DAC for the next five years before the effect of net realized and unrealized gains and losses, based on DAC at December 31, 1998 and current assumptions, is as follows (in thousands): 1999 2000 2001 2002 2003 Gross amortization $5,771 $5,450 $4,940 $4,384 $3,874 Interest accreted 1,489 1,191 932 742 601 Net amortization $4,282 $4,259 $4,008 $3,642 $3,273 The amounts included in the foregoing table do not include any amortization of DAC resulting from the sale of new products after December 31, 1998. Any changes in future annual amortization of this asset are not expected to have a significant effect on results of operations because the amount of amortization is expected to be proportionate to the profits from the produced policies, net of interest on DAC. VARIANCES BETWEEN ACTUAL AND EXPECTED PROFITS. Actual experience on purchased and produced insurance may vary from projections due to differences in renewal premiums collected, investment spreads, mortality costs, persistency, administrative costs and other factors. Variances from original projections, whether positive or negative, are included in net income as they occur. To the extent that these variances indicate that future experience will differ from the estimated profits reflected in the capitalization and amortization of the cost of policies purchased or the cost of policies produced, current and future amortization rates may be adjusted. ACCOUNTING FOR ANNUITIES AND UNIVERSAL AND INTEREST-SENSITIVE LIFE PRODUCTS. The Company primarily accounts for its annuity, universal and interest-sensitive life policy deposits in accordance with Statement of Financial Accounting Standards No. 97 ("SFAS No. 97"), "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments". Under SFAS No. 97, a benefit reserve is established at the time of policy issuance in an amount equal to the deposits received. Thereafter, the benefit reserve is adjusted for any additional deposits, interest credited and partial or complete withdrawals. Revenues for annuities and universal and interest-sensitive life policies, other than certain non-interest sensitive annuities, consist of policy charges for surrenders and partial withdrawals, mortality and administration, and investment income earned. Such revenues do not include the annuity, universal and interest-sensitive life policy deposits. Expenses related to these products include interest credited to policyowner account balances, operating costs for policy administration, amortization of DAC and mortality costs in excess of account balances. Costs relating to the acquisition of new business, primarily commissions paid to agents, which vary with and are directly related to the production of new business, are deferred to the extent that such costs are recoverable from future profit margins. At the time of issuance, the acquisition expenses, approximately 13% of initial annuity premium deposits and 50% of premiums from universal and interest-sensitive life products for SMC, are capitalized as DAC. In accordance with SFAS No. 97, DAC with interest is amortized over the lives of the policies in a constant relationship to the present value of estimated future gross profits. UNIT-LINKED PRODUCT ACCOUNTING. Separate account assets and liabilities are maintained primarily for contracts of which the majority represents unit-linked products where benefits on surrender and maturity are not guaranteed. They generally represent funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Investment income and investment gains and losses accrue directly to such policyholders. SMC earns income from the investment management fee it charges on such unit-linked contracts, which ranges from .8% to 1.2% of the value of the underlying separate accounts. In addition, on certain contracts, SMC can potentially earn up to a 1.7% initiation fee on new business sold. RESULTS OF OPERATIONS BY SEGMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1998: The following tables and narratives summarize the results of our operations by business segment.
1998 1997 1996 (Dollars in thousands) Income before income taxes, and extraordinary charge: Domestic operations: Operating income $3,700 $1,146 $104 Net realized investment gains 353 396 1,302 Gain on disposal of subsidiary -- -- 886 Income before income taxes and extraordinary 4,053 1,542 2,292 gain International operations: Operating income 2,258 1,720 1,243 Income before income taxes and extraordinary 2,258 1,720 1,243 gain Consolidated: Operating income 5,958 2,866 1,347 Net investment gains 353 396 1,302 Gain on disposal of subsidiary -- -- 886 Income before income taxes and extraordinary 6,311 3,262 3,535 gain Income tax expense (benefit) 1,630 617 (730) Income before extraordinary gain 4,681 2,645 4,265 Extraordinary gain on early redemption of redeemable preferred stock, net taxes of $0 -- -- 502 Net income $4,681 $2,645 $4,767
CONSOLIDATED RESULTS AND ANALYSIS SMC's 1998 operating earnings were $4.4 million, or 58 cents per diluted share, up 87% and 35%, respectively over 1997. Operating earnings increased as a result of i) increased spread revenues due to an increase in weighted average insurance liabilities (primarily due to the inclusion of Savers Life and Midwestern Life operations), ii) favorable mortality experience, iii) fees from administration contracts and iv) increased fees from separate accounts. The percentage increase in operating earnings was greater than the percentage increase in operating earnings per diluted share primarily because of the 67% increase in weighted average diluted common shares or equivalents outstanding during the period. This increase in weighted average shares outstanding resulted primarily from issued shares in connection with the acquisitions of Savers Life and Midwestern Life. SMC's 1997 operating earnings were $2.4 million, or 43 cents per diluted share, up 103% and 104%, respectively over 1996. Operating earnings increased as a result of i) increased spread revenues due to an increase in weighted average insurance liabilities (primarily due to the inclusion of Shelby Life operations), ii) a nonproportional increase in operating expenses relative to the increase in weighted average insurance liabilities, iii) fees from administration contracts, and iv) decreased premium deficiency reserves. DOMESTIC OPERATIONS:
1998 1997 1996 (Dollars in thousands) Premiums collected: Traditional life $8,392 $7,036 $10,376 Universal and interest-sensitive life 3,352 4,302 2,353 Subtotal - life products 11,744 11,338 12,729 FPDA's 58,111 42,251 37,963 Equity-indexed annuities 16,858 -- -- Other annuities and deposits 3,537 2,809 2,064 Subtotal - annuity products 78,506 45,060 40,027 Medicare supplement premiums 5,992 -- -- Total premiums collected $96,242 $56,398 $52,756 Life premiums $8,392 $7,036 $10,376 Health premiums 5,992 -- -- Policy income 6,529 5,512 2,551 Total policy related income 20,913 12,548 12,927 Net investment income 33,721 28,614 20,132 Other income 3,068 1,093 1,277 Total revenues (a) 57,702 42,255 34,336 Life benefits and claims 8,487 8,910 10,247 Health benefits and claims 4,823 -- -- Interest credited on interest sensitive annuities and other financial products 19,775 16,281 11,092 Amortization 4,755 3,248 2,592 Other operating expenses 12,423 10,289 9,496 Health commissions 784 -- -- Interest expense and financing costs 2,955 2,381 805 Total benefits and expenses 54,002 41,109 34,232 Operating income before income taxes and extraordinary gain 3,700 1,146 104 Net realized investment gains 353 396 1,302 Gain on disposal of subsidiary -- -- 886 Income before income taxes and $4,053 $1,542 $2,292 extraordinary gain
(a) Revenues exclude net investment gains, and gain on disposal of subsidiary DOMESTIC OPERATIONS (CONTINUED):
1998 1997 1996 Number of annuity contracts in force 21,933 14,013 13,221 Interest-sensitive annuity and other financial product reserves, net of $506,749 $350,607 $333,633 reinsurance ceded Number of life policies in force 71,991 68,571 76,219 Life insurance in force, net of reinsurance $1,319,415 $1,178,171{ (1)} $1,367,675 ceded
(1)The decrease in life insurance in force is due to the termination and recapture of a reinsurance agreement effective January 1, 1997. See "Business of SMC -- Reinsurance". GENERAL: This segment consists of revenues earned and expenses incurred from United States operations which includes deposits and/or income from annuity products (primarily FPDA's), equity indexed products, universal life products and traditional life products. The profitability for this segment is primarily a function of its investment spread earned (i.e. the excess of investment earnings over interest credited on annuity and universal life deposits), persistency of the in force business, mortality experience and operating expenses. PREMIUM INCOME: Life premiums were up $1.4 million or 19% in 1998, to $8.4 million. Traditional life premiums of $1.1 million were earned from Savers Life and Midwestern Life in 1998. The remaining increase of $.3 million is due to premiums from existing blocks of traditional life business from Standard Life and Dixie Life. Health premiums for 1998 include $6.0 million of Medicare supplement premiums that were earned from March 12, 1998, the acquisition date of Savers Life, through July 1, 1998, the effective date of the sale of Medicare supplement block of business. Life premiums decreased $3.3 million or 32% in 1997, to $7.0 million. The decrease is attributable to the recapture of premiums ceded of $4.2 million due to the termination and recapture of a reinsurance agreement with National Mutual offset by an increase of premium income of $1.7 million earned from the inclusion of Shelby Life. NET PREMIUM DEPOSITS: Net premium deposits for 1998, received from the sales of FPDA's, equity indexed annuities, interest sensitive annuities and other financial products increased $32.5 million or 66%, to $81.9 million. The increase relates to i) an increase in the agency base achieved through the recruitment of high volume agents and larger managing general agencies, ii) continued expansion of geographical concentration, iii) the introduction of a new equity-indexed annuity product in May 1998, which contributed $16.9 million of deposits for the period and iv) deposits collected from Savers Life and Midwestern Life of $3.6 million. Net premium deposits for 1997 received from the sales of FPDA's, interest sensitive annuities and other financial products increased $7.0 million or 16%, to $49.4 million. The increase relates to i) an aggressive marketing campaign targeting high volume marketing companies and ii) the continued development of SMC's distribution system through the marketing support from Standard Marketing, and iii) an increase in the agency base achieved by expanding geographical concentrations in the Mid-south and California. A change in premium deposits in a single period does not directly cause operating income to change, although continued increases or decreases in premiums may affect the growth rate of total assets on which investment spreads are earned. POLICY INCOME: Policy income represents mortality charges, administrative fees and surrender charges. During 1998 policy income increased $1.0 million or 18% to $6.5 million. The increase relates to $.8 million of surrender charges on certain FPDA products of Standard Life which is primarily the result of lowering credited rates on those products. During 1997 policy income increased $3.0 million or 116% to $5.5 million. The increase in policy income resulted from an increase in mortality and administrative fees of $1.8 million from the inclusion of Shelby Life in operations for periods subsequent to November 1, 1996 and an increase in policy surrender charges from FPDA's of $.7 million from Standard Life. NET INVESTMENT INCOME: Net investment income fluctuates with changes in i) the amount of average invested assets and ii) and the yield earned on invested assets. During 1998 net investment income increased $5.1 million or 18%, to $33.7 million. Average invested assets increased by $89.8 million or 23% due to the growth in insurance liabilities from the acquisitions of Savers Life and Midwestern Life, which contributed $4.2 million of investment income for the period. Net investment income also increased due to the impact from the new equity indexed product of $.6 million. During 1997 net investment income increased $8.5 million or 42%, to $28.6 million. Average invested assets increased by $99.0 million or 35% due to the growth in insurance liabilities of approximately $100 million from the acquisition of Shelby Life and increased sales of FPDA's. The net investment yield earned on average invested assets was 7.48%, 7.77% and 7.32% for 1998, 1997 and 1996, respectively. Investment yields fluctuate from period to period primarily due to changes in the general interest rate environment. OTHER INCOME: Other income consists of fee income related to servicing blocks of business for unaffiliated companies, experience refunds, and commission income. Other income for 1998 increased $2.0 million or 181%, to $3.1 million. This increase primarily relates to $1.8 million of fee income from the Savers Marketing Qual Choice administration agreement. BENEFITS AND CLAIMS: Life benefits and claims include i) paid life insurance, ii) benefits from annuity policies that incorporate significant mortality features, and iii) changes in future policy reserves. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims. Such volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claim experience tend to offset periods of lower claims experience. Health benefits and claims in 1998 include $4.8 million of Medicare supplement benefits incurred from March 12, 1998, the acquisition date of Savers Life through July 1, 1998, the effective date of the sale of the Medicare supplement block of business. Life benefits and claims in 1997 declined $1.3 million or 13%, to $8.9 million due to i) an increase in future policy reserves of $4.2 million in 1996 related to the termination and recapture of the reinsurance agreement with National Mutual. This decrease was somewhat offset by an increase in benefits and claims from adverse mortality experience and $1.2 million of additional benefits from the inclusion of Shelby Life. INTEREST CREDITED ON INTEREST SENSITIVE ANNUITIES AND OTHER FINANCIAL PRODUCTS: During 1998, interest credited on interest sensitive annuities and other financial products increased $3.5 million or 21%, to $19.8 million due to i) interest credited on the insurance liabilities of Savers Life and Midwestern Life of $2.4 million, ii) the impact from the new equity indexed product of $.6 million and iii) interest credited on the general growth of insurance liabilities from increased FPDA sales. These increases were somewhat offset by a decrease in the weighted average credited rate for the period. During 1997 , interest credited on interest sensitive annuities and other financial products increased $5.2 million or 47% to $16.3 million. The increase is related to the inclusion of interest credited on Shelby Life products of $3.7 million, increases of credited interest on new annuity sales, the increase in the growth of policy reserves from FPDA sales and an increase in the average credited interest rate. The weighted average credited rate was 5.25%, 5.71% and 5.27 % in 1998, 1997 and 1996 respectively. AMORTIZATION: Amortization includes i) amortization related to the present value of polices purchased from acquired insurance business ii) amortization of deferred acquisitions costs related to capitalized costs of insurance business sold and iii) amortization of goodwill and organizational costs. Amortization in 1998 increased $1.5 million or 46%, to $4.8 million. The increase in amortization expense is primarily related to deferred policy acquisition costs and is a result of emerging gross profits from business sold in recent years, increased surrenders and a corresponding increase in the amortization of costs related to purchased insurance business. Amortization expense of $.5 million related to purchased insurance business of Savers Life and Midwestern Life. Amortization in 1997 increased $.7 million or 25%, to $3.2 million and related to $.6 million of present value of future profit amortization of Shelby Life. OTHER OPERATING EXPENSES: Other operating expenses consist of general operating expenses, including salaries, and commission expenses, net of deferrable amounts. During 1998, other operating expenses increased $2.1 million or 21% , to $12.4 million . The majority of this increase relates to normal operating expenses from Savers Life and Midwestern Life. During 1997, other operating expenses increased $.8 million or 8%, to $10.3 million. This increase relates to additional expenses as a result of the Shelby Life acquisition in late 1996. HEALTH COMMISSIONS: In 1998, commission expense included $.8 million of Medicare supplement insurance commissions incurred from March 12, 1998, the acquisition date of Savers Life through July 1, 1998, the effective sale date of the Medicare supplement block of business. INTEREST EXPENSE AND FINANCING COSTS: Interest expense and financing costs for 1998 increased $.6 million or 24%, to $3.0 million, due to increased average borrowings for the period of $6.4 million primarily related to the acquisitions of Savers Life and Midwestern Life. This increase was offset somewhat by a decreased interest rate charged on the revolving line of credit. Interest expense and financing costs for 1997 increased $1.6 million or 196% to $2.4 million. The increase resulted primarily from i) increased borrowing of $10.0 million in November 1996 from the amended credit agreement, ii) borrowings of $4.0 million from an unaffiliated insurance company in connection with the acquisition of Shelby Life, iii) additional borrowings of $5.6 million in connection with funding capital contributions to an insurance subsidiary and, iv) the redemption of Class S preferred stock. NET REALIZED INVESTMENT GAINS: Net realized investment gains fluctuate from period to period and arise when securities are sold in response to changes in the investment environment which provide opportunities to maximize return on the investment portfolio without adversely affecting the quality and overall yield. Net realized investment gains were $ .4 million for 1998 and 1997. INTERNATIONAL OPERATIONS:
1998 1997 1996 (Dollars in thousands) Premiums and deposits collected: Traditional life $95 $64 $92 Separate account deposits 42,536 21,954 16,902 Total premiums and deposits collected $42,631 $22,018 $16,994 Premium income $95 $64 $92 Net investment income 859 902 739 Separate account fees 2,120 1,521 1,462 Amortization of negative goodwill 1,388 1,388 1,388 Other income 353 85 -- Total revenues 4,815 3,960 3,681 Benefits and claims (40) (70) (430) Other operating expenses 2,597 2,310 2,868 Total benefits and expenses 2,557 2,240 2,438 Income before income taxes and $2,258 $1,720 $1,243 extraordinary gain Separate account contracts{ (1)} 3,070 2,329 2,484 Separate account liabilities{ (1)} $190,246 $148,064 $128,546
(1) primarily unit-linked products GENERAL: International operations includes revenues earned and expenses incurred from abroad, primarily Europe, and includes fees collected on deposits from unit-linked products. The profitability for this segment primarily depends on the amount of separate account assets under management, the management fee charged on those assets and expense management. FEES FROM SEPARATE ACCOUNTS: Fee income fluctuates in relationship to total separate account assets and the fees earned on such assets. During 1998, fees from separate accounts increased $.6 million or 39%, to $2.1 million. This increase is due primarily to an increase in the value of assets held in separate accounts of $42.2 million or 29% , to $190.2 million. Net deposits from sales of unit-linked products by SMI increased $20.6 million or 94%, to $42.5 million. This increase is a continuation of expanded marketing efforts that were initiated in 1996 and 1997. During 1997, fees from separate accounts increased due to an increase in the value of assets held in separate accounts of $19.5 million or 15%, to $148.1 million. Net deposits from the sales of unit-linked products by SMI increased $5.1 million or 30%, to $22 million. NET INVESTMENT INCOME: Net investment income was remained unchanged at $.9 million for 1998 and 1997 on average invested assets of approximately $11.0 million. The net yield was 7.74%, 7.57% and 6.81% for 1998, 1997 and 1996, respectively. AMORTIZATION OF NEGATIVE GOODWILL: The excess cost of assets acquired over the purchase price paid for SMI in December of 1993 of $6.9 million has been amortized over 5 years at $1.4 million per year and is fully amortized at December 31, 1998. BENEFITS AND CLAIMS: Benefits and claims include changes to future policyholder benefits and premium deficiency reserves. During 1997, benefits and claims increased $.3 million partially due to increased traditional life reserves. OTHER OPERATING EXPENSES: Other operating expenses for 1998 increased $.3 million or 12%, to $2.6 million. The increase primarily relates to an increased level of business activity for the period. The number of separate account contracts administered increased 32%, to 3070. Other operating expenses for 1997 declined $.6 million or 19%, to $2.3 million. The decrease primarily related to the a favorable impact of the US dollar relative to foreign currency. FOREIGN CURRENCY TRANSLATION: Although the net impact of foreign currency translation is deemed to be immaterial, comparisons between 1998, 1997 and 1996 are impacted by the strengthening and destrengthening of the U.S. dollar relative to foreign currencies, primarily the Luxembourg franc. The impact of these translations have not been quantified on individual components. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY OF STANDARD MANAGEMENT (PARENT COMPANY) Standard Management is a financial services holding company whose liquidity requirements are met through payments received from its subsidiaries. These payments include i) interest on surplus debenture, ii) dividends, iii) management fees and iv) rental income, which are subject to restrictions under applicable insurance laws and are used to pay operating expenses and meet debt service obligations. These internal sources of liquidity have been supplemented in the past by external sources such as a revolving credit agreements and long term debt and equity financing in the capital markets. GENERAL: On a consolidated GAAP basis SMC reported net cash provided by operations of $.3 million and $7.8 million for 1998 and 1997, respectively. Although deposits received on SMC's interest-sensitive annuities and other financial products are not included in cash flow from operations under GAAP, such funds are available for use by SMC. Cash provided by operations plus net deposits received, less net account balances returned to policyholders on interest sensitive annuities and other financial products, resulted in positive cash flow of $29.2 million and $19.6 million for 1998 and 1997, respectively. Cash generated on a consolidated basis is available to Standard Management only to the extent that it is generated at the Standard Management level or is available through dividends, interest, management fees or other payments from subsidiaries. SMC instituted a program to repurchase its common stock in order to increase the market value of the stock. At December 31, 1998, Standard Management is authorized to repurchase 1.1 million additional shares of SMC Common Stock under this program. At February 28, 1999, Standard Management had "parent company only" cash and short-term investments of $.4 million. These funds are available to Standard Management for general corporate purposes. Standard Management's "parent company only" operating expenses (not including interest expense) were $3.1 million and $3.4 million for 1998 and 1997, respectively. In addition, Standard Management has available $1.0 million from its Amended Credit Agreement. In 1998, the Company issued convertible redeemable preferred stock with a stated value of $6.5 million. Proceeds were used to reduce the borrowings from the Amended Credit Agreement. Holders are entitled to receive annual dividends of $7.75 per share. Refer to Notes 7 and 10 to the consolidated financial statements for additional information. Standard Management anticipates the available cash from its existing working capital, plus anticipated 1999 dividends, management fees, rental income and interest payments on its surplus debentures receivable will be more than adequate to meet its anticipated "parent company only" cash requirements for 1999. INTEREST IN SURPLUS DEBENTURES AND NOTES PAYABLE: The following are characteristics of the Amended Credit Agreement at December 31, 1998: $25.0 million outstanding balance Weighted average interest rate of 8.52% Principal payments: $3.3 million due March 2000, $4.3 million thereafter through March 2005 Subject to certain restrictions and covenants Interest payments required in 1999 based on December 31, 1998 balances will be $2.1 million The following are characteristics of the subordinated convertible debt agreement at December 31, 1998: $10.0 million outstanding balance Interest rate of 10% per annum Due date of July 2004 Interest payments required in 1999 based on December 31, 1998 balances will be $1.0 million Refer to Note 5 to the consolidated financial statements for additional information From the funds borrowed by Standard Management pursuant to the Amended Credit Agreement and the subordinated convertible debt agreement, $27.0 million was loaned to Standard Life pursuant to Unsecured Surplus Debenture Agreements ("Surplus Debenture") which requires Standard Life to make quarterly interest payments to Standard Management at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. The interest and principal payments are subject to quarterly approval by the Indiana Department of Insurance, depending upon satisfaction of certain financial tests relating to levels of Standard Life's capital and surplus and general approval of the Commissioner of the Indiana Department of Insurance. Standard Management currently anticipates these quarterly approvals will be granted. Assuming the approvals are granted and the December 31, 1998 interest rate of 9.75% continues, Standard Management will receive interest income of $2.6 million from the Surplus Debenture in 1999. DIVIDENDS. Dividends from Standard Life to Standard Management are limited by laws applicable to insurance companies. As an Indiana domiciled insurance company, Standard Life may pay a dividend or distribution from its surplus profits, without the prior approval of the Commissioner of the Indiana Department of Insurance, if the dividend or distribution, together with all other dividends and distributions paid within the preceding twelve months, does not exceed the greater of (i) net gain from operations or (ii) 10% of surplus, in each case as shown in its preceding annual statutory financial statements. In 1999, Standard Life can pay dividends of approximately $4.4 million without regulatory approval. MANAGEMENT FEES. Pursuant to a management services agreement, Standard Life paid Standard Management $2.0 million during 1998 and $2.0 million during 1997 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. Prior to its merger into Standard Life, Savers Life paid Standard Management $.8 million during 1998 for certain management services pursuant to a management services agreement. In addition, Dixie Life paid Standard Life $1.0 million during 1998 and $1.1 million during 1997 for certain management services provided. Both of these agreements provide that they may be modified or terminated by the Indiana and Mississippi departments of insurance in the event of financial hardship of Standard Life or Dixie Life. Pursuant to the management services agreement, Premier Life (Luxembourg) paid Standard Management $.1 million during 1998 and 1997 for certain management and administrative services. The agreement provides that it may be modified or terminated by either Standard Management or Premier Life (Luxembourg). EQUIPMENT RENTAL FEES. In 1998 and 1997, Standard Management charged subsidiaries $1.1 million per year for the use of equipment owned by Standard Management. LIQUIDITY OF INSURANCE OPERATIONS U.S. INSURANCE OPERATIONS. The principal liquidity requirements of Standard Life are its contractual obligations to policyholders, dividend, rent, management fee and Surplus Debenture payments to Standard Management and other operating expenses. The primary source of funding for these obligations has been cash flow from premium income, net investment income, investment sales and maturities and sales of FPDAs. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits and policy withdrawals and surrenders. The amount of withdrawals and surrenders is affected by a variety of factors such as renewal interest crediting rates, interest rates for competing products, general economic conditions, Standard Life's A.M. Best ratings (currently rated "B+") and events in the industry that affect policyholders' confidence. The policies and annuities issued by Standard Life contain provisions that allow policyholders to withdraw or surrender their policies under defined circumstances. These policies and annuities generally contain provisions which apply penalties or otherwise restrict the ability of policyholders to make such withdrawals or surrenders. Standard Life closely monitors the surrender and policy loan activity of its insurance products and manages the composition of its investment portfolios, including liquidity, in light of such activity. Changes in interest rates may affect the incidence of policy surrenders and other withdrawals. In addition to the potential effect on liquidity, unanticipated withdrawals in a changing interest rate environment could adversely affect earnings if SMC were required to sell investments at reduced values to meet liquidity demands. SMC manages the asset and liability portfolios in order to minimize the adverse earnings effect of changing market interest rates. SMC seeks assets that have duration characteristics similar to the liabilities that they support. SMC also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. SMC's U.S. insurance subsidiaries currently expect available liquidity sources and future cash flows to be adequate to meet the demand for funds. Statutory surplus is computed according to rules prescribed by the NAIC, as modified by the Indiana Department of Insurance, or the state in which the insurance subsidiaries do business. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative perspective. With respect to new business, statutory accounting practices require that: (i) acquisition costs (primarily commissions and policy issue costs) and (ii) reserves for future guaranteed principal payments and interest in excess of statutory rates, be expensed in the year the new business is written. These items cause a reduction in statutory surplus ("surplus strain") in the year written for many insurance products. SMC designs its products to minimize such first-year losses, but certain products continue to cause a statutory loss in the year written. For each product, SMC controls the amount of net new premiums written to manage the effect of such surplus strain. SMC's long-term growth goals contemplate continued growth in its insurance businesses. To achieve these growth goals, SMC's U.S. insurance subsidiaries will need to increase statutory surplus. Additional statutory surplus may be secured through various sources such as internally generated statutory earnings, infusions by Standard Management with funds generated through debt or equity offerings or mergers with other life insurance companies. If additional capital is not available from one or more of these sources, SMC believes that it could reduce surplus strain through the use of reinsurance or through reduced writing of new business. Management believes that the operational cash flow of Standard Life will be sufficient to meet its anticipated needs for 1999. As of December 31, 1998, Standard Life had statutory capital and surplus for regulatory purposes of $43.6 million compared to $25.9 million at December 31, 1997. The increase is primarily due to the issuance of $14.0 million of surplus debentures in connection with the merger of Midwestern Life and Savers Life into Standard Life. The remaining increase is primarily due to 1998 net gain from operations of Standard Life of $1.7 million. As the life insurance and annuity business produced by Standard Life increases, Standard Life expects to continue to satisfy statutory capital and surplus requirements through statutory profits, through the continued reinsurance of a portion of its new business, and through additional capital contributions by Standard Management. Net cash flow from operations on a statutory basis of Standard Life, after payment of benefits and operating expenses, was $15.8 million and $19.6 million for 1998 and 1997, respectively. If the need arises for cash which is not readily available, additional liquidity could be obtained from the sale of invested assets. Effective January 1, 1999 the Company decided to no longer sell new business through Dixie Life. All new business will instead be sold through Standard Life. This decision is not expected to have a material effect on operations or financial condition of the Company. INTERNATIONAL OPERATIONS. SMI dividends are limited to its accumulated earnings without regulatory approval. SMI and Premier Life (Luxembourg) were not permitted to pay dividends in 1998 and 1997 due to accumulated losses. Premier Life (Bermuda) did not pay dividends in 1998 and 1997. SMC does not anticipate any dividends from these companies in 1999. FACTORS THAT MAY AFFECT FUTURE RESULTS MERGERS, ACQUISITIONS AND CONSOLIDATIONS. The U.S. insurance industry is experiencing an increasing number of mergers, acquisitions, consolidations and sales of certain business lines. These consolidations are largely the result of the following: the need to reduce costs of distribution and overhead; the need to maintain business in force; increased competition; regulatory capital requirements; and technology costs. SMC expects this trend to continue. FOREIGN CURRENCY RISK. SMI policyholders invest in assets denominated in a wide range of currencies. As policyholders are not permitted to invest directly in options, futures and derivatives, their investment and currency risk is limited to premiums they have paid. Although policyholders effectively bear the currency risk, SMI could be exposed to currency fluctuations if currencies within the conventional investment portfolio or certain actuarial reserves are mismatched. In order to minimize this risk, SMI continually matches the assets and liabilities of the portfolio and the reserves. In addition, Premier Life (Luxembourg) shareholder's equity is denominated in Luxembourg francs. Premier Life (Luxembourg) does not hedge currency risk because its shareholder's equity will remain in Luxembourg francs for the foreseeable future, thus, no significant realized foreign exchange gains or losses are anticipated. At December 31, 1998, there was an immaterial unrealized loss from foreign currency. EURO CURRENCY. Effective January 1, 1999, the eleven participating European member union countries established fixed conversion rates between their legal currencies and the euro. The legal currencies in those countries will continue to be used as legal tender through January 1, 2002. Subsequent to this date, the legal currencies will be canceled and euro bills and coins will be used for cash transactions in the participating countries. During this three year dual-currency environment, conversion rates between the legal currencies will no longer be computed directly between one another. Instead, a special "triangulation" procedure must be followed by first converting one legal currency into its euro equivalent and then converting the euro equivalent into the other legal currency. Although the Company has not initiated an analysis plan for the euro conversion, SMC does not expect it to have a material impact on its operations or financial condition. POSSIBILITY OF FUTURE DILUTION OF OWNERSHIP AND VOTING POWER. The SMC Board of Directors has the authority to issue up to .9 million additional shares of preferred stock and 12.4 million additional shares of common stock. The board's authority under SMC's charter typically does not require stockholder approval unless it is otherwise required for a particular transaction. Although SMC is not currently involved in any life insurance acquisitions, the Company regularly investigates such opportunities and could issue additional shares of SMC common or preferred stock in connection with an acquisition. UNCERTAINTIES REGARDING INTANGIBLE ASSETS. Included in SMC's December 31, 1998 financial statements are certain assets that are primarily valued , for financial statement purposes, on the basis of management assumptions. These assets include items such as: deferred acquisition costs; present value of future profits; costs in excess of net assets acquired; and organization and deferred debt issuance costs. The value of these assets reflected in the December 31, 1998 balance sheet total $67.6 million or 7.1% of SMC's assets. SMC has established procedures to periodically review the assumptions used to value these assets and determine the need to make adjustments of such values in SMC's consolidated financial statements. SMC has determined that the assumptions used in the initial valuation of the assets are consistent with the current operations of SMC as of December 31, 1998. REGULATORY ENVIRONMENT. Currently, prescribed or permitted statutory accounting principles ("SAP") may vary between states and between companies. The NAIC is in the process of codifying SAP to promote standardization of methods utilized throughout the industry. Completion of this project might result in changes in statutory accounting practices for SMC's insurance subsidiaries; however, it is not expected that such changes would materially affect SMC's insurance subsidiaries' statutory capital requirements. FINANCIAL SERVICES DEREGULATION. The United States Congress is currently considering a number of legislative proposals intended to reduce or eliminate restrictions on affiliations among financial services organizations. Proposals are extant which would allow banks to own or affiliate with insurers and securities firms. An increased presence of banks in the life insurance and annuity businesses may increase competition in these markets. The Company cannot predict the impact of these proposals on the earnings of the Company. IMPACT OF YEAR 2000. The Company updated its main operating computer systems in 1995 with Year 2000 ready systems at a cost of $.5 million. Since that time the Company has completed modifications or conversions of other portions of its software, hardware and imbedded chip technology so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company believes that with such modifications and conversions, the Year 2000 issue will not pose significant operational problems for its computer systems. The total cost of the Year 2000 project is $.6 million including the $.5 million previously discussed. These costs are not material to the Company's financial statements and were funded through operating cash flows. The Company is currently assessing the risks associated with their external business relationships, including those with agents and financial institutions. The Company has been informed by approximately 50% of their external business partners that they are or will be Year 2000 ready sometime in 1999. The Company is still accumulating data from the remaining business partners, which it hopes to have concluded by mid 1999. The Company also assessed what contingency plans will be needed, if any, of its critical systems or those of external business relationships that are not Year 2000 ready after December 31, 1999. The Company does not currently anticipate such a situation, but the consideration of a contingency plan will continue to evolve as new information becomes available. The failure to correct a Year 2000 problem could result in an interruption, or failure of, a number of normal business activities or operations. However, management has concluded that the Year 2000 issue will not materially affect future financial results, or cause reported financial information to be nonindicative of future operating results or financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company seeks to invest available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. Many of the Company's products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency. Approximately 75% of the total insurance liabilities at December 31, 1998 had surrender penalties or other restrictions and approximately 9% are not subject to surrender. The Company also seeks to maximize the total return on its investments through active investment management. Accordingly, the Company has determined that the entire portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest rates; (ii) changes in relative values of individual securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in credit quality outlook for certain securities; (v) liquidity needs; and (vi) other factors. Profitability of many of the Company's products is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. Although substantially all credited rates on annuity products may be changed annually (subject to minimum guaranteed rates), changes in competition and other factors, including the impact of the level of surrenders and withdrawals, may limit the ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As of December 31, 1998, the average yield, computed on the cost basis of the investment portfolio, was 7.48%, and the average interest rate credited or accruing to total insurance liabilities was 5.25%, excluding interest bonuses guaranteed for the first year of the annuity contract only. Computer models were used to perform simulations of the cash flows generated from the Company's existing business under various interest rate scenarios. These simulations measured the potential gain or loss in fair value of interest rate-sensitive financial instruments. With such estimates, the Company seeks to closely match the duration of assets to the duration of liabilities. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. At December 31, 1998, the adjusted modified duration of fixed maturity securities and short-term investments was approximately 5.6 years, and the duration of insurance liabilities was approximately 4.1 years. If interest rates were to increase by 10% from their December 31, 1998 levels, the Company's fixed maturity securities and short-term investments (net of the corresponding changes in the values of cost of policies purchased, cost of policies produced and insurance liabilities) would decline in fair value by approximately $3.5 million. The calculations involved in the Company's computer simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in the value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because the Company's investments and liabilities are actively managed, actual losses could be less than those estimated above. ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required with respect to this Item 8 are listed in Item 14(a)(1) and included in a separate section of this report. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The Registrant will file a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the Company's 1999 Annual Meeting of Shareholders, (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statements which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning SMC's directors required by this item is incorporated by reference to SMC's Proxy Statement. The information concerning SMC's executive officers required by this Item is incorporated by reference herein to the section in Part I, entitled "Executive Officers." The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to SMC's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to SMC's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to SMC's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report. (a)(3) List of Exhibits: Exhibit NUMBER DESCRIPTION OF DOCUMENT 2.1 Amended and Restated Agreement and Plan of Merger dated as of December 9, 1997 among SMC, SAC and Savers Life. (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-43023)). 2.2 Stock Purchase Agreement dated as of June 4, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.3 First Amendment to Stock Purchase Agreement dated as of July 1, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.4 Second Amendment to Stock Purchase Agreement dated as of July 23, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 2.5 Third Amendment to Stock Purchase Agreement dated as of October 8, 1998 by and among SMC and MC Equities, Inc. (incorporated by reference to SMC's Form 8-K (Registration No. 0-20882)). 3.1 Amended and Restated Articles of Incorporation, as amended (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 3.2 Amended and Restated Bylaws of SMC as amended (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993 and to Exhibit 3 of SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1994). 4.1 Form of Senior Note Agreement Warrant (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370)). 4.2 Form of Oppbridge Partners Warrant (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370)). 4.3 Registration Rights Agreement, dated as of May 3, 1990 among SMC, Howard T. Cohn and Joseph J. Piazza and the first amendment thereto, dated June 4, 1990 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370). 4.4 Amended and Restated Registration Rights Agreement dated as of April 15, 1997 by and between SMC and Fleet National Bank. 4.5 Form of Fleet National Bank Warrant. Exhibit NUMBER DESCRIPTION OF DOCUMENT 4.6 Form of President's Club Warrant (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882)). 4.7 Registration Rights Agreement dated as of November 8, 1996 by and between SMC and Conseco Variable Insurance Company (formerly Great American Reserve Insurance Company) (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1996). 4.8 Form of Sand Brothers & Company, Ltd. Warrant (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1997). 9 Voting Trust Agreement dated as of November 8, 1996 among Delta Life and Annuity Company, Messrs. Ronald D. Hunter and Allen O. Jones, Jr., as Voting Trustees, and SMC (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-35447)). 10.1 Amended Advisory Agreement, dated as of August 1, 1991, between SMC and Conseco Capital Management, Inc., as amended, April 17, 1995 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.2 Second Amended and Restated Employment Contract by and between SMC and Ronald D. Hunter, dated and effective, as amended, April 3, 1995 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1995). 10.3 Second Amended and Restated Employment Contract by and between SMC and Edward T. Stahl, dated and effective, as amended, April 3, 1995 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1995). 10.4 Second Amended and Restated Employment contract by and between SMC and Raymond J. Ohlson, dated and effective, as amended, April 3, 1995 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1995). 10.5 First Amended and Restated Employment Contract by and between SMC and Stephen M. Coons dated and effective, April 3, 1995 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1995). 10.6 Indemnification Agreement between SMC and Stephen M. Coons and Coons & Saint, dated August 1, 1991 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.7 Standard Management Corporation Amended and Restated 1992 Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-35447) as filed with the Commission on September 11, 1997. 10.8 Lease by and between Standard Life and WRC Properties, Inc., dated February 27, 1991 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.9 Management Service Agreement between Standard Life and SMC dated August 1, 1992, as amended on January 1, 1997 and as further amended on January 1, 1999. 10.10 Agreement for Assumption Reinsurance between the National Organization Of Life and Health Insurance Guaranty Associations and Standard Life, concerning, The Midwest Life Insurance Company In Liquidation effective June 1, 1992 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.11 Reinsurance Agreement between Standard Life and Swiss Re Life and Health effective May 1, 1975 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). Exhibit NUMBER DESCRIPTION OF DOCUMENT 10.12 Reinsurance Agreement between Firstmark Standard Life Insurance Company and Swiss Re Life and Health effective February 1, 1984 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.13 Reinsurance Contract between First International and Standard Life dated July 10, 1992 (incorporated by reference to SMC's Registration Statement on Form S-1 (Registration No. 33-53370) as filed with the Commission on January 27, 1993). 10.14 Amended Reinsurance Agreement between Standard Life and Winterthur Life Re Insurance Company effective January 1, 1995 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.15 Management Service Agreement between Premier Life (Luxembourg) and SMC dated September 30, 1994 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1994). 10.16 Assignment of Management Contract dated October 2, 1995 of Management Contract dated January 1, 1987 between DNC and Dixie Life to Standard Life (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.17 Automatic Indemnity Reinsurance Agreement between First International and The Guardian Insurance & Annuity Company, Inc. dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.18 Indemnity Retrocession Agreement between The Guardian Insurance & Annuity Company, Inc. and Standard Life dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.19 Automatic Indemnity Reinsurance Agreement between The Guardian Insurance & Annuity Company, Inc. and Standard Life dated and effective January 1, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.20 Administrative Services Agreement between First International and Standard Life dated and effective March 18, 1996 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.21 Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement dated as of March 10, 1998 between SMC and Fleet National Bank. (Incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.22 Amended and Restated Note Agreement dated as of March 10, 1998 between SMC and Fleet National Bank in the amount of $20,000,000.(Incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.23 Amended and Restated Pledge Agreement dated as of March 10, 1998 between SMC and Fleet National Bank. (Incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882)). 10.24 Revised Service Contract Agreement dated as of October 16, 1995 and effective January 1, 1995 between Standard Life and Standard Marketing (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). 10.25 Note Agreement dated as of November 8, 1996, as amended and restated on June 30, 1997, by and between SMC and Conseco Variable Insurance Company in the amount of $4,371,573 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1997). 10.26 Surplus Debenture dated as of November 8, 1996 by and between SMC and Standard Life in the amount of $13,000,000 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1996). 10.27 Portfolio Indemnify Reinsurance Agreement between Dixie Life and Cologne Life Reinsurance Company dated and effective December 31, 1997 (incorporated by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year ended December 31, 1996). Exhibit NUMBER DESCRIPTION OF DOCUMENT 10.28 Note Agreement dated as of June 30, 1997 between SMC, Conseco Health Insurance Company (formerly Capitol American Life Insurance Company) and Conseco Senior Health Insurance Company (formerly Transport Life Insurance Company) in the amount of $5,628,427 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1997). 10.29 Senior Subordinated Convertible Note dated as of June 30, 1997 between SMC and Conseco Health Insurance Company in the amount of $3,628,427 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1997). 10.30 Senior Subordinated Convertible Note dated as of June 30, 1997 between SMC and Conseco Senior Health Insurance Company in the amount of $2,000,000 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1997). 10.31 Coinsurance Agreement effective as of July 1, 1997 by and between Savers Life and World Insurance Company (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-35447)). 10.32 Amendment I to the Guardian Indemnity Retrocession Agreement effective as of January 1, 1996 by and between The Guardian Insurance and Annuity Company and Standard Life (incorporated by reference to SMC's Registration Statement on Form S-4 (Registration No. 333-35447)). 10.33 Promissory Note from Ronald D. Hunter to SMC in the amount of $775,500 executed October 28, 1997 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1997). 10.34 Reinsurance Agreement between Standard Life and Life Reassurance Corporation of America effective September 1, 1997. 10.35 Reinsurance Agreement between Standard Life and Business Men's Assurance Company of America effective September 1, 1997. 10.36 Management Services Agreement between Savers Life and SMC dated March 11, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1998). 10.37 Indemnity Reinsurance Agreement between Standard Life and the Mercantile and General Life Reassurance Company of America dated March 30, 1998 and effective June 1, 1997 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0- 20882) for the quarter ended June 30, 1998). 10.38 Certificate of Designations for Series A Convertible Redeemable Preferred Stock (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended June 30, 1998). 10.39 Quota Share Reinsurance Agreement between Savers Life and the Oxford Life Insurance Company dated September 24, 1998 and effective July 1, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.40 Addendum No. 5 to Reinsurance Agreement between Standard Life Insurance Company of Indiana and Winterthur Life Re Insurance Company dated August 20, 1998 and effective October 1, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10- Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.41 Employment Agreement between Robert B. Neal and Standard Management Corporation dated October 2, 1998 and effective October 2, 1998 (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter ended September 30, 1998). 10.42 Articles of Merger of Savers Life into Standard Life effective as of December 31, 1998 and approved by the Indiana Department of Insurance December 29, 1998. Exhibit NUMBER DESCRIPTION OF DOCUMENT 10.43 Plan and Agreement of Merger of Savers Life into Standard Life effective as of December 31, 1998 dated October 30, 1998. 10.44 Articles of Merger of Midwestern Life into Standard Life effective as of December 31, 1998 and approved by the Indiana Department of Insurance December 29, 1998. 10.45 Plan and Agreement of Merger of Midwestern Life into Standard Life effective as of December 31, 1998 dated October 30, 1998. 10.46 Amended and Restated note Agreement dated as of September 24, 1998 between SMC and Fleet National Bank in the amount of $26,000,000. 10.47 Amendment No. 2 to Amended and Restated Revolving Line of Credit Agreement dated as of September 24, 1998 between SMC and Fleet National Bank. 10.48 Amended and Restated Registration Rights Agreement dated as of August 19, 1998 between SMC and Fleet National Bank. 10.49 Amended and Restated Pledge Agreement dated as of September 23, 1998, between SMC and Fleet National Bank. 10.50 Warrant to purchase common stock of SMC dated August 19, 1998 entitling Fleet National Bank to purchase 20,000 shares. 10.51 Guaranty dated October 1, 1998 made by SMC in favor of Fleet National Bank. 10.52 Surplus debenture dated as of December 31, 1998 by and between SMC and Standard Life in the amount of $8.0 million. 10.53 Surplus debenture dated as of December 31, 1998 by and between SMC and Standard Life in the amount of $6.0 million. 21 List of Subsidiaries of SMC 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Audit 24 Powers of Attorney 27 Financial Data Schedule, which is submitted electronically pursuant to Regulation S-K to the Securities and Exchange Commission for information only and not filed. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. EXHIBIT NUMBER 10.9 10.42 10.43 10.44 10.45 10.46 10.47 10.48 10.49 10.50 10.51 10.52 10.53 (b) Reports on Form 8-K filed during the fourth quarter of 1998. A report on Form 8-K was filed with the Commission to report under Item 5 the signing of the Third Amendment to the Stock Purchase Agreement dated as of October 8, 1998 to purchase Midwestern National Life Insurance Company of Ohio. A report on Form 8-K was filed with the Commission to report under Item 2 the purchase of Midwestern National Life Insurance Company of Ohio dated as of November 13, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 30, 1999 STANDARD MANAGEMENT CORPORATION /S/ RONALD D. HUNTER Ronald D. Hunter Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30, 1999 by the following persons on behalf of the Registrant and in the capacities indicated. /S/ RONALD D. HUNTER Ronald D. Hunter Chairman, President and Chief Executive Officer (Principal Executive Officer) * Paul B. Pheffer Director, Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) * Gerald R. Hochgesang Senior Vice President -- Finance (Principal Accounting Officer) * Raymond J. Ohlson Director * Edward T. Stahl Director * Stephen M. Coons Director * Martial R. Knieser Director * Robert A. Borns Director * John J. Dillon Director * Jerry E. Francis Director *By: /s/ RONALD D. HUNTER Ronald D. Hunter Attorney-in-Fact ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS and FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES Year Ended December 31, 1998 STANDARD MANAGEMENT CORPORATION INDIANAPOLIS, INDIANA STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-8 Notes to Consolidated Financial Statements F-9 FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedules are included in this report and should be read in conjunction with the Audited Consolidated Financial Statements. Schedule II -- Condensed Financial Information of Registrant (Parent Company) for the Years Ended December 31, 1998, 1997 and 1996 F-32 Schedule IV -- Reinsurance for the Years Ended December 31, 1998, 1997 and 1996 F-36 Schedules not listed above have been omitted because they are not applicable or are not required, or because the required information is included in the Audited Consolidated Financial Statements or related Notes. REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Standard Management Corporation We have audited the accompanying consolidated balance sheets of Standard Management Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the consolidated balance sheets at September 30, 1998 and 1997 or the consolidated statements of operations, shareholder's equity and cash flows for the three years ended September 30, 1998 of Standard Management International S.A. and subsidiaries, a wholly owned subsidiary group, which financial statements reflect assets totaling approximately 22% and 24% of the Company's consolidated assets at December 31, 1998 and 1997 and revenues totaling approximately 8%, 8% and 9% of consolidated revenues for each of the three years in the period ended December 31, 1998. Those financial statements, which as explained in Note 1, are included in the Company's consolidated balance sheets at December 31, 1998 and 1997, and the Company's consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the data included for Standard Management International S.A., is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Standard Management Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Indianapolis, Indiana February 18, 1999 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Standard Management International, S.A. We have audited the consolidated balance sheets of Standard Management International S.A. and subsidiaries as at September 30, 1998 and 1997 and the related consolidated statements of operations, shareholder's equity and cash flows for each of the three years in the period ended September 30, 1998 (none of which aforementioned financial statements are separately presented herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting 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 aspects, the consolidated financial position of Standard Management International S.A. and subsidiaries as at September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles in the United States of America. Luxembourg City, Luxembourg February 18, 1999 KPMG Audit STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31 1998 1997 ASSETS Investments: Securities available for sale: Fixed maturity securities, at fair value (amortized cost: 1998 - $551,312 $372,576 $547,115; 1997 - $367,372) Equity securities, at fair value (cost: 1998 - $1,498; 1997 - $55) 1,316 52 Mortgage loans on real estate 8,578 375 Policy loans 15,019 9,495 Real estate 3,435 2,163 Other invested assets 837 779 Short-term investments 11,626 13,342 Total investments 592,123 398,782 Cash 13,591 4,165 Accrued investment income 9,563 6,512 Amounts due and recoverable from reinsurers 76,897 61,596 Deferred policy acquisition costs 32,946 21,435 Present value of future profits 28,793 20,537 Excess of acquisition cost over net assets acquired 5,886 2,445 Federal income tax recoverable 1,059 1,854 Other assets 5,046 3,602 Assets held in separate accounts 190,246 148,064 Total assets $956,150 $668,992 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance policy liabilities $638,435 $439,390 Accounts payable and accrued expenses 12,277 6,349 Notes payable 35,000 26,000 Deferred federal income taxes 7,620 4,488 Excess of net assets acquired over acquisition cost -- 1,388 Liabilities related to separate accounts 190,246 148,064 Total liabilities 883,578 625,679 Series A convertible redeemable preferred stock, par value $100 per share: authorized 130,000 shares; 65,300 shares issued and outstanding in 1998 6,530 -- Shareholders' Equity: Preferred stock, no par value: authorized 870,000 shares; none issued and outstanding -- -- Common stock, no par value: authorized 20,000,000 shares; outstanding 1998-7,641,454; 1997- 60,586 40,646 4,876,490 Treasury stock (6,220) (4,572) Accumulated other comprehensive income: Unrealized gain on securities available for sale (net taxes of: 1998 - 1,660 2,171 $765; 1997 - $1,094) Unrealized gain on other investments (net taxes of: 1998 - $12) 23 -- Foreign currency translation adjustment (net taxes (benefits) of: 1998 4 (473) - $2; 1997 - $(244)) Retained earnings 9,989 5,541 Total shareholders' equity 66,042 43,313 Total liabilities and shareholders' equity $956,150 $668,992
See accompanying notes to consolidated financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31 1998 1997 1996 Revenues: Life premiums $8,487 $7,100 $10,468 Health premiums 5,992 -- -- Net investment income 34,580 29,516 20,871 Net realized investment gains 353 396 1,302 Gain on disposal of subsidiaries -- -- 886 Policy income 6,529 5,512 2,551 Amortization of excess of net assets acquired over 1,388 1,388 1,388 acquisition cost Fees from separate accounts 2,120 1,521 1,462 Other income 3,421 1,178 1,277 Total revenues 62,870 46,611 40,205 Benefits and expenses: Life benefits and claims 8,447 8,840 9,817 Health benefits and claims 4,823 -- -- Interest credited on interest-sensitive annuities and other 19,775 16,281 11,092 financial products Amortization 4,755 3,248 2,592 Other operating expenses 15,020 12,599 12,364 Health commissions 784 -- -- Interest expense and financing costs 2,955 2,381 805 Total benefits and expenses 56,559 43,349 36,670 Income before federal income taxes, extraordinary gain and preferred stock 6,311 3,262 3,535 dividends Federal income tax expense (benefit) 1,630 617 (730) Income before extraordinary gain and preferred stock 4,681 2,645 4,265 dividends Extraordinary gain on early redemption of redeemable preferred stock, -- -- 502 net taxes of $0 Net income 4,681 2,645 4,767 Preferred stock dividends 180 97 208 Earnings available to common shareholders $4,501 $2,548 $4,559 Earnings per common share: Income before extraordinary gain and preferred stock $.68 $.54 $.88 dividends Extraordinary gain -- -- .10 Net income .68 .54 .98 Preferred stock dividends .03 .02 .04 Earnings available to common shareholders $.65 $.52 $.94 Earnings per common share - assuming dilutions: Income before extraordinary gain and preferred stock $.62 $.48 $.82 dividends Extraordinary gain -- -- .09 Net income .62 .48 .91 Preferred stock dividends .02 .01 .04 Earnings available to common shareholders - assuming $.60 $.47 $.87 dilutions
See accompanying notes to consolidated financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Accumulated Other Common Treasury Comprehensive Retained Total Stock Stock Income Earnings Balance at January 1, 1996 $40,242 $39,808 $(2,621) $ 3,741 $(686) Comprehensive income, net of tax: Net income 4,767 4,767 Other comprehensive income: Change in unrealized gain (loss) of securities (3,328) (3,328) (net taxes (benefits) of $(1,714)) Change in foreign currency (net taxes(benefits) (468) (468) of $(241)) Other comprehensive income (3,796) Total comprehensive income 971 Issuance of common stock 100 100 Common stock dividends 850 850 Issuance of common stock warrants 285 285 Repurchase of common stock warrants (600) (600) Gain on reissuance of treasury stock in connection with purchase of Shelby 38 38 Life Treasury stock acquired (2,126) (2,126) Reissuance of treasury stock in connection with 6 6 exercise of stock options Reissuance of treasury stock in connection with 1,213 1,213 purchase of Shelby Life Common stock dividend, plus cash in lieu of fractional shares (850) (850) Loss on reissuance of treasury stock (2) (2) Preferred stock dividends (208) (208) Balance at December 31, 1996 39,919 40,481 (3,528) (55) 3,021 Comprehensive income, net of tax: Net income 2,645 2,645 Other comprehensive income: Change in unrealized gain (loss) of securities 2,917 2,917 (net taxes of $1,503) Change in foreign currency (net taxes (benefits) OF $(600)) (1,164) (1,164) Other comprehensive income 1,753 Total comprehensive income 4,398 Issuance of common stock warrants 165 165 Treasury stock acquired (1,079) (1,079) Reissuance of treasury stock in connection with exercise of stock options 35 35 Loss on reissuance of treasury stock (28) (28) Preferred stock dividends (97) (97) Balance at December 31, 1997 43,313 40,646 (4,572) 1,698 5,541
(continued on following page) See accompanying notes to consolidated financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (DOLLARS IN THOUSANDS)
Accumulated Other Common Stock Treasury Comprehensive Retained Total Stock Income Earnings Balance at December 31, 1997 (carried forward from prior page) 43,313 40,646 (4,572) 1,698 5,541 Comprehensive income, net of tax: Net income 4,681 4,681 Other comprehensive income: Change in unrealized gain (loss) of securities (488) (488) (net taxes (benefits) of $(251)) Change in foreign currency (net taxes of 477 477 $246) Other comprehensive income (11) Total comprehensive income 4,670 Issuance of common stock for Savers Life 15,024 15,024 acquisition Issuance of common stock for Midwestern Life acquisition 4,614 4,614 Issuance of common stock warrants 64 64 Issuance of common stock in connection with exercise of stock warrants 233 234 (1) Treasury stock acquired (1,702) (1,702) Conversion of preferred stock into common 4 4 stock Reissuance of treasury stock in connection with exercise of stock options 2 54 (52) exercise of stock options Preferred stock dividends (180) (180) Balance at December 31, 1998 $66,042 $60,586 $(6,220) $1,687 $9,989
See accompanying notes to consolidated financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31 1998 1997 1996 OPERATING ACTIVITIES Net income $4,681 $2,645 $4,767 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 2,658 1,456 1,221 Policy acquisition costs deferred (13,542) (7,005) (6,400) Deferred federal income taxes 957 1,187 158 Depreciation and amortization 1,209 1,085 544 Insurance policy liabilities 6,400 9,441 4,785 Net realized investment gains (353) (396) (1,302) Accrued investment income (1,451) (314) (770) Extraordinary gain on early redemption of redeemable -- -- (502) preferred stock Other (290) (335) (775) Net cash provided by operating activities 269 7,764 1,726 FINANCING ACTIVITIES Issuance of common stock, net 19,638 -- -- Borrowings, net of debt issuance costs of $206, $70 and $208 in 1998, 1997 11,794 5,558 16,792 and 1996, respectively Repayments on long-term debt and obligations under capital (3,141) (543) (491) lease Premiums received on interest-sensitive annuities and other financial products credited 81,858 49,362 42,347 to policyholder account balances, net of premiums ceded Return of policyholder account balances on interest-sensitive annuities and other financial products, net of premiums ceded (52,934) (37,477) (17,356) Issuance of Series A redeemable preferred stock 6,389 -- -- Redemption of preferred stock -- (1,855) (949) Repurchase of common stock warrants -- -- (600) Proceeds from common and treasury stock sales 234 138 100 Purchase of common stock for treasury (1,647) (1,079) (2,126) Net cash provided by financing activities 62,191 14,104 37,717 INVESTING ACTIVITIES Fixed maturity securities available for sale: Purchases (261,744) (205,976) (249,638) Sales 162,503 161,891 194,244 Maturities, calls and redemptions 32,570 28,380 10,254 Short-term investments, net 44,460 (4,925) 11,890 Other investments, net 320 (2,186) (551) Purchase of Savers Life Insurance Company, less cash acquired (18,039) -- -- of $518 Purchase of Midwestern National Life Insurance Company of Ohio, less cash (13,104) -- -- acquired of $1,026 Purchase of Shelby Life Insurance Company, less cash acquired -- -- (14,618) of $32 Dividends paid by Shelby Life Insurance Company to former -- -- (3,000) parent Proceeds from sale of First International Life Insurance Company, less cash transferred -- -- 11,327 to seller of $265 Net cash used by investing activities (53,034) (22,816) (40,092) Net increase (decrease) in cash 9,426 (948) (649) Cash at beginning of year 4,165 5,113 5,762 Cash at end of year $13,591 $4,165 $5,113
See accompanying notes to consolidated financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Standard Management Corporation ("Standard Management") is an international financial services holding company, which directly and through its subsidiaries i) acquires and manages in force life insurance and annuity business, ii) issues and distributes life insurance and annuity products, and iii) offers unit-linked assurance products through its international subsidiaries. Standard Management's active subsidiaries at December 31, 1998 include: (i) Standard Life Insurance Company of Indiana ("Standard Life") and its subsidiary, Dixie National Life Insurance Company ("Dixie Life"), (ii) Standard Management International, S.A. and its subsidiaries ("SMI"), Premier Life (Luxembourg) S.A. ("Premier Life (Luxembourg)") and Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)"), (iii) Standard Marketing Corporation ("Standard Marketing") and (iv) Savers Marketing Corporation ("Savers Marketing"). BASIS OF PRESENTATION The accompanying consolidated financial statements of Standard Management and its subsidiaries (the "Company" or "SMC") have been prepared in conformity with generally accepted accounting principles ("GAAP") and include the accounts of the Company since acquisition or organization. All significant intercompany balances and transactions have been eliminated. The fiscal year end for SMI is September 30. To facilitate reporting on the consolidated level, the fiscal year end for SMI was not changed and the consolidated balance sheets and statements of operations for SMI at September 30, 1998 and 1997 and for each of the three years in the period ended September 30, 1998, are included in the Company's consolidated balance sheets at December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998. USE OF ESTIMATES The nature of the Company's insurance businesses requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts disclosed in this report. INVESTMENTS The Company classifies its fixed maturity and equity securities as available for sale and, accordingly, such securities are carried at fair value. Fixed maturity securities include bonds and redeemable preferred stocks. Changes in fair values of securities available for sale, after adjustment for deferred policy acquisition costs, present value of future profits and deferred income taxes, are reported as unrealized gains or losses directly in shareholders' equity and, accordingly, have no effect on net income. The deferred policy acquisition costs and present value of future profits adjustments to the unrealized gains or losses represent valuation adjustments or reinstatements of these assets that would have been required as a charge or credit to operations had such unrealized amounts been realized. The cost of fixed maturity securities is adjusted for amortization of premiums and discounts. The amortization is provided on a constant effective yield method over the life of the securities and is included in net investment income. Mortgage-backed and other collateralized securities, classified as fixed maturity securities in the consolidated balance sheets, are comprised principally of obligations backed by an agency of the United States government (although generally not by the full faith and credit of the United States government). The Company has reduced the risk normally associated with these investments by primarily investing in highly rated securities and in those that provide more predictable prepayment patterns. The income from these securities is recognized using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the income recognized is adjusted currently to match that which would have been recorded had the effective yield been applied since the acquisition of the security. This adjustment is included in net investment income. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Mortgage loans on real estate and policy loans are carried at unpaid principal balances and are generally collateralized. Real estate investments, which the Company has the intent to hold for the production of income, are carried at cost, less accumulated depreciation. Short-term investments are carried at amortized cost, which approximates fair value. NET REALIZED INVESTMENT GAINS OR LOSSES Net realized investment gains and losses are calculated using the specific identification method and included in the consolidated statements of income. If the values of investments decline below their amortized cost and this decline is considered to be other than temporary, the amortized cost of these investments is reduced to net realizable value and the reduction is recorded as a realized loss. FUTURE POLICY BENEFITS Liabilities for future policy benefits for deferred annuities and universal life policies are equal to full account value that accrues to the policyholder (cumulative premiums less certain charges, plus interest credited) with rates ranging from 4.8% to 11% in 1998 and 4.5% to 12% in 1997. Future policy benefits for traditional life insurance contracts are computed using the net level premium method on the basis of assumed investment yields, mortality and withdrawals which were appropriate at the time the policies were issued. 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 vary by issue age, type of coverage, and duration. RECOGNITION OF INSURANCE POLICY REVENUE AND RELATED BENEFITS AND EXPENSES Revenue for interest-sensitive annuity contracts consists of policy charges for surrenders and investment income earned. Premiums received for these annuity contracts are reflected as premium deposits and are not recorded as revenues. Expenses related to these annuities include interest credited to policyholder account balances. Revenue for universal life insurance policies consists of policy charges for the cost of insurance, policy administration charges, surrender charges and investment income earned during the period. Expenses related to universal life policies include interest credited to policyholder account balances and death benefits incurred in excess of policyholder account balances. Traditional life insurance and immediate annuity premiums are recognized as premium revenue when due over the premium paying period of the policies. Benefits are charged to expense in the period when claims are incurred and are associated with related premiums through changes in reserves for future policy benefits which results in the recognition of profit over the premium paying period of the policies. REINSURANCE Premiums, annuity policy charges, benefits and claims, interest credited and amortization expense are reported net of reinsurance ceded and are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. SEPARATE ACCOUNTS The majority of the balance represents i) unit-linked business, where benefits on surrender and maturity are not guaranteed, and ii) investment contracts which pay fixed benefits to the policyholder and have minimal mortality risk. Separate accounts generally represent funds maintained in accounts to meet specific investment objectives of policyholders who bear the investment risk. The Company records the related liabilities at amounts equal to the underlying assets. Investment income and investment gains and losses accrue directly to such policyholders. The assets of each account are segregated and are not subject to claims that arise out of any other business of the Company. Deposits, net investment income and realized gains and losses on separate accounts assets are not reflected in the consolidated statements of income. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION The Company's foreign subsidiaries' balance sheets and statements of income are translated at the year end exchange rates and average exchange rates for the year, respectively. The resulting unrealized gain or loss adjustment from the translation to U.S. dollars is recorded in the foreign currency translation adjustment as a separate component of accumulated other comprehensive income. Foreign exchange gains or losses relating to policyholders' funds in separate accounts are allocated to the relevant separate account. INCOME TAXES Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Standard Life and Dixie Life filed a life/life consolidated return for 1997 and plan to file a consolidated return for 1998. SMC, Standard Marketing and other U.S. non-insurance subsidiaries are taxed as regular corporations and file a consolidated return. SMC and its U.S. non-insurance subsidiaries were eligible to consolidate with Standard Life for income tax purposes beginning in 1996, but do not currently plan to do so. SMI is incorporated as a holding company in the Grand Duchy of Luxembourg and, accordingly, is not currently subject to taxation on income or capital gains. SMI is subject to an annual capital tax which is calculated on the nominal value of the statutory shareholder's equity at an annual rate of .20%. Premier Life (Luxembourg) is a normal commercial taxable company and is subject to income tax at regular corporate rates (statutory corporate rate of 37.45%), and annual capital taxes amounting to approximately 1% of its net equity. Premier Life (Bermuda) is exempt from taxation on income until March 2016 pursuant to a decree from the Minister of Finance in Bermuda. To the extent that such income is taxable under U.S. law, such income will be included in SMC's consolidated return. PRESENT VALUE OF FUTURE PROFITS Present value of future profits is recorded in connection with acquisitions of insurance companies or a block of policies. The initial value is based on the actuarially determined present value of the projected future gross profits from the in-force business acquired. In selecting the interest rate to calculate the discounted present value of the projected future gross profits, the Company uses the risk rate of return believed to best reflect the characteristics of the purchased policies, taking into account the relative risks of such policies, the cost of funds to acquire the business and other factors. The value of in force insurance purchased is amortized on a constant yield basis over its estimated life from the date of acquisition in proportion to the emergence of profits over a period of approximately 20 years. For acquisitions the Company made on or before November 19, 1992, the Company amortizes the asset with interest at the same discount rate used to determine the present value of future profits at the date of purchase. For acquisitions after November 19, 1992, the Company amortizes the asset using the interest rate credited to the underlying policies. DEFERRED POLICY ACQUISITION COSTS Costs relating to the production of new business (primarily commissions and certain costs of marketing, policy issuance and underwriting) are deferred and included in the deferred policy acquisition cost asset to the extent that such costs are recoverable from future related policy revenues. For interest-sensitive annuities and other financial products, deferred policy acquisition costs, with interest, are amortized over the lives of the policies and products in a constant relationship to the present value of estimated future gross profits, discounted using the interest rate credited to the policy. Traditional life insurance deferred policy acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company reviews the recoverability of the carrying value of the deferred policy acquisition costs each year. For interest-sensitive annuities and other financial products, the Company considers estimated future gross profits in determining whether the carrying value is appropriate; for other insurance products, the Company considers estimated future premiums. In all cases, the Company considers expected mortality, interest earned and crediting rates, persistency and expenses. Amortization is adjusted retrospectively for interest-sensitive annuities and other financial products when estimates of future gross profits to be realized are revised. EXCESS OF ACQUISITION COST OVER NET ASSETS ACQUIRED The excess of the cost to acquire purchased companies over the fair value of net assets acquired is being amortized on a straight-line basis over periods that generally correspond with the benefits expected to be derived from the acquisitions, usually 20 to 40 years. Accumulated amortization was $.6 million and $.4 million at December 31, 1998 and 1997, respectively. The Company continually monitors the value of excess of acquisition cost over net assets acquired ("goodwill") based on estimates of future earnings. If it determines that goodwill has been impaired, the carrying value is reduced with a corresponding charge to expense. EXCESS OF NET ASSETS ACQUIRED OVER ACQUISITION COST The excess of the net assets acquired over the cost to acquire purchased companies ("negative goodwill"), after reducing the basis in property and equipment and other noncurrent assets to zero, is being amortized into earnings on a straight-line basis over a five year period. Accumulated amortization was $6.6 million and $5.2 million at December 31, 1998 and 1997, respectively. STOCK OPTIONS The Company recognizes compensation expense for its stock option plan using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. Under the Company's stock option plans, no expense is recognized since the exercise price equals or exceeds the market price at the measurement date. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's net income or shareholders' equity. The adoption of SFAS No. 130 requires unrealized gains or losses on the Company's securities and foreign currency translation adjustments to be included in other comprehensive income, which is a separate component of shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. Comprehensive income excludes net realized investment gains of $.7 million (after income taxes of $.3 million). In June 1997, the Financial Accounting Standards Board ("FASB) issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise" and defines financial and descriptive information about a company's operating segments that is to be disclosed in the financial statements. SFAS No. 131 is effective for financial statements issued for fiscal years beginning after December 15, 1997 and was adopted by the Company in the first quarter of 1998. The Company considers its domestic and international operations to be its operating segments. See Note 14. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company adopted the Statement effective July 1, 1998. There was no material income statement impact due to the adoption of FASB 133. See Note 15. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3") was issued by the American Institute of Certified Public Accountants in December 1997 and provides guidance for determining when an insurance company or other enterprise should recognize a liability for guaranty-fund assessments and guidance for measuring the liability. The statement is effective for 1999 financial statements with early adoption permitted. The adoption of this statement is not expected to have a material effect on the Company's financial statements. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 consolidated financial statements and notes have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on previously reported shareholders' equity or net income in the periods presented. 2. ACQUISITIONS On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers Life"). Each of the 1,779,908 shares of Savers Life Common Stock outstanding was converted into 1.2 shares of SMC Common Stock plus $1.50. Each holder of Savers Life Common Stock could elect to receive the $1.50 per share portion of the merger consideration in the form of additional shares of SMC Common Stock. SMC issued approximately 2.2 million shares with a value of approximately $14.9 million and paid $2.2 million in cash and $1.5 million in acquisition costs for an aggregate purchase price of $18.6 million to acquire Savers Life. SMC increased the Amended and Restated Revolving Line of Credit Agreement (the "Amended Credit Agreement") to $20.0 million to finance the acquisition of Savers Life. On October 30, 1998, SMC acquired Midwestern National Life Insurance Company of Ohio ("Midwestern Life"). SMC issued 696,453 shares of its common stock valued at $4.6 million, increased its bank debt by $6.0 million on restructured terms by increasing the Amended Credit Agreement to $26.0 million, and paid $2.9 million in cash and $.6 million of acquisition costs for an aggregate purchase price of $14.1 million to acquire Midwestern Life. The acquisitions of Savers Life and Midwestern Life were accounted for using the purchase method of accounting and accordingly, SMC's consolidated financial statements include the results of operations of the acquired companies from the effective dates of their respective acquisitions. Under purchase accounting, SMC allocated the total purchase price of the assets and liabilities acquired, based on a determination of their fair values and recorded the excess of acquisition cost over net assets acquired as goodwill, which will be amortized on a straight line basis over 30 years and 20 years for Savers Life and Midwestern Life, respectively. SMC merged Savers Life and Midwestern Life into Standard Life effective December 31, 1998, with Standard Life as the surviving entity. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITIONS (CONTINUED) The following schedule summarizes the assets acquired and the liabilities assumed with the Savers Life and Midwestern Life acquisitions described above (in thousands):
Savers Midwestern Life Life Assets acquired: Fixed maturity securities $ 7,055 $ 99,243 Equity securities 2,840 174 Mortgage loans on real estate 6,273 223 Real estate 1,639 -- Policy loans 9 6,480 Short term investments 42,745 -- Cash 518 1,026 Present value of future profits 5,960 6,999 Other assets 7,944 9,671 Total assets acquired 74,983 123,816 Liabilities assumed: Policy reserves 58,680 100,497 Deferred federal income taxes -- 3,073 Other liabilities 1,386 6,141 Total liabilities assumed 60,066 109,711 Net assets acquired 14,917 14,105 Excess of acquisition cost over net assets acquired 3,640 25 Total purchase price $ 18,557 $ 14,130
The following are supplemental unaudited pro forma consolidated results of operations of the Company as if the acquisitions of Savers Life and Midwestern Life had occurred on January 1, 1997. The following amounts are based upon certain assumptions and estimates which the Company believes are reasonable and do not reflect any benefit from savings which might be achieved from combined operations. The amounts are not necessarily indicative of the results of operations had these transactions occurred on January 1, 1997, or the results of future operations (in thousands, except per share amounts): Year Ended DECEMBER 31 1998 1997 Revenues $80,710 $95,883 Earnings available to common shareholders 2,657 3,842 Earnings per share .34 .49 Earnings per share, assuming dilution .32 .46 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale are as follows (in thousands):
December 31, 1998 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities available for sale: Fixed maturity securities: United States Treasury securities and obligations of United States $34,635 $606 $53 $35,188 government agencies Obligations of states and political 3,337 141 -- 3,478 subdivisions Foreign government securities 46,872 616 4,541 42,947 Utilities 23,316 662 74 23,904 Corporate bonds 366,348 10,965 4,498 372,815 Mortgaged-backed securities 66,721 716 312 67,125 Redeemable preferred stock 5,886 8 39 5,855 Total fixed maturity securities 547,115 13,714 9,517 551,312 Equity securities 1,498 9 191 1,316 Total securities available for sale $548,613 $13,723 $9,708 $552,628 December 31, 1997 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities available for sale: Fixed maturity securities: United States Treasury securities and obligations of United States $27,613 $174 $90 $27,697 government agencies Obligations of states and political 3,790 204 26 3,968 subdivisions Foreign government securities 30,558 497 3,296 27,759 Utilities 26,606 534 109 27,031 Corporate bonds 223,958 8,140 1,609 230,489 Mortgaged-backed securities 51,266 657 60 51,863 Redeemable preferred stock 3,581 188 -- 3,769 Total fixed maturity securities 367,372 10,394 5,190 372,576 Equity securities 55 -- 3 52 Total securities available for sale $367,427 $10,394 $5,193 $372,628
The estimated fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or by discounting expected future cash flows using a current market rate applicable to the coupon rate, credit rating, and maturity of the investments. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of fixed maturity securities at December 31, 1998 by contractual maturity are shown below (in thousands). Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their lives. Amortized Fair COST VALUE Due in one year or less $ 3,636 $ 3,651 Due after one year through five years 92,862 93,959 Due after five years through ten years 163,869 163,208 Due after ten years 214,141 217,514 Subtotal 474,508 478,332 Redeemable preferred stock 5,886 5,855 Mortgage-backed securities 66,721 67,125 Total fixed maturity securities $547,115 $551,312 The Company maintains a highly-diversified investment portfolio with limited concentration of financial instruments in any given region, industry or economic characteristic. At December 31, 1998, the Company held no investments in any entity in excess of 10% of shareholders' equity other than asset-backed securities and investments issued or guaranteed by the U.S. government or a U.S. government agency, all of which were classified as fixed maturity securities available for sale. Net investment income was attributable to the following (in thousands):
Year Ended December 31 1998 1997 1996 Fixed maturity securities $30,484 $27,151 $19,865 Common stocks 46 -- -- Mortgage loans on real estate 679 123 309 Policy loans 654 618 447 Real estate 135 58 65 Short-term investments and other 3,291 2,098 602 Gross investment income 35,289 30,048 21,288 Less: investment expenses 709 532 417 Net investment income $34,580 $29,516 $20,871 Net realized investment gains arose from the following (in thousands): Year Ended December 31 1998 1997 1996 Fixed maturity securities available for sale: Gross realized gains $2,570 $2,209 $2,111 Gross realized losses 2,074 1,695 913 Net 496 514 1,198 Real estate -- 26 -- Other gains (losses) (143) (144) 104 Net realized investment gains $353 $396 $1,302
3. INVESTMENTS (CONTINUED) Life insurance companies are required to maintain certain amounts of assets with state or other regulatory authorities. At December 31, 1998 fixed maturity securities of $20.9 million and cash and short-term investments of $2.5 million were held on deposit by various state regulatory authorities in compliance with statutory regulations. Additionally, fixed maturity securities of $.3 million and short-term investments of $6.2 million of SMI were held by a custodian bank approved by the Luxembourg regulatory authorities to comply with local insurance laws. 4. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS The activity related to the deferred policy acquisition costs of business produced is summarized as follows (in thousands):
Year Ended December 31 1998 1997 1996 Balance, beginning of year $21,435 $18,309 $10,054 Additions 13,542 7,005 6,400 Amortization (2,658) (1,456) (1,221) Adjustment relating to net unrealized (gain) loss on securities available for sale 627 (2,423) 3,076 Balance, end of year $32,946 $21,435 $18,309 The activity related to the present value of future profits of the business acquired is summarized as follows (in thousands): Year Ended December 31 1998 1997 1996 Balance, beginning of year $20,537 $23,806 $15,246 Amounts related to acquisitions and disposals 10,401 (1,374) 9,615 Interest accreted on unamortized balance 4,223 3,178 2,563 Gross amortization during the year (6,088) (4,844) (3,812) Adjustments relating to net unrealized (gain) loss on securities available for sale (280) (229) 194 Balance, end of year $28,793 $20,537 $23,806
The percentages of future expected net amortization of the beginning balance of the present value of future profits, before the effect of net unrealized gains and losses, will be between 6% and 9% in each of the years 1999 through 2003. Future net amortization is based on the present value of future profits at December 31, 1998 and current assumptions as to future events on all policies in force. The discount rate used to calculate the present value of future profits reflected in the Company's consolidated balance sheets at December 31, 1998, ranged from 7.5% to 18%. The Company used a 13% discount rate to calculate the present value of future profits on the Savers Life and Midwestern Life acquisitions. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NOTES PAYABLE Notes payable were as follows (in thousands):
Interest December 31 Rate 1998 1997 Borrowings under revolving credit agreements 8.52%{ (1)} $25,000 $16,000 Senior subordinated convertible notes 10.00% 10,000 10,000 $35,000 $26,000
(1) Current weighted average rate at December 31, 1998. BORROWINGS UNDER REVOLVING CREDIT AGREEMENTS Standard Management has outstanding borrowings at December 31, 1998 pursuant to the Amended Credit Agreement that provides for it to borrow up to $26.0 million in the form of a seven-year reducing revolving loan arrangement. Standard Management has agreed to pay a non-use fee of .50% per annum on the unused portion of the commitment. In connection with the original and Amended Credit Agreement, SMC issued warrants to the bank to purchase 93,500 shares of Common Stock. Borrowings under the Amended Credit Agreement may be used for contributions to surplus of insurance subsidiaries, acquisition financing and repurchases of Common Stock. The debt is secured by a Pledge Agreement of all of the issued and outstanding shares of Common stock of Standard Life and Standard Marketing. 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 periodically, plus 1% per annum, or (ii) a rate at LIBOR plus 3.25%. The repayment schedule of the $25.0 million includes $3.3 million due March 2000 and $4.3 million each year thereafter to March 2005. Indebtedness incurred under the Amended Credit Agreement is subject to certain restrictions and covenants including, among other things, certain minimum financial ratios, minimum consolidated equity requirements for SMC, positive net income, minimum statutory surplus requirements for the Company's insurance subsidiaries and certain limitations on acquisitions, additional indebtedness, investments, mergers, consolidations and sales of assets. SMI has an unused line of credit of $1.7 million, with no borrowings in connection with this line of credit in 1998 or 1997. SENIOR SUBORDINATED CONVERTIBLE NOTES In connection with the acquisition of Shelby Life, Standard Management borrowed $4.0 million from an insurance company pursuant to a subordinated convertible debt agreement which was due in December 2003. At June 30, 1997, this subordinated convertible debt agreement was amended to the principal amount of $4.4 million which is due July 2004, unless previously converted, and requires interest payments in cash on January 1 and July 1 of each year at 10% per annum. At June 30, 1997, Standard Management borrowed an additional $5.6 million from the insurance company pursuant to another subordinated convertible debt agreement (collectively, the "Notes"), which is due July 2004 unless previously converted, and also requires interest payments in cash on January 1 and July 1 of each year at 10% per annum. Proceeds from the additional borrowings were used for contributions to surplus of insurance subsidiaries of $2.4 million, redemption of Class S Preferred Stock of approximately $1.8 million (SEE NOTE 7), and other general corporate purposes. The Notes are convertible at any time at the option of the noteholders into SMC Common Stock at the rate of $5.747 per share. The Notes may be prepaid in whole or in part at the option of Standard Management commencing on July 1, 2000 at redemption prices equal to 105% of the principal amount (plus accrued interest) and declining to 102% of the principal amount plus accrued interest. The Notes may be prepaid prior to July 1, 2000 at a redemption price equal to 101% of the principal amount (plus accrued interest) under certain limited circumstances. The Notes are subject to certain restrictions and covenants substantially similar to those in the Amended Credit Agreement. INTEREST PAID Cash paid for interest was $2.7 million, $1.5 million, and $.4 million in 1998, 1997 and 1996, respectively. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES The components of the federal income tax expense (benefit), applicable to pre-tax income before extraordinary gains, were as follows (in thousands):
Year Ended December 31 1998 1997 1996 Current taxes (benefit) $673 $(570) $(888) Deferred taxes 957 1,187 158 $1,630 $617 $(730)
The effective tax rate on pre-tax income before extraordinary gain is lower than the statutory corporate federal income tax rate as follows (in thousands):
Year Ended December 31 1998 1997 1996 Federal income tax expense at statutory rates (34%) $2,146 $1,109 $1,202 Nonrecognition of losses in SMC consolidated return and in foreign subsidiaries -- 314 543 Amortization of excess of net assets acquired over (472) (472) (472) acquisition cost Tax benefit from disposal of subsidiary -- -- (1,420) Tax benefits from capital loss carryforwards not -- (200) -- previously recognized Release of reserve for tax adjustments -- (100) (325) Other items, net (44) (34) (258) Federal income tax expense (benefit) $1,630 $617 $(730) Effective tax rate 26% 19% (21)%
The Company recovered $1.7 million, $1.3 million and $.1 million in federal income taxes in 1998, 1997 and 1996, respectively, and paid federal income taxes of $.7 million, $.2 million and $.9 million in 1998, 1997 and 1996, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax return purposes. Significant temporary differences included in the Company's deferred tax assets (liabilities) are as follows (in thousands):
December 31 1998 1997 Deferred income tax assets: Future policy benefits $12,338 $9,368 Capital and net operating loss carryforwards 5,556 6,123 Other-net 1,567 1,126 Gross deferred tax assets 19,461 16,617 Valuation allowance for deferred tax assets (9,023) (6,962) Deferred income tax assets, net of valuation allowance 10,438 9,655 Deferred income tax liabilities: Unrealized gain on securities available for sale (2,514) (1,820) Present value of future profits (9,791) (6,983) Deferred policy acquisition costs (5,753) (5,340) Total deferred income tax liabilities (18,058) (14,143) Net deferred income tax liabilities $(7,620) $(4,488)
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The Company is required to establish a "valuation allowance" for any portion of its deferred tax assets which are unlikely to be realized. The valuation allowance for deferred tax assets includes $1.0 million at December 31, 1998 with respect to corporate income tax loss carryforwards of Standard Management International, S.A. which, if recognized in the future, will result in an addition to negative goodwill and be amortized into income over its remaining life. The valuation allowance for deferred tax assets includes $1.8 million at December 31, 1998 with respect to deferred tax assets at the date of acquisition and net tax operating loss carry forwards of Dixie Life and Shelby Life which, if recognized in the future, will result in a reduction to goodwill and be amortized into income over its remaining life by reducing goodwill amortization expense. As of December 31, 1998, Standard Management and its noninsurance subsidiaries had consolidated net operating loss carryforwards of approximately $9.4 million for tax return purposes which expire from 2005 through 2012. These carryforwards will only be available to reduce the taxable income of Standard Management. At December 31, 1998, the Standard Life consolidated return had net operating loss carryforwards of approximately $4.1 million which expire in 2010 and 2018. As a result of the change in ownership of Midwestern Life, $1.1 million of these loss carryforwards are subject to an annual limitation of $.7 million. These carryforwards will only be available to reduce the taxable income of the Standard Life consolidated return. At December 31, 1998, Premier Life (Luxembourg) had accumulated corporate income tax loss carryforwards of approximately $2.6 million, all of which may be carried forward indefinitely. The Internal Revenue Service has completed its examination of the Company for years through 1993 in 1996. All adjustments to taxable income determined by completed examinations, which were not material, have reduced the net operating loss carryforwards. Upon completion of the examination, a tax reserve for adjustments of $.3 million was released and recorded in income in 1996. In 1997, the Internal Revenue Service completed its examination of Standard Life through 1996. All adjustments including a tax benefit from previously expired capital loss carryforwards were settled during 1997 resulting in a net tax benefit of approximately $.2 million during 1997 and upon completion of the examination, a tax reserve for adjustments of $.1 million was released into income in 1997. 7. SHAREHOLDERS' EQUITY REDEEMABLE PREFERRED STOCK Shareholders have authorized 1,000,000 shares of Preferred Stock. Other terms, including preferences, voting and conversion rights, may be established by the Board of Directors. In 1995, 300,000 shares of the authorized preferred stock were designated as Class S cumulative convertible redeemable preferred stock ("Class S preferred stock"). In February 1996 these shares were issued at a par value of $10.00 per share. The Company repurchased and retired 140,111 of these shares at a cost of $1.0 million in 1996, which resulted in an extraordinary gain of $.5 million. Effective August 1997, SMC redeemed the remaining Class S preferred stock for $1.8 million. In 1998, 130,000 shares of the authorized preferred stock were designated as Series A convertible redeemable preferred stock ("Series A preferred stock"). The Company issued 65,300 shares with a stated value of $6.5 million ($100 per share) in 1998. The following, among other things, are characteristics of the Series A preferred stock: The holders are entitled to cumulative annual dividends of $7.75 per share (payable quarterly). Conversion into 11.767 shares of SMC common stock per share of Series A preferred stock. Redeemable on July 1, 2003. Redemption by the Company may occur at 105% of stated value beginning July 1, 1999 and decreasing 1% per year to 100% at July 1, 2003. There are no voting rights attached to these shares. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY (CONTINUED) COMMON STOCK The Company repurchased 308,465, 154,903, and 431,026 shares of Common Stock for $1.7 million, $1.1 million, and $2.1 million in 1998, 1997 and 1996, respectively under its stock repurchase program. At December 31, 1998, the Company was authorized to purchase an additional 1,057,179 shares under this program. The following table represents outstanding warrants to purchase Common Stock as of December 31, 1998: Exercise Warrants ISSUE DATE EXPIRATION DATE PRICE OUTSTANDING June 1989 December 1999 $3.5216 229,430 January 1994 January 1999 7.8571 42,000 November 1995 November 2002 4.5238 31,500 July 1996 July 2003 4.3750 30,000 September 1996 September 1999 5.5000 16,500 April 1997 April 2004 5.1250 12,000 July 1997 July 2000 5.7500 75,000 September 1997 September 2000 7.5000 15,000 February 1998 August 2000 8.2500 50,000 October 1998 October 2001 8.0000 75,000 October 1998 October 2001 7.1250 20,000 596,430 CHANGES IN SHARES OF COMMON STOCK AND TREASURY STOCK The following table represents changes in the number of common and treasury shares as of December 31:
1998 1997 1996 Common Stock: Balance, beginning of year 5,752,499 5,752,499 5,459,573 Issuance of common stock 3,049,814 -- 20,000 5% common stock dividend -- -- 272,926 Balance, end of year 8,802,313 5,752,499 5,752,499 Treasury Stock: Balance, beginning of year (876,009) (728,229) (502,025) Treasury stock acquired (308,465) (154,903) (431,026) 5% common stock dividend -- -- (46,402) Reissuance of treasury stock in connection with exercise of stock options 23,615 7,123 1,224 Reissuance of treasury stock in connection with purchase of Shelby Life -- -- 250,000 Balance, end of year (1,160,859) (876,009) (728,229)
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY (CONTINUED) UNREALIZED GAIN ON SECURITIES The components of the balance sheet caption "Unrealized gain on securities available for sale" in shareholders' equity are summarized as follows (in thousands):
December 31 1998 1997 Fair value of securities available for sale $552,628 $372,628 Amortized cost of securities available for sale 548,613 367,427 Gross unrealized gain on securities available for sale 4,015 5,201 Adjustments for: Deferred policy acquisition costs (1,101) (1,727) Present value of future profits (489) (209) Deferred federal income tax liability (765) (1,094) Net unrealized gain on securities available for sale $1,660 $2,171
8. STOCK OPTION PLAN SMC has a non-qualified Stock Option Plan (the "Plan") under which 2,500,000 shares of Common Stock are reserved for grants of stock options to employees and directors. The purchase price per share specified in any Plan option must be at least equal to the fair market value of common stock at the grant date. Options generally become exercisable over a three-year period and have a term of 10 years. The Plan is administered by the Board of Directors and officers of SMC. The terms of the options, including the number of shares and the exercise price, are subject to the sole discretion of the Board of Directors. A total of 490,533 shares are available for future issuance for the Plan as of December 31, 1998. SFAS No. 123 entitled "Accounting for Stock-Based Compensation" issued in October 1995, was adopted by the Company as of December 31, 1997. The provisions of SFAS No. 123 allows companies to either expense the estimated fair value of stock options or to continue their current practice and disclose the pro forma effects on net income and earnings per share had the fair value of the options been expensed. The Company has elected to continue its practice of recognizing compensation expense for its Plan using the intrinsic value based method of accounting and to provide the required pro forma information. Had compensation cost for the Plan been determined based on the fair value at the grant date for awards under the Plan consistent with the provisions of SFAS No. 123, the Company's pro forma net income and pro forma earnings per share would have been the following (in thousands, except per share amounts):
Year Ended December 31 1998 1997 1996 Net income $3,094 $623 $3,227 Earnings per share .43 .11 .62 Earnings per share, assuming dilution .43 .11 .60
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-valuation model with the following weighted-average assumptions : 1998 1997 1996 Risk-free interest rates 5.6% 5.7% 5.9% Volatility factors .55 .37 .49 Weighted average expected life 7 years 7 years 7 years STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLAN (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its employee stock options. Because SFAS No. 123 is effective only for awards granted after January 1, 1995, the pro forma disclosures provided may not be representative of the effects on reported net income for future years. A summary of the Company's stock option activity and related information for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Price Price Price Shares Shares Shares Options outstanding, beginning 1,916,820 $6.08 1,446,169 $5.98 1,164,720 $6.46 of year Exercised (97,988) 5.23 (17,300) 4.52 (1,224) 3.57 Granted 79,950 6.94 685,000 6.29 769,122 6.14 Expired or forfeited (7,495) 6.75 (197,049) 4.30 (486,449) 7.56 Options outstanding, end of 1,891,287 6.15 1,916,820 6.08 1,446,169 5.98 year Options exercisable, end of 1,664,153 1,467,185 1,097,028 year Weighted-average fair value of options granted during $ 4.42 $ 3.10 $ 3.62 the year
Information with respect to stock options outstanding at December 31, 1998 is as follows:
Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Range of Average Average Average Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Price Exercisable Price Life (years) $3-5 348,988 7 $4.40 318,988 $4.36 5-7 988,867 8 6.03 811,733 5.93 7-9 534,532 7 7.42 514,532 7.41 9-11 18,900 5 9.40 18,900 9.40 1,891,287 1,664,153
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. REINSURANCE The Company's insurance subsidiaries have entered into reinsurance agreements with non-affiliated companies to limit the net loss arising from large risks, maintain their exposure to loss within capital resources, provide additional capacity for future growth and enter into sharing arrangements. The maximum amount of life insurance retained on any one life ranges from $30,000 to $150,000. Amounts of standard risk in excess of that limit are reinsured. Reinsurance premiums ceded to other insurers were $17.0 million, $4.8 million, and $2.2 million in 1998, 1997 and 1996, respectively. Reinsurance ceded has reduced benefits and claims incurred by $10.5 million, $5.4 million, and $6.2 million in 1998, 1997 and 1996, respectively. A contingent liability exists to the extent any of the reinsuring companies are unable to meet their obligations under the reinsurance agreements. To minimize exposure to significant losses from reinsurance insolvencies, 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. Based on its periodic reviews of these companies, the Company believes the assuming companies are able to honor all contractual commitments under the reinsurance agreements. At December 31, 1998 the Company's largest annuity reinsurer, which is rated "A" (Excellent) by A.M. Best, represented $33.7 million, or 56.3% of total reinsurance recoverable and $6.5 million of premium deposits ceded. From January 1, 1996 to March 31, 1996, approximately 50% of Standard Life's annuity business was ceded. Effective April 1, 1996, Standard Life reduced it to 25% and effective October 1, 1998, discontinued ceding its annuity business. On July 1, 1998, Savers Life's medicare supplement business was sold to Oxford Life Insurance Company through a quota share reinsurance agreement. Under the terms of the reinsurance agreement, Savers Life will administer the medicare supplement business through July 1, 1999 and will receive administration fee income. Effective December 31, 1998, Standard Life replaced Savers Life as a party to this reinsurance agreement and became responsible for the administration of the Medicare Supplement business. 10. RELATED PARTY TRANSACTIONS On October 28, 1997, SMC made an interest-free loan to an officer and director of SMC, in the amount of $778,000, representing a new loan in the sum of $438,000 and consolidation of an existing loan. The principal balance of the loan was $778,000 at December 31, 1998 and 1997. Repayment is due within 10 days of the officer's voluntary termination or resignation as an officer of SMC. In the event of a termination of the officer's employment with SMC following a change in control, the loan is deemed to be forgiven. On September 2, 1998, SMC made a loan to a director of SMC, in the amount of $120,000 with an interest rate of prime plus 1%. At December 31, 1998, the principal balance of the loan was $58,500. SMC entered into a covenant not to compete agreement with a former officer and director in February 1997, effective July 1, 1996, the date his employment agreement terminated. In accordance with the covenant not to compete agreement, the officer and director received payments of $275,000 and $125,000 in 1997 and 1998, respectively, and will receive $100,000 in 1999. SMC is a guarantor on a $70,000 loan to a director and officer. The guaranty will be effective until the earlier of repayment of the loan or June 25, 1999. Certain officers and directors purchased 31,000 shares, or $3.1 million of the Series A preferred stock as described in Note 7. These shares were purchased in connection with a loan agreement of $2.6 million which the Company has guaranteed. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company rents office and storage space under noncancellable operating leases. The Company incurred rent expense for operating leases of $1.0 million, $.9 million, and $1.0 million in 1998, 1997 and 1996, respectively. Pursuant to the terms of a lease agreement effective June 1, 1991, Standard Life has agreed to lease office space for a ten year period. After the initial ten year lease period, Standard Life may continue to lease the premises on a month to month basis at a rental of 125% of the prevailing market rate for the leased premises in effect at that time. Future required minimum rental payments, by year and in the aggregate, under operating leases as of December 31, 1998, are as follows (in thousands): 1999 $ 913 2000 805 2001 429 2002 128 2003 128 Thereafter 16 Total minimum lease payments $2,419 EMPLOYMENT AGREEMENTS Certain officers are employed pursuant to executive employment agreements that create certain liabilities in the event of the termination of the covered executives following a change in control of the Company. The commitment under these agreements is approximately three times their current annual salaries. Additionally, following termination from the Company due to a change in control, each executive is entitled to receive a lump sum payment equal to all unexercised stock options granted multiplied by the highest per share fair market value during the six month period ending on the date of termination. There were unexercised options outstanding to these executives to buy 1,327,880 shares at December 31, 1998. 12. LITIGATION An officer and director of SMC resigned effective April 15, 1997. On June 19, 1997, this former officer commenced an action in the Superior Court of Marion County, Indiana against SMC claiming that his employment agreement contained a provision to the effect that, following a termination of his employment with SMC under certain circumstances, he would be entitled to receive certain benefits. This former officer has asserted to SMC that he is entitled to a lump sum termination payment of $1.7 million and liquidated damages not exceeding $3.3 million by virtue of his voluntarily leaving SMC's employment. SMC disputes those claims. SMC filed its Answer and Counterclaim on September 11, 1997. SMC's investigation since the action was filed revealed a basis for the termination of employment of the former officer for cause relative to after-acquired evidence. On October 14, 1997, the Board of Directors of SMC terminated the former officer for cause effective March 15, 1997. Such termination will also be argued by SMC as a complete defense to all claims asserted by the former officer. The ultimate outcome of the action cannot presently be determined. Accordingly, no provision for any liability that may result has been made in the consolidated financial statements. Management believes that the conclusion of such litigation will not have a material adverse effect on SMC's consolidated financial condition. In addition, the Company is involved in various legal proceedings in the normal course of business. In most cases, such proceedings involve claims under insurance policies or other contracts of the Company. The outcomes of these legal proceedings are not expected to have a material adverse effect on the consolidated financial position, liquidity or future results of operations of the Company based on the Company's current understanding of the relevant facts and law. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES The Company's U.S. life insurance subsidiaries maintain their records in conformity with statutory accounting practices prescribed or permitted by state insurance regulatory authorities. Statutory accounting practices differ in certain respects from GAAP. In consolidation, adjustments have been made to conform the Company's domestic subsidiaries' accounts with GAAP. The Company's U.S. life insurance subsidiaries had consolidated statutory capital and surplus of $43.6 million and $25.9 million at December 31, 1998 and 1997, respectively, after elimination of subsidiaries intercompany accounts. Consolidated net income of the Company's life insurance subsidiaries on a statutory basis, after elimination of subsidiaries intercompany accounts was $1.7 million, $1.8 million, and $3.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum statutory capital and surplus required by the Indiana Insurance Code was $.5 million as of December 31, 1998. "Prescribed" statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to be adopted by states with an implementation date of January 1, 2001, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Effective December 31, 1998, Standard Life strengthened policy reserves by $.3 million pursuant to the statutory Actuarial Guideline 33. Standard Life received permission from the Indiana Department of Insurance Commissioner to grade in the remaining effect of Actuarial Guideline 33 in 1999 and 2000. This permitted accounting practice increased statutory surplus by $.7 million at December 31, 1998. Policy reserves for Dixie Life's fixed premium universal life policies were calculated according to the Commissioners' Reserve Valuation Method ("CRVM") for traditional whole life policies. This differs from prescribed statutory accounting practices. Effective October 2, 1995, Dixie Life received permission from the Mississippi Insurance Department to strengthen the reserves for these policies by using the CRVM methodology as modified by the Universal Life Model Regulation. This reserve strengthening was recorded quarterly through September 30, 1998. From the funds borrowed by SMC pursuant to the Amended Credit Agreement and the subordinated convertible debt agreement, $27.0 million ($13.0 million at December 31, 1997) was loaned to Standard Life pursuant to an Unsecured Surplus Debenture Agreement ("Surplus Debenture") which requires Standard Life to make quarterly interest payments to SMC at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. As required by state regulatory authorities, the balance of the surplus debenture at December 31, 1998 and 1997 of $27.0 million and $13.0 million, respectively, is classified as a part of capital and surplus of Standard Life. The interest and principal payments are subject to quarterly approval by the Indiana Department of Insurance, depending upon satisfaction of certain financial tests relating to levels of Standard Life's capital and surplus and general approval of the Commissioner of the Indiana Department of Insurance. SMC's ability to pay operating expenses and meet debt service obligations is partially dependent upon the amount of dividends received from Standard Life. Standard Life's ability to pay cash dividends to SMC is, in turn, restricted by law or subject to approval by the insurance regulatory authorities of Indiana. Dividends are permitted based on, among other things, the level of the preceding year statutory surplus and net income. In 1997 and 1996, Standard Life paid dividends of $1.6 million and $1.0 million, respectively, to SMC. During 1999, Standard Life can pay dividends of $4.4 million without regulatory approval; Standard Life must notify the Indiana regulatory authorities of the intent to pay dividends at least thirty days prior to payment. State insurance regulatory authorities impose minimum risk-based capital requirements on insurance enterprises that were developed by the NAIC. The formulas for determining the amount of risk-based capital ("RBC") specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of investment and insurance risks. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. At December 31, 1998, the RBC Ratios of Standard Life and Dixie Life were both at least two and a half times greater than the levels at which company action is required. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STATUTORY ACCOUNTING INFORMATION OF SUBSIDIARIES (CONTINUED) The statutory capital and surplus for Premier Life (Luxembourg) was $6.8 million and $7.3 million at fiscal years ended 1998 and 1997, respectively, and minimum capital and surplus under local insurance regulations was $2.9 million at fiscal years ended 1998 and 1997. The statutory capital and surplus for Premier Life (Bermuda) was $2.1 million and $1.4 million at fiscal years ended 1998 and 1997, respectively, and minimum capital and surplus under local insurance regulations was $.3 million at fiscal years ended 1998 and 1997. SMI dividends are limited to its accumulated earnings without regulatory approval. SMI and Premier Life (Luxembourg) were not permitted to pay dividends under Luxembourg law in 1998 and 1997 due to accumulated losses. 14. OPERATIONS BY BUSINESS SEGMENT In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under this new pronouncement, effective for financial statements issued for fiscal years beginning after December 15, 1997, a company must provide disclosures about operating segments on the same basis it uses internally to evaluate the performance of its operations and allocate its resources. The Company identified the following two operating segments which are the primary components of its business. DOMESTIC OPERATIONS includes revenues earned and expenses incurred from United States operations and includes deposits and/or income from annuity products (primarily FPDA's), equity indexed products, universal life products and traditional life products. The profitability for this segment primarily depends on the investment spread earned (annuities and universal life), the persistency of the in-force business, claim experience and expense management. INTERNATIONAL OPERATIONS includes revenues earned and expenses incurred from abroad, primarily Europe, and includes fees collected on deposits from unit-linked products. The profitability for this segment primarily depends on the amount of separate account assets under management, the management fee charged on those assets and expense management. The accounting policies of the segments are the same as described in Note 1 (Summary of Significant Accounting Policies). The following segment presentation contains the same operating data and results the Company uses to evaluate the performance of the business and provides reconciliations to consolidated totals (in thousands):
Year Ended December 31 1998 1997 1996 Revenues: Domestic $58,055 $42,651 $36,524 International 4,815 3,960 3,681 Consolidated Revenues $62,870 $46,611 $40,205 Net Investment Income: Domestic $33,721 $28,614 $20,132 International 859 902 739 Consolidated Net Investment Income $34,580 $29,516 $20,871 Interest Credited on Interest Sensitive Annuities and Other $19,775 $16,281 $11,092 Financial Products (All Domestic) Pre-tax Income: Domestic $4,053 $1,542 $2,292 International 2,258 1,720 1,243 Consolidated Pre-tax Income $6,311 $3,262 $3,535 Assets: Domestic $750,683 $508,476 $486,576 International 205,467 160,516 141,837 Consolidated Assets $956,150 $668,992 $628,413
15. DERIVATIVE FINANCIAL INSTRUMENTS In May 1998, Standard Life began offering equity-indexed annuity products which provide a base rate of return with a higher potential return linked to the performance of a broad-based equity index. The Company buys Standard & Poor's 500 Index Call Options (the "S&P 500 Call Options") in an effort to hedge potential increases to policyholder benefits resulting from increases in the S&P 500 Index to which the product's return is linked. The cost of the S&P 500 Call Options is included in the pricing of the equity- indexed annuity products. The changes in the values of the S&P 500 Call Options are reflected in net investment income and fluctuate in relation to changes in policyholder account balances for these annuities. Premiums paid to purchase these instruments are deferred and amortized over their term. At December 31, 1998, net investment income included $.6 million related to changes in the fair value of the S&P 500 Call Options. Such investment income was substantially offset by amounts credited to financial products. The fair value of the S&P 500 Call Options was $1.8 million at December 31, 1998. If the counterparts of the aforementioned financial instruments do not meet their obligations, the Company may have to recognize a loss. The Company limits its exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At December 31, 1998, all of the counterparties were rated "A" or higher by Standard & Poor's Corporation. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following discussion outlines the methods and assumptions used by the Company in estimating its fair value disclosures for its financial instrument assets and liabilities. Because fair values for all balance sheet items are not required to be disclosed pursuant to SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", the aggregate fair value amounts presented herein do not necessarily represent the underlying value of the Company; likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein. FIXED MATURITY SECURITIES: Fair values for fixed maturity securities are based on quoted market prices from broker-dealers, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or, in the case of private placements, are estimated by discounting the expected future cash flows using current market rates applicable to the coupon rate, credit rating and maturity of the investments. EQUITY SECURITIES: The fair values for equity securities are based on the quoted market prices. DERIVATIVE SECURITIES: The fair values for derivative securities are based on internal methods developed by our investment advisor. MORTGAGE LOANS AND POLICY LOANS: The estimated fair values for mortgage loans and policy loans are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings. ASSETS AND LIABILITIES HELD IN SEPARATE ACCOUNTS: Fair values for the assets held in separate accounts are determined from broker-dealers or valuations supplied by internationally recognized statistical rating organizations. The separate account liability represents the Company's obligations to policyholders and approximates fair value. INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: Fair values for the Company's liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining contracts being valued. The estimated fair value of the liabilities for investment contracts was approximately equal to its carrying value at December 31, 1998 and 1997. This is due to i) credited rates on the vast majority of account balances approximating current rates paid on similar investments and ii) rates not generally being guaranteed beyond one year. INSURANCE LIABILITIES FOR NON-INVESTMENT CONTRACTS: Fair value disclosures for the Company's reserves for insurance contracts other than investment-type contracts are not required and have not been determined by the Company. However, the Company closely monitors the level of its insurance liabilities and the fair value of reserves under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk. NOTES PAYABLE: The Company believes the fair value of its variable rate long-term debt was equal to its carrying value at December 31, 1998 and 1997. The Company negotiated the terms of its Amended Credit Agreement with its lenders in November 1996. Those negotiations were based on the financial condition of the Company and market conditions at that time. The financial condition of the Company has not changed significantly since the negotiations, and although market conditions 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) have changed, the Company pays a variable rate of interest on the debt which reflects the change in market conditions. The fair value of the subordinated convertible debt is based on quoted market prices for the amount of shares convertible. The carrying amount of all other financial instruments approximates their fair values. The fair value of the Company's financial instruments is shown below using a summarized version of the Company's assets and liabilities at December 31, 1998 and 1997 (in thousands). Refer to Note 3 for additional information relating to the fair value of investments.
December 31 1998 1997 Fair Carrying Fair Carrying Value Amount Value Amount Assets: Investments: Securities available for sale: Fixed maturity securities $551,312 $551,312 $372,576 $372,576 Equity securities 1,316 1,316 52 52 Mortgage loans on real estate 8,856 8,578 377 375 Policy loans 14,295 15,019 8,978 9,495 Other invested assets 837 837 779 779 Short-term investments 11,626 11,626 13,342 13,342 Cash 13,591 13,591 4,165 4,165 Assets held in separate accounts 190,246 190,246 148,064 148,064 Liabilities: Insurance liabilities for 506,749 506,749 350,607 350,607 investment contracts Notes payable 37,180 35,000 27,419 26,000 Liabilities related to separate 190,246 190,246 148,064 148,064 accounts
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. EARNINGS PER SHARE A reconciliation of the numerator and denominator of the earnings per share computation is as follows (dollars in thousands, except per share amounts):
1998 1997 1996 Numerator: Income before extraordinary gain and preferred stock $4,681 $2,645 $4,265 dividends Extraordinary gain on early redemption of redeemable -- -- 502 preferred stock Preferred stock dividends (180) (97) (208) Numerator for basic earnings per share - Income available to common shareholders 4,501 2,548 4,559 Effect of dilutive securities: Preferred stock dividends 180 97 208 14% subordinated convertible debt -- -- 82 10% subordinated convertible debt 1,000 -- -- 1,180 97 290 Numerator for diluted earnings per share - Income available to common shareholders after $5,681 $2,645 $4,849 assumed conversions Denominator: Denominator for basic earnings per share - weighted - 6,846,335 4,948,302 4,856,316 average shares Effect of dilutive securities: Stock options 263,636 182,615 24,311 Stock warrants 211,989 230,285 108,062 Class S convertible preferred stock -- 230,015 393,701 14% subordinated convertible debt -- -- 166,667 10% subordinated convertible debt 1,740,038 -- -- Series A convertible preferred stock 301,765 -- -- Dilutive potential common shares 2,517,428 642,915 692,741 Denominator for diluted earnings per share - adjusted weighted -average shares and assumed conversions 9,363,763 5,591,217 5,549,057 Basic earnings per share $.65 $.52 $.94 Diluted earnings per share $.60 $.47 $.87
The Notes convertible in 1997 (SEE NOTE 5) were not included in the computation of diluted earnings per share in 1997 due to their antidilutive effect. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings per common and common equivalent share for each quarter are computed independently of earnings per share for the year. Due to the transactions affecting the weighted average number of shares outstanding in each quarter and due to the uneven distribution of earnings during the year, the sum of the quarterly earnings per share may not equal the earnings per share for the year.
1998 Quarters First Second Third Fourth Total revenues $11,675 $19,798 $13,887 $17,510 Components of net income: Operating income $734 $1,276 $1,120 $1,317 Net realized investment gain 14 17 18 185 Net income $748 $1,293 $1,138 $1,502 Net income per common share $.14 $.18 $.16 $.20 Net income per common share, assuming dilution $.13 $.16 $.15 $.17 1997 Quarters First Second Third Fourth Total revenues $11,998 $11,342 $11,615 $11,656 Components of net income: Operating income $528 $661 $537 $658 Net realized investment gains 115 21 53 72 Net income $643 $682 $590 $730 Net income per common share $.13 $.14 $.12 $.15 Net income per common share, assuming dilution $.11 $.12 $.11 $.13
Reporting the results of insurance operations on a quarterly basis requires the use of numerous estimates throughout the year, primarily in the computation of reserves, amortization of deferred policy acquisition costs and present value of future profits, and the effective rate for income taxes. It is the Company's practice to review estimates at the end of each quarter and, if necessary, make appropriate adjustments, with the effect of such adjustments being reported in current operations. Only at year-end is the Company able to assess the accuracy of its previous quarterly estimates. The Company's fourth quarter results include the effect of the difference between previous estimates and actual year-end results. Therefore, the results of an interim period may not be indicative of the results of the entire year. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31 1998 1997 ASSETS Investments: Investment in subsidiaries $77,382 $52,005 Surplus debenture due from Standard Life 27,000 13,000 Fixed maturity securities, at fair value (amortized cost $900) 900 -- Equity securities available for sale, at fair value (amortized 28 2 cost: 1998 - $20; 1997 -$5) Real estate 122 130 Notes receivable from officers and directors 837 778 Short-term investments, at cost, which approximates fair value -- 79 106,279 65,994 Cash 940 1,327 Property and equipment, less accumulated depreciation of $2,038 in 1998 862 879 and $1,636 in 1997 Note receivable from affiliate 2,858 2,858 Amounts receivable from subsidiaries 2,338 1,212 Other assets 1,229 1,892 Total assets $113,350 $74,162 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Obligations under capital lease $ -- $141 Notes payable 35,000 26,000 Note payable to affiliate 2,858 2,858 Amounts due to subsidiaries 850 397 Other liabilities 2,070 1,453 Total liabilities 40,778 30,849 Class A cumulative convertible redeemable preferred stock, par value $100 per share: authorized 130,000 shares; issued and outstanding 65,300 shares in 1998 6,530 -- Shareholders' Equity: Preferred stock, no par value: Authorized 870,000 shares; none issued and outstanding -- -- Common stock, no par value: Authorized 20,000,000 shares; outstanding 1998 - 7,641,454; 1997 60,586 40,646 - 4,876,490 Treasury stock, at cost, 1,160,854 shares in 1998 and 876,009 shares in (6,220) (4,572) 1997 Accumulated other comprehensive income: Unrealized gain (loss) on securities of subsidiaries 1,683 2,171 Foreign currency translation adjustment of subsidiaries 4 (473) Retained earnings 9,989 5,541 Total shareholders' equity 66,042 43,313 Total liabilities and shareholders' equity $113,350 $74,162
See accompanying notes to condensed financial statements. STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
Year Ended December 31 1998 1997 1996 Revenues: Net investment income (loss) $(26) $-- $32 Interest income from subsidiaries 1,709 1,519 357 Net realized investment losses (100) -- -- Loss on disposal of subsidiary -- -- (156) Other income 118 154 135 Rental income from subsidiaries 995 1,145 853 Management fees from subsidiaries 2,850 2,100 1,905 Total revenues 5,546 4,918 3,126 Expenses: Other operating expenses 3,134 3,420 3,470 Interest expense and financing costs 2,850 2,367 799 Interest expense on note payable to affiliate 160 162 161 Total expenses 6,144 5,949 4,430 Income (loss) before federal income taxes, equity in earnings of consolidated subsidiaries, extraordinary gain (598) (1,031) (1,304) and preferred stock dividends Federal income tax expense (credit) 30 (76) -- Income (loss) before equity in earnings of consolidated subsidiaries, extraordinary gain and preferred stock dividends (628) (955) (1,304) Equity in earnings of consolidated subsidiaries 5,309 3,600 5,569 Income before extraordinary gain and preferred 4,681 2,645 4,265 stock dividends Extraordinary gain on early redemption of redeemable preferred stock, net taxes of $0 -- -- 502 Net income 4,681 2,645 4,767 Preferred stock dividends 180 97 208 Earnings available to common shareholders $4,501 $2,548 $4,559
See accompanying notes to condensed financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31 1998 1997 1996 OPERATING ACTIVITIES Net income $4,681 $2,645 $4,767 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred debt issuance costs 97 71 32 Depreciation and amortization 439 646 564 Equity in earnings of subsidiaries (5,309) (3,600) (5,569) Accrued interest payable 197 435 320 Other liabilities (38) 79 192 Dividend from Standard Life -- 1,600 1,000 Extraordinary gain -- -- (502) Other (483) (370) 165 Net cash provided (used) by operating (416) 1,506 969 activities FINANCING ACTIVITIES Issuance of common stock, net 19,638 -- -- Borrowings, net of debt issuance costs of $206, $70 and $208 in 1998, 1997 and 1996, respectively 11,794 5,558 16,792 Repayments on long-term debt and obligations under (3,141) (543) (491) capital lease Issuance of convertible preferred stock net of issuance costs of $141 in 1998 6,389 -- -- Reissuance of treasury stock in connection with exercise of stock options and warrants 234 -- -- Redemption of redeemable preferred stock -- (1,855) (949) Repurchase of stock warrants -- -- (600) Proceeds from common and treasury stock sales -- 138 100 Purchase of common stock for treasury (1,672) (503) (2,126) Net cash provided by financing activities 33,242 2,795 12,726 INVESTING ACTIVITIES Investments, net (1,685) (1,035) 197 Purchase of property and equipment, net (385) (439) (246) Surplus debenture contributed to Standard Life -- -- (13,000) Capital contribution to Standard Life -- (2,400) -- Purchase of Savers Life, less cash acquired of $518 (18,039) -- -- Purchase of Midwestern Life, less cash acquired of (13,104) -- -- $1,026 Net cash used by investing activities (33,213) (3,874) (13,049) Net increase (decrease) in cash (387) 427 646 Cash at beginning of year 1,327 900 254 Cash at end of year $940 $1,327 $900
See accompanying notes to condensed financial statements. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STANDARD MANAGEMENT CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BASIS OF PRESENTATION For purposes of these condensed financial statements, Standard Management Corporation ("SMC") carries its investments in subsidiaries at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. Net income of its subsidiaries is included in income using the equity method. These condensed financial statements should be read in conjunction with SMC's consolidated financial statements included elsewhere in this document. 2. DIVIDENDS FROM SUBSIDIARIES SMC received a cash dividend from subsidiaries of $1.6 million and $1.0 million in 1997 and 1996, respectively. STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SCHEDULE IV -- REINSURANCE STANDARD MANAGEMENT CORPORATION YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
Percentage Ceded to Assumed of Amount Gross Other from Other Assumed Amount Companies Companies Net Amount to Net YEAR ENDED DECEMBER 31, 1998 Life insurance in force $2,520,340 $1,231,533 $217 $1,289,024 0.02% Premiums: Life insurance and annuities $13,160 $4,705 $-- $8,455 Accident and health insurance 18,333 12,341 -- 5,992 Supplementary contract and other funds on deposit 32 -- -- 32 Total premiums $31,525 $17,046 $-- $14,479 YEAR ENDED DECEMBER 31, 1997 Life insurance in force $2,447,782 $1,269,848 $237 $1,178,171 0.02% Premiums: Life insurance and annuities $11,735 $4,821 $-- $6,914 Accident and health insurance 17 -- -- 17 Supplementary contract and other funds on deposit 169 -- -- 169 Total premiums $11,921 $4,821 $-- $7,100 YEAR ENDED DECEMBER 31, 1996 Life insurance in force $3,000,763 $1,633,340 $252 $1,367,675 0.02% Premiums: Life insurance and annuities $11,862 $2,152 $-- $9,710 Accident and health insurance 21 -- -- 21 Supplementary contract and other funds on deposit 737 -- -- 737 Total premiums $12,620 $2,152 $-- $10,468
STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EXHIBIT 21 SUBSIDIARIES OF STANDARD MANAGEMENT CORPORATION STATE PERCENTAGE OF OR COUNTRY IN NAME OF SUBSIDIARY OUTSTANDING WHICH ORGANIZED Standard Life Insurance Company of Indiana 100% Indiana Dixie National Life Insurance Company 99.4% Mississippi Standard Marketing Corporation 100% Indiana Savers Marketing Corporation 100% North Carolina Standard Marketing International, Ltd. 100% Bermuda Standard Investor Services Corporation 100% Indiana Standard Administrative Services, Inc. 100% Indiana Standard Management International S.A. 100% Luxembourg Premier Life (Luxembourg) S.A. 100% Luxembourg Premier Life (Bermuda) Limited 100% Bermuda Standard Development, LLC 100% Indiana STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-92906) pertaining to the Second Amended and Restated Stock Option Plan of Standard Management Corporation, the Registration Statement (Form S-8 No. 333-41119) pertaining to the Amended and Restated Stock Option Plan of Standard Management Corporation and the Registration Statement (Form S-8 No. 333-41117) pertaining to the Standard Management Corporation Savings Plan, of our report dated February 18, 1999, with respect to the consolidated financial statements and schedules of Standard Management Corporation and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1998. Ernst & Young LLP Indianapolis, Indiana March 30, 1999 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-92906) pertaining to the Second Amended and Restated Stock Option Plan of Standard Management Corporation, the Registration Statement (Form S-8 No. 333-41119) pertaining to the Amended and Restated Stock Option Plan of Standard Management Corporation and the Registration Statement (Form S- 8 No. 333-41117) pertaining to the Standard Management Corporation Savings Plan, of our report dated February 18, 1999, with respect to the consolidated financial statements of Standard Management International S. A. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1998 of Standard Management Corporation. KPMG Audit Luxembourg March 30, 1999 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned persons whose signature appear immediately below, does hereby constitute and appoint Ronald D. Hunter and Stephen M. Coons, each with full power to act alone, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign on behalf of the undersigned an Annual Report on Form 10-K ("Form 10-K") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or his substitute lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March, 1999. /S/ RONALD D. HUNTER /S/ PAUL B. PHEFFER Ronald D. Hunter Paul B. Pheffer /S/ GERALD R. HOCHGESANG /S/ RAYMOND J. OHLSON Gerald R. Hochgesang Raymond J. Ohlson /S/ EDWARD T. STAHL /S/ STEPHEN M. COONS Edward T. Stahl Stephen M. Coons /S/ MARTIAL R. KNIESER /S/ ROBERT A. BORNS Martial R. Knieser Robert A. Borns /S/ JOHN J. DILLON /S/ JERRY E. FRANCIS John J. Dillon Jerry E. Francis STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) EX-10.9 2 AMENDMENT #3 TO MANAGEMENT SERVICE AGREEMENT WHEREAS, Standard Management Corporation and Standard Life Insurance Company of Indiana have entered into a Management Service Agreement effective August 1, 1992. AND WHEREAS, Standard Management Corporation and Standard Life Insurance Company of Indiana have entered into Amendment #1 to this Management Service Agreement effective January 1, 1995. AND WHEREAS, Standard Management Corporation and Standard Life Insurance Company of Indiana have entered into Amendment #2 to this Management Services Agreement effective January 1, 1997. NOW THEREFORE, effective January 1, 1999, paragraph 4 of such agreement as amended by Amendment #1 and Amendment #2 shall be amended by deleting the former paragraph 4 in its entirety and replacing it with the following: 4. In consideration for the services provided in paragraphs 1, 2, and 3, Standard agrees to pay the company a monthly fee of Three Hundred Thousand Dollars ($300,000) which is due and payable within ten (10) days from the receipt of the invoice. IN WITNESS WHEREOF, the parties hereto have executed effective January 1, 1999 this Amendment #3 to the Management Service Agreement. STANDARD MANAGEMENTSTANDARD LIFE INSURANCE CORPORATIONCOMPANY OF INDIANA By: _________________________By: ________________________________ Edward T. StahlRaymond J. Ohlson Executive Vice President & President Director Corporate Development EX-10.42 3 ARTICLES OF MERGER OF SAVERS LIFE INSURANCE COMPANY (HEREINAFTER THE AMERGING CORPORATION@) INTO STANDARD LIFE INSURANCE COMPANY OF INDIANA (HEREINAFTER THE ASURVIVING CORPORATION@) In compliance with the requirements of the Indiana Business Corporation Law (the AAct@), the undersigned corporations desiring to effect a merger, set forth the following facts: ARTICLE I SURVIVING CORPORATION SECTION 1.The name of the corporation surviving the merger is Standard Life Insurance Company of Indiana, an Indiana corporation and such name has not been changed as a result of the merger. SECTION 2.The surviving corporation is a domestic corporation existing pursuant to the provisions of the Act, incorporated on July 3, 1934. ARTICLE II MERGING CORPORATION The name, state of incorporation and date of incorporation of the Merging Corporation, which is a party to the merger, is as follows: Name of Corporation:Savers Life Insurance Company State of Domicile:North Carolina Date of Incorporation under the Laws of the State of North Carolina:January 22, 1980 ARTICLE III PLAN OF MERGER The Plan of Merger, containing such information as required by Indiana Code Section 23-1-40-1(b), is set forth in Exhibit AA,@ attached hereto and made a part hereof. ARTICLE IV MANNER OF ADOPTION AND VOTE A.ACTION BY SURVIVING CORPORATION. The designation of each class of stock entitled to vote on the merger, number of outstanding shares, number of votes entitled to vote on the merger, the number of votes represented by the written consent of the sole shareholder of the Surviving Corporation, the number of votes cast in favor of the merger and the number of votes cast against the merger is set forth below: TOTALCOMMON Designation of Voting Group, Common Stock,1,200,0001,200,000 no par value Number of Outstanding Shares897,033897,033 Number of Votes Entitled To Be Cast897,033897,033 Number of Votes Represented by the Written Consent897,033897,033 Number of Shares Voted in Favor897,033897,033 Number of Shares Voted Against- 0 -- 0 - Unanimous vote after waiver of notice of meeting was obtained by written consent of the sole shareholder of the Surviving Corporation at a Special Meeting of the sole shareholder held on October 30, 1998. B.ACTION BY FOREIGN MERGING CORPORATION. The designation of each class of stock, number of outstanding shares, number of votes entitled to vote on the merger, the number of votes represented by the written consent of the sole shareholder of the Merging Corporation, the number of votes cast in favor of the merger and the number of votes cast against the merger is set forth below: TOTALCOMMON Designation of Voting Group, Common Stock1,0001,000 Number of Outstanding Shares1,0001,000 Number of Votes Entitled To Be Cast1,0001,000 Number of Votes Represented by the Written Consent1,0001,000 Number of Shares Voted in Favor1,0001,000 Number of Shares Voted Against- 0 -- 0 - Unanimous vote after waiver of notice of meeting was obtained by written consent of the sole shareholder of the Merging Corporation at a Special Meeting of the sole shareholder effective as of October 30, 1998. ARTICLE V EFFECTIVE DATE The effective date of the merger shall be December 31, 1998. IN WITNESS WHEREOF, the undersigned, being, respectively, the President and Secretary of Standard Life Insurance Company of Indiana, execute these Articles of Merger and verifies, subject to penalties of perjury, that the statements contained herein are true, this ______ day of December, 1998. ___________________________________________________________ Raymond J. Ohlson, PresidentEdward T. Stahl, Secretary State of Indiana } } ss: County of Marion } Before me the undersigned, a Notary Public for Marion County, State of Indiana, personally appeared, respectively as President and Secretary, Raymond J. Ohlson and Edward T. Stahl, and acknowledged the execution of this instrument this _________ day of December, 1998. (SEAL)______________________________ Carla J. James, Notary Public My commission expires ____________________ IN WITNESS WHEREOF, the undersigned, being, respectively, the President and Secretary of Savers Life Insurance Company, execute these Articles of Merger and verifies, subject to penalties of perjury, that the statements contained herein are true, this ______ day of December, 1998. ___________________________________________________________ Raymond J. Ohlson, PresidentEdward T. Stahl, Secretary State of Indiana } } ss: County of Marion } Before me the undersigned, a Notary Public for Marion County, State of Indiana, personally appeared, respectively as President and Secretary, Raymond J. Ohlson and Edward T. Stahl, and acknowledged the execution of this instrument this ________ day of December, 1998. (SEAL)______________________________ Carla J. James, Notary Public My commission expires ____________________ EX-10.43 4 PLAN AND AGREEMENT OF MERGER OF SAVERS LIFE INSURANCE COMPANY, AS MERGING CORPORATION, AND STANDARD LIFE INSURANCE COMPANY OF INDIANA, AS SURVIVING CORPORATION THIS PLAN AND AGREEMENT OF MERGER (the APlan@) entered into this 30th day of October, 1998, by and between SAVERS LIFE INSURANCE COMPANY, a North Carolina corporation (hereinafter called ASavers Life@), and STANDARD LIFE INSURANCE COMPANY OF INDIANA, an Indiana corporation (hereinafter called AStandard Life@), W I T N E S S E T H: WHEREAS, Savers Life is a corporation duly organized and existing under the laws of the State of North Carolina, as amended; WHEREAS, Standard Life is a corporation duly organized and existing under the Indiana Business Corporation Law, as amended; WHEREAS, Savers Life has one thousand (1,000) shares of authorized capital stock, no par value, of which one thousand (1,000) shares are issued and outstanding; WHEREAS, Standard Life has one million two hundred thousand (1,200,000) shares of authorized capital stock, without par value, of which eight hundred ninety- seven thousand thirty-three (897,033) shares are issued and outstanding; WHEREAS, the issued and outstanding stock of the two (2) respective corporations and the holders and percentages thereof are as follows: SAVERS LIFE STANDARD LIFE Standard Management Corp. 1,000 100% 897,033 100% TOTAL 1,000 100% 897,033 100% WHEREAS, in order to effect certain administrative, managerial and financial economies and benefits, it is the desire of the parties hereto to merge Savers Life into Standard Life; NOW, THEREFORE, in consideration of the mutual promises, agreements and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Savers Life and Standard Life do hereby make such merger upon the following terms and conditions: 1.EFFECTIVE DATE OF MERGER. The Effective Date of the merger shall be December 31, 1998. The parties hereto shall seek issuance by the Secretary of State of Indiana of the certificate of merger effecting the merger herein provided. 2.PARTIES TO THE MERGER. The parties to this Plan are Savers Life Insurance Company and Standard Life Insurance Company of Indiana. 3.CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE MERGER. All of the obligations under this Plan are subject to the Board of Directors of each of the undersigned corporations satisfying itself that no income tax liability will be incurred by any party hereto or its shareholders as a result of the consummation of this Plan, the sole shareholder of each corporation approving this Plan and each corporation complying with the laws of either the State of Indiana or the State of North Carolina allowing it to complete the merger contemplated hereunder. 4.EXCHANGE OF STOCK; TERMS AND CONDITIONS OF MERGER. The fair market value of the stock issued and outstanding of Savers Life has been determined to be Seventeen Million and Fifty-Six Thousand Dollars ($17,056,000). On the Effective Date, the sole shareholder of Savers Life shall be entitled to receive no additional shares of common stock of Standard Life. 5.SUBMISSION TO SHAREHOLDERS. This Plan shall be submitted separately to the sole shareholder of each of the corporations which is a party hereto for approval in the manner provided by the laws of either the State of Indiana or the State of North Carolina. 6.MECHANICS OF CLOSING; MANNER AND BASIS OF CARRYING MERGER INTO EFFECT. Upon approval of the Plan, Edward T. Stahl, as Secretary of Standard Life, shall execute Articles of Merger as required by the Secretary of State of Indiana in order to effectuate the merger herein contemplated. The proper officers of Savers Life shall execute and deliver to Standard Life such specific assignments and other documents for the transfer of assets or stock as may be required. Upon the Closing Date, Standard Life shall cause the Articles of Merger to be filed with the Secretary of State of Indiana and to be recorded with the Recorder of any county in which the parties hereto own real estate or have their principal place of business. 7.SURVIVING CORPORATE ENTITY. Upon the Effective Date of the merger, Savers Life shall merge into and become a part of Standard Life, which shall survive the merger and the name of which shall continue to be Standard Life, and the separate corporate existence of Savers Life shall thereupon cease. 8.ATTRIBUTES AND PROPERTY OF THE SURVIVING CORPORATION. Upon the Effective Date of the merger, Standard Life, as the surviving corporation, shall, in accordance with the provisions of the Indiana Business Corporation Law, as amended, thereupon and thereafter possess all the rights, privileges, immunities, powers and franchises, of a public as well as of a private nature, of each of the parties hereto. All property, real, personal and mixed, and debts due on whatever account and all other choses in action and all and every other interest of or belonging to or due to each of the parties shall be taken and deemed to be transferred to and vested in Standard Life without further act or deed. 9.LIABILITIES OF STANDARD LIFE AS THE SURVIVING CORPORATION. Upon the Effective Date of the merger, Standard Life shall, in accordance with the provisions of the Indiana Business Corporation Law, as amended, thereupon and thenceforth be responsible and liable for all of the liability and obligations of each of the parties hereto in the same manner and to the same extent as if Standard Life had itself incurred the same or contracted therefor. Any claim existing or action or proceeding pending by or against any of the parties hereto, may be prosecuted to judgment as if such merger had not taken place or Standard Life may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any of the parties hereto shall be impaired by such merger, but any such liens shall be limited to the property upon which they were liens immediately prior to the time of such merger. 10.ARTICLES AND BY-LAWS OF THE SURVIVING CORPORATION. The Articles of Incorporation, together with all amendments thereof, and the Code of By-Laws of Standard Life as they exist on the Effective Date, shall continue to be the Articles of Incorporation and the Code of By-Laws, respectively, of Standard Life upon and after the Effective Date until changed or amended in accordance with the terms thereof. 11.BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. All the members of the Board of Directors and all the officers of Standard Life, as the surviving corporation on the Effective Date of the merger, shall be and continue as the directors and officers, respectively, of Standard Life, after such date, to hold office for the same terms and upon the same conditions as theretofore existed between each of them, respectively, and Standard Life. 12.ADDITIONAL DOCUMENTS. The parties hereto agree that they will cause to be executed any such further and additional documents and instruments as may from time to time be reasonably required for the purposes of consummating or carrying out the merger as contemplated by this Agreement. 13.SUCCESSORS AND ASSIGNS. This Plan and each of its provisions shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Plan cannot be assigned by any of the parties. Nothing herein, express or implied, is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto, any rights or remedies under or by reason of this Plan. 14.GOVERNING LAW. The validity, interpretation and performance of this Plan shall be governed by, construed and enforced in accordance with the laws of the State of Indiana. IN WITNESS WHEREOF, the parties hereto have respectively caused this Plan to be executed by their duly authorized officers this 30{th} day of October, 1998. SAVERS LIFE INSURANCE COMPANY BY: _______________________________ Raymond J. Ohlson, President ATTEST: ___________________________ Edward T. Stahl, Secretary A(Savers Life)@ (Merging Corporation) STANDARD LIFE INSURANCE COMPANY OFINDIANA BY: _________________________________________ Raymond J. Ohlson, President ATTEST: ______________________________ Edward T. Stahl, Secretary A(Standard Life)@ (Surviving Corporation) EX-10.44 5 ARTICLES OF MERGER OF MIDWESTERN NATIONAL LIFE INSURANCE COMPANY OF OHIO (HEREINAFTER THE AMERGING CORPORATION@) INTO STANDARD LIFE INSURANCE COMPANY OF INDIANA (HEREINAFTER THE ASURVIVING CORPORATION@) In compliance with the requirements of the Indiana Business Corporation Law (the AAct@), the undersigned corporations desiring to effect a merger, set forth the following facts: ARTICLE I SURVIVING CORPORATION SECTION 1.The name of the corporation surviving the merger is Standard Life Insurance Company of Indiana, an Indiana corporation and such name has not been changed as a result of the merger. SECTION 2.The surviving corporation is a domestic corporation existing pursuant to the provisions of the Act, incorporated on July 3, 1934. ARTICLE II MERGING CORPORATION The name, state of incorporation and date of incorporation of the Merging Corporation, which is a party to the merger, is as follows: Name of Corporation:Midwestern National Life Insurance Company of Ohio State of Domicile:Ohio Date of Incorporation under the Laws of the State of Ohio:August 6, 1962 ARTICLE III PLAN OF MERGER The Plan of Merger, containing such information as required by Indiana Code Section 23-1-40-1(b), is set forth in Exhibit AA,@ attached hereto and made a part hereof. ARTICLE IV MANNER OF ADOPTION AND VOTE A.ACTION BY SURVIVING CORPORATION. The designation of each class of stock entitled to vote on the merger, number of outstanding shares, number of votes entitled to vote on the merger, the number of votes represented by the written consent of the sole shareholder of the Surviving Corporation, the number of votes cast in favor of the merger and the number of votes cast against the merger is set forth below: TOTALCOMMON Designation of Voting Group, Common Stock,1,200,0001,200,000 no par value Number of Outstanding Shares897,033897,033 Number of Votes Entitled To Be Cast897,033897,033 Number of Votes Represented by the Written Consent897,033897,033 Number of Shares Voted in Favor897,033897,033 Number of Shares Voted Against- 0 -- 0 - Unanimous vote after waiver of notice of meeting was obtained by written consent of the sole shareholder of the Surviving Corporation at a Special Meeting of the sole shareholder held on October 30, 1998. B.ACTION BY FOREIGN MERGING CORPORATION. The designation of each class of stock, number of outstanding shares, number of votes entitled to vote on the merger, the number of votes represented by the written consent of the sole shareholder of the Merging Corporation, the number of votes cast in favor of the merger and the number of votes cast against the merger is set forth below: TOTAL COMMON Designation of Voting Group, Common Stock, 11,765 11,765 $1.00 Par Value Number of Outstanding Shares 1,000 1,000 Number of Votes Entitled To Be Cast 1,000 1,000 Number of Votes Represented by the Written Consent 1,000 1,000 Number of Shares Voted in Favor 1,000 1,000 Number of Shares Voted Against - 0 - - 0 - Unanimous vote after waiver of notice of meeting was obtained by written consent of the sole shareholder of the Merging Corporation at a Special Meeting of the sole shareholder effective as of October 30, 1998. ARTICLE V EFFECTIVE DATE The effective date of the merger shall be December 31, 1998. IN WITNESS WHEREOF, the undersigned, being, respectively, the President and Secretary of Standard Life Insurance Company of Indiana, execute these Articles of Merger and verifies, subject to penalties of perjury, that the statements contained herein are true, this ______ day of December, 1998. ___________________________________________________________ Raymond J. Ohlson, PresidentEdward T. Stahl, Secretary State of ___________________ } } ss: County of _________________ } Before me the undersigned, a Notary Public for Marion County, State of Indiana, personally appeared, respectively as President and Secretary, Raymond J. Ohlson and Edward T. Stahl, and acknowledged the execution of this instrument this _________ day of December, 1998. (SEAL)______________________________ Carla J. James, Notary Public My commission expires ____________________ IN WITNESS WHEREOF, the undersigned, being, respectively, the President and Secretary of Midwestern National Life Insurance Company of Ohio, execute these Articles of Merger and verifies, subject to penalties of perjury, that the statements contained herein are true, this ______ day of December, 1998. ___________________________________________________________ Edward T. Stahl, PresidentStephen M. Coons, Secretary State of Indiana } } ss: County of Marion } Before me the undersigned, a Notary Public for Marion County, State of Indiana, personally appeared, respectively as President and Secretary, Edward T. Stahl and Stephen M. Coons, and acknowledged the execution of this instrument this ________ day of December, 1998. (SEAL)______________________________ Carla J. James, Notary Public My commission expires ____________________ EX-10.45 6 PLAN AND AGREEMENT OF MERGER OF MIDWESTERN NATIONAL LIFE INSURANCE COMPANY OF OHIO, AS MERGING CORPORATION, AND STANDARD LIFE INSURANCE COMPANY OF INDIANA, AS SURVIVING CORPORATION THIS PLAN AND AGREEMENT OF MERGER (the APlan@) entered into this _______ day of October, 1998, by and between MIDWESTERN NATIONAL LIFE INSURANCE COMPANY OF OHIO, an Ohio corporation (hereinafter called AMidwestern Life@), and STANDARD LIFE INSURANCE COMPANY OF INDIANA, an Indiana corporation (hereinafter called AStandard Life@), W I T N E S S E T H: WHEREAS, Midwestern Life is a corporation duly organized and existing under the laws of the State of Ohio, as amended; WHEREAS, Standard Life is a corporation duly organized and existing under the Indiana Business Corporation Law, as amended; WHEREAS, Midwestern Life has eleven thousand seven hundred sixty-five (11,765) shares of authorized capital stock, $1.00 par value, of which one thousand (1,000) shares are issued and outstanding; WHEREAS, Standard Life has one million two hundred thousand (1,200,000) shares of authorized capital stock, without par value, of which eight hundred ninety- seven thousand thirty-three (897,033) shares are issued and outstanding; WHEREAS, the issued and outstanding stock of the two (2) respective corporations and the holders and percentages thereof are as follows: MIDWESTERN LIFE STANDARD LIFE Standard Management Corp.1,000100%897,033100% TOTAL1,000100%897,033100% WHEREAS, in order to effect certain administrative, managerial and financial economies and benefits, it is the desire of the parties hereto to merge Midwestern Life into Standard Life; NOW, THEREFORE, in consideration of the mutual promises, agreements and covenants herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, Midwestern Life and Standard Life do hereby make such merger upon the following terms and conditions: 1.EFFECTIVE DATE OF MERGER. The Effective Date of the merger shall be December 31, 1998. The parties hereto shall seek issuance by the Secretary of State of Indiana of the certificate of merger effecting the merger herein provided. 2.PARTIES TO THE MERGER. The parties to this Plan are Midwestern National Life Insurance Company of Ohio and Standard Life Insurance Company of Indiana. 3.CONDITIONS PRECEDENT TO THE CONSUMMATION OF THE MERGER. All of the obligations under this Plan are subject to the Board of Directors of each of the undersigned corporations satisfying itself that no income tax liability will be incurred by any party hereto or its shareholders as a result of the consummation of this Plan, the sole shareholder of each corporation approving this Plan and each corporation complying with the laws of either the State of Indiana or the State of Ohio allowing it to complete the merger contemplated hereunder. 4.EXCHANGE OF STOCK; TERMS AND CONDITIONS OF MERGER. The fair market value of the stock issued and outstanding of Midwestern Life has been determined to be Thirteen Million Five Hundred Thousand Dollars ($13,500,000). On the Effective Date, the sole shareholder of Midwestern Life shall be entitled to receive no additional shares of common stock of Standard Life. 5.SUBMISSION TO SHAREHOLDERS. This Plan shall be submitted separately to the sole shareholder of each of the corporations which is a party hereto for approval in the manner provided by the laws of either the State of Indiana or the State of Ohio. 6.MECHANICS OF CLOSING; MANNER AND BASIS OF CARRYING MERGER INTO EFFECT. Upon approval of the Plan, Edward T. Stahl, as Secretary of Standard Life, shall execute Articles of Merger as required by the Secretary of State of Indiana in order to effectuate the merger herein contemplated. The proper officers of Midwestern Life shall execute and deliver to Standard Life such specific assignments and other documents for the transfer of assets or stock as may be required. Upon the Closing Date, Standard Life shall cause the Articles of Merger to be filed with the Secretary of State of Indiana and to be recorded with the Recorder of any county in which the parties hereto own real estate or have their principal place of business. 7.SURVIVING CORPORATE ENTITY. Upon the Effective Date of the merger, Midwestern Life shall merge into and become a part of Standard Life, which shall survive the merger and the name of which shall continue to be Standard Life, and the separate corporate existence of Midwestern Life shall thereupon cease. 8.ATTRIBUTES AND PROPERTY OF THE SURVIVING CORPORATION. Upon the Effective Date of the merger, Standard Life, as the surviving corporation, shall, in accordance with the provisions of the Indiana Business Corporation Law, as amended, thereupon and thereafter possess all the rights, privileges, immunities, powers and franchises, of a public as well as of a private nature, of each of the parties hereto. All property, real, personal and mixed, and debts due on whatever account and all other choses in action and all and every other interest of or belonging to or due to each of the parties shall be taken and deemed to be transferred to and vested in Standard Life without further act or deed. 9.LIABILITIES OF STANDARD LIFE AS THE SURVIVING CORPORATION. Upon the Effective Date of the merger, Standard Life shall, in accordance with the provisions of the Indiana Business Corporation Law, as amended, thereupon and thenceforth be responsible and liable for all of the liability and obligations of each of the parties hereto in the same manner and to the same extent as if Standard Life had itself incurred the same or contracted therefor. Any claim existing or action or proceeding pending by or against any of the parties hereto, may be prosecuted to judgment as if such merger had not taken place or Standard Life may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any of the parties hereto shall be impaired by such merger, but any such liens shall be limited to the property upon which they were liens immediately prior to the time of such merger. 10.ARTICLES AND BY-LAWS OF THE SURVIVING CORPORATION. The Articles of Incorporation, together with all amendments thereof, and the Code of By-Laws of Standard Life as they exist on the Effective Date, shall continue to be the Articles of Incorporation and the Code of By-Laws, respectively, of Standard Life upon and after the Effective Date until changed or amended in accordance with the terms thereof. 11.BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. All the members of the Board of Directors and all the officers of Standard Life, as the surviving corporation on the Effective Date of the merger, shall be and continue as the directors and officers, respectively, of Standard Life, after such date, to hold office for the same terms and upon the same conditions as theretofore existed between each of them, respectively, and Standard Life. 12.ADDITIONAL DOCUMENTS. The parties hereto agree that they will cause to be executed any such further and additional documents and instruments as may from time to time be reasonably required for the purposes of consummating or carrying out the merger as contemplated by this Agreement. 13.SUCCESSORS AND ASSIGNS. This Plan and each of its provisions shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Plan cannot be assigned by any of the parties. Nothing herein, express or implied, is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto, any rights or remedies under or by reason of this Plan. 14.GOVERNING LAW. The validity, interpretation and performance of this Plan shall be governed by, construed and enforced in accordance with the laws of the State of Indiana. IN WITNESS WHEREOF, the parties hereto have respectively caused this Plan to be executed by their duly authorized officers this ____ day of October, 1998. MIDWESTERN NATIONAL LIFE INSURANCE COMPANY OF OHIO BY: _______________________________ Edward T. Stahl, President ATTEST: ___________________________ Stephen M. Coons, Secretary A(Midwestern Life)@ (Merging Corporation) STANDARD LIFE INSURANCE COMPANY OFINDIANA BY: _________________________________________ Raymond J. Ohlson, President ATTEST: ______________________________ Edward T. Stahl, Secretary A(Standard Life)@ (Surviving Corporation) EX-10.46 7 AMENDED AND RESTATED NOTE $26,000,000 September 24, 1998 STANDARD MANAGEMENT CORPORATION, a corporation organized under the laws of Indiana (the "Borrower"), for value received, hereby promises to pay to the order of FLEET NATIONAL BANK, a national banking association having an office at 777 Main Street, Hartford, Connecticut (the "Bank"), the principal sum of TWENTY SIX MILLION DOLLARS ($26,000,000), or, if less, the amount loaned by the Bank to the Borrower pursuant to the Revolving Line of Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the date(s) and in the manner provided in said Agreement. The Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said principal office, in like money, at the rates of interest as provided in the Agreement described below, on the date(s) and in the manner provided in said Agreement. The date and amount of each type of loan made by the Bank to the Borrower under this Note and the Agreement referred to below, and each payment of principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof. This is the Note referred to in that certain Amended and Restated Revolving Line of Credit Agreement dated as of November 8, 1996 by and between the Borrower and the Bank, as amended by that certain Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement dated March 10, 1998 by and between the Borrower and the Bank, as amended by that certain Amendment No. 2 to the Amended and Restated Revolving Line of Credit Agreement dated as of the date hereof by and between the Borrower and the Bank (as further amended from time to time the "Agreement"), and evidences the Loans issued by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Agreement. The Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayments on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. This Note is being substituted for and replaces that certain Amended and Restated Note dated March 10, 1998 in the principal amount of $20,000,000 made by the Borrower in favor of the Bank. Nothing herein shall be construed to constitute payment or discharge of any of the indebtedness due and owing under said prior promissory note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of Connecticut. STANDARD MANAGEMENT CORPORATION By________________________________ Name:Stephen M. Coons, Esq. Title:Executive Vice President and General Counsel
Amount of Loan Amount of Payment Balance DATE Outstanding Notation By
EX-10.47 8 AMENDMENT NO. 2 TO AMENDED AND RESTATED REVOLVING LINE OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS Dated as of September 24, 1998 This AMENDMENT NO. 2 TO REVOLVING LINE OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS between STANDARD MANAGEMENT CORPORATION, an Indiana corporation (the "Borrower"), and FLEET NATIONAL BANK, a national banking association (formerly known as Shawmut Bank Connecticut, National Association) (the "Bank"). PRELIMINARY STATEMENT. A.The Borrower and the Bank entered into an Amended and Restated Revolving Line of Credit Agreement dated as of November 8, 1996 (the "Credit Agreement"; the terms defined therein being used herein as therein defined unless otherwise defined herein). B.The Borrower and the Bank entered into an Amendment No. 1 to Revolving Line of Credit Agreement and Other Documents dated as of March 10, 1998, (the "Amendment No. 1" and together with the Credit Agreement are collectively, the "Existing Credit Agreement"). C.The Borrower and the Bank have agreed to amend the Existing Credit Agreement, the Amended and Restated Note dated March 10, 1998 (the "First Amended Note") and the other Loan Documents to increase the principal amount available thereunder from $20,000,000 to $26,000,000. SECTION 1.AMENDMENTS TO EXISTING CREDIT AGREEMENT AND NOTE. (a)EXISTING CREDIT AGREEMENT. The Existing Credit Agreement and the First Amended Note are, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (i) COMMITMENT. The term "Commitment" contained in Section 2.1 is hereby modified to read as follows: "Commitment" means the obligation of the Bank to make the Loans to the Borrower under this Agreement up to the aggregate principal amount not to exceed at any time outstanding Twenty Six Million Dollars ($26,000,000), as such amount may be reduced or otherwise modified from time to time. (ii) REDUCTION OF COMMITMENT. Section 2.2 is hereby deleted in its entirety and the following is substituted in lieu thereof: The Commitment shall be reduced to (i) $21,666,667 on March 10, 2000 so that, for the period beginning March 10, 2000 through March 9, 2001, the Revolving Credit Loans made by the Bank to the Borrower shall not in the aggregate exceed $21,666,667; (ii) $17,333,334 on March 10, 2001 so that, for the period beginning March 10, 2001 through March 9, 2002, the Revolving Credit Loans made by the Bank to the Borrower shall not in the aggregate exceed $17,333,334; (iii) $13,000,001 on March 10, 2002 so that, for the period beginning March 10, 2002 through March 9, 2003, the Revolving Credit Loans made by the Bank to the Borrower shall not in the aggregate exceed $13,000,001; (iv) $8,666,668 on March 10, 2003 so that, for the period beginning March 10, 2003 through March 9, 2004, the Revolving Credit Loans made by the Bank to the Borrower shall not in the aggregate exceed $8,666,668; (v) $4,333,335 on March 10, 2004 so that, for the period beginning March 10, 2004 through March 10, 2005, the Revolving Credit Loans made by the Bank to the Borrower shall not in the aggregate exceed $4,333,335. (iii) CLOSING FEE. The Borrower agrees to pay to the Bank a closing fee equal to $60,000. (iv)TICKING FEE. In order to induce the Bank to enter into this Amendment, the Borrower agrees to pay to the Bank a ticking fee on $6,000,000 at the rate of one-quarter of one percent (1/4 of 1%) per annum, based on a year of 360 days for the actual days elapsed, payable for the period beginning on August 19, 1998 and ending on September 23, 1998. (v)USE OF PROCEEDS. The $6,000,000 increase in the Commitment afforded to the Borrower pursuant to this Amendment shall be used by the Borrower to finance the transactions contemplated under the Stock Purchase Agreement, as amended among the Borrower and Midwestern National Life Insurance Company of Ohio, an Ohio corporation. (vi) WARRANTS. In order to induce the Bank to enter into this Amendment, the Borrower shall deliver to the Bank on or prior to the date hereof, a Warrant, in the form attached hereto as EXHIBIT C, entitling the Bank to subscribe for and purchase 20,000 additional shares of common stock of the Borrower (said Warrant being referred to herein as the "Fifth Warrant"). The Bank has the immediate right under the Fifth Warrant to purchase 20,000 shares of common stock of the Borrower. The Bank acknowledges that the maximum number of shares of common stock of the Borrower which the Bank shall be entitled to purchase under the Fifth Warrant is 20,000 and that such shares must be purchased on or before August 19, 2005 pursuant to the terms of the Fifth Warrant. (vii)The amount "$37,500,000" in Section 9.1 of the Existing Credit Agreement is deleted and the amount "$61,000,000" is substituted therefore. (viii)The amount "$23,000,000" in Section 9.3 of the Existing Credit Agreement is deleted and the amount "$37,000,000" is substituted therefore. (ix)The year "1997" in Section 9.3 of the Existing Credit Agreement is deleted and the year "1998" is substituted therefore. (b)NOTE. The First Amended Note is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended and restated in its entirety in the form of EXHIBIT A hereto. SECTION 2.CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when, the Bank shall have received counterparts of this Amendment executed by the Borrower and the Bank, and Section 1 hereof shall become effective when, and only when, the Bank shall have additionally received all of the following documents, each document (unless otherwise indicated) being dated the date of receipt thereof by the Bank (which date shall be the same for all such documents), in form and substance satisfactory to the Bank: (a)The executed Amended and Restated Note in the form of EXHIBIT A hereto. (b)The executed Amended and Restated Pledge Agreement in the form of EXHIBIT B hereto, together with certificates representing the Pledged Shares referred to therein, accompanied by undated stock powers executed in blank. (c)The executed Fifth Warrant in the form of EXHIBIT C hereto. (d)The executed Amended and Restated Registration Rights Agreement in the form of EXHIBIT D hereto. (e)Evidence of all applicable insurance regulatory approvals, if any, which are necessary or required in connection with the Borrower's execution, delivery and performance of the Loan Documents. (f)A schedule of insurance then in effect pursuant to Section 7.5 of the Existing Credit Agreement. (g)Certified copies of (i) the resolutions of the Borrower approving this Amendment and the matters contemplated hereby and thereby and (ii) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Amendment and the matters contemplated hereby. (h)A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower, authorized to sign this Amendment and the other documents to be delivered hereunder. (i)A certificate of existence for each of the Borrower, Standard Life, Standard Marketing and Dixie National and Savers Life Insurance Company. (j)A favorable opinion of counsel for the Borrower (which may be delivered by in-house counsel) to the effect that this Amendment, and the Amended and Restated Note have been duly authorized, executed and delivered by the Borrower, and such instruments constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, with references therein to the Credit Agreement to mean the Existing Credit Agreement as amended by this Amendment. (k)A certificate signed by a duly authorized officer of each Borrower stating that: (i)The representations and warranties contained in herein, in Article 6 of the Existing Credit Agreement and in each other Loan Document are true and correct on and as of the date of such certificate as though made on and as of such date; (ii)No event has occurred and is continuing which constitutes a Default or Event of Default; and (iii)There has been no material adverse change in the business, management, operations, properties, prospects or condition (financial or otherwise) of the Borrower or any of its respective Affiliates or Subsidiaries since March 8, 1998. (l)Payment to the Bank of the Closing Fee pursuant to Section 1 (a)(iii) of this Amendment. (m)Any other closing items reasonably required by the Bank. SECTION 3.REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each Borrower represents and warrants as follows: (a)The execution, delivery and performance by the Borrower of this Amendment, the Amended and Restated Note and the Loan Documents, as amended hereby, to which it is a party have been duly authorized by all necessary action and do not and will not: (a) require any consent or approval of its shareholders; (b) contravene its certificate of incorporation and bylaws; (c) violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation (including, without limitation, Regulation U), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower or any of its Subsidiaries or Affiliates; (d) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Borrower is a party or by which it or its properties may be bound or affected; (e) result in, or require, the creation or imposition of any Lien, upon or with respect to any of the properties now owned or hereafter acquired by such Borrower; or (f) cause the Borrower (or any Subsidiary or Affiliate, as the case may be) to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. (b)This Amendment, the Amended and Restated Note and each other Loan Document, as amended hereby, to which the Borrower is a party is, or when delivered under this Amendment will be, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. (c)There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened, against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the ability of the Borrower to perform its obligation under this Amendment, the Amended and Restated Promissory Note or any of the other Loan Documents, as amended hereby. SECTION 4.REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a)Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Existing Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference in the other Loan Documents to the Credit Agreement and the Note and the Amendment No. 1 and the First Amended Note, shall mean and be a reference to the Existing Credit Agreement, the Note and the First Amended Note, as amended hereby. In addition, each reference in the other Loan Documents to the "Loan Documents" shall mean and be a reference to the Existing Credit Agreement, the Note and the First Amended Note, as amended hereby, together with each of the other documents to be delivered pursuant to Section 2 of this Amendment. (b)Except as specifically amended above and except to the extent that any of the Loan Documents are substituted for and replaced by the documents to be delivered pursuant to Section 2 of this Amendment, the Existing Credit Agreement, the Note and the First Amended Note, and all other Loan Documents, shall remain in full force and effect and are hereby ratified and confirmed. (c)The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 5.COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all costs and expenses, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Amendment, the Amended and Restated Note and the other instruments and documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 5. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Amendment, the Amended and Restated Note and the other instruments and documents to be delivered hereunder, and agree to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION 6.EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 7.GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. STANDARD MANAGEMENT CORPORATION By_____________________________________ Name: Stephen M. Coons, Esq. Title:Executive Vice President and General Counsel FLEET NATIONAL BANK By_____________________________________ Name: James H. Steane II Title:Vice President EX-10.48 9 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT BETWEEN STANDARD MANAGEMENT CORPORATION AND FLEET NATIONAL BANK AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of August 19, 1998 by and between STANDARD MANAGEMENT CORPORATION, an Indiana corporation (the "COMPANY"), and FLEET NATIONAL BANK, a national banking association (the "STOCKHOLDER"). WHEREAS, the Company and the Stockholder entered into an Amended and Restated Revolving Line of Credit Agreement dated as of November 8, 1996 (the "Credit Agreement") pursuant to which the Company was indebted to the Stockholder for up to the principal amount of $16,000,000; and WHEREAS, the Company and the Stockholder entered into an Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement and Other Loan Documents (the "Amendment No. 1" and collectively with the Credit Agreement, the "Existing Credit Agreement"), pursuant to which the Stockholder agreed to make certain loans to the Pledgor in the principal amount of up to $20,000,000; and WHEREAS, in connection therewith, the Company executed certain Warrants To Purchase Common Stock of the Company dated as of November 21, 1995, July 18, 1996, and April 15, 1997 respectively, in favor of the Stockholder (the "Initial Warrants"), and also entered into an Amended and Restated Registration Rights Agreement dated as of November 8, 1996 and dated as of April 15, 1997, respectively, by and between the Stockholder and the Company (the "Existing Registration Rights Agreements"); and WHEREAS, the Company has requested that the Stockholder increase the funds available to the Company under the Existing Credit Agreement up to the principal amount of $26,000,000; and WHEREAS, it is a condition precedent to the Stockholder making said increase available to the Company that (i) the Existing Credit Agreement be amended pursuant to a certain Amendment No. 2 to Revolving Line of Credit Agreement and Other Loan Documents dated as of the date hereof between the Company and the Stockholder, (ii) the Company deliver an additional Warrant To Purchase Common Stock of the Company dated as of the date hereof (collectively, with the Initial Warrants, referred to herein as the "WARRANTS") entitling the Stockholder to subscribe for and purchase 20,000 additional shares of common stock of the Company; and (iii) that the Existing Registration Rights Agreements be amended and restated in its entirety; and WHEREAS, certain capitalized terms used herein are used as defined in Article 11 herein and in the Initial Warrants and the other Warrants. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1.DEMAND REGISTRATION 1.1.REQUESTS FOR REGISTRATION. (i) At any time, a holder of Warrants or Warrant Stock may demand registration under the Securities Act of all or any portion of the Registrable Securities owned by such holder. In order to accomplish such demand, a holder shall send written notice of the demand to the Company, and such notice shall specify the number of Registrable Securities sought to be registered. Unless the Company elects, at its sole option, to make a cash payment to the holder of the Warrants or Warrant Stock as more particularly described in Section 1.1(ii) below in lieu of proceeding with a Demand Registration, the Company shall proceed with any Demand Registration requested by a holder of Warrants or Warrant Stock if the number of Registrable Securities which the Stockholders (including the holder requesting the Demand Registration) shall have elected to include in such Demand Registration pursuant to this Section 1.1 shall be at least 51% of the Warrant Stock issued or issuable upon exercise of the Warrants (excluding Warrant Stock already the subject of a Demand Registration). The minimum share amounts specified in this Section 1.1 shall be appropriately adjusted to account for any stock dividend, stock split, recapitalization, merger, consolidation, reorganization or other action as a result of which additional shares of Common Stock are issued on account of, in conversion of or in exchange for shares of outstanding Common Stock. (ii) If the holder of the Warrants or Warrant Stock makes a demand for a Demand Registration of all or a portion of the Registrable Securities owned by such holder, the Company may, instead, at its sole option, elect to make a cash payment to such holder equal to the value of the Warrants or Warrant Stock (or the portion thereof being exercised) in an amount computed using the formula set forth in Section 2.1(iii)(2) of the Warrants. 1.2.MAXIMUM NUMBER OF DEMAND REGISTRATIONS. In no event shall the total number of Demand Registrations exceed two. 1.3.PROCEDURE. Within 10 days after receipt of a demand pursuant to Section 1.1 hereof, the Company shall give written notice of such requested registration to all other Stockholders and will include in such registration, subject to the allocation provisions below, all other Registrable Securities with respect to which the Company has received written requests for inclusion within 20 days after the Company's mailing of such notice, plus any securities of the Company that the Company chooses to include on its own behalf. 1.4.EXPENSES. The Company will pay the Registration Expenses of any Demand Registration, but the Underwriting Commissions, if such Demand Registration is underwritten, will be paid by the Selling Stockholders in proportion to any Registrable Securities to be included on their behalf. 1.5.EXPENSES. The Company shall pay the Registration Expenses of the first Demand Registration, but the Underwriting Commissions, if such first Demand Registration is underwritten, will be paid by the Selling Stockholders in proportion to any Registrable Securities to be included on their behalf. The Selling Stockholders shall pay the Registration Expenses and the Underwriting Commissions, if any, of all other Demand Registrations in proportion to the Registrable Securities included on their behalf. 1.6.PRIORITY ON DEMAND REGISTRATIONS. If a Demand Registration is underwritten and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included exceeds the number that can be sold in such offering, at a price reasonably related to the fair value, the Company will allocate the Registrable Securities to be included in such Demand Registration, first, to the holders of Warrants and Warrant Stock PRO RATA on the basis of the number of shares of Warrant Stock for which the Company has received written requests for inclusion, and, second, to the Company, and, third, PRO RATA on the basis of the number of Registrable Securities owned by the Selling Stockholders. 1.7.SELECTION OF UNDERWRITERS. Any Demand Registration may be underwritten, at the election of the Selling Stockholders, and the selection of investment banker(s) and manager(s) and the other decisions regarding the underwriting arrangements for any such offering will be made by the Selling Stockholders; PROVIDED, HOWEVER, that the selection of investment banker(s) and manager(s) shall be subject to the consent of the Company, such consent not to be unreasonably withheld. 2.PIGGYBACK REGISTRATIONS 2.1.RIGHT TO PIGGYBACK. Whenever the Company proposes to register the offer, sale or offer and sale of any of its securities for its own behalf under the Securities Act (other than a Demand Registration), and the registration form to be used may be used for the registrations of Registrable Securities to be sold in the manner proposed by the Selling Stockholders (a "PIGGYBACK REGISTRATION"), the Company will give prompt written notice to all Stockholders and will include in such Piggyback Registration, subject to the allocation provisions below, all Registrable Securities with respect to which the Company has received written requests for inclusion within 20 days after the Company's mailing of such notice. The Company shall not select a Restricted Form that would preclude registration of the Registrable Securities that the Company has been requested to include in such registration if the Company could use another available form of registration statement which is not a Restricted form and the use of which would not give rise to added Registration Expenses. 2.2.PIGGYBACK EXPENSES. In all Piggyback Registrations, the Company will pay the Registration Expenses related to the Registrable Securities of the Selling Stockholders, but the Underwriting Commissions will be paid by the Selling Stockholders in proportion to any Registrable Securities included on their behalf. 2.3.PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an underwritten registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number that can be sold in such offering, at a price reasonable related to fair value, the Company will allocate the securities to be included as follows: first, the securities the Company proposes to sell on its own behalf; second, Registrable Securities requested to be included in such registration, PRO RATA on the basis of the number of Registrable Securities owned, among the Selling Stockholders; and third, securities requested to be included in such registration by any stockholders of the Company other than the Selling Stockholders. 2.4.WITHDRAWAL OR ABANDONMENT. Nothing contained in this Section 2 shall be construed as limiting or otherwise interfering with the right of the Company to withdraw or abandon in its sole discretion any registration statement filed by it in connection with a Piggyback Registration notwithstanding the inclusion therein of Registrable Securities. 3.HOLDBACK AGREEMENTS Each of the Stockholder and the Company agree not to effect any public sale or public distribution of equity securities of the Company of any securities convertible into or exchangeable or exercisable for such securities during the 7 days prior to and the 180 days after any underwritten registration of equity securities of the Company becomes effective (except as part of such underwritten registration or except in connection with obligations of the Company existing on the effective date of the registration statement relating to such underwritten offering). 4.REGISTRATION PROCEDURES Whenever the Stockholders have requested that any Registrable Securities be registered pursuant to Section 1 of this Agreement, unless the Company elects, at its sole option, to make a cash payment to the holder of the Warrants or Warrant Stock as more particularly described in Section 1.1(ii) above in lieu of proceeding with a Demand Registration, the Company will, as expeditiously as possible, or whenever the Stockholders have requested that any Registrable Securities be registered pursuant to Section 2 of this Agreement, the Company will, to the extent applicable: (a)PREPARATION AND FILING OF REGISTRATION STATEMENT. Prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish each Selling Stockholder with copies of all such documents proposed to be filed). (b)PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. Prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the greater of (x) a period of not less than 120 days or (y) until the Registrable Securities included therein have been sold. (c)COPIES OF DOCUMENTS. Furnish to each Selling Stockholder such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus), and such other documents as such Selling Stockholder may reasonably request in order to facilitate the disposition of the Registrable Securities included therein owned by such Selling Stockholder. (d)BLUE SKY QUALIFICATIONS. Use its best efforts to register or quality such Registrable Securities under such other securities or blue sky laws of such jurisdictions as the Selling Stockholders or managing underwriters may reasonably request; PROVIDED, HOWEVER, that in connection with any such registration or qualification the Company shall not be obligated to file a general consent to service of process, or to qualify to do business as a foreign corporation, or otherwise subject itself to taxation in connection with such qualification or compliance. (e)NOTIFICATION OF EFFECTIVENESS; AMENDMENTS. Notify each Selling Stockholder at any time when a prospectus relating to the Registrable Securities included therein is required to be delivered under the Securities Act within the period that the Company is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement as theretofore amended or supplemented contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, at the request of any such Selling Stockholder, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. (f)LISTING. Cause all such Registrable Securities to be listed or included on securities exchanges on which similar securities issued by the Company are then listed or included. (g)TRANSFER AGENT AND REGISTRAR. Provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement. (h)OTHER AGREEMENTS. Enter into such customary agreement (including an underwriting agreement containing customary terms and conditions, including usual and customary indemnification provisions, in form reasonably acceptable to the Company) and take such other customary actions as may be reasonable necessary to expedite or facilitate the disposition of such Registrable Securities. (i)LETTERS FROM INDEPENDENT ACCOUNTANTS. Obtain a "cold comfort" letter addressed to the Company from its independent accountants in such form and covering such matters of the type customarily covered by "cold comfort" letters delivered by such public accountants. (j)INSPECTION OF RECORDS. Make available for inspection by any Selling Stockholder, and, upon execution of a confidentiality agreement mutually acceptable to all parties, by any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 5.REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Stockholders: 5.1.DUE ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized and validly existing under the laws of its jurisdiction of incorporation and is duly qualified as a foreign corporation in each jurisdiction in which the failure to be so qualified could reasonably be expected to have a material adverse effect on the Company. 5.2.DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of this Agreement by the Company has been duly authorized by all necessary corporate action and this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 5.3.NO VIOLATION OR DEFAULT. The execution and delivery by the Company of this Agreement does not, and the performance by the Company of its obligations hereunder will not, violate any provisions of its charter or by-laws or constitute a default under any other agreement to which the Company is a party or by which it or its assets may be bound. 6.REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER The Stockholder represents and warrants to the Company: 6.1.DUE ORGANIZATION AND GOOD STANDING. The Stockholder is a national banking association, duly organized and validly existing under the laws of the United States of America and is duly qualified as a foreign corporation in each jurisdiction in which the failure to be so qualified could reasonably be expected to have a material adverse effect on such Stockholder. 6.2.DUE AUTHORIZATION; BINDING EFFECT. The execution and delivery of this Agreement by the Stockholder has been duly authorized by all necessary action and this Agreement constitutes the legal, valid and binding obligation of such Stockholder enforceable against such Stockholder in accordance with its terms. 6.3.NO VIOLATION. The execution and delivery of this Agreement by the Stockholder does not, and the performance by such Stockholder of its obligations hereunder will not, violate any provision of the organizational documents of such Stockholder. 6.4.NO DEFAULT. The execution and delivery of this Agreement by the Stockholder does not, and the performance by such Stockholder of its obligations hereunder will not, violate any other agreement to which such Stockholder is a party or by which any of its assets may be bound. 7.INFORMATION REGARDING SELLING STOCKHOLDERS Each Selling Stockholder shall provide to the Company such information as may be reasonably requested by the Company for use in the preparation and filing of any registration statement covering Registrable Securities owned by such Selling Stockholder, and the obligation of the Company to include Registrable Securities in any registration statement on behalf of any Selling Stockholder shall be subject to such Selling Stockholder's providing such information as promptly as practicable. 8.INDEMNIFICATION 8.1.INDEMNIFICATION BY THE COMPANY. The Company hereby indemnifies, to the extent permitted by law, each Selling Stockholder, its officers and directors, and each person who controls such holder (within the meaning of the Securities Act), against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same occurs in reliance upon and in conformity with any information furnished in writing to the Company by any Selling Stockholder expressly for use therein or is caused by any such Selling Stockholder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Selling Stockholder with copies of the same. 8.2.INDEMNIFICATION BY THE SELLING STOCKHOLDERS. In connection with any registration statement in which a Selling Stockholder is participating, each such Selling Stockholder will furnish to the Company in writing such information as is reasonably requested by the Company for use in such registration statement or prospectus and will indemnify, to the extent permitted by law, the Company, its directors and officers and each person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission or such alleged untrue statement or alleged omission occurs in reliance upon and in conformity with information so furnished in writing by such Selling Stockholder specifically for use in the registration statement. 8.3.PROCEDURES AS TO INDEMNIFICATION. Any person entitled to indemnification hereunder shall (i) give prompt notice to the indemnifying party of any claim with respect to which it may seek indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonable satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 8.4.CONTRIBUTION. If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense (including legal fees or expenses) as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The Company and each holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 8.4 were determined by PRO RATA allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 8, an indemnified Holder shall not be required to contribute any amount in excess of the net proceeds received by the indemnified Holder from the sale of the Registrable Securities. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9.CONDITION TO THE COMPANY'S OBLIGATIONS In connection with an underwritten offering, it shall be a condition to the Company's obligations to include Registrable Securities on behalf of any Selling Stockholder that the underwriters agree to indemnify the Company, its directors and officers and each person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein no misleading, but only to the extent that such untrue statement or omission or such alleged untrue statement or alleged omission is contained in information furnished in writing by such underwriters on their own behalf specifically for use in preparing the registration statement. 10.FORM S-3 AND RULE 144 10.1.AVAILABILITY OF SHORT FORM. The Company represents and warrants that it meets and will use its best efforts to continue to meet the requirements which must be met by the Company in order for the Registrable Securities to be registered in a Demand Registration on Form S-3 under the Securities Act or any comparable or successor form or forms; and the Company further represents and warrants that it has registered the Common Stock and will use its best efforts to register any other Registrable Securities and maintain the registration of any securities registered under the Securities Exchange Act of 1934 in accordance with the provisions of that Act. 10.2.CONDITIONS OF RULE 144. The Company represents and warrants that it satisfies and will use its best efforts to continue to satisfy the conditions set forth in Rule 144 under the Securities Act which must be satisfied by an issuer in order for a holder of restricted securities to sell such securities under the provisions of such rule, including the timely filing of all reports required to be filed under the Securities Exchange Act of 1934, as amended. 11.DEFINITIONS 11.1.AGREEMENT. The term "AGREEMENT" shall mean this Registration Rights Agreement, as the same may be amended from time to time. 11.2.COMMON STOCK. The term "COMMON STOCK" shall mean the Common Stock, no par value, of the Company. 11.3.COMPANY. The term "COMPANY" shall have the meaning set forth in the first paragraph of this Agreement. 11.4.DEMAND REGISTRATION. The term "DEMAND REGISTRATION" shall have the meaning set forth in Section 1.1 hereof. 11.6.PIGGYBACK REGISTRATION. The term "PIGGYBACK REGISTRATION" shall have the meaning set forth in Section 2.1 hereof. 11.7.REGISTRABLE SECURITIES. The term "REGISTRABLE SECURITIES" means any Common Stock registered in the names of the Stockholders from time to time, any Warrant Stock issued or issuable upon exercise of Warrant, and any securities issued or to be issued with respect to such securities by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been (i) effectively registered under the Securities Act or disposed of in accordance with the registration statement covering them or (ii) transferred pursuant to Rule 144 under the Securities Act (or any similar rule then in force). 11.8.REGISTRATION EXPENSES. The term "REGISTRATION EXPENSES" means all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, expenses and fees for listing the securities to be registered on exchanges or trading system on which similar securities issued by the Company are then listed or included, and fees and disbursements of counsel for the Company. 11.9.RESTRICTED FORM. The term "RESTRICTED FORM" shall mean a form of registration statement under the Securities Act which imposes for its use a limitation on the maximum value or number of securities to be included therein. 11.10.SECURITIES ACT. The term "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. 11.11.SELLING STOCKHOLDER. The term "SELLING STOCKHOLDER" means any Stockholder who requests inclusion of all or a portion of its shares of Registrable Securities in a Demand Registration pursuant to Sections 1 herein or a Piggyback Registration pursuant to Section 2. 11.12.SHORT FORM. The term "SHORT FORM" shall have the meaning set forth in Section 1.1 hereof. 11.13.STOCKHOLDERS. The term "STOCKHOLDER" or shall have the meaning set forth in the first paragraph hereof, and the term "STOCKHOLDERS" shall mean, collectively, the Stockholder and any other holder(s) of Warrants issued by the Company. 11.14.UNDERWRITING COMMISSIONS. The term "UNDERWRITING COMMISSIONS" means all underwriting discounts or commissions relating to the sale of securities of the Company, but excludes any expenses reimbursed to underwriters. 12.MISCELLANEOUS 12.1.NOTICES. Any notices required hereunder shall be sent by certified or registered mail, and shall be addressed to the address of the Company's corporate headquartered in the case of any notice to the Company, and until changed by notice to the Company, to the Stockholders at their address set forth opposite their signatures hereto. 12.2.AMENDMENTS AND WAIVERS. The provisions of this Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company has obtained the written consent of the Stockholders which own 51% of the Registrable Securities. 12.3.SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective transferees, successors and personal representatives of the Stockholders. The rights to cause the Company to register Registrable Securities pursuant to this Agreement shall follow the Warrants, and the Warrant Stock and shall be exercisable by the holders of any Warrants or Warrant Stock, including any transferees of Warrants or Warrant Stock. 12.4.GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Connecticut. 12.5.COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be considered to be an original instrument and to be effective as of the date first written above. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. STANDARD MANAGEMENT CORPORATION By _________________________ Name: Stephen M. Coons, Esq. Title: Executive Vice President and General Counsel FLEET NATIONAL BANK By _________________________ Name:James H. Steane II Title:Vice President EX-10.49 10 AMENDED AND RESTATED PLEDGE AGREEMENT AMENDED AND RESTATED PLEDGE AGREEMENT, dated as of September 23, 1998, between FLEET NATIONAL BANK, a national banking association (the "Bank"), and STANDARD MANAGEMENT CORPORATION, an Indiana corporation (the "Pledgor"). WHEREAS, the Pledgor is the owner of all of the issued and outstanding capital stock (the "Pledged Shares") of Standard Life Insurance Company of Indiana, an Indiana corporation ("Standard Life"), and of Standard Marketing Corporation, an Indiana corporation ("Standard Marketing," and collectively referred to herein with Standard Life as the "Subsidiaries"); and WHEREAS, the Bank and the Pledgor entered into an Amended and Restated Revolving Line of Credit Agreement dated as of November 8, 1996 (the "Existing Credit Agreement") pursuant to which the Bank agreed to make certain loans to the Pledgor in the principal amount of up to $16,000,000; and WHEREAS, the Bank and the Pledgor entered into an Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement and Other Loan Documents (the "Amendment No. 1") pursuant to which the Bank agreed to make certain loans to the Pledgor in the principal amount of up to $20,000,000; and WHEREAS, as of the date hereof, the Bank and the Pledgor are entering into an Amendment No. 2 to Amended and Restated Revolving Line of Credit Agreement and Other Loan Documents (the "Amendment No. 2") (the Existing Credit Agreement, as amended by the Amendment No. 1, the Amendment No. 2 and as it may hereafter be amended or otherwise modified from time to time, being hereinafter referred to as the "Revolving Line of Credit Agreement"; terms used herein and not otherwise defined having the meaning set forth therein) in order to increase the Commitment of the Bank to make Revolving Credit Loans to the Pledgor under the Existing Credit Agreement in the principal amount of up to $26,000,000; and WHEREAS, it is a condition precedent to the making of the Loans by the Bank to the Pledgor under the Revolving Line of Credit Agreement that the Pledgor shall have made the pledge and granted the Bank a perfected security interest in the Pledged Shares as contemplated by this Amended and Restated Pledge Agreement; and WHEREAS, each of the parties hereto desires to take such other actions as may be necessary or desirable so that the Bank will have a perfected security interest in the Pledged Shares; and WHEREAS, all terms used herein and not otherwise defined shall have the meanings set forth in the Revolving Line of Credit Agreement. NOW THEREFORE, in consideration of the premises contained herein and in order to induce the Bank to make the Loans under the Revolving Line of Credit Agreement, the parties hereto hereby agree as follows: SECTION 1.PLEDGE AND GRANT OF SECURITY. The Pledgor hereby pledges to the Bank and grants to the Bank a security interest in the following (the "Pledged Collateral"): (i)the Pledged Shares and the certificates representing the Pledged Shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (ii)all additional shares of stock of any issuer from time to time acquired by the Pledgor in substitution for or in addition to the Pledged Shares or otherwise in any manner, and the certificates representing such substituted or additional shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; and (iii)all proceeds of any and all of the foregoing Pledged Collateral. SECTION 2. SECURITY FOR OBLIGATIONS. (a)This Agreement secures the payment of all obligations of the Pledgor to the Bank under the Revolving Line of Credit Agreement, the Note and the other Loan Documents, now or hereafter existing, whether for principal, interest, fees, expenses or otherwise, and all obligations of the Pledgor now or hereafter existing under this Agreement (all such obligations of the Pledgor being the "Obligations"). (b)The Pledgor immediately shall cause to be duly and properly filed all necessary financing statements in all locations required by applicable law in order to effectuate the perfected security interest contemplated hereby, including immediately filing amendments or other financing statements upon any substitution or addition to the Pledged Collateral. SECTION 3. DELIVERY OR OTHER TRANSFER OF PLEDGED COLLATERAL. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by the Bank pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form satisfactory to the Bank. SECTION 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants as follows: (a)The Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. (b)The Pledgor is the legal and beneficial owner of the Pledged Collateral, free and clear of any lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement. (c)The pledge of, and grant of a security interest in, the Pledged Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Pledged Collateral, securing the payment of the Obligations. (d)All filings and other actions necessary or desirable to perfect and protect the security interest created by this Agreement have been duly made or taken, as the case may be, including the filings of UCC financing statements on Form UCC-1 in the locations set forth on Schedule A attached hereto, which filings are the only filings necessary to perfect the Bank's security interest in the Pledged Collateral. Except for such financing statements as may have been filed in favor of the Bank relating to the security interest created by this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Pledged Collateral is on file in any recording office. (e)No authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the pledge of, and grant of a security interest in, the Pledged Collateral by the Pledgor pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor or (ii) for the exercise by the Bank of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement. (f)Each of Standard Life and Standard Marketing are wholly-owned subsidiaries of the Pledgor. In addition, more than 99% of the outstanding shares of stock of Dixie National are owned by Standard Life. (g)The Pledged Shares constitute one hundred percent (100%) of the issued and outstanding shares of stock of each of Standard Life and Standard Marketing as indicated on Schedule I attached hereto. (h)The Pledged Shares are not subject to any shareholder or other agreement relating to the sale, pledge, transfer or disposition of the Pledged Shares. SECTION 5.PERFECTION OF SECURITY INTEREST IN PROCEEDS OR ADDITIONAL PLEDGED COLLATERAL. In order to perfect the security interest of the Bank in any proceeds of the Pledged Collateral or any additional shares of stock or indebtedness which may be acquired by or otherwise come into the possession of the Pledgor in substitution for or in addition to any of the Pledged Collateral, the Pledgor shall cause to be delivered to the Bank any cash or other property payable in consideration of the sale of any Pledged Shares and all certificates representing the Pledged Shares or other securities among the Pledged Collateral, along with duly executed instruments of transfer or assignment in blank. SECTION 6.VOTING RIGHTS; DIVIDENDS, ETC. (a)So long as no Event of Default (as defined in the Revolving Line of Credit Agreement) shall have occurred and be continuing: (i)The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purposes not inconsistent with the terms of this Agreement or the Revolving Line of Credit Agreement. (ii)The Pledgor shall be entitled to receive and retain any and all dividends and interest paid in respect of the Pledged Collateral; PROVIDED, HOWEVER, that any and all (A)dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral; (B)dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and (C)cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Collateral, shall be delivered forthwith to the Bank to hold as Pledged Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Bank, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Bank as Pledged Collateral in the same form as so received (with any necessary endorsement). (b)Upon the occurrence and during the continuance of an Event of Default: (i)All rights of the Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) hereof and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) hereof shall cease, and all such rights shall thereupon become vested in the Bank, which shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends and interest payments. The Bank agrees to promptly notify the Pledgor of any such vesting of rights pursuant to this Section 6(b)(i), provided that the failure to give such notice shall not affect the validity of any such vesting or otherwise impair the rights or remedies of the Bank hereunder or otherwise. (ii)All dividends and interest payments which are received by the Pledgor contrary to the provisions of paragraph (i) of this Section 6(b) shall be received in trust for the benefit of the Bank or its nominee, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Bank or its nominee, as Pledged Collateral in the same form as so received (with any necessary endorsement). SECTION 7. TRANSFERS AND OTHER LIENS; ADDITIONAL SECURITIES. (a)The Pledgor agrees that it will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, or (ii) create or permit to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement. (b)The Pledgor agrees that it will cause each of the Subsidiaries to deliver directly to the Bank or its nominee any stock or other securities which may be issued in addition to, in substitution for or as a dividend or distribution relating to any of the Pledged Collateral, and the Pledgor will promptly take any other action reasonably requested by the Bank to pledge to the Bank immediately upon acquisition thereof by the Pledgor (whether directly or indirectly), such additional shares of stock or other securities or indebtedness to be included in the Pledged Collateral. (c)The Pledgor agrees that it will cause Standard Life not to (i) sell, pledge, assign or otherwise dispose of, or grant any option with respect to, any of the capital stock of Dixie National, or (ii) create or permit to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the capital stock of Dixie National. SECTION 8.BANK MAY PERFORM. If the Pledgor fails to perform any agreement contained herein, the Bank may itself perform, or cause performance of, such agreement, and the expenses of the Bank incurred in connection therewith shall be payable by the Pledgor under Section 11. SECTION 9.REASONABLE CARE. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Collateral is accorded treatment substantially equal to that which the Bank accords its own property. SECTION 10. REMEDIES UPON DEFAULT. If any Event of Default shall have occurred and be continuing: (a)The Bank may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of Connecticut at that time (the "Code") (whether or not the Code applies to the affected Collateral), and may also, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Bank's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Bank may deem commercially reasonable. The Bank agrees to attempt to obtain the reasonable value of the Pledged Collateral upon any such sale. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Bank shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Bank may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b)Any cash held by the Bank as Pledged Collateral and all cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of the Bank, be transferred to the Bank as collateral for, and/or then or at any time thereafter applied in whole or in part by the Bank against all or any part of the Obligations in such order as the Bank shall elect. Any surplus of such cash or cash proceeds held by the Bank and remaining after payment in full of all the Obligations shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. SECTION 11.FEES AND EXPENSES. The Pledgor will upon demand pay to the Bank the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Bank may incur in connection with (a) the administration of this Agreement, (b) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (c) the exercise or enforcement of any of the rights of the Bank hereunder or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. SECTION 12.AMENDMENTS; ETC. No amendment or waiver of any provisions of this Agreement nor consent to any departure herefrom, shall in any event be effective unless, in the case of an amendment, the same shall be in writing and signed by the Pledgor and the Bank and, in the case of a waiver and consent, the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 13.ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed, telegraphed or delivered, If to the Pledgor: Standard Management Corporation 9100 Keystone Crossing Indianapolis, Indiana 46240 Attention:Stephen M. Coons, Esq. Executive Vice President and General Counsel If to the Bank: Fleet National Bank 777 Main Street Hartford, Connecticut 06115 Attention:Mildred Chavarria Jones Vice President or as to any party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company or in the case of personal delivery, upon delivery, in each case, addressed as aforesaid, except that with respect to notice to the Bank hereunder, the same shall be effective only upon receipt. SECTION 14.FURTHER ASSURANCES. The Pledgor agrees that at any time and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Bank may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Bank to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. SECTION 15.CONTINUING SECURITY INTERESTS; TRANSFER OF NOTE. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until payment in full of the Obligations, (b) be binding upon the Pledgor, its successors and assigns, (c) be binding upon the Bank, its successors and assigns and (d) inure to the benefit of the Bank and its successors, transferees and assigns. Upon the payment in full of the Obligations, the Pledgor shall be entitled to the return, upon its request and at its expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 16.GOVERNING LAW; TERMS. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. Unless otherwise defined herein or in the Revolving Line of Credit Agreement, terms defined in Articles 8 or 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. FLEET NATIONAL BANK By: _________________________________ Name: James H. Steane II Title:Vice President STANDARD MANAGEMENTCORPORATION By: _________________________________ Name:Stephen M. Coons, Esq. Title:Executive Vice President and General Counsel SCHEDULE A Locations for Filing UCC FINANCING STATEMENTS ON FORM UCC-1 Office of the Secretary of State of Indiana Marion, Indiana County Recorder Office SCHEDULE I Attached to and forming a part of that certain Amended and Restated Pledge Agreement dated as of September 23, 1998 by and between STANDARD MANAGEMENT CORPORATION and FLEET NATIONAL BANK
Percentage Stock of STOCK Class of Certificate Number of Outstanding ISSUER STOCK NO(S). PAR VALUE SHARES SHARES Standard Life Common 1 None 897,033 100% Insurance Company of Indiana Standard Marketing Common 1 None 1,000 100% Corporation
EX-10.50 11 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT. No. of Shares of Common Stock: Warrant No. 5 WARRANT To Purchase Common Stock of STANDARD MANAGEMENT CORPORATION THIS IS TO CERTIFY THAT FLEET NATIONAL BANK, or its registered assigns, is entitled, at any time or from time to time prior to the Expiration Date (as hereinafter defined), to purchase from Standard Management Corporation, an Indiana corporation (the "COMPANY"), 20,000 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, at a purchase price of $7.125 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1.DEFINITIONS. As used in this Warrant, the following terms have the respective meanings set forth below: "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued or issuable by the Company after the Closing Date, other than the Warrant Stock. "AFFILIATE" shall have the meaning set forth in the Revolving Line of Credit Agreement. "ASSIGNED VALUE" shall mean, in respect of any share of Common Stock on any date herein specified (i) if there is a public market for Common Stock, the average closing price of the Common Stock on the largest exchange on which such shares are traded (or if not traded on an exchange, then the average of the closing bid and ask prices quoted over-the-counter) over the 10 trading days prior to the date of the determination (as such prices are reported in The Wall Street Journal or if not so reported, in any nationally recognized financial journal or newspaper), (ii) if there is no public market for Common Stock, the highest price at which shares of Common Stock are offered for sale in a public offering registered pursuant to the Securities Act or in an arms-length private offering, if any such offering is pending (unless such offer is revoked prior to such sale) on the date of determination of the Assigned Value, or (iii) if there is no public market for Common Stock and no such offering is pending, the fair market value per share of Common Stock as determined in good faith by the Company's board of directors. "BUSINESS DAY" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of Connecticut. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of capital stock, including each class of common stock and preferred stock of such Person. "CLOSING DATE" shall mean August 19, 1998. "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "COMMON STOCK" shall mean (except where the context otherwise indicates) the Common Stock, no par value, of the Company as constituted on the Closing Date, and any Capital Stock into which such Common Stock may thereafter be changed, and shall also include (i) Capital Stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.7) received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.7. "COMMON STOCK OUTSTANDING" shall mean, at any date as of which the number of shares thereof is to be determined, all issued and outstanding shares of Common Stock and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "CURRENT MARKET PRICE" shall mean, in respect of any share of Common Stock on any date herein specified, the Assigned Value per share of Common Stock as at such date. "CURRENT WARRANT PRICE" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to exercise of this Warrant on such date. "EXPIRATION DATE" shall mean August 19, 2005. "FULLY-DILUTED OUTSTANDING" shall mean, (i) when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, the number of shares of Common Stock Outstanding at such date and the number of shares of Common Stock which would be outstanding if the Warrants, the Company's convertible preferred stock, if any, and all other outstanding rights, options or warrants to purchase, or securities convertible into, shares of Common Stock and all security convertible or exchangeable into any of the foregoing, that are "in-the- money" were converted into or exercised or exchanged for shares of Common Stock on such date, and (ii) when used with reference to Voting Securities, at any date as of which the number of shares thereof is to be determined, the number of shares of Voting Securities Outstanding at such date and the number of shares of Voting Securities which would be outstanding if any outstanding rights, warrants or options to purchase, or securities convertible into, shares of Voting Securities and all securities convertible or exchangeable into any of the foregoing, that are "in-the-money" were converted into or exercised or exchanged for shares of Voting Securities on such date. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "HOLDER" shall mean the Person or Persons in whose name this Warrant or, as applicable, the Warrant Stock, is registered on the books of the Company maintained for such purpose. "INITIAL PUBLIC OFFERING" shall mean the first time a registration statement filed by the Company under the Securities Act with respect to its securities, whether on behalf of itself or otherwise, is declared effective, other than a registration statement filed on Form S-8 or any successor forms thereto. "LIEN" means any mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance against real or personal property, or a security interest of any kind (including, without limitation, any conditional sale or other title retention agreement or any lease in the nature thereof, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "MAJORITY HOLDERS" shall mean Holders of more than 50% of (i) Warrants exercisable for the aggregate number of shares of Common Stock then purchasable upon exercise of all Warrants, whether or not then exercisable, PLUS (ii) where a provision affects Holders of the Warrant Stock, the Warrant Stock. "OTHER PROPERTY" is defined in Section 4.7. "PERSON" shall have the meaning defined in the Revolving Line of Credit Agreement. "REGISTRATION RIGHTS AGREEMENT" shall mean that certain Amended and Restated Registration Rights Agreement dated as of August 19, 1998 by and between the Company and Holder. "RESTRICTED COMMON STOCK" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9 herein. "REVOLVING LINE OF CREDIT AGREEMENT" shall mean that certain Amended and Restated Revolving Line of Credit Agreement dated as of November 8, 1996, by and between the Company and Holder, as amended by that certain Amendment No. 1 to Amended and Restated Revolving Line of Credit Agreement and Other Loan Documents dated as of March 10, 1998 by and between the Company and Holder, as amended by that certain Amendment No. 2 to Amended and Restated Revolving Line of Credit Agreement and Other Loan Documents dated as of September 24, 1998 by and between the Company and the Holder. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SUBSIDIARY" shall have the meaning set forth in the Revolving Line of Credit Agreement. "VOTING SECURITIES" means any class of Capital Stock of a corporation or other equity shares, interests, participations, rights in or other equivalents (however designated) of a Person other than a corporation, and any rights (including without limitation debt securities convertible into Capital Stock), warrants or options exercisable or exchangeable for or convertible into such Capital Stock or other equity securities, pursuant to which the holders thereof have (or would have upon exercise, conversion or exchange) the general voting power under ordinary circumstances to vote for the election of directors, managers, trustees or general partners of any Person (irrespective of whether or not at the time any other class or classes will have or might have voting power by reason of the happening of any contingency). "VOTING SECURITIES OUTSTANDING" shall mean, at any date as of which the number of shares thereof is to be determined, all issued and outstanding shares of Voting Securities, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Voting Securities. "WARRANTS" shall mean all of the Warrants of the Company issued prior to or on the date hereof or to be issued subsequent to the date hereof pursuant to the Revolving Line of Credit Agreement, including this Warrant, and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions, except as to date of issuance, the purchase price, the number of shares of Common Stock for which they may be exercised and the date by which such Warrants must be exercised. "WARRANT PRICE" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1 multiplied by (ii) the Current Warrant Price as of the date of such exercise. "WARRANT STOCK" shall mean the shares of Common Stock issuable to the Holders upon the exercise of this Warrant. 2.EXERCISE OF WARRANT: OTHER AGREEMENTS 2.1.MANNER OF EXERCISE. (i)From and after the date hereof until 5:00 P.M., New York City time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 9100 Keystone Crossing, Suite 600, Indianapolis, Indiana 46240, or at the office or agency designated by the Company pursuant to Section 11, (a) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (b) this Warrant, (c) payment of the Warrant Price by certified or official bank check from Holder, unless the Holder is making a cashless exercise pursuant to Section 2.1(iii) herein, and (d) if the Holder is making a cashless exercise pursuant to Section 2.1(iii) herein, a statement. Such notice shall be substantially in the form of EXHIBIT A hereto, duly executed by Holder or its agent or attorney. (ii)Upon receipt thereof, the Company shall, as promptly as practicable, and in any event within ten (10) Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of shares of Common Stock issuable upon such exercise as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as such Holder shall request in the notice and shall be registered in the name of Holder or such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the check or checks and this Warrant, is received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing the Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. (iii)(1)In lieu of paying the Warrant Price, Holder may elect to receive shares of the Company's Common Stock equal to the value of this Warrant (or the portion thereof being exercised), in which event the Company shall issue to Holder the number of shares of the Company's Common Stock computed using the following formula: X = Y (A-B) A Where: X =the number of shares of Warrant Stock to be issued to the Holder; Y =the number of shares of Warrant Stock otherwise purchasable (or the portion thereof being exercised) under this Warrant (at the date of exercise); A =the Current Market Price of one share of the Company's Common Stock (at the date of such exercise); and B =the Current Warrant Price (as adjusted to the date of such exercise). (2)In lieu of paying the Warrant Price, Holder may elect to receive cash equal to the value of this Warrant (or the portion thereof being exercised), in which event the Company shall pay to Holder cash in an amount computed using the following formula: X = Y (A-B) Where: X =the amount of cash to be paid to Holder; Y =the number of shares of Warrant Stock otherwise purchasable (or the portion thereof being exercised) under this Warrant (at the date of exercise); A =the Current Market Price of one share of the Company's Common Stock (at the date of such exercise); and B =the Current Warrant Price (as adjusted to the date of such exercise). 2.2.PAYMENT OF TAXES. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued, fully paid and nonassessable and, to the extent permitted by law, free of liens or preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof unless such tax is imposed by law on Holder, in which case such tax or charge shall be paid by Holder. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case, the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. 2.3.OTHER AGREEMENTS. This Warrant and the Warrant Stock shall be governed by the terms of this Warrant, the Registration Rights Agreement and, to the extent applicable, the Revolving Line of Credit Agreement (the terms of which are hereby incorporated herein by this reference). Each Holder agrees to be bound by, and shall enjoy the benefits of, this Warrant, the Registration Rights Agreement and the Revolving Line of Credit Agreement. The registered holder of the Warrant Stock issued upon exercise of this Warrant (in whole or in part) shall be entitled to all rights granted pursuant to the Registration Rights Agreement and agrees to be bound by all of the obligations and limitations thereof, including the ability of the Company to elect to make a cash payment to the Holder as more particularly described in Section 1.1(ii) of the Registration Rights Agreement in lieu of proceeding with a Demand Registration (as such term is defined in the Registration Rights Agreement). 3.TRANSFER. DIVISION AND COMBINATION. 3.1.TRANSFER. Subject to compliance with Section 9 herein, Holder shall have the right to transfer of this Warrant and all rights hereunder and the Warrant Stock, in each case, in whole or in part. Such transfer shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant or the Warrant Stock at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 11, together with, in the case of this Warrant, a written assignment of this Warrant substantially in the form of EXHIBIT B hereto duly executed by Holder or its agent or attorney and, in the case of Warrant Stock, stock powers or other instrument of assignment duly executed, and, in each case, funds sufficient to pay any transfer taxes payable upon the making of such transfer. 3.2.DIVISION AND COMBINATION. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with this Section 3, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3.EXPENSES. The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. 3.4.MAINTENANCE OF BOOKS. The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 4.ADJUSTMENTS. The number of shares of Common Stock for which this Warrant is exercisable shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give each Holder notice of any event described below which requires an adjustment pursuant to this Section 4 at the time of such event. 4.1.STOCK DIVIDENDS. SUBDIVISIONS AND COMBINATIONS. If, at any time, the Company shall: (i)pay holders of its Common Stock a dividend in, or otherwise make a distribution of, Additional Shares of Common Stock, (ii)subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, (iii)combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv)issue any shares of equity securities pursuant to a reclassification of shares of Common Stock, then the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event. The Current Warrant Price shall be adjusted to equal the Current Warrant Price hereunder immediately prior to any such adjustment multiplied by a fraction, the numerator of which shall be the number of shares on a Fully Diluted Outstanding basis immediately prior to such adjustment and the denominator of which shall be the number of shares on a Fully Diluted Outstanding basis immediately after such event. 4.2.CERTAIN OTHER DISTRIBUTIONS. If, at any time, the Company shall pay holders of its Common Stock a dividend in, or otherwise distribute: (i)cash, (ii)any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), or (iii)any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), then the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment by a fraction (I) the numerator of which shall be the Current Market Price per share of Common Stock at the date of such payment and (II) the denominator of which shall be (x) such Current Market Price per share of Common Stock minus (y) the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of the Company) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4.1. The Current Warrant Price shall be adjusted to equal the Current Warrant Price hereunder immediately prior to any such adjustment multiplied by a fraction, the numerator of which shall be the number of shares for which this Warrant is exercisable immediately prior to such adjustment and the denominator of which shall be the number of shares for which this Warrant is exercisable immediately after such adjustment, as calculated above. 4.3.ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. (i)If at any time the Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for consideration in an amount per Additional Share of Common Stock less than the Current Market Price, then the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale by a fraction (I) the numerator of which shall be the number of Fully Diluted Outstanding shares of Common Stock immediately after such issue or sale, and (II) the denominator of which shall be the number of Fully Diluted Outstanding shares of Common Stock immediately prior to such issue or sale plus the number of shares which the aggregate offering price of the total number of such Additional Shares of Common Stock would purchase at the then Current Market Price. Current Warrant Price shall be adjusted to equal the Current Warrant Price hereunder immediately prior to any such adjustment multiplied by a fraction, the numerator of which shall be the number of shares for which this Warrant is exercisable immediately prior to such adjustment, and the denominator is the number of shares for which this Warrant is exercisable immediately after such adjustment, as calculated above. (ii)The provisions of Section 4.3(i) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Section 4.1. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under Section 4.3(i) upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 4.4. 4.4.ISSUANCE OF WARRANTS, CONVERTIBLE SECURITIES OR OTHER RIGHTS. If, at any time, the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation or otherwise) issue or sell, any warrants, options or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exercise, purchase, exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such warrants, options or other rights or upon conversion or exchange of such Convertible Securities shall be less than the Current Market Price in effect immediately prior to the exercise of this Warrant, then the number of shares for which this Warrant is exercisable and the Current Warrant Price shall each be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock issuable (assuming immediate exercisability for all shares covered) pursuant to all such warrants, options or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the exercise of this Warrant. No further adjustments of the number of shares for which this Warrant is exercisable or the Current Warrant Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 4.5.OTHER ACTION AFFECTING WARRANT. If at any time or from time to time the Company shall take any action in respect of or affecting the Common Stock other than an action described in any of the foregoing Sections 4.1 to 4.4, inclusive, then, unless in the reasonable judgment of the Board of Directors of the Company such action will not have a materially adverse effect upon the rights of any Holder, the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted in such manner and at such time as the Board of Directors of the Company may in good faith determine to be equitable under the circumstances. 4.6.OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER SECTION 4.6. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable provided for in this Section 4: (i)COMPUTATION OF CONSIDERATION. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants, options or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by the Company therefor shall be the amount of the cash received by the Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company (excluding therefrom any director designated by the transferor thereof). In case any Additional Shares of Common Stock or any Convertible Securities or any warrants, options or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company (excluding therefrom any director designated by the transferor thereof), of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants, options or other rights, as the case may be. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants, options or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants, options or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants, options or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (ii)WHEN ADJUSTMENTS TO BE MADE. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 4.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 1% of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iii)FRACTIONAL INTERESTS. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one-tenth of a share. (iv)WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 4.7.REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. (i)In case the Company shall reorganize its capital, reclassify its Capital Stock, consolidate or merge with or into another corporation, or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed to the holders of Common Stock of the Company, then each Holder shall have the right thereafter to receive, upon exercise of such Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. (ii)In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, (a) Holder shall continue to enjoy, with respect to any shares of common stock of the successor or acquiring corporation or the Company or any Other Property consisting of Capital Stock or warrants acquired by Holder, all the rights and benefits available to Holder pursuant to this Warrant and all other agreements executed in connection with this Warrant and/or the Warrant Stock, and (b) the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 3. (iii)For purposes of this Section 4.7, "COMMON STOCK OF THE SUCCESSOR OR ACQUIRING CORPORATION" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.7 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (iv)The Company shall not consolidate or merge with or into an Affiliate of the Company, nor sell, transfer or otherwise dispose of all or substantially all its property, assets or business to such an Affiliate unless and until (a) such consolidation, merger, sale, transfer or disposition is fair and equitable to the Company, each Holder and all holders of Warrant Stock and is on terms which are at least as favorable as those that would be obtainable in a similar transaction with an unrelated third party, and (b) each Holder shall have received, at the Company's sole cost and expense, the opinion of a financial advisor satisfactory to such Holder in such Holder's reasonable discretion to the effect that the proposed consolidation, merger, sale, transfer or disposition satisfies the conditions set forth in the immediately preceding clause (a). 4.8.CERTAIN LIMITATIONS. Notwithstanding anything to the contrary contained in the Company's Articles of Incorporation, Bylaws or other documents governing the terms of the Company's Capital Stock, the Company agrees not to amend its Articles of Incorporation or Bylaws, enter into any other transaction or execute any other document that would cause a reduction in the par value per share of Common Stock below the Current Warrant Price. 5.NOTICES TO WARRANT HOLDERS. 5.1.NOTICE OF ADJUSTMENTS. Whenever the number of shares of Common Stock for which this Warrant is exercisable is subject to adjustment pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company determined the fair value of any evidences of indebtedness shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.6(i)), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.7) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 17.1. The Company shall keep at its office or agency designated pursuant to Section 11 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any Holder or any prospective purchaser of a Warrant designated by a Holder thereof. 5.2.NOTICE OF CORPORATE ACTION. If at any time: (i)the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Company) or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (ii)there shall be any capital reorganization of the Company, any reclassification or recapitalization of the Capital Stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation, or (iii)there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (a) at least 20 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clauses also shall specify (I) with respect to clause (a), the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (II) with respect to clauses (a) and (b), the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17.1. 6.NO IMPAIRMENT. The Company shall not by any action, including, without limitation, amending its articles of incorporation or through any reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, winding up, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, including reducing the par value of its Common Stock, and (iii) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. 7.RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY. From and after the date hereof, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and, to the extent permitted by law, free of liens or preemptive rights. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 8.TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS. In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record as of the close of business on a Business Day. The Company will not, at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 9.RESTRICTIONS OF TRANSFERABILITY. Each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT." 10.LOSS OR MUTILATION. Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it, and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; PROVIDED, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 11.OFFICE OF THE COMPANY. As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. The Company shall notify each Holder in writing prior to any change of address of the office at which the Warrants may be presented. 12.LIMITATION OF LIABILITY. No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of such Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 13.CAPITALIZATION. As of August 19, 1998, there are outstanding 7,228,058 shares of Common Stock; 879,802 shares of treasury stock of the Company; and 37,300 outstanding shares of Series A Preferred Stock and 0 shares of treasury Series A Preferred Stock, which are convertible into a maximum number of 438,823 shares of Common Stock. 14.REGISTERED HOLDER. Notwithstanding any other provision of this Warrant, Holder and/or its affiliates may exercise this Warrant solely to the extent such exercise would not result in Holder and/or its affiliates holding, directly or indirectly, in excess of 4.99% of the outstanding Common Stock of the Company (such determination to be made by Holder), except for an exercise in connection with (i) a widely dispersed public offering of the Warrant Stock, (ii) a sale of the Warrant Stock in the secondary market pursuant to the transaction and volume limitations of Rule 144 under the Securities Act (irrespective of holding periods), or (iii) a private placement or sale, including those made pursuant to Rule 144A under the Securities Act, so long as Holder and/or its affiliates do not collectively acquire more than 2% of the Common Stock of the Company pursuant to any such transfer. 15.UNDERTAKINGS. Holder covenants with the Company that it will not exercise or attempt to exercise influence over the management or policies of the Company in connection with this Warrant or any shares of Common Stock for which this Warrant may be exercised. 16.SHAREHOLDER COMMUNICATIONS. The Company will provide the Registered Holder with copies of all written communications distributed to shareholders generally. 17.MISCELLANEOUS. 17.1.NOTICE GENERALLY. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback, addressed as follows: (i)If to any Holder or holder of the Warrant Stock, at its last known address appearing on the books of the Company maintained for such purpose. (ii)If to the Company at: 9100 Keystone Crossing Suite 600 Indianapolis, Indiana 46240 Attention: Stephen M. Coons, Esq. Telecopy: (317) 574-6227 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 17.2.SUCCESSORS AND ASSIGNS. This Warrant and the rights evidenced hereby (including, without limitation, those relating to the Warrant Stock) shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and all Holders from time to time of the Warrant Stock, and shall be enforceable by any such Holder(s). 17.3.AMENDMENT. (i)This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of the Company and the Majority Holders, PROVIDED that no such Warrant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the Warrant Price without the prior written consent of Holder thereof. (ii)No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 17.4.SEVERABILITY. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 17.5.HEADINGS. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 17.6.GOVERNING LAW. This Warrant shall be governed by the laws of the State of Connecticut, without regard to the provisions thereof relating to conflict of laws. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed. Dated: August 19, 1998 STANDARD MANAGEMENT CORPORATION By:__________________________________ Name: Stephen M. Coons, Esq. Its:Executive Vice President and General Counsel -- EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of _______ shares of Common Stock of the Company, and herewith makes payment in the amount of $________ therefor, and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to ___________, whose address is ____________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. In lieu of paying the purchase price, I hereby make a cashless exercise of this Warrant for the purchase of _______ shares of Common Stock of the Company pursuant to Section 2.1(iii) of this Warrant and request that [$______] [certificates representing _____ shares] be [paid][issued] and delivered to _______, whose address is ____________. ____________________________________ (Name of Registered Owner) (Signature of Registered Owner) (Street Address) (City) (State) (Zip Code) -- EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below:
NAME AND ADDRESS OF ASSIGNEE No. of Shares of Common Stock
and does hereby irrevocably constitute and appoint __________________ attorney-in-fact to register such transfer on the books of ______________________ maintained for the purpose, with full power of substitution in the premises. Dated: Name: Signature: Witness: NOTICE:The signature on this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. -- EX-10.51 12 GUARANTY GUARANTY dated as of October 1, 1998 made by the undersigned (the "GUARANTOR") in favor of Fleet National Bank and/or any of its subsidiaries or affiliates (individually or collectively, as the context may require, the "BANK"). PRELIMINARY STATEMENTS: The Bank has entered into certain term loans in the aggregate principal amount not to exceed $3,000,000 as outlined in a Letter Agreement dated the date hereof with the parties identified from time to time on Schedule A attached hereto (collectively, the "BORROWERS") providing for credit extensions or financial accommodation to one or more of the Borrowers on said Schedule A (all of the foregoing credit extensions or financial accommodations being the "LOANS" and any writing evidencing, supporting or securing a Loan, including but not limited to this Guaranty, as the same may be amended, restated, renewed, updated, extended or supplemented from time to time, being a "FACILITY DOCUMENT"). Each of the Borrowers is a director and/or officer of the Guarantor. THEREFORE, in order to induce the Bank to extend credit or give financial accommodation under the Loans, the Guarantor agrees as follows: Section 1. GUARANTY OF PAYMENT. The Guarantor unconditionally and irrevocably guarantees to the Bank the punctual payment of all sums now owing or which may in the future be owing by the Borrowers under the Loans, when the same are due and payable, whether on demand, at stated maturity, by acceleration or otherwise, and whether for principal, interest, fees, expenses, indemnification or otherwise (all of the foregoing sums being the "LIABILITIES"). The Liabilities include, without limitation, interest accruing after the commencement of a proceeding under bankruptcy, insolvency or similar laws of any jurisdiction at the rate or rates provided in the Facility Documents. This Guaranty is a guaranty of payment and not of collection only. The Bank shall not be required to exhaust any right or remedy or take any action against any Borrower or any other person or entity or any collateral. The Guarantor agrees that, as between the Guarantor and the Bank, the Liabilities may be declared to be due and payable for the purposes of this Guaranty notwithstanding any stay, injunction or other prohibition which may prevent, delay or vitiate any declaration as regards any Borrower (including any prohibition under any subordination agreement) and that in the event of a declaration or attempted declaration, the Liabilities shall immediately become due and payable by the Guarantor for the purposes of this Guaranty. Section 2. GUARANTY ABSOLUTE. The Guarantor guarantees that the Liabilities shall be paid strictly in accordance with the terms of the Loans. The liability of the Guarantor under this Guaranty is absolute and unconditional irrespective of: (a) any change in the time, manner or place of payment of, or in any other term of, all or any of the Facility Documents or Liabilities, or any other amendment or waiver of or any consent to departure from any of the terms of any Facility Document or Liability; (b) any release or amendment or waiver of, or consent to departure from, any other guaranty or support document, or any exchange, release or non-perfection of any collateral, for all or any of the Facility Documents or Liabilities; (c) any present or future law, regulation or order of any jurisdiction (whether of right or in fact) or of any agency thereof purporting to reduce, amend, restructure or otherwise affect any term of any Facility Document or Liability; (d) without being limited by the foregoing, any lack of validity or enforceability of any Facility Document or Liability; (e) any restrictions contained in any subordination agreement that limit or otherwise affect the rights and remedies of the Bank against any Borrower or any other parties other than the Guarantor; and (f) any other defense, setoff or counterclaim whatsoever with respect to the Facility Documents or the transactions contemplated thereby which might constitute a defense available to, or discharge of, any Borrower or a guarantor. Section 3. GUARANTY IRREVOCABLE. This Guaranty is a continuing guaranty of all Liabilities now or hereafter existing under the Loans and shall remain in full force and effect until the indefeasible payment in full of all Liabilities and other amounts payable under this Guaranty and until the Loans are no longer in effect or, if earlier, when the Guarantor has given the Bank written notice that this Guaranty has been revoked; PROVIDED that any notice under this Section shall not release the Guarantor from any Liability, absolute or contingent, existing prior to the Bank's actual receipt of the notice at its branches or departments responsible for the Loans. Section 4. REINSTATEMENT. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Liabilities is rescinded or must otherwise be returned by the Bank on the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though the payment had not been made. Section 5. SUBROGATION. The Guarantor shall not exercise any rights which it may acquire by way of subrogation, by any payment made under this Guaranty or otherwise, until all the Liabilities have been paid in full and the Loans are no longer in effect. If any amount is paid to the Guarantor on account of subrogation rights under this Guaranty at any time when all the Liabilities have not been paid in full, the amount shall be held in trust for the benefit of the Bank and shall be promptly paid to the Bank to be credited and applied to the Liabilities, whether matured or unmatured or absolute or contingent, in accordance with the terms of the Loans. If the Guarantor makes payment to the Bank of all or any part of the Liabilities and all the Liabilities are paid in full and the Loans are no longer in effect, the Bank shall, at the Guarantor's request, execute and deliver to the Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to the Guarantor of an interest in the Liabilities resulting from the payment, including an assignment, without recourse or warranty, of all of the Bank's right, title and interest in the Liabilities and all security therefor and guaranties thereof. Section 6. SUBORDINATION. Without limiting the Bank's rights under any other agreement, any liabilities owed by any Borrower to the Guarantor in connection with any extension of credit or financial accommodation by the Guarantor to or for the account of any Borrower, including but not limited to interest accruing at the agreed contract rate after the commencement of a bankruptcy or similar proceeding, are hereby subordinated to the Liabilities, and such liabilities of any Borrower to the Guarantor, if the Bank so requests, shall be collected, enforced and received by the Guarantor as trustee for the Bank and shall be paid over to the Bank on account of the Liabilities but without reducing or affecting in any manner the liability of the Guarantor under the other provisions of this Guaranty. Section 7. PAYMENTS GENERALLY. All payments by the Guarantor shall be made in the manner, at the place and in the currency (the "PAYMENT CURRENCY") required by the Facility Documents; PROVIDED, HOWEVER, that (if the Payment Currency is other than U.S. dollars) the Guarantor may, at its option (or, if for any reason whatsoever the Guarantor is unable to effect payments in the foregoing manner, the Guarantor shall be obligated to) pay to the Bank at its principal office the equivalent amount in U.S. dollars computed at the selling rate of the Bank or a selling rate chosen by the Bank, most recently in effect on or prior to the date the Liability becomes due, for cable transfers of the Payment Currency to the place where the Liability is payable. In any case in which the Guarantor makes or is obligated to make payment in U.S. dollars, the Guarantor shall hold the Bank harmless from any loss incurred by the Bank arising from any change in the value of U.S. dollars in relation to the Payment Currency between the date the Liability becomes due and the date the Bank is actually able, following the conversion of the U.S. dollars paid by the Guarantor into the Payment Currency and remittance of such Payment Currency to the place where such Liability is payable, to apply such Payment Currency to such Liability. Section 8. CERTAIN TAXES. The Guarantor further agrees that all payments to be made hereunder shall be made without setoff or counterclaim and free and clear of, and without deduction for, any taxes (other than Bank income taxes), levies, imposts, duties, charges, fees, deductions, withholdings or restrictions or conditions of any nature whatsoever now or hereafter imposed, levied, collected, withheld or assessed by any country or by any political subdivision or taxing authority thereof or therein ("TAXES"). If any Taxes are required to be withheld from any amounts payable to the Bank hereunder, the amounts so payable to the Bank shall be increased to the extent necessary to yield to the Bank (after payment of all Taxes) the amounts payable hereunder in the full amounts so to be paid. Whenever any Tax is paid by the Guarantor, as promptly as possible thereafter, the Guarantor shall send the Bank an official receipt showing payment thereof, together with such additional documentary evidence as may be required from time to time by the Bank. Section 9. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents and warrants as follows: a)INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. The Guarantor is duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. b)POWER AND AUTHORITY; NO CONFLICTS. The execution, delivery and performance by the Guarantor of the Facility Documents to which it is a party have been duly authorized by all necessary action and do not and will not: (i) require any consent or approval of the stockholders of the Guarantor; (ii) contravene the charter or by-laws of the Guarantor; (iii) violate any provision of, or require any filing, registration, consent or approval under, any law, rule, regulation (including, without limitation, Regulation U), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to any Guarantor or any of the Guarantor's Subsidiaries; (iv) result in a breach of or constitute a default or require any consent under any material indenture or loan or credit agreement or any other material agreement, lease or instrument to which any Guarantor is a party or by which it or its properties may be bound or affected; (v) result in, or require, the creation or imposition of any Lien (as defined in the Security Agreement), upon or with respect to any of the properties now owned or hereafter acquired by any Guarantor; or (vi) cause any Guarantor (or any Subsidiary of the Guarantor) to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such material indenture, agreement, lease or instrument. c)LEGALLY ENFORCEABLE AGREEMENTS. Each Facility Document to which any Guarantor is a party is, or when delivered under this Agreement will be, a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. d)LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of any Guarantor, threatened, against or affecting such Guarantor or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of such Guarantor or any such Subsidiary or the ability of such Guarantor to perform its obligations under the Facility Documents to which it is a party. e)FINANCIAL STATEMENTS. The consolidated balance sheet of the Guarantor and its Subsidiaries as at December 31, 1997, and the related consolidated income statement and statements of cash flows and changes in stockholders' equity of the Guarantor and its Subsidiaries for the fiscal year then ended, and the accompanying footnotes, together with the opinion thereon, of Ernst & Young, LLP independent certified public accountants, and the Guarantor's and its Subsidiaries', if applicable, Form 10-Q filed with the Securities and Exchange Commission for the period ended March 31, 1998, copies of which have been furnished to the Bank, are complete and correct and fairly present the financial condition of the Guarantor and its Subsidiaries as at such dates and the results of the operations of the Guarantor and its Subsidiaries for the periods covered by such statements, all in accordance with GAAP consistently applied. There are no liabilities of the Guarantor or any of its Subsidiaries, fixed or contingent, which are material but are not reflected in the financial statements or in the notes thereto, other than liabilities arising in the ordinary course of business since March 31, 1998. No information, exhibit or report furnished by any Guarantor to the Bank in connection with the negotiation of this Guaranty or the other Facility Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statement contained therein not materially misleading. Since March 31, 1998 with respect to the Guarantor, there has been no material adverse change in the condition (financial or otherwise), business, operations or prospects of the Guarantor or any of its Subsidiaries. f)OWNERSHIP AND LIENS. The Guarantor and each of its respective Subsidiaries have title to, or valid leasehold interests in, all of their respective properties and assets, real and personal, including the properties and assets, and leasehold interests reflected in the financial statements referred to in Section 9(e) (other than any properties or assets disposed of in the ordinary course of business), and none of the properties and assets owned by any Guarantor or any of the Subsidiaries and none of its leasehold interests is subject to any Lien, except as disclosed in such financial statements or as may be permitted hereunder. g)TAXES. The Guarantor and each of its respective Subsidiaries have filed all tax returns (federal, state and local) required to be filed and have paid all taxes, assessments and governmental charges and levies thereon to be due, including interests and penalties, except as otherwise disclosed in the financial statements provided to the Bank pursuant to Section 9(e) herein. h)ERISA. Each Plan (as defined in the Security Agreement), and each Multiemployer Plan (as defined in the Security Agreement), is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Internal Revenue Code and any other applicable federal or state law. As of the most recent valuation date for each Plan, each Plan was "fully funded," which for purposes of this Section 9(h) shall mean that the fair market value of the assets of the Plan is not less than the present value of the accrued benefits of all participants in the Plan, computed on a Plan termination basis. No Plan has ceased being fully funded as of the date these representations are made with respect to any Loan under the Facility Documents. i)SUBSIDIARIES AND OWNERSHIP OF STOCK. Schedule 9(i) is a complete and accurate list of the Subsidiaries of the Guarantor, showing the jurisdiction of incorporation or organization of each Subsidiary and showing the percentage of the Guarantor's ownership of the outstanding stock or other interest of each such Subsidiary. All of the outstanding capital stock or other interest of each such Subsidiary has been validly issued, is fully paid and nonassessable and, except for prior liens in favor of the Bank, is owned by the Guarantor free and clear of all Liens. j)CREDIT ARRANGEMENTS. All credit agreements, indentures, purchase agreements, guaranties, capital leases and other investments, agreements and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which the Guarantor or any of the Guarantor's Subsidiaries is in any manner directly or contingently obligated have been disclosed to the Bank, and the Guarantors represent that they shall, upon the request of the Bank, complete a schedule outlining all such agreements; and the maximum principal or face amounts of the credit in question, outstanding and which can be outstanding, are correctly stated, and all Liens of any nature given or agreed to be given as security therefor have been accurately disclosed to the Bank. k)OPERATION OF BUSINESS. The Guarantor and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted, and neither the Guarantor nor any of its Subsidiaries is in violation of any valid rights of others with respect to any of the foregoing. l)NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS. The Guarantor and each of its Subsidiaries have satisfied all judgments and neither the Guarantor nor any of its Subsidiaries is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. m)NO DEFAULTS ON OTHER AGREEMENTS. Neither the Guarantor nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction which could have a material adverse effect on the business, properties, assets, operations or conditions, financial or otherwise, of any Guarantor or any of its Subsidiaries, or the ability of any Guarantor to carry out its obligations under the Facility Documents to which it is a party. Neither the Guarantor nor any of its Subsidiaries is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument material to its business to which it is a party. n)LABOR DISPUTES AND ACTS OF GOD. Neither the business nor the properties of the Guarantor or of any of its Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), materially and adversely affecting such business or properties or the operation of the Guarantor or such Subsidiary. o)GOVERNMENTAL REGULATION. Neither the Guarantor nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce Act, the Federal Power Act or any statute or regulation limiting its ability to incur indebtedness for money borrowed as contemplated hereby. p)SOLVENCY. (i)The present fair salable value of the assets of the Guarantor after giving effect to all the transactions contemplated by the Facility Documents and the funding of the Loans exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Guarantor and its Subsidiaries, if any, as they mature. (ii)The property of the Guarantor does not constitute unreasonably small capital for the Guarantor to carry out its business as now conducted and as proposed to be conducted, including the capital needs of the Guarantor. (iii)The Guarantor does not intend to, nor does it believe that it will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by the Guarantor, and of amounts to be payable on or in respect of debt of the Guarantor). The cash available to the Guarantor, after taking into account all other anticipated uses of the cash of the Guarantor, is anticipated to be sufficient to pay all such amounts on or in respect of debt of the Guarantor when such amounts are required to be paid. (iv)The Guarantor does not believe that final judgments against it in actions for money damages will be rendered at a time when, or in an amount such that, the Guarantor will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). The cash available to the Guarantor after taking into account all other anticipated uses of the cash of the Guarantor (including the payments on or in respect of debt referred to in paragraph (iii) of this Section 9(p)), is anticipated to be sufficient to pay all such judgments promptly in accordance with their terms. q)SATISFACTION OF CONDITIONS. There are no conditions precedent to the effectiveness of this Guaranty that have not been satisfied or waived. r)INDEPENDENT ANALYSIS. The Guarantor has, independently and without reliance upon the Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Guaranty. Section 10.AFFIRMATIVE COVENANTS. The Guarantor covenants and agrees that, so long as any part of the Liabilities shall remain unpaid, the Guarantor will, unless the Bank shall otherwise consent in writing: a)MAINTENANCE OF EXISTENCE. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence and good standing in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each of its Subsidiaries to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is required. b)CONDUCT OF BUSINESS. Continue, and cause each of its Subsidiaries to continue, to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Guaranty. c)MAINTENANCE OF PROPERTIES. Maintain, keep and preserve, and cause each of its Subsidiaries to maintain, keep and preserve, all of its properties (tangible and intangible), necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. d)MAINTENANCE OF RECORDS. Keep, and cause each of its Subsidiaries to keep, adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of the Guarantor and its Subsidiaries. e)MAINTENANCE OF INSURANCE. Maintain, and cause each of its Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or similar business and similarly situated, which insurance may provide for reasonable deductibility from coverage thereof. f)COMPLIANCE WITH LAWS. Comply, and cause each of the its Subsidiaries to comply, in all respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property. g)RIGHT OF INSPECTION, AUDIT AND APPRAISAL. At any reasonable time and from time to time, permit the Bank or any agent or representative thereof, to examine and make copies and abstracts from the records and books of account of, and visit the properties of, the Guarantors and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Guarantor and any such Subsidiary with any of their respective officers and directors and the Guarantor's independent accountants. h)REPORTING REQUIREMENTS. Furnish to the Bank: (i)as soon as available and in any event within 90 days after the end of each fiscal year of the Guarantor, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such fiscal year and a consolidated income statement and statements of cash flows and changes in stockholders' equity of the Guarantor and its Subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the consolidated figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP and accompanied by an opinion thereon acceptable to the Bank by Ernst & Young, LLP or other independent accountants of national standing selected by the Guarantor; (ii)as soon as available and in any event within 30 days after the end of each fiscal quarter of the Guarantor of each fiscal year of the Guarantor, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such quarter and a consolidated income statement and statements of cash flows and changes in stockholders' equity of the Guarantor and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the previous fiscal year and all prepared in accordance with GAAP and certified by the chairman or chief financial officer of the Guarantor; (iii)promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any Guarantor or any of its Subsidiaries which, if determined adversely to the Guarantor or such Subsidiary, could have a material adverse effect on the financial condition, properties or operations of the Guarantor or such Subsidiary; (iv)as soon as possible and in any event within five days after the occurrence of each Default or Event of Default or material adverse change in the business, operations, properties, prospects or condition (financial or otherwise) of any Guarantor, a written notice setting forth the details of such Default, Event of Default or material adverse change and the action which is proposed to be taken by the Guarantor with respect thereto; (v)promptly after the filing or receiving thereof, copies of all reports and notices which the Guarantor or any Subsidiary files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or which the Guarantor or any Subsidiary receives from such Person; and (vi)promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Bank pursuant to any other clause of this Section 10(h). Section 11.NEGATIVE COVENANTS. The Guarantor covenants and agrees that, so long as any part of the Liabilities shall remain unpaid, the Guarantor will not, without the prior written consent of the Bank: a)STOCK OF SUBSIDIARIES, ETC. Sell or otherwise dispose of any shares of capital stock of any of its Subsidiaries, except in connection with a transaction permitted under Section 11(b) herein or for fair value, or permit any such Subsidiary to issue any additional shares of its capital stock, except directors' qualifying shares or for fair value. b)MERGERS, ETC. Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person (or enter into any agreement to do any of the foregoing), or permit any of their respective Subsidiaries to do so. Nothing herein shall prohibit the Guarantor from acquiring all or substantially all of the assets of the business of any Person so long as the Guarantor remains the surviving entity. Section 12. REMEDIES GENERALLY. The remedies provided in this Guaranty are cumulative and not exclusive of any remedies provided by law. Section 13. SETOFF. The Guarantor agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim the Bank may otherwise have, the Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it for the account of the Guarantor at any of the Bank's offices, in U.S. dollars or in any other currency, against any amount payable by the Guarantor under this Guaranty which is not paid when due (regardless of whether such balances are then due to the Guarantor), in which case it shall promptly notify the Guarantor thereof; PROVIDED that the Bank's failure to give such notice shall not affect the validity thereof. Section 14. FORMALITIES. The Guarantor waives presentment, notice of dishonor, protest, notice of acceptance of this Guaranty or incurrence of any Liability and any other formality with respect to any of the Liabilities or this Guaranty. Section 15. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Guaranty, nor consent to any departure by the Guarantor therefrom, shall be effective unless it is in writing and signed by the Bank, and then the waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Bank to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver or preclude any other or further exercise thereof or the exercise of any other right. Section 16. EXPENSES. The Guarantor shall reimburse the Bank on demand for all reasonable costs, expenses and charges (including without limitation fees and charges of external legal counsel for the Bank and costs allocated by its internal legal department) incurred by the Bank in connection with the preparation, performance or enforcement of this Guaranty. The obligations of the Guarantor under this Section shall survive the termination of this Guaranty. Section 17. ASSIGNMENT. This Guaranty shall be binding on, and shall inure to the benefit of the Guarantor, the Bank and their respective successors and assigns; PROVIDED that the Guarantor may not assign or transfer its rights or obligations under this Guaranty. Without limiting the generality of the foregoing: (a) the obligations of the Guarantor under this Guaranty shall continue in full force and effect and shall be binding on the estate of the Guarantor; and (b) the Bank may assign, sell participations in or otherwise transfer its rights under the Loans to any other person or entity, and the other person or entity shall then become vested with all the rights granted to the Bank in this Guaranty or otherwise. Section 18. CAPTIONS. The headings and captions in this Guaranty are for convenience only and shall not affect the interpretation or construction of this Guaranty. Section 19. GOVERNING LAW; TERMS. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. Unless otherwise defined herein or in the Agreement, terms used in Article 9 of the Uniform Commercial Code in the State of Connecticut are used herein as therein defined. Section 20. COMMERCIAL WAIVER. THE GUARANTOR ACKNOWLEDGES THAT THE OBLIGATIONS ARE FOR COMMERCIAL PURPOSES AND WAIVES THE RIGHT TO NOTICE AND HEARING UNDER SECTIONS 52-278a THROUGH 52-278n OF THE CONNECTICUT GENERAL STATUTES AS NOW OR HEREAFTER AMENDED AND AUTHORIZES THE ATTORNEY OF THE BANK, OR THE SUCCESSOR THERETO, TO ISSUE A WRIT OF PREJUDGMENT REMEDY WITHOUT COURT ORDER. FURTHER, THE GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL VALUATION, APPRAISEMENTS, HOMESTEAD, EXEMPTION, STAY, REDEMPTION AND MORATORIUM LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BECOME LAWS. THE GUARANTOR ACKNOWLEDGES THAT IT MAKES THESE WAIVERS KNOWINGLY, VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF THESE WAIVERS WITH ITS ATTORNEYS. Section 21. WAIVER OF JURY TRIAL. THE GUARANTOR AND THE BANK MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF THE CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER FACILITY DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR THE COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS AGREEMENT AND MAKE THE LOANS. IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered as of the date first above written. STANDARD MANAGEMENT CORPORATION By___________________________ Name: Stephen M. Coons, Esq. Title: Executive Vice President and General Counsel Address: 9100 Keystone Crossing 6th Floor Indianapolis, Indiana 46420 Schedule A - List of Borrowers Schedule 9(i) - List of Subsidiaries SCHEDULE A LIST OF BORROWERS NAME RESIDENT ADDRESS Ronald D. Hunter 3570 Sedgemoor Circle Carmel, Indiana 46032 Stephen M. Coons 1135 Brookhaven Court Atlanta, Georgia 30319 Raymond J. Ohlson 13728 Smokey Ridge Road Carmel,Indiana 46033 Paul B. Pheffer 8651 Jaffa Court, E. Drive, #17 Indianapolis, Indiana 46260 Edward T. Stahl 7328 Sylvan Ridge Road Indianapolis, Indiana 46240 Ramesh H. Bhat 4127 Boca Trail Fort Wayne, Indiana 46815 Robert A. Borns 515 Round Hill Road Indianapolis, Indiana 46260 Jerry E. Francis 340 Staffordshire Road Winston-Salem, North Carolina 27104 Patrick M. Whicher 47 rue Nic Martha L-2133 Luxembourg SCHEDULE 9(I) LIST OF SUBSIDIARIES STATE OFPERCENTAGE SUBSIDIARYINCORPORATIONOWNERSHIP 1.Standard Life Insurance Company of IndianaIndiana100% 2.Standard Marketing CorporationIndiana100% 3.Dixie National Life Insurance CompanyMississippi99% 4.Savers Life Insurance CompanyNorth Carolina100% EX-10.52 13 STANDARD LIFE INSURANCE COMPANY OF INDIANA SURPLUS DEBENTURE $8,000,000 DECEMBER 31, 1998 FOR VALUE RECEIVED, STANDARD LIFE INSURANCE COMPANY OF INDIANA, an Indiana stock life insurance corporation (hereinafter called AStandard Life of Indiana@), subject to the terms, conditions, restrictions, and limitations herein contained, promises to pay STANDARD MANAGEMENT CORPORATION, an Indiana corporation (ASMC@), the principal sum of Eight Million Dollars ($8,000,000) with interest on the unpaid balance thereof payable quarterly in arrears, beginning March 31, 1999 and on each calendar quarter end thereafter, until paid in full, at a variable rate (the ARate@) equal to the corporate base rate as reported by the bank or branch with the greatest amount of assets in the State of Indiana, as in effect on the first business day of each month during the term of this Surplus Debenture plus 2%. In no event shall the Rate increase by more than 2% in any one year or increase by more than 5% over the term of this Surplus Debenture over the Rate in effect on the date of execution of this Surplus Debenture. Both principal and interest on this Surplus Debenture shall be due and payable in the following manner at the offices of SMC in Indianapolis, Indiana. (1)On or before each calendar quarter end commencing March 31, 1999, the Board of Directors of Standard Life of Indiana shall calculate the surplus of Standard Life of Indiana as of the end of the preceding fiscal quarter (e.g., March 31, 1999, the surplus calculation shall be as of December 31, 1998) in accordance with accounting practices required or permitted by the Insurance Department of the State of Indiana. (2)On or before January 1 of each calendar year, commencing January 1, 2026, the Board of Directors of Standard Life of Indiana shall calculate the surplus of Standard Life of Indiana as of the end of the preceding fiscal quarter in accordance with accounting practices required or permitted by the Insurance Department of the State of Indiana. (3)Provided the surplus of Standard Life of Indiana at the time the calculation required in paragraph (1) above is made, exceeds the surplus of Standard Life of Indiana at the Closing on December 31, 1998 and the prior approval of the Commissioner of Insurance of the State of Indiana is obtained in accordance with the provisions of the Indiana Insurance Code, Standard Life of Indiana shall pay to the holder hereof, on the dates specified in paragraph (1) above, an amount equal to the lesser of (a) the accrued but unpaid interest on the unpaid principal balance of this Surplus Debenture or (b) the amount by which the surplus of Standard Life of Indiana exceeds (the surplus of Standard Life of Indiana at Closing). (4)If, at the time the calculation required in paragraph (1) above is made, the surplus of Standard Life of Indiana does not exceed (the surplus of Standard Life of Indiana at Closing) by an amount sufficient to pay all accrued but unpaid interest on this Surplus Debenture, the remaining accrued but unpaid interest shall bear interest, payable quarterly in arrears, at the Rate. (5)Provided the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing) plus an amount equal to all accrued but unpaid interest on January 1 of the calendar year in which the calculation required in paragraph (2) above is made and the prior approval of the Commissioner of Insurance of the State of Indiana is obtained in accordance with the provisions of the Indiana Insurance Code, Standard Life of Indiana shall pay to the holder hereof an Annual Installment (herein so called) of principal on this Surplus Debenture within fifteen (15) days after such calculation is made. Each Annual Installment of principal becoming due and payable hereunder shall equal the amount specified therefor in the following amortization schedule or such lesser amount (or at the sole option of Standard Life of Indiana, such greater amount) by which the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing), plus such accrued but unpaid interest: YEAR PRINCIPAL PAYMENT 2026 $1,000,000 2027 $1,000,000 2028 $1,000,000 2029 $1,000,000 2030 $1,000,000 2031 $1,000,000 2032 $1,000,000 2033 $1,000,000 If the Annual Installment of principal paid by Standard Life of Indiana in any calendar year is less than the amount shown for such year in the foregoing table, the amount shown in the table for the following calendar year shall be increased by the amount of such deficit and if no amount is shown in the table for such calendar year, the amount due in the following calendar year shall be the amount of such deficit. If any principal of the Surplus Debenture remains unpaid after January 1, 2033, the Annual Installment of principal due for each year thereafter shall be such unpaid principal balance or such lesser amount by which the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing) plus accrued interest payable hereunder. (6)Surplus shall be calculated as required for inclusion in the Annual Statement of Standard Life of Indiana filed with the Indiana Department of Insurance as of December 31, of each year. (7)The obligation of Standard Life of Indiana to pay this Surplus Debenture shall not be considered or treated as a current or fixed liability or obligation of Standard Life of Indiana for statutory accounting purposes under the Indiana Insurance Code and the rules and regulations promulgated thereunder, except to the extent a payment of principal or interest has been approved by the Commissioner. For all other purposes, this Surplus Debenture shall be considered a debt instrument payable in accordance with and subject to the terms hereof, and shall not for any purpose be considered or treated as an equity interest in Standard Life of Indiana. (8)In the event of liquidation of Standard Life of Indiana, this Surplus Debenture shall become immediately due and payable and shall be superior to and in preference of the rights and claims of shareholders of Standard Life of Indiana; provided, however, that, in any liquidation proceeding pursuant to the Indiana Insurance Code, all obligations, rights, and claims hereunder are expressly subordinated to (a) the claims of any supervisor, conservator, or receiver of Standard Life of Indiana appointed by the Commissioner of Insurance of the State of Indiana and (b) the claims of all other creditors, except the claims of shareholders of Standard Life of Indiana in their capacities as shareholders. (9)Each payment made hereunder shall be credited first to accrued but unpaid interest, if any, and the balance of such payment shall be credited to the principal amount hereof. (10)Nothing herein contained shall be construed as prohibiting Standard Life of Indiana from merging or consolidating with any other corporation or from selling or reinsuring any part of its business, or from acquiring all or any part of the assets of any other corporation. In the event Standard Life of Indiana shall be consolidated or merged into another corporation or shall sell substantially all of its assets to any other corporation, the corporation into which Standard Life of Indiana is consolidated or merged or to which the assets of Standard Life of Indiana are transferred shall assume the liability of Standard Life of Indiana hereunder. (11)No recourse shall be had for the payment of the principal of, or the interest on, this Surplus Debenture, or for any claims based hereon or otherwise in respect hereof, against any past, present or future incorporator, shareholder, officer, or director of Standard Life of Indiana; such liability being by acceptance and as a part of the consideration for the issuance hereof, expressly released. (12)By acceptance and as part of the consideration for the issuance hereof, the above-named payee and holder hereof expressly acknowledges that it has been informed and has knowledge that this Surplus Debenture has not been registered under the Securities Act of 1933, as amended, or the Securities Act or Blue Sky laws of any state, and that Standard Life of Indiana has issued this Surplus Debenture pursuant to exemptions from registration available under such acts. The above-named payee hereof further expressly acknowledges and agrees that it is acquiring this Surplus Debenture for investment purposes and not with a view toward a public distribution hereof and that this Surplus Debenture may not be sold or otherwise transferred in the absence of an effective registration statement with respect hereto or an exemption from registration under the Securities Act of 1933, as amended, or any other applicable securities law. (13)If this Surplus Debenture is collected through judicial proceedings, Standard Life of Indiana agrees, subject to the conditions and restrictions contained herein, to pay reasonable attorneys= fees to the holder with respect to legal services performed in such collection. (14)Regardless of the provisions of I.C. 27-1-7-19 specifying the conditions under which payments on the Surplus Debenture will be approved or Standard Life of Indiana=s satisfaction of the conditions identified therein, the Commissioner of the Indiana Department of Insurance may refuse to approve the payment of principal or interest on the Surplus Debenture (i) on the basis of statutory or regulatory grounds, or (ii) if, in the determination of the Commissioner, the financial condition of Standard Life of Indiana does not warrant payment. IN WITNESS WHEREOF, Standard Life Insurance Company of Indiana has caused this Surplus Debenture to be fully executed on ________________________, 1998. STANDARD LIFE INSURANCE COMPANY OF INDIANA By: __________________________________ Paul B. Pheffer Executive Vice President & Chief Financial Officer EX-10.53 14 STANDARD LIFE INSURANCE COMPANY OF INDIANA SURPLUS DEBENTURE $6,000,000 DECEMBER 31, 1998 FOR VALUE RECEIVED, STANDARD LIFE INSURANCE COMPANY OF INDIANA, an Indiana stock life insurance corporation (hereinafter called AStandard Life of Indiana@), subject to the terms, conditions, restrictions, and limitations herein contained, promises to pay STANDARD MANAGEMENT CORPORATION, an Indiana corporation (ASMC@), the principal sum of Six Million Dollars ($6,000,000) with interest on the unpaid balance thereof payable quarterly in arrears, beginning March 31, 1999 and on each calendar quarter end thereafter, until paid in full, at a variable rate (the ARate@) equal to the corporate base rate as reported by the bank or branch with the greatest amount of assets in the State of Indiana, as in effect on the first business day of each month during the term of this Surplus Debenture plus 2%. In no event shall the Rate increase by more than 2% in any one year or increase by more than 5% over the term of this Surplus Debenture over the Rate in effect on the date of execution of this Surplus Debenture. Both principal and interest on this Surplus Debenture shall be due and payable in the following manner at the offices of SMC in Indianapolis, Indiana. (1)On or before each calendar quarter end commencing March 31, 1999, the Board of Directors of Standard Life of Indiana shall calculate the surplus of Standard Life of Indiana as of the end of the preceding fiscal quarter (e.g., March 31, 1999, the surplus calculation shall be as of December 31, 1998) in accordance with accounting practices required or permitted by the Insurance Department of the State of Indiana. (2)On or before January 1 of each calendar year, commencing January 1, 2020, the Board of Directors of Standard Life of Indiana shall calculate the surplus of Standard Life of Indiana as of the end of the preceding fiscal quarter in accordance with accounting practices required or permitted by the Insurance Department of the State of Indiana. (3)Provided the surplus of Standard Life of Indiana at the time the calculation required in paragraph (1) above is made, exceeds the surplus of Standard Life of Indiana at the Closing on December 31, 1998 (the AClosing@) and the prior approval of the Commissioner of Insurance of the State of Indiana is obtained in accordance with the provisions of the Indiana Insurance Code, Standard Life of Indiana shall pay to the holder hereof, on the dates specified in paragraph (1) above, an amount equal to the lesser of (a) the accrued but unpaid interest on the unpaid principal balance of this Surplus Debenture or (b) the amount by which the surplus of Standard Life of Indiana exceeds (the surplus of Standard Life of Indiana at Closing). (4)If, at the time the calculation required in paragraph (1) above is made, the surplus of Standard Life of Indiana does not exceed (the surplus of Standard Life of Indiana at Closing) by an amount sufficient to pay all accrued but unpaid interest on this Surplus Debenture, the remaining accrued but unpaid interest shall bear interest, payable quarterly in arrears, at the Rate. (5)Provided the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing) plus an amount equal to all accrued but unpaid interest on January 1 of the calendar year in which the calculation required in paragraph (2) above is made and the prior approval of the Commissioner of Insurance of the State of Indiana is obtained in accordance with the provisions of the Indiana Insurance Code, Standard Life of Indiana shall pay to the holder hereof an Annual Installment (herein so called) of principal on this Surplus Debenture within fifteen (15) days after such calculation is made. Each Annual Installment of principal becoming due and payable hereunder shall equal the amount specified therefor in the following amortization schedule or such lesser amount (or at the sole option of Standard Life of Indiana, such greater amount) by which the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing), plus such accrued but unpaid interest: YEAR PRINCIPAL PAYMENT 2020 $1,000,000 2021 $1,000,000 2022 $1,000,000 2023 $1,000,000 2024 $1,000,000 2025 $1,000,000 If the Annual Installment of principal paid by Standard Life of Indiana in any calendar year is less than the amount shown for such year in the foregoing table, the amount shown in the table for the following calendar year shall be increased by the amount of such deficit and if no amount is shown in the table for such calendar year, the amount due in the following calendar year shall be the amount of such deficit. If any principal of the Surplus Debenture remains unpaid after January 1, 2025, the Annual Installment of principal due for each year thereafter shall be such unpaid principal balance or such lesser amount by which the surplus of Standard Life of Indiana exceeds the sum of (the surplus of Standard Life of Indiana at Closing) plus accrued interest payable hereunder. (6)Surplus shall be calculated as required for inclusion in the Annual Statement of Standard Life of Indiana filed with the Indiana Department of Insurance as of December 31, of each year. (7)The obligation of Standard Life of Indiana to pay this Surplus Debenture shall not be considered or treated as a current or fixed liability or obligation of Standard Life of Indiana for statutory accounting purposes under the Indiana Insurance Code and the rules and regulations promulgated thereunder, except to the extent a payment of principal or interest has been approved by the Commissioner. For all other purposes, this Surplus Debenture shall be considered a debt instrument payable in accordance with and subject to the terms hereof, and shall not for any purpose be considered or treated as an equity interest in Standard Life of Indiana. (8)In the event of liquidation of Standard Life of Indiana, this Surplus Debenture shall become immediately due and payable and shall be superior to and in preference of the rights and claims of shareholders of Standard Life of Indiana; provided, however, that, in any liquidation proceeding pursuant to the Indiana Insurance Code, all obligations, rights, and claims hereunder are expressly subordinated to (a) the claims of any supervisor, conservator, or receiver of Standard Life of Indiana appointed by the Commissioner of Insurance of the State of Indiana and (b) the claims of all other creditors, except the claims of shareholders of Standard Life of Indiana in their capacities as shareholders. (9)Each payment made hereunder shall be credited first to accrued but unpaid interest, if any, and the balance of such payment shall be credited to the principal amount hereof. (10)Nothing herein contained shall be construed as prohibiting Standard Life of Indiana from merging or consolidating with any other corporation or from selling or reinsuring any part of its business, or from acquiring all or any part of the assets of any other corporation. In the event Standard Life of Indiana shall be consolidated or merged into another corporation or shall sell substantially all of its assets to any other corporation, the corporation into which Standard Life of Indiana is consolidated or merged or to which the assets of Standard Life of Indiana are transferred shall assume the liability of Standard Life of Indiana hereunder. (11)No recourse shall be had for the payment of the principal of, or the interest on, this Surplus Debenture, or for any claims based hereon or otherwise in respect hereof, against any past, present or future incorporator, shareholder, officer, or director of Standard Life of Indiana; such liability being by acceptance and as a part of the consideration for the issuance hereof, expressly released. (12)By acceptance and as part of the consideration for the issuance hereof, the above-named payee and holder hereof expressly acknowledges that it has been informed and has knowledge that this Surplus Debenture has not been registered under the Securities Act of 1933, as amended, or the Securities Act or Blue Sky laws of any state, and that Standard Life of Indiana has issued this Surplus Debenture pursuant to exemptions from registration available under such acts. The above-named payee hereof further expressly acknowledges and agrees that it is acquiring this Surplus Debenture for investment purposes and not with a view toward a public distribution hereof and that this Surplus Debenture may not be sold or otherwise transferred in the absence of an effective registration statement with respect hereto or an exemption from registration under the Securities Act of 1933, as amended, or any other applicable securities law. (13)If this Surplus Debenture is collected through judicial proceedings, Standard Life of Indiana agrees, subject to the conditions and restrictions contained herein, to pay reasonable attorneys= fees to the holder with respect to legal services performed in such collection. (14)Regardless of the provisions of I.C. 27-1-7-19 specifying the conditions under which payments on the Surplus Debenture will be approved or Standard Life of Indiana=s satisfaction of the conditions identified therein, the Commissioner of the Indiana Department of Insurance may refuse to approve the payment of principal or interest on the Surplus Debenture (i) on the basis of statutory or regulatory grounds, or (ii) if, in the determination of the Commissioner, the financial condition of Standard Life of Indiana does not warrant payment. IN WITNESS WHEREOF, Standard Life Insurance Company of Indiana has caused this Surplus Debenture to be fully executed on ________________________, 1998. STANDARD LIFE INSURANCE COMPANY OF INDIANA By: __________________________________ Paul B. Pheffer Executive Vice President & Chief Financial Officer EX-27 15
7 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 551,312 0 0 1,316 8,578 3,435 592,123 13,591 76,897 61,739 956,150 638,435 0 0 0 35,000 6,530 0 54,366 11,676 956,150 14,479 34,580 353 10,037 33,045 4,755 15,804 6,311 1,630 4,681 0 0 0 4,681 .68 .62 0 0 0 0 0 0 0 Includes $28,793 of present value of future profits. Includes retained earnings of $9,989 and other comprehensive income of $1,687. Includes policy charges of $6,529, negative amortization of $1,388 and fees from separate accounts of $2,120. Includes benefits and claims of $13,270 and interest credited on financial products of $19,775. EPS data does not include reductions for preferred stock dividends.
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