<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                   FORM 10-K/A


[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934


                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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.)

10689 North Pennsylvania Avenue, Indianapolis, Indiana 46280   (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,
2001 as reported on The NASDAQ Stock Market, was approximately $20.0 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, 2001 Registrant had outstanding 7,545,156 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.

<PAGE>   2


                                     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 domestic
asset accumulation and international unit-linked assurance products. During 1999
and 2000, SMC has focused on organic growth. In years prior to 1999, a primary
component of SMC's growth related to the acquisition of selected insurance
companies and blocks of in force life insurance and annuity businesses. 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, 2000:

    -    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 ("FPDA's"), equity-indexed annuities, single premium
         immediate annuities ("SPIA's"), and traditional and universal life
         insurance products. Standard Life also generates cash flow and income
         from closed blocks of in force life insurance and annuities. 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
         administers life insurance products, primarily "burial expense"
         policies. Effective January 1, 1999, the Company ceased selling new
         business through Dixie Life. Dixie Life has a rating of "B" ("Fair") by
         A.M. Best.

    -    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 include the following holding company and its
two wholly owned insurance subsidiaries at December 31, 2000:

    -    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, 2000, Standard
         Management International, S.A. and its subsidiaries ("SMI") had
         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 unit-linked products throughout the European Union.

    -    Premier Life (Bermuda) Ltd. ("Premier Life (Bermuda)") primarily offers
         unit-linked products in markets throughout the world.

MARKETING

         DOMESTIC MARKETING

         General: The Company's agency force, of approximately 4,000 independent
general agents, was organized to provide a lower cost alternative to the
traditional captive agency force. These agents distribute a full line of life
insurance and annuity products issued by Standard Life. The Company selectively
recruits new agents from those formerly associated with companies acquired by
SMC.


                                       2
<PAGE>   3

         SMC believes that both agents and policy owners value the service
provided by SMC. The Company i) assists agents in submitting and processing
policy applications, ii) assists with licensing applications, iii) provides
marketing support for its agents, and iv) introduces agents to lead services.

         Standard Life offers a full portfolio of life insurance and annuity
products selected on the basis of their competitive position, company
profitability and likely consumer acceptance. Such portfolio includes FPDA's,
equity-indexed annuities, and whole and universal life insurance products.

         Each general agent operates his own agency and is responsible for all
expenses of the agency. The general agents are compensated directly by Standard
Life, who performs all policy issuance, underwriting and accounting functions.
Standard Life is not dependent on any one agent or agency for any substantial
amount of its business. No single agent accounted for more than 5% of Standard
Life's annual sales in 2000, and the top twenty individual agents accounted for
approximately 37% of Standard Life's volume in 2000. At December 31, 2000,
approximately 66% of Standard Life's independent agents were located in Indiana,
California, Florida, Ohio, Hawaii and North Carolina with the balance
distributed across the country. Standard Life is attempting to increase the
number and geographic diversity of its agents.

         Standard Life does not have exclusive agency agreements with its
agents. Therefore, SMC's management believes most of these agents sell similar
products for other insurance companies. This could result in a sales decline if
Standard Life's products were to become relatively less competitive. Standard
Life's 2000 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 an aggressive program
aimed at retention of key producers and expanded geographical concentration.

         Savers Marketing distributes life and annuity products through
financial institutions and independent general agents. Savers Marketing has
approximately 2,000 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 ("the 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.

         INTERNATIONAL MARKETING

          SMI has designed and launched new single and regular premium products
in recent years. It is also in discussions with a number of distribution
companies to form alliances to produce tailored products for their markets.
Premier Life (Luxembourg) writes business within the European Union and Premier
Life (Bermuda) writes international business throughout the world. The primary
market for SMI's products is considered to be medium to high net worth
individuals who typically have in excess of $100,000 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 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 through independent agents and stock
brokers who have established connections with 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 United
States ("U.S.") insurance companies on a high level of service to intermediaries
and policyholders while striving to achieve low overhead costs. No single agent
or broker accounted for more than 12% of SMI's annual sales for 2000, and the
top ten agents and/or brokers accounted for approximately 47.6% of annual sales
for 2000.

CURRENTLY MARKETED PRODUCTS

         SMC primarily markets unit-linked policies, FPDA's, equity-indexed
annuities, SPIA's, traditional life, universal and interest-sensitive life
insurance 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, 2000, 1999 and 1998, respectively (in thousands).


                                       3
<PAGE>   4

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                          2000                    1999                     1998
                                                  -------------------      -------------------      -------------------
                                                   AMOUNT         %         Amount         %         Amount         %
                                                  --------      -----      --------      -----      --------      -----
<S>                                               <C>           <C>        <C>           <C>        <C>           <C>
Currently marketed products:
   Unit-linked products ....................      $170,514       47.2      $ 55,192       25.1      $ 42,536       32.5

   FPDA's ..................................        94,699       26.2        98,678       44.9        60,086       45.8

   Equity-indexed annuities ................        73,122       20.2        59,348       27.0        16,858       12.9

   SPIA's ..................................        21,506        5.9         3,162        1.4         2,545        1.9

   Universal and interest-sensitive life ...           963         .3         2,302        1.0         5,816        4.4

   Traditional life ........................           734         .2         1,029         .6         3,282        2.5
                                                  --------      -----      --------      -----      --------      -----
                                                  $361,538      100.0      $219,711      100.0      $131,123      100.0
                                                  ========      =====      ========      =====      ========      =====
</TABLE>

         The increase in deposits from unit-linked products in 2000 is primarily
due to i) strengthening of SMI's distribution system by engaging more, highly
productive agents, ii) concentrated marketing efforts in certain European
countries, primarily Sweden, Belgium and Italy, and iii) favorable demand, in
general, for investment based products.

         Annuity sales increased in 2000 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
marketing efforts.

         The individual annuity business is a growing segment of the savings and
retirement industry, which increased in sales from $49 billion in 1989 to more
than $115 billion in 1999. The individual annuity market, which is one of SMC's
primary targets, comprises virtually all of it s domestic sales and 52% of its
total 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 the investment during the accumulation period.

         SMC's gross domestic sale percentages by U.S. geographical region are
summarized as follows:

<TABLE>
<CAPTION>
         State                                          2000             1999              1998
         -----                                          ----             ----              ----
         <S>                                            <C>              <C>               <C>
         Indiana......................................   19%              15%               17%
         California...................................   15               11                 5
         Ohio.........................................    9               14                15
         Florida......................................    9                8                 8
         North Carolina...............................    6                8                10
         Hawaii.......................................    6                5                 7
         Wisconsin....................................    4                2                 2
         Michigan.....................................    4                1                 2
         All other states(1)..........................   28               36                34
                                                        ---              ---               ---
         Total........................................  100%             100%              100%
                                                        ===              ===               ===
</TABLE>

(1)      No other state had gross sales greater than 4% in 2000.

DOMESTIC PRODUCTS

         FPDA's provide for an initial deposit by the owner and optional
additional deposits, the time and amount of which are at the discretion of the
owner. Standard Life credits the account of the owner with earnings at interest
rates that are revised periodically until the maturity date. This accumulated
value is tax deferred. Revisions to interest rates on FPDA's are restricted by
an initial crediting rate guaranteed for a specific period of time, usually one
year, and a minimum crediting rate guaranteed for the term of the FPDA, which is
typically 3%. At maturity, the owner can elect a lump sum cash payment of the
accumulated value or one of the various payout options available. Standard
Life's FPDA's also typically provide for penalty-free partial withdrawals of up
to 10% annually of the accumulation value after the owner has held the FPDA for
more than 12 months. In addition, the owner 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 FPDA's 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.


                                       4
<PAGE>   5

         As of January 1, 2001, the crediting rates available on Standard Life's
currently marketed FPDA's ranged from 5.75% to 12.5%, with most new issues
having an interest rate with a one-year guarantee period. A series of annuity
products introduced in 2000 have their interest rate guaranteed for an initial
period of 5-10 years. After the initial period, the crediting rate may be
changed periodically, subject to a minimum guaranteed rate of 3.0%. As of
January 1, 2001, interest crediting rates after the initial guarantee period
ranged from 4% to 5.5%. The surrender charge is initially 7% to 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, 2001, the
bail-out rate for Standard Life's FPDA's was 4.5%; certain currently marketed
products carry a bail out rate for the first two to five years after issuance.
As of December 31, 2000, Standard Life had 6,352 currently marketed FPDA
contracts in force.

         Equity-indexed Annuities. In response to consumers' desire for
alternative investment products with returns linked to common stocks, Standard
Life introduced a line of equity-indexed annuity products in May 1998. These
products accounted for $73.1 million of the total premiums collected in 2000.
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 Standard
& Poor's 500 Index ("S&P's 500 Index") and/or the Dow Jones Industrial Average
Index ("DJIA") 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 is 70% plus a first-year "bonus"). The
minimum guaranteed values are equal to between 75% and 85% of first year
premiums and between 87.5% and 90% of renewal premiums collected for
equity-indexed annuities, plus interest credited at an annual rate of 3%. The
annuities provide 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. The Company purchases S&P's 500 Index or DJIA
Index Call Options to hedge potential increases to policyholder benefits
resulting from increases in the Index to which the product's return is linked.
As of December 31, 2000, Standard Life had 4,015 currently marketed
equity-indexed contracts.

         SPIA's. Standard Life offers two SPIA's 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 plus accumulated interest credited to the annuity. A new
SPIA product was introduced in the first quarter of 2000, which resulted in a
500% increase in sales over 1999 for this line of business. As of December 31,
2000, Standard Life had 475 currently marketed SPIA contracts in force. Payout
is guaranteed until the termination of the contract.

         Universal Life. Flexible premium universal life ("FPUL") policies
provide for periodic deposits, interest credits to account values and charges to
the account values for mortality and administrative costs. As of January 1,
2001, the current interest rate on new sales of FPUL's was 5% to 6% with a
guaranteed interest rate of 4%. As of December 31, 2000, Standard Life had 645
currently marketed FPUL policies in force.

         Traditional Life. Standard Life offers several types of
non-participating traditional life policies, whole life policies with face
amounts up to $50,000. Traditional 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. The
term policy provides benefits only as long as premiums are paid. As of December
31, 2000, Standard Life had 3,635 currently marketed traditional life policies
in force.


                                       5
<PAGE>   6

INTERNATIONAL PRODUCTS

         Unit-linked Products. 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 benefit 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. Products
include i) single premium unit-linked, publicly traded investments and ii)
annual premium unit-linked, publicly traded investments and personal portfolio
investments which can be used to place personal assets including private stock
and investments with limited markets. 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 sold investment contracts, 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 SMI 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.

FORMER PRODUCTS ("CLOSED BLOCKS")

         SMC also generates cash flow and income from its closed blocks of in
force life insurance and annuities. Closed blocks consist 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 their assets or future profits. The premiums received on the
closed blocks are primarily from the ordinary and universal life business.
Closed block premiums typically decline over extended periods of time as a
result of policy lapses, surrenders and expiries.

         Annuities. SMC's closed blocks of deferred annuities consist primarily
of FPDA's and a small amount of single premium deferred annuities ("SPDA's"),
which, unlike FPDA's, do not provide for additional deposits. As of January 1,
2001, these deferred annuities had crediting rates ranging from 3.0% to 5.25%
and guaranteed minimum crediting rates ranging from 3.0% to 5.0%. 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 in which benefits
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 7.0% and cannot be changed. At December 31, 2000, SMC had
13,374 annuity contracts in force for closed blocks.

         Traditional Life. The traditional 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, 2000,
SMC had 39,317 traditional 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, 2000, SMC had 11,936 universal life policies in force for the closed block
of business.

Refer to "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion on product profitability.

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 ("U.S.") use a
common integrated system that permits efficiency and cost control. SMC's MIS
system services approximately 75,000 active policies at December 31, 2000 and is
continually being improved to provide for growth from potential acquisitions and
sales.

         SMI's administrative and MIS departments in Luxembourg are an
autonomous unit from the systems in the U.S. In 2000, SMI integrated an
operating system consistent with that used for Domestic operations, in an effort
to enhance efficiency and effectiveness. Additional system enhancements are in
process and are expected to be completed in 2001.


                                       6
<PAGE>   7

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 traditional 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 annuities is minimal.

         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.

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
interest earned on invested assets and rates credited on insurance liabilities.
Substantially all credited rates on FPDA's may be changed at least annually. For
the year ended December 31, 2000, the weighted average net yield of SMC's
investment portfolio was 7.28% and the weighted average interest rate credited
on SMC's interest-sensitive liability portfolio, excluding liabilities related
to separate accounts and equity indexed annuities, was approximately 4.90% per
annum for an average interest spread of 238 basis points at December 31, 2000,
compared to 226 basis points at December 31, 1999. The increase in the average
interest spread includes lower crediting rates on new and existing FPDA business
in order to meet targeted pricing spreads. 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 a measure of a security's price sensitivity to changes in
market interest rates. The option adjusted duration of fixed maturity securities
and short-term investments for its U.S. insurance subsidiaries was 4.4 and 5.3
at December 31, 2000 and 1999, respectively.

         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 National Association of Insurance Commissioners ("NAIC") assigns quality
ratings and uniform book values to securities 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
range from Class 1 to Class 6, with a rating in Class 1 being of the highest
quality. The following table sets forth the quality of SMC's fixed maturity
securities as of December 31, 2000, classified in accordance with the ratings
assigned by the NAIC:

<TABLE>
<CAPTION>
                                                                                  PERCENT OF FIXED
                      NAIC RATING                                                MATURITY SECURITIES
                      -----------                                                -------------------
                     <S>                                                         <C>
                      1....................................................              57
                      2....................................................              37
                                                                                        ---
                      TOTAL INVESTMENT GRADE...............................              94
                      3-4..................................................               5
                      5-6..................................................               1
                                                                                        ---
                              TOTAL FIXED MATURITY SECURITIES..............             100%
                                                                                        ===
</TABLE>

         Effective December 1, 2000, Zurich Scudder Investments (formerly known
as Scudder Kemper Investments, Inc.) began managing SMC's domestic fixed
maturity securities, subject to the direction of SMC's Investment Committee.
Prior to December 1, 2000 SMC's domestic invested assets were managed by Conseco
Capital Management, Inc.

         Approximately 27% of SMC's fixed maturity securities at December 31,
2000 are comprised of mortgage-backed securities that include CMOs and
mortgage-backed pass-through securities. Approximately 4% 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


                                       7
<PAGE>   8

of both principal and interest and 70% 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, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                                                           ESTIMATED       AVG.
                                                                    % OF                         % OF      AVG. LIFE       TERM
                                                   AMORTIZED        FIXED          FAIR         FIXED          OF        TO FINAL
                                                      COST        MATURITIES      VALUE       MATURITIES   INVESTMENT    MATURITY
                                                   ---------      ----------     --------     ----------   ----------    --------
                                                                                                           (IN YEARS)   (IN YEARS)
<S>                                                <C>            <C>            <C>          <C>          <C>           <C>
AGENCY CMOS:

PLANNED AND TARGET AMORTIZATION CLASSES ....        $ 32,395         4.4%        $ 32,240         4.6%        5.2          21.5

SEQUENTIAL AND SUPPORT CLASSES .............           6,118         0.8%           5,950         0.8%        4.8          23.6
                                                    --------        ----         --------        ----         ---          ----

     TOTAL .................................          38,513         5.2%          38,190         5.4%        5.1          21.8

NON-AGENCY CMOS:

  SEQUENTIAL CLASSES .......................           3,311         0.5%           3,069         0.4%        4.7          11.8

  OTHER ....................................          28,191         3.8%          28,493         4.0%        6.3          23.8
                                                    --------        ----         --------        ----         ---          ----


TOTAL ......................................          31,402         4.3%          31,562         4.4%        6.1          22.6

NON AGENCY CMBS ............................          17,960         2.4%          16,683         2.3%        4.4          17.9

AGENCY MORTGAGE-BACKED PASS-THROUGH
  SECURITIES ...............................         114,915        15.6%         115,955        16.3%        6.5          24.5
                                                    --------        ----         --------        ----         ---          ----

     TOTAL MORTGAGE-BACKED SECURITIES ......        $202,890        27.5%        $202,390        28.4%        6.0          23.1
                                                    ========        ====         ========        ====         ===          ====
</TABLE>

         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
18% 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 82% of the book value of SMC's mortgage-backed securities at
December 31, 2000, 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.

RESERVES

         Our insurance subsidiaries have established and carry as liabilities in
their financial statements actuarially determined liabilities to satisfy their
respective annuity contract and life insurance policy obligations.

         Insurance policy liabilities for deferred annuities and universal life
policies are equal to the full account value that accrues to the policyholder
(cumulative premiums less certain charges, plus interest credited) with rates
ranging from 3.0% to 12.5% in 2001 and 3.0% to 12.5% in 2000.

         Standard Management performs periodic studies to compare current
experience for mortality, interest and lapse rates with projected experience
used in calculating the deferred annuity and universal life insurance policy
liabilities. Differences are reflected currently in earnings for each period.
Standard Management historically has not experienced significant adverse
deviations from its assumptions.


                                       8
<PAGE>   9

         Insurance policy liabilities 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 6.2% to 7.5%. Mortality is based upon various actuarial tables,
principally the 1965-1970 or the 1975-1980 Select and Ultimate Table.
Withdrawals are based upon Company experience and vary by issue age, type of
coverage, and duration.


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. SMC's
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 2000, 1999 and 1998, excluding financial reinsurance agreements,
represented 45.3%, 40.3% and 46.8%, 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 2000, 1999 and 1998
represented 8.71%, 9.15%, and 9.42%, respectively, of net combined individual
life insurance in force.

         The following is reinsurance ceded information for in force life
insurance policies at December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                        % OF TOTAL
                                  FACE VALUE OF        REINSURANCE         REINSURANCE
INSURANCE COMPANY                 LIFE POLICIES           CEDED            RECOVERABLE
-----------------                 -------------        -----------         -----------
<S>                               <C>                  <C>                 <C>
LINCOLN NATIONAL LIFE
INSURANCE COMPANY                   $ 184,483             15.21%             $1,374

EMPLOYERS REINSURANCE
CORPORATION                           119,815              9.88%                341

BUSINESS MEN'S ASSURANCE
COMPANY OF AMERICA                    114,824              9.47%                413
</TABLE>

         Reinsured life insurance in force at December 31, 2000 is ceded to
insurers rated "A" ("Excellent") or better by A.M. Best. SMC historically has
not experienced any material losses in collection of reinsurance receivables.

          SMC's largest annuity reinsurer at December 31, 2000, SCOR Life U.S.
Insurance Company ("SCOR Life"), formerly known as Winterthur Life Re Insurance
Company, represented $22.7 million, or 55.5% of total reinsurance recoverable
and is rated "A+" ("Superior") by A.M. Best. SCOR Life 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 $41.9 million at December 31,
2000.

         Standard Life's adjusted surplus was greater than 5.5% of its admitted
assets at December 31, 2000. "Admitted assets" are defined by the National
Association of Insurance Commissioners as "probable future economic benefits
obtained or controlled by a particular entity as a result of past transactions
or events" which may be included in an insurance company's balance sheet. Some
assets or portions of assets may be considered "nonadmitted" because they do not
conform to the laws and regulations of various states. Therefore, certain assets
which normally would be accorded value in noninsurance corporations are accorded
no value and thus reduce the reported surplus of the insurance company.

         Effective October 1, 1998, Standard Life no longer ceded its new
annuity business as the growth of its liabilities, which can erode surplus
during periods of increasing sales, was not as great as originally anticipated.
The annuity business remained in effect for policies reinsured prior to October
1, 1998. As a result of discontinuing ceding its new annuity business, Standard
Life has been able to retain more profitable business.

         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


                                       9
<PAGE>   10

gain or loss for GAAP. Under the terms of the reinsurance agreement, Standard
Life administered the Medicare supplement business through October 1, 1999 in
exchange for administrative fee income. The consummation of this transaction
resulted in the Company exiting from the Medicare supplement business it
acquired with the Savers Life acquisition.

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 Life's distribution 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 future 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 (in millions):

<TABLE>
<CAPTION>
                                                                  Purchase Price
                                             ------------------------------------------------------------
                                                                               Acquisition
                 Company                     SMC Stock           Cash             Costs             Total
         -------------------------           ---------           ----          -----------          -----
         <S>                                 <C>                 <C>           <C>                  <C>
         Savers Life                           $14.9             $2.2             $ 1.5             $18.6

         Midwestern Life
         Insurance Company of Ohio
         ("Midwestern Life")                     4.6              8.9                .6              14.1
</TABLE>

         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. 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 is
being amortized on a straight-line basis over 20 - 30 years.

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 competitive products,
competitive commission structures, internet based agent services, 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


                                       10
<PAGE>   11

securities. The Company began distributing annuities through financial
institutions as a result of the acquisition of Savers Marketing in March 1998.
The recent passage, by Congress, of the Gramm-Leach-Bliley Financial Services
Modernization Act ("GLB Act") has expanded competitive opportunities for
non-insurance financial services companies. The full effects of the GLB Act on
our competition cannot be predicted with certainty at this time.

         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 investment advisors,
brokers, accountants and tax attorneys.

         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 that, 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 that, 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's business, management believes that it is able to compete on the
basis of their competitive crediting rates, asset quality, strong relations with
its independent agents and the quality of service to its policyholders.

FEDERAL INCOME TAXATION

         The life insurance and annuity products marketed and issued by Standard
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 that 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
U.S. taxing jurisdictions. Accordingly, it is subject to change by Congress and
the legislatures of the respective taxing jurisdictions.

         SMC and its U.S. non-insurance subsidiaries file a consolidated return
for federal income tax purposes and, as of December 31, 2000, have net operating
loss carryforwards of approximately $6.3 million, which expire from 2007 to
2018.

         In addition, Standard Life and Dixie Life file a consolidated return
for federal income tax purposes and at December 31, 2000, have a net operating
loss carryforward of approximately $2.2 million, which expires in 2010, 2012 and
2019. These carryforwards will be available to reduce taxable income in the
Standard Life consolidated return.

         SMI is a Luxembourg 1929 holding company, and has a preferential tax
status. SMI is completely exempt from corporate income tax, municipal business
tax and net capital tax, but is subject to "taxe d'abonnement", levied annually
at a rate of 0.2% of the paid up capital. 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 0.5% of its net
equity. At December 31, 2000, Premier Life (Luxembourg) had accumulated
corporate income tax loss carryforwards of approximately $.4 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.

         Effective January 1, 2000, Standard Management entered into a tax
sharing agreement with Savers Marketing and SMI that allocates the consolidated
federal income tax liability. In 2000, Savers Marketing and SMI paid Standard
Management $.3 million and $1.0 million, respectively, in accordance with this
agreement.

INFLATION

         The primary direct effect of inflation on SMC 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.


                                       11
<PAGE>   12

         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 in 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 an independent actuary. In
addition, Premier Life's (Luxembourg) 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, 2000, there is a $2.4 million unrealized loss
from foreign currency translation.

         Due to the nature of unit-linked products issued by SMI, which
represent virtually all 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 ("IDOI")
of its intention to enter into these transactions and the IDOI has not
disapproved of them within the period specified by Indiana law. Among other
things, these 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
IDOI 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 requirement.

         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 these


                                       12
<PAGE>   13

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 state regulatory authorities require deposits of
assets for the protection of either policyholders in those states or for all
policyholders. At December 31, 2000, securities of $8.4 million or approximately
1% of the book value of SMC's U.S. insurance subsidiaries' invested assets were
on deposit with various state treasurers or custodians. These deposits must
consist of securities that comply with the standards that the particular state
has established. SMI's account assets plus $6.6 million were held by a custodian
bank approved by the Luxembourg regulatory authorities to comply with local
insurance laws at December 31, 2000.

         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 that require
corrective action as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
      LEVEL                    RBC RATIO                   CORRECTIVE ACTION
-------------------------------------------------------------------------------------
<S>                          <C>                    <C>
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
-------------------------------------------------------------------------------------
</TABLE>

         At December 31, 2000, the RBC Ratios of Standard Life and Dixie Life
were both at least two 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 Standard
Management.

         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 Investment Maintenance Reserve ("IMR"), which consists of
the portion of realized capital gains and losses from the sale of fixed income


                                       13
<PAGE>   14

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, 2000 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              MAXIMUM
                                                                 AVR            AVR          IMR
                                                               -------        -------      -------
                      <S>                                      <C>            <C>          <C>
                      STANDARD LIFE.....................       $ 2,536        $ 7,909      $11,636
                      DIXIE LIFE........................           232            432          160
</TABLE>

         The annual addition to the AVR for 2000 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, 2000, 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 had an Examination
during 1996 for the five-year period ended December 31, 1995 and Dixie Life had
an examination during 1998 for the three-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. The recently passed GLB Act
has left the currently existing regime of state insurance regulation largely
intact; however, more comprehensive federal legislation in this area is still
being actively considered by Congress.

EMPLOYEES

         As of March 15, 2001, SMC had 149 employees which were comprised of the
following: Standard Life - 89 employees, Savers Marketing - 24 employees, SMI -
24 employees (15 of whom are covered by a collective bargaining agreement), and
Standard Management - 12 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 recently completed the construction of a new
domestic home office of 58,000 square feet at 10689 North Pennsylvania Avenue,
Indianapolis, Indiana. SMC owns this new building. 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 which expires on September 30, 2001.

         Savers Marketing leases approximately 6,000 square feet in an office
building located at 8064 North Point Boulevard, Winston-Salem, North Carolina,
under the terms of a lease, which 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 which expires on November
16, 2003.


                                       14
<PAGE>   15

ITEM 3. LEGAL PROCEEDINGS

         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 that would entitle him to receive certain benefits
following a termination of his employment with SMC under certain circumstances.
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 was argued by SMC as a
complete defense to all claims asserted by the former officer. On January 12,
2001, the trial court ruled on motions for summary judgment filed by both SMC
and the former officer. The court ruled that the officer was entitled to a
severance benefit in the amount of $.4 million plus interest thereon calculated
as of July 15, 1997. The court dismissed all of the former officer's other
claims, including his request for additional damages up to $3.3 million. On
February 12, 2001, the former officer filed a notice of appeal of the trial
court's ruling as to the dismissal of all additional damages, and the former
officer is in the process of perfecting the appeal. Currently, SMC plans to
cross-appeal the $.4 million in damages awarded, as well as aggressively pursue
its counterclaim which is still pending in the trial court. Management believes
that the conclusion of such litigation will not have a material adverse effect
on SMC's consolidated financial conditions.

         In addition, SMC is involved in various legal proceedings in the normal
course of business. In most cases, these 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 7, 2000,
the following individuals were elected to the Board of Directors:

<TABLE>
<CAPTION>
                                                                         Shares For           Shares Withheld
                                                                         ----------           ---------------
         <S>                                                             <C>                  <C>
         Stephen M. Coons........................................         4,955,677               294,558
         Martial R. Knieser......................................         4,947,863               302,372
         P.B. (Pete) Pheffer.....................................         4,945,863               304,372
</TABLE>

         A total of 5,250,235 shares were present in person or by proxy at the
Annual Meeting of Stockholders.

EXECUTIVE OFFICERS

         The following sets forth information concerning each of SMC's executive
officers:

         RONALD D. HUNTER, 49, Chairman of the Board, Chief Executive Officer
and President of SMC

         -        Chairman of the Board and Chief Executive Officer of Standard
                  Life since 1987

         -        Held management and sales positions with:

                           Conseco, Inc from 1981 to 1986

                           Aetna Life & Casualty Company from 1978 to 1981

                           United Home Life Insurance Company from 1975 to 1977

                           Prudential Life Insurance Company from 1972 to 1975

         RAYMOND J. OHLSON, 50, Executive Vice President, Chief Marketing
Officer and Director of SMC

         -        President of Standard Life since 1993

         -        President and Director of Standard Marketing since 1991

         -        Earned CLU designation in 1980

         -        Life member of the Million Dollar Round Table

         P.B. (PETE) PHEFFER, CPA, 50, Executive Vice President, Chief Financial
Officer and Director of SMC

         -        Senior Vice President -- Chief Financial Officer and Treasurer
                  of Jackson National Life Insurance Company from 1994 to 1996

         -        Senior Vice President -- Chief Financial Officer of Kemper
                  Life Insurance Companies from 1992 to 1994

         -        Received MBA from the University of Chicago in 1988

         STEPHEN M. COONS, 60, Executive Vice President, General Counsel,
Secretary and Director of SMC

         -        Counsel to the law firm of Coons, Maddox & Koeller from 1993
                  to 1995

         -        Partner with the law firm of Coons & Saint prior to 1993

         -        Indiana Securities Commissioner from 1978 to 1983


                                       15
<PAGE>   16

         -        Practicing law for 30 years

         EDWARD T. STAHL, 54, Executive Vice President, Chief Administrative
Officer and Director of SMC

         -        Secretary of Standard Life since 1993

         -        President and Chief Operations Officer of Standard Life from
                  1988 to 1993

         -        Director of Standard Life since 1987

         -        Served in various capacities in the insurance industry since
                  1966 and is a member of several insurance associations


                                       16
<PAGE>   17

                                     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
cash dividends on its Common Stock. At the close of business on March 15, 2001
there were approximately 3,000 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.

<TABLE>
<CAPTION>
                                                                                                   SMC
                                                                                              Common Stock
                                                                                         ----------------------
                                                                                         High              Low
                                                                                         -----            -----
<S>      <C>                                                                             <C>              <C>
1999
         Quarter ended March 31, 1999                                                    7.125            5.375
         Quarter ended June 30, 1999                                                     6.563            5.250
         Quarter ended September 30, 1999                                                6.938            4.656
         Quarter ended December 31, 1999                                                 6.219            4.250

2000
         QUARTER ENDED MARCH 31, 2000                                                    5.250            4.188
         QUARTER ENDED JUNE 30, 2000                                                     4.813            3.063
         QUARTER ENDED SEPTEMBER 30, 2000                                                4.000            2.750
         QUARTER ENDED DECEMBER 31, 2000                                                 4.000            2.938
</TABLE>


                                       17
<PAGE>   18

ITEM 6. SMC SELECTED HISTORICAL FINANCIAL DATA (A)
        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SHARES OUTSTANDING)

         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.

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31
                                                         ------------------------------------------------------------------------
                                                             2000            1999          1998             1997          1996
                                                         ------------     ----------    ----------       ----------    ----------
<S>                                                      <C>              <C>           <C>              <C>           <C>
STATEMENT OF OPERATIONS DATA:
Premium income ......................................    $     15,470     $   13,090    $   14,479(d)    $    7,100    $   10,468(e)
Investment activity
    Net investment income............................          50,776         43,612        33,589           29,197        20,871
    Call option gains (losses) ......................          (7,603)         1,209           632               --            --
    Net realized investment gains (losses) ..........          (4,492)            78           353              396         1,302
Total revenues ......................................          76,063         72,963        63,275           46,855        40,205
Interest expense and financing costs ................           3,417          3,385         2,955            2,381           805
Total benefits and expenses .........................          69,659         65,565        56,964           43,593        36,670(e)
Income before income taxes and
    extraordinary gain (loss) .......................           6,404          7,398         6,311            3,262         3,535
Net income ..........................................           5,267          5,272         4,681            2,645         4,767

PER SHARE DATA:
Net income ..........................................             .68            .69           .68              .54           .98
Net income, assuming dilution .......................    $        .66     $      .65    $      .62       $      .48    $      .91
Weighted average common shares
      outstanding, assuming dilution ................       9,183,949      9,553,731     9,363,763        5,591,217     5,549,057
Book value per common share .........................    $       8.34     $     6.85    $     8.64       $     8.88    $     7.95
Common shares outstanding ...........................       7,545,156      7,785,156     7,641,454        4,876,490     5,024,270

COVERAGE RATIOS (B):
Earnings to fixed charges ...........................             1.2X           1.2X          1.3X             1.2X          1.3X
Earnings to fixed charges, excluding
      policyholder interest .........................             2.5X           2.8x          3.0x             2.4x          5.4x

BALANCE SHEET DATA (at year end):
Invested assets .....................................    $    760,444     $  648,503    $  592,123       $  398,782    $  370,138
Assets held in separate accounts ....................         520,439        319,973       190,246          148,064       128,546
Total assets ........................................       1,470,457      1,150,977       956,150          668,992       628,413
Long-term debt, notes payable and capital
      lease obligations .............................          31,500         34,500        35,000           26,141        20,697
Total liabilities ...................................       1,401,028      1,091,087       883,578          625,679       586,737
Preferred stock .....................................           6,530          6,530         6,530               --         1,757
Shareholders' equity ................................          62,899         53,360        66,042           43,313        39,919

OTHER DATA:
Operating income(c) .................................           7,333          5,221         4,448            2,384         1,174
Operating cash flows ................................             935          2,853           207            7,696         1,726
</TABLE>


                                       18
<PAGE>   19

                 NOTES TO SMC SELECTED HISTORICAL FINANCIAL DATA
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(a)      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 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.

(b)      The ratio of earnings to fixed charges is calculated by dividing
         earnings (income before federal income taxes, extraordinary loss and
         preferred stock dividends plus interest expense and policyholder
         interest) by fixed charges (interest expense on notes payable,
         dividends on preferred stock and policyholder interest). The "Earnings
         to fixed charges, excluding policyholder interest" ratios do not
         include interest credited to policyholder accounts of $21.1 million,
         $25.7 million, $19.8 million, $16.3 million, and $11.1 million for the
         years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
         "Earnings to fixed charges, excluding policyholder interest" may not be
         comparable to similarly titled measures used by other companies.

(c)      Operating income is commonly used as a meaningful measure of reporting
         results as a supplemental disclosure to net income. Operating income is
         not a GAAP measure of performance and may not be comparable to
         similarly titled measures used by other companies. Operating income
         represents income before extraordinary gains (losses), excluding net
         realized investment gains (losses) (less income taxes (benefits) and
         amortization relating to such gains (losses)), and gain on disposal of
         subsidiary. Operating income should be reviewed in conjunction with net
         income and cash flow information included elsewhere in this report.

(d)      Includes Medicare supplement premiums of $6.0 million related to the
         Savers Life acquisition. This business was sold effective July 1, 1998.

(e)      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.


                                       19
<PAGE>   20

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 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:

         -        General economic conditions and other factors, including
                  prevailing interest rate levels, and stock market performance,
                  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.

         -        The Company's ability to achieve anticipated levels of
                  operational efficiencies at recently acquired companies, as
                  well as through other cost-saving initiatives.

         -        Customer response to new products, distribution channels and
                  marketing initiatives.

         -        Mortality, morbidity and other factors which may affect the
                  profitability of the Company's insurance products.

         -        Changes in the federal income tax laws and regulation which
                  may affect the relative tax advantages of some of the
                  Company's products.

         -        Increasing competition in the sale of the Company's products.

         -        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.

         -        The availability and terms of future acquisitions.

         -        The risk factors or uncertainties listed from time to time in
                  any document incorporated by reference herein.

GENERAL

         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 such
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.

         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 traditional life
and annuity business in force at December 31, 2000 was 6.9 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


                                       20
<PAGE>   21

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 2000, 1999 and 1998 Standard Life experienced
total policy lapses, excluding surrenders, of 5.7%, 3.6% and 5.0% of total
policies in force at December 31 of each year, respectively.

         Present Value of Future Profits. 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. 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.

         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, 2000 and current assumptions as to future events on all policies in
force, are expected to be between 8% and 10% in each of the years 2001 through
2005.

         SMC used discount rates of 13% and 15% to calculate the present value
of future profits of the Savers Life and Midwestern Life acquisitions,
respectively. Each is being amortized over 20 years based on the mix of their
respective annuity and life business.

         For more information related to Present Value of Future Profits refer
to Note 4 to the Consolidated Financial Statements.

         Deferred Acquisition Costs. 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.


                                       21
<PAGE>   22

         Amortization of DAC related to operations was $9.7 million, $4.6
million, and $3.3 million for the years ended December 31, 2000, 1999 and 1998,
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. Interest is being
accumulated at the projected crediting rate on the policies. 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, 2000 and
current assumptions, is as follows (in thousands):

<TABLE>
<CAPTION>
                                          2001              2002              2003              2004             2005
                                        --------          --------          --------          --------          ------
<S>                                     <C>               <C>               <C>               <C>               <C>
Gross amortization ...........          $ 13,793          $ 13,387          $ 12,123          $ 10,736          $9,451
Interest accumulation ........             5,854             4,765             3,870             3,180           2,612
                                        --------          --------          --------          --------          ------
Net amortization .............          $  7,939          $  8,622          $  8,253          $  7,556          $6,839
                                        ========          ========          ========          ========          ======
</TABLE>

         The amounts included in the foregoing table do not include any
amortization of DAC resulting from the sale of new products after December 31,
2000. 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. These 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 55% 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.

         Accounting for Unit-linked Products. 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 these policyholders.
SMC earns income from the investment management fee it charges on these
unit-linked contracts, which ranges from .8% to 1.2% of the value of the
underlying separate accounts.


                                       22
<PAGE>   23

Results of operations by segment for the three years ended December 31, 2000:

The following tables and narratives summarize the results of our operations by
business segment:

<TABLE>
<CAPTION>
                                                                                       2000               1999              1998
                                                                                     --------           --------          --------
                                                                                                 (Dollars in thousands)

<S>                                                                                  <C>                <C>               <C>
Operating income before income taxes:
     Domestic operations ..................................................          $  5,440           $  6,054          $  3,700
     International operations .............................................             3,128              1,266             2,258
                                                                                     --------           --------          --------

     Consolidated operating income before income taxes ....................             8,568              7,320             5,958
     Applicable income taxes related to operating income ..................             1,235              2,099             1,510
                                                                                     --------           --------          --------

              Consolidated operating income after taxes ...................             7,333              5,221             4,448
                                                                                     --------           --------          --------

     Consolidated realized investment gains (losses) before
        income taxes (benefits) ...........................................            (2,164)                78               353

   Applicable income taxes (benefits) related to realized investment
         gains (losses) ...................................................              (457)                27               120
                                                                                     --------           --------          --------

            Consolidated realized investment gains (losses) after taxes
               (benefits) .................................................            (1,707)                51               233
                                                                                     --------           --------          --------
            Income before extraordinary loss ..............................             5,626              5,272             4,681
                                                                                     --------           --------          --------
            Extraordinary loss, net of $185 tax benefit ...................               359                 --                --
                                                                                     --------           --------          --------
            Net income ....................................................          $  5,267           $  5,272          $  4,681
                                                                                     ========           ========          ========
</TABLE>

Consolidated Results and Analysis

     SMC's 2000 net income was $5.3 million, or 66 cents per diluted share, up
2% on a diluted per share basis over the comparable 1999 period. The results for
2000 include increases due to i) net spread revenue, the difference between the
investment income earned on SMC's investments less the interest SMC credits to
its policyholders, of $22.1 million compared to $19.1 million, ii) fees from
separate accounts of $7.7 million compared to $3.9 million, and iii) a lower
marginal tax rate due to the utilization of SMC's net operating loss
carryforwards. These increases were offset by i) paid life insurance claims of
$7.1 million compared to $5.7 million, ii) amortization of $9.4 million compared
to $7.5 million, iii) net realized investment losses of $4.5 million, and iv) an
extraordinary loss of $.4 million in the 2000 period. Operating income for 2000
was $7.3 million, an increase of 40% over 1999.

     SMC's 1999 net income was $5.3 million, or 65 cents per diluted share, up
13% and 5%, respectively, compared to 1998. The results for 1999 include
increases due to i) net spread revenue of $19.1 million compared to $14.4
million, ii) fees from separate accounts of $3.9 million compared to $2.9
million, and iii) economies of scale achieved through the acquisitions of Savers
Life and Midwestern Life, including the elimination of certain Medicare
supplement expenses in connection with the sale of that business. These
increases were somewhat offset by i) the completion of negative goodwill
amortization, a nonrecurring item, which contributed $1.4 million or $.15 per
diluted share in 1998, ii) paid life insurance claims of $5.7 million compared
to $5.1 million, and iii) amortization of $7.5 million compared to $5.4 million.
Operating income for 1999 was $5.2 million, an increase of 17% over 1998.


                                       23
<PAGE>   24

Domestic operations:

<TABLE>
<CAPTION>
                                                                                       2000               1999              1998
                                                                                   -----------         ----------        ----------
                                                                                                 (Dollars in thousands)

<S>                                                                                <C>                 <C>               <C>
Premiums and deposits collected:
  Traditional life ........................................................        $    15,429         $   12,990        $    8,392
  Medicare supplement .....................................................                 --                 --             5,992
                                                                                   -----------         ----------        ----------
  Subtotal - traditional and Medicare supplement premiums .................             15,429             12,990            14,384
                                                                                   -----------         ----------        ----------
  FPDA's ..................................................................             94,699             98,678            58,072
  Equity-indexed annuities ................................................             73,122             59,348            16,858
  SPIA's and other deposits ...............................................             27,802              5,872             3,537
  Universal and interest-sensitive life ...................................                866              1,778             3,391
                                                                                   -----------         ----------        ----------
  Subtotal - interest-sensitive and other financial products ..............            196,489            165,676            81,858
                                                                                   -----------         ----------        ----------

               Total premiums and deposits collected ......................        $   211,918         $  178,666        $   96,242
                                                                                   ===========         ==========        ==========
Premium income ............................................................        $    15,429         $   12,990        $   14,384
Policy income .............................................................              8,204              6,826             6,529
                                                                                   -----------         ----------        ----------

           Total policy related income ....................................             23,633             19,816            20,913

Net investment income......................................................             50,278             43,167            33,089
Call option gains (losses) ................................................             (7,603)             1,209               632
Fee and other income ......................................................              5,980              4,207             3,068
                                                                                   -----------         ----------        ----------

           Total revenues(a) ..............................................             72,288             68,399            57,702
                                                                                   -----------         ----------        ----------

Benefits and claims .......................................................             20,045             14,516            13,310
Interest credited to interest sensitive annuities and other financial
  products ................................................................             21,080             25,728            19,775
Amortization ..............................................................              9,703              6,313             4,755
Commission expenses .......................................................              1,918                735               895
Other operating expenses ..................................................             10,685             11,668            12,312
Interest expense and financing costs ......................................              3,417              3,385             2,955
                                                                                   -----------         ----------        ----------

           Total benefits and expenses ....................................             66,848             62,345            54,002
                                                                                   -----------         ----------        ----------
           Operating income before income taxes ...........................              5,440              6,054             3,700

Net realized investment gains (losses), net of related amortization .......             (2,164)                78               353
                                                                                   -----------         ----------        ----------

           Income before income taxes .....................................        $     3,276         $    6,132        $    4,053
                                                                                   ===========         ==========        ==========
</TABLE>

(a) total revenues exclude net realized investment gains (losses), net of
related amortization.

<TABLE>
<S>                                                                                <C>                 <C>               <C>
Number of annuity contracts in force ......................................             24,216             24,322            20,121
                                                                                   ===========         ==========        ==========
Interest-sensitive annuity and other financial
         products reserves, net of reinsurance ceded ......................        $   695,475         $  595,388        $  506,749
                                                                                   ===========         ==========        ==========
Number of life policies in force ..........................................             55,533             61,573            66,412
                                                                                   ===========         ==========        ==========
Life insurance in force, net of reinsurance ceded .........................        $ 1,042,566         $1,367,533        $1,403,164
                                                                                   ===========         ==========        ==========
</TABLE>


                                       24
<PAGE>   25

General: This segment consists of revenues earned and expenses incurred from
U.S. operations which includes deposits and/or income from annuity products
(primarily FPDA's), equity-indexed products, SPIA's, universal life products and
traditional life products. This segment has been significantly impacted by the
acquisitions of Savers Life, effective March 12, 1998, and Midwestern Life,
effective October 30, 1998. 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 management of operating
expenses.

Premium deposits consist of FPDA's, equity-indexed annuities, SPIA's,
interest-sensitive annuities and other financial products that do not
incorporate significant mortality features. For GAAP these premium deposits are
not shown as premium income in the income statement. Furthermore, 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.

         -        Premium deposits for 2000 increased $30.8 million or 19% to
                  $196.5 million. The increase relates to i) a continued
                  increase in the agency base achieved through the recruitment
                  of high volume agents and larger managing general agencies,
                  ii) the introduction of a SPIA product that contributed $18.3
                  million of deposits for the period, and iii) continued
                  momentum of our equity-indexed products which contributed an
                  additional $13.8 million for the period.

         -        Premium deposits for 1999 increased $83.8 million or 102% to
                  $165.7 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) expansion of
                  geographical concentration, iii) the full year impact of an
                  equity-indexed product introduced in 1998, and iv) the
                  introduction of three equity-indexed annuity products in 1999.

Premium income consists of premiums earned from i) traditional life products,
ii) annuity business that incorporates significant mortality features, and iii)
Medicare supplement premiums for the 1998 period.

         -        Life premiums were up $2.4 million or 19% in 2000 to $15.4
                  million, which is primarily the result of increased
                  traditional life premiums and other deposits that incorporate
                  mortality features.

         -        Life premiums were up $4.6 million or 55% in 1999 to $13.0
                  million. The increase was primarily the result of renewal
                  premiums from Midwestern Life's traditional life block and
                  first year premiums of existing traditional life products.

         -        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 sale date of the Medicare supplement block of
                  business.

Policy income represents i) mortality charges and administrative fees earned on
universal life products, and ii) surrender charges earned as a result of
terminated universal life and annuity policies.

         -        During 2000, policy income increased $1.4 million or 20% to
                  $8.2 million. The increase primarily relates to $1.6 million
                  of surrender income received as a result of i) reducing
                  crediting rates on certain FPDA products and ii) general
                  market conditions, offset by lower cost of insurance income.

         -        During 1999, policy income increased $.3 million or 5% to $6.8
                  million. The increase is due to i) mortality charges of a new
                  universal life product and ii) surrender charges on certain
                  FPDA products which is primarily the result of lowering
                  credited rates on those products.

Net investment income includes interest earned on invested assets and fluctuates
with changes in i) the amount of average invested assets supporting insurance
liabilities, and ii) the average yield earned on those invested assets.

         -        During 2000, net investment income increased $7.1 million or
                  16% to $50.3 million. Average invested assets, at book value,
                  increased by $95.7 million or 15% due to the growth in
                  insurance liabilities from premium sales of recent periods.

         -        During 1999, net investment income increased $10.1 million or
                  31% to $43.2 million. Average invested assets, at book value,
                  increased by $166.7 million or 35% due to the growth in
                  insurance liabilities from premium sales of recent periods and
                  from the acquisitions of Savers Life and Midwestern Life.


                                       25
<PAGE>   26

         -        The net investment yield earned on average invested assets was
                  7.26%, 7.13% and 7.27% for 2000, 1999 and 1998, respectively.
                  Investment yields fluctuate from period to period primarily
                  due to changes in the general interest rate environment.

Call option gains (losses) relate to equity-indexed products which are hedged
with call options to limit risk against unusually high crediting rates from
favorable returns in the equity market. The market value of these options
fluctuate from period to period and are substantially offset by amounts credited
to policyholder account balances.

         -        During 2000, call option losses increased $8.8 million to
                  ($7.6) million compared to call option gains of $1.2 million
                  in 1999. The increased losses were due to the unfavorable
                  impact of changes in the market value of SMC's call options.
                  Also refer to "Interest credited on interest sensitive
                  annuities and other financial products" below.

         -        During 1999, call option gains increased $0.6 million to $1.2
                  million compared to call option gains of $0.6 million in 1998.
                  This increase was due to the favorable impact of changes in
                  the market value of SMC's call options.

Fee and other income consist of fee income related to servicing blocks of
business for unaffiliated companies, experience refunds, and commission income.

         -        During 2000, fee and other income increased $1.8 million or
                  42%, to $6.0 million. This increase includes i) $1.5 million
                  of commission income from administrative agreements, including
                  the Savers Marketing administrative agreement, and ii) $.3
                  million of other income related to a recovery under a keyman
                  insurance policy.

         -        During 1999, fee and other income increased $1.1 million or
                  37%, to $4.2 million. This increase was due to commission
                  income that related to the Savers Marketing administrative
                  agreement and the marketing efforts associated with the
                  management of that business.

Benefits and claims include i) paid life insurance claims, ii) benefits from
other 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 claim experience.

         -        Benefits and claims in 2000 increased $5.5 million or 38%, to
                  $20.0 million. This increase includes i) additional reserves
                  needed as a result of increased traditional life premiums and
                  other deposits that incorporate mortality features and ii)
                  additional mortality benefits of $1.5 million compared to the
                  1999 period.

         -        Benefits and claims in 1999 increased $1.2 million, to $14.5
                  million. This is due to $6.1 million of claims and benefits
                  resulting from an increase in the average in force life
                  business for the periods due to the acquisitions of Savers
                  Life and Midwestern Life. This was somewhat offset by the
                  inclusion of $4.9 million of benefits and claims in 1998
                  results related to the Medicare supplement business that was
                  sold July 1998.

Interest credited to interest-sensitive annuities and other financial products
represents interest credited to insurance liabilities of the FPDA's,
equity-indexed annuities, SPIA's, interest sensitive and other financial
products. This expense fluctuates with changes in i) average interest-sensitive
insurance liabilities, ii) the average credited rate on those liabilities, and
iii) the market value fluctuations of call options. Also refer to "Net
investment income" in Item 7.

         -        In 2000, interest credited decreased $4.6 million or 18%, to
                  $21.1 million. This decrease consists of a $7.6 million
                  decline in the market value of liabilities supporting
                  equity-indexed products. This decrease was offset by increased
                  interest credited due to larger average interest sensitive
                  liabilities of $98.9 million or 20% for the period, including
                  a $61.4 million increase from equity-indexed products.

         -        In 1999, interest credited increased $6.0 million or 30%, to
                  $25.7 million. This increase was due to larger average
                  interest-sensitive insurance liabilities of approximately
                  $125.3 million or 34% for the period, which includes increases
                  from the acquisitions of Savers Life and Midwestern Life, and
                  from equity indexed products. The remaining increase primarily
                  relates to FPDA products. These increases were somewhat offset
                  by a decrease in the average credited rate for the period.


                                       26
<PAGE>   27

         -        The weighted average credited rate was 4.90%, 4.89% and 5.16%
                  in 2000, 1999 and 1998, respectively.

Amortization includes i) amortization related to the present value of polices
purchased from acquired insurance business, ii) amortization of deferred
acquisition costs related to capitalized costs of insurance business sold, and
iii) amortization of goodwill and organizational costs.

         -        Amortization in 2000 increased $3.4 million or 54%, to $9.7
                  million. This increase relates to i) additional amortization
                  of deferred acquisition costs, ii) increased business in
                  force, and iii) the recognition of additional profits for the
                  period. Additional profits were recognized from i) the
                  realization of profits from increased sales of annuity
                  products in recent periods and ii) the realization of profits
                  from surrender income of deferred annuities.

         -        Amortization in 1999 increased $1.6 million or 33%, to $6.3
                  million. This increase relates to additional amortization of
                  deferred acquisition costs, due to increased business in
                  force, and the recognition of additional profits for the
                  period. Additional profits were recognized from i) the
                  realization of profits from increased sales of annuity
                  products in recent periods, and ii) the realization of profits
                  from the purchased insurance business of Savers Life and
                  Midwestern Life.

Commission expenses represent commission expenses, net of deferrable amounts.

         -        During 2000, commission expenses increased $1.2 million to
                  $1.9 million primarily due to nondeferrable commissions
                  related to SPIA sales during the year. We enhanced our
                  presence in this market beginning in 2000.

         -        During 1999, commission expenses declined $0.2 million to $0.7
                  million due to slight variations in product mix and sales for
                  the period.

Other operating expenses consist of general operating expenses, including
salaries, and commission expenses, net of deferrable amounts.

         -        In 2000, other operating expenses decreased $1.0 million or
                  8%, to $10.7 million. The decrease is due to continued
                  efficiencies achieved through the assimilation of recent
                  acquisitions.

         -        In 1999, other operating expenses declined $.6 million or 5%,
                  to $11.7 million. The majority of this decrease relates to
                  efficiencies achieved through the assimilation of the former
                  insurance operations of Savers Life, Savers Marketing and
                  Midwestern Life including the elimination of certain Medicare
                  supplement expenses in connection with the sale of that
                  business.

Interest expense and financing costs represent interest expense incurred and the
amortization of related debt issuance costs.

         -        In 2000, interest expense and financing costs remained at $3.4
                  million. Average borrowings for the period declined $3.2
                  million, however, they were offset by an increased interest
                  rate for the period.

         -        In 1999, interest expense and financing costs increased $.4
                  million or 15%, to $3.4 million primarily due to increased
                  average borrowings for the period of approximately $5.6
                  million and an increase in the average interest rate for the
                  period on the revolving line of credit.

Net realized investment gains (losses), net of related amortization fluctuate
from period to period and generally arise when securities are sold in response
to changes in the investment environment. Realized investment gains (losses) can
affect the timing of the amortization of deferred acquisition costs and the
amortization of the present value of future profits.

         -        Net realized investment losses, net of related costs and
                  amortization, for 2000 were $2.2 million, which is reduced by
                  $2.3 million of deferred acquisition cost amortization.
                  Approximately 64% of the gross losses for 2000 are related to
                  fixed maturity securities that have a decline in fair value
                  that is considered other than temporary. These securities are
                  considered to be in substantive default (i.e. default as to
                  interest and principal). The Company maintains a high quality
                  investment portfolio with 94% of its fixed maturity securities
                  being classified as investment grade securities.

         -        In 1999, net realized investment gains were $.1 million.


                                       27
<PAGE>   28

International operations:

<TABLE>
<CAPTION>
                                                                 2000                1999                 1998
                                                              ----------          ----------           ----------
                                                                            (Dollars in thousands)

<S>                                                           <C>                 <C>                  <C>
Premiums and deposits collected:
  Traditional life .................................          $       41          $      100           $       95
  Separate account deposits ........................             170,514              55,192               42,536
                                                              ----------          ----------           ----------

           Total premiums and deposits collected ...          $  170,555          $   55,292           $   42,631
                                                              ==========          ==========           ==========

Premium income .....................................          $       41          $      100           $       95

Net investment income ..............................                 498                 445                  500

Separate account fees ..............................               7,728               3,941                2,884

Amortization of negative goodwill ..................                  --                  --                1,388

Other income .......................................                  --                  --                  353
                                                              ----------          ----------           ----------

           Total revenues ..........................               8,267               4,486                5,220
                                                              ----------          ----------           ----------


Benefits and claims ................................                  35                (140)                 (40)

Amortization .......................................               2,061               1,158                  658

Commission expenses ................................                  12                  10                   22

Other operating expenses ...........................               3,031               2,192                2,322
                                                              ----------          ----------           ----------

           Total benefits and expenses .............               5,139               3,220                2,962
                                                              ----------          ----------           ----------

           Income before income taxes ..............          $    3,128          $    1,266           $    2,258
                                                              ==========          ==========           ==========




Separate account contracts(1) ......................               4,989               3,380                3,070
                                                              ==========          ==========           ==========


Separate account liabilities(1) ....................          $  520,439          $  319,973           $  190,246
                                                              ==========          ==========           ==========
</TABLE>

(1)      Primarily unit-linked assurance products

General: International operations include revenues earned and expenses incurred
from abroad, primarily Europe, and include 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 management of operating expenses.

Net investment income represents income earned on corporate assets such as cash,
short-term investments and fixed securities. SMI is required to hold a certain
level of cash and short-term investments in order to comply with local insurance
laws.

         -        Net investment income was $.5 million and $.4 million in 2000
                  and 1999, respectively, on average invested assets of
                  approximately $11.0 million for each period.

         -        The net investment yields earned on average invested assets
                  were 4.54%, 4.06% and 4.74% for 2000, 1999 and 1998,
                  respectively.

Fees from separate accounts represent the net fees earned on the various
unit-linked products sold. The fees fluctuate in relationship to total separate
account assets and the fees earned on such assets. Fees include initial set-up
fees on certain products and annual recurring fees on almost all products.

         -        During 2000, fees from separate accounts increased $3.8
                  million or 96%, to $7.7 million. This increase is primarily
                  due to an increase of 82% in the average value of assets held
                  in separate accounts for the period. Actual separate account


                                       28
<PAGE>   29

                  assets increased $200.5 million or 63%, to $520.4 million. Net
                  deposits from SMI's sales of unit-linked products increased
                  $115.3 million or 209%, to $170.5 million for the period. The
                  increase in deposits is primarily due to i) strengthening of
                  SMI's distribution system by engaging more, highly productive
                  agents, ii) concentrated marketing efforts in certain European
                  countries, primarily Sweden, Belgium and Italy, and iii)
                  favorable demand, in general, for investment based products.

         -        During 1999, fees from separate accounts increased $1.1
                  million or 37%, to $3.9 million. This increase is primarily
                  due to an increase of 36% in the average value of assets held
                  in separate accounts for the period. Actual separate account
                  assets increased $129.7 million or 68%, to $320.0 million. Net
                  deposits from SMI's sales of unit-linked products increased
                  $12.7 million or 30%, to $55.2 million for the period. This
                  increase is due to expanded marketing efforts, which have
                  generated additional sales in Sweden and Belgium for the
                  period.

Amortization of negative goodwill, which is the amortization of the excess cost
of assets acquired over the purchase price paid for SMI in December 1993 of $6.9
million, has been amortized over 5 years at $1.4 million per year and was fully
amortized at December 31, 1998.

Amortization includes the amortization of deferred acquisition costs, such as
sales commissions and other costs, directly related to selling new business.

         -        Amortization increased $.9 million in 2000 to $2.1 million and
                  increased $.5 million in 1999 to $1.2 million. These increases
                  are due to amortizing deferred acquisition costs associated
                  with increased sales of recent periods.

Commission expenses represent commission expenses, net of deferrable amounts.

         -        Commission expenses remained at less than $.1 million for the
                  years ended December 31, 2000 and 1999. Due to the nature of
                  SMI's business, virtually 100% of incurred commissions are
                  deferred.

Other operating expenses consist of recurring general operating expenses, net of
deferred amounts.

         -        Other operating expenses increased $1.1 million or 56% in
                  2000, to $3.0 million primarily as a result of fixed costs
                  associated with international business growth. The number of
                  separate account contracts administered increased 48% to 4,989
                  in 2000 and 10% to 3,380 in 1999.

         -        Other operating expenses declined $.1 million or 6% in 1999,
                  to $2.2 million.

Foreign currency translation comparisons between 2000, 1999 and 1998 are
impacted by the strengthening and weakening of the U.S. dollar relative to
foreign currencies, primarily the Luxembourg franc. The impact of these
translations has been quantified on individual income statement components
of fees from separate accounts and amortization solely.


                                       29
<PAGE>   30

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) surplus debenture interest, 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 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 $.9 million and $2.9 million for 2000 and 1999, respectively.
Although deposits received on SMC's interest-sensitive annuities and other
financial products are not included in cash flow from operations under GAAP,
these 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 $108.2 million and $92.6 million for 2000 and 1999, 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 has instituted a program to repurchase its common stock. At
December 31, 2000, Standard Management is authorized to repurchase 724,790
additional shares of SMC Common Stock under this program.

         At April 27, 2001, Standard Management had "parent company only" cash
and short-term investments of $.7 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 $4.5 million and
$4.8 million for 2000 and 1999, respectively.

         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, respectively, to the consolidated
financial statements for additional information.

         Standard Management anticipates the available cash from its existing
working capital, plus anticipated 2001 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
2001.

         Surplus Debenture and Notes Payable Interest:

         THE FOLLOWING ARE CHARACTERISTICS OF THE AMENDED CREDIT AGREEMENT AT
DECEMBER 31, 2000:

    -    $20.5 million outstanding balance

    -    Weighted average interest rate of 9.86%

    -    Principal payments: $3.2 million due March 2001 (which was
         paid), $4.3 million due annually through March 2005

    -    Subject to restrictions and financial and other covenants

    -    Interest payments required in 2001 based on December 31, 2000
         balances will be $1.8 million

         THE FOLLOWING ARE CHARACTERISTICS OF THE SUBORDINATED DEBT AGREEMENT AT
DECEMBER 31, 2000:

    -    $11.0 million outstanding balance

    -    Interest rate is greater of i) 10% per annum or ii) six month
         London Inter-Bank Offered Rate ("LIBOR") plus 1.5%

    -    Due October 2007

    -    Interest payments required in 2001 based on December 31, 2000
         balances will be $1.1 million

         Refer to Note 5 to the consolidated financial statements for additional
information.


                                       30
<PAGE>   31

         Standard Management loaned $27.0 million 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 IDOI, 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 IDOI.
Standard Management currently anticipates these quarterly approvals will be
granted. Assuming the approvals are granted and the December 31, 2000 interest
rate of 11.50% continues, Standard Management will receive interest income of
$3.1 million from the surplus debenture in 2001.

         Dividends paid 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 IDOI, 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 2001, 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 $3.6 million during 2000 and $3.4 million during
1999 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 $1.2 million and $.9 million in 2000 and
1999, respectively, for certain management services provided. Both of these
agreements provide that they may be modified or terminated by the applicable
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 $.3 million during 2000 and $.2 million
during 1999 for certain management, technical support 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 2000 and 1999, Standard Management charged
subsidiaries $1.1 million and $1.0 million, respectively, 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 interest 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 FPDA's and equity-indexed
products. 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 rating (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, to ensure it has sufficient cash
resources 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 IDOI, 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


                                       31
<PAGE>   32

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 2001. As of December 31,
2000, Standard Life had statutory capital and surplus for regulatory purposes of
$43.9 million compared to $43.7 million at December 31, 1999. 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 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 $95.4
million and $91.4 million for 2000 and 1999, respectively. If the need arises
for cash, which is not readily available, additional liquidity could be obtained
from the sale of invested assets.

         International Operations. The amount of dividends that may be paid by
SMI without regulatory approval is limited to its accumulated earnings. SMI and
Premier Life (Luxembourg) were not permitted to pay dividends in 2000 and 1999
due to accumulated losses. Premier Life (Bermuda) paid a dividend of $.3 million
in 2000 and $.8 million in 1999 to SMI and no dividends in 1998. SMC does not
anticipate receiving dividends from SMI in 2001.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         SMC is subject to a number of factors affecting its business, including
intense competition in the industry and the ability to attract and retain agents
and employees. If SMC is unable to respond appropriately to any of these
factors, business and financial results could suffer.

         SMC's operating results are affected by many factors, including,
competition, lapse rates, interest rates, maintenance of insurance ratings,
governmental regulation and general business conditions, many of which are
outside its control.

         SMC operates in a highly competitive environment and is in direct
competition with a large number of insurance companies, many of which offer a
greater number of products through a greater number of agents and have greater
resources. In addition, SMC may be subject, from time to time, to new
competition resulting from additional private insurance carriers introducing
products similar to those offered by SMC. Moreover, as a result of recent
federal legislation, commercial banks, insurance companies, and investment banks
may now combine, provided certain requirements are satisfied, and SMC expects to
encounter increased competition from these providers of financial services. This
competitive environment could result in lower premiums, loss of sales and
reduced profitability.

         SMC's management believes that the ability to compete is dependent
upon, among other things, the ability to retain and attract independent general
agents to market products and the ability to develop competitive products that
also are profitable. Although management believes that good relationships with
our independent general agents exist, competition for those agents among
insurance companies is intense. SMC's independent general agents typically
represent other insurance companies and may sell products that compete with our
products. See "Business of SMC-Competition."

         SMC's success also depends upon the continued contributions of key
officers and employees. Should one or more of these individuals leave or
otherwise become unavailable to SMC for any reason, business and results of
operations could be materially adversely affected. See "Business of
SMC-Employees."

         SMC's success depends on the performance of others. SMC's results may
be affected by the performance of others because of entering into various
arrangements involving other parties. For instance, many products are sold
through independent distribution channels and arise from arrangements with
unrelated marketing organizations. As with all financial services companies, the
ability to conduct business is dependent upon consumer confidence in the
industry and its products. Actions of competitors, and financial difficulties of
other companies in the industry, could undermine consumer confidence and
adversely affect business results.

         Financial results could suffer if our A.M. Best ratings are downgraded.
Insurers compete with other insurance companies, financial intermediaries and
other institutions on the basis of a number of factors, including the ratings
assigned by A.M. Best. 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 that, 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 that, 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 reviews its ratings of
insurance companies from time to time. If the A.M. Best ratings were


                                       32
<PAGE>   33

downgraded, sales of annuity products and life insurance policies could be
significantly impacted and the financial condition and results of operations
could be materially adversely affected. See "Business of SMC-Competition."

         A tax law change could adversely affect SMC's ability to compete with
non-insurance products. Under the United States Internal Revenue Code, income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain products a competitive advantage over
other non-insurance products. To the extent that the Internal Revenue Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including SMC, would be adversely affected with respect to
their ability to sell these products, and, depending on grandfathering
provisions, the surrenders of existing annuity contracts and life insurance
policies. In addition, life insurance products are often used to fund estate tax
obligations. If the estate tax were eliminated or significantly reduced, the
demand for certain life insurance products could be adversely affected. SMC
cannot predict what tax initiatives may be enacted which could have an adverse
affect on its business.

         Interest-rate fluctuations could negatively affect spread income.
Significant changes in interest rates expose insurance companies to the risk of
not earning anticipated spreads between the interest rate earned on investments
and the credited interest rates paid on outstanding policies. Both rising and
declining interest rates can negatively affect spread income. Although SMC
develops and maintains asset/liability management programs and procedures
designed to preserve spread income in rising or falling interest rate
environments, changes in interest rates could adversely affect these spreads.

         Financial results could suffer if the value of investments decreases
due to factors beyond SMC's control. SMC's invested assets are subject to
customary risks of credit defaults and changes in market values. The value of
the Company's investment portfolio depends in part on the financial condition of
the companies in which it has made investments. Factors that my affect the
overall market value of invested assets include interest rate levels, financial
market performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual companies.

         SMC's reinsurance program is subject to the financial failure of the
reinsurer and to market conditions which affect the amount and cost of
reinsurance. If a large number of SMC's reinsurers fail or market conditions
make it more difficult to reinsure profitably, SMC financial results could
suffer. SMC is able to assume insurance risks beyond the level which capital and
surplus would support by transferring substantial portions of risks to other,
larger insurers through reinsurance contracts. These reinsurance arrangements,
which are the usual practice in the insurance industry, leave exposure to credit
risk which exists because reinsurance does not fully relieve SMC of liability to
insureds for the portion of the risks ceded to reinsurers. Although SMC places
reinsurance with reinsurers it believes to be financially stable, a reinsurer's
subsequent insolvency or inability to make payments under the terms of a
reinsurance treaty could have a materially adverse effect on SMC's financial
condition.

         Policy claims fluctuate from year to year, and future benefit payments
may exceed reserves, which may cause financial results to suffer. Financial
results may fluctuate from year to year due to fluctuations in policy claims
received by subsidiaries. Reserves are established for claims and future policy
benefits based on accepted actuarial practices. By care in underwriting new
policies and sharing risk with reinsurance companies, SMC has attempted to limit
the risk that actual payments for death and other benefits will exceed its
reserves. The reserves are, however, only actuarial estimates and it is possible
that SMC's claims experience could be worse than anticipated, so that reserves
may prove to be insufficient. If this were to happen, it could result in a
decline in operating earnings.

         SMC could be forced to sell illiquid investments at a loss to cover
policyholder withdrawals. Many products allow policyholders and contract holders
to withdraw their funds under defined circumstances. SMC manages its liabilities
and configures its investment portfolio to provide and maintain sufficient
liquidity to support anticipated withdrawal demands, contract benefits and
maturities. While a significant amount of liquid assets are owned, certain
portions of assets are relatively illiquid. Unanticipated withdrawal or
surrender activity could, under some circumstances, compel SMC to dispose of
illiquid assets on unfavorable terms, which could have an adverse effect.

         Because a significant portion of SMC's annuity contracts are
surrenderable, any substantial increase in the level of surrenders could
negatively affect financial results. As of February 28, 2001, approximately
91.7% or $598.6 million of annuity contracts in force (measured by statutory
reserves) were surrenderable. Approximately 8.3% of those contracts or
approximately $54.5 million of annuity contracts in force (measured by statutory
reserves) are surrenderable without charge. Changes in prevailing interest
rates, ratings or other factors which result in or lead to significant levels of
surrenders of existing annuity contracts could have a material adverse effect
upon SMC's financial condition and results of operations. Surrenders result in a
reduction of invested assets that earn investment income and a reduction of
policyholder account balances that credit interest. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

         A stock price decline may limit the ability to raise capital or
consummate acquisitions. During 1999 and 2000, many financial services
companies, including SMC, experienced a decrease in the market price of their
common stock. Although management believes that SMC has sufficient, internally
generated cash flow to fund its day-to-day operations, a lower stock price may
limit the ability to raise capital to fund other growth opportunities and
acquisitions.


                                       33
<PAGE>   34

         SMC's business strategy has in the past and might in the future include
the acquisition of other businesses. SMC may not be able to identify appropriate
acquisition candidates or properly integrate their businesses. From time to
time, acquisitions of other businesses may be considered. Competition for
acquisition candidates, which may limit the number of acquisition opportunities,
may lead to higher acquisition prices. Also, SMC may not be able to identify,
acquire or manage additional businesses profitably or to successfully integrate
the acquired businesses. Businesses acquired may have liabilities that SMC
underestimated or did not discover during pre-acquisition investigations. Some
of the liabilities of the businesses acquired, even if not expressly assumed,
may be imposed on SMC as the successor to the business. Further, each
acquisition involves a number of other special risks that could cause the
acquired business to fail to meet expectations. For example:

    -    the acquired business may not achieve expected results;

    -    key personnel of the acquired business may not be retained;

    -    substantial, unanticipated costs, delays or other operational
         financial problems may be incurred when the business is
         integrated with SMC;

    -    management's attention may be diverted; or

    -    management may not be able to manage the combined entity
         effectively or to make acquisitions and grow our business
         internally at the same time.

         The timing, size or success of any future acquisitions cannot be
predicted, nor the ability to integrate any acquired businesses, or their
associated capital requirements. In addition, SMC may not be able to obtain
acquisition financing when required, or such financing may only be available on
terms and conditions that are unacceptable. SMC's failure to address the above
issues, could cause financial results to suffer.

         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's
(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, 2000, there was a $2.4 million unrealized loss from foreign
currency translation.

         Euro Currency. Effective January 1, 1999, 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 June 30, 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 11.0 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.


                                       34
<PAGE>   35

         Uncertainties Regarding Intangible Assets. Included in SMC's December
31, 2000 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, 2000 balance
sheet total $124.6 million or 8.5% 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, 2000.

         Regulatory Environment. Currently, prescribed or permitted statutory
accounting principles ("SAP") may vary between states and between companies. The
NAIC has completed 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. There can
be no assurance that existing insurance-related laws and regulations will not
become more restrictive in the future and, therefore, it is not possible to
predict the potential effects that any proposed or future legislation may have
on the financial condition or operations of the company. See "Business of
SMC-Regulatory Factors."

         Financial Services Deregulation. The U.S. Congress is currently
considering a number of legislative proposals intended to reduce or eliminate
restrictions on affiliations among financial services organizations. The
recently passed GLB Act 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.

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 86% of the total
insurance liabilities at December 31, 2000 had surrender penalties or other
restrictions and approximately 4% 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, 2000, the average yield, computed on the
cost basis of the investment portfolio, was 7.28%, and the average interest rate
credited or accruing to total insurance liabilities was 4.90%, excluding
guaranteed interest bonuses for the first year of the annuity contract.

         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 duration 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, 2000, the option adjusted duration of fixed maturity securities and
short-term investments were approximately 4.4, and the option adjusted duration
of insurance liabilities was approximately 3.9.

         If interest rates were to increase by 10% from their December 31, 2000
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 $17.1 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


                                       35
<PAGE>   36

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.

         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 an 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, 2000, there is a $2.4 million unrealized loss
from foreign currency translation.

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 2001 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 that 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.


                                       36
<PAGE>   37

                                     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:

<TABLE>
<CAPTION>
Exhibit
Number            Description of Document
-------           -----------------------
<S>               <C>
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               Amended and Restated Registration Rights Agreement dated as of April
                  15, 1997 by and between SMC and Fleet National Bank (incorporated by
                  reference to SMC's Annual Report on Form 10-K (File No. 0-20882)).

4.3               Form of Fleet National Bank Warrant (incorporated by reference to SMC's
                  Annual Report on Form 10-K (File No. 0-20882)).

4.4               Form of President's Club Warrant (incorporated by reference to SMC's
                  Annual Report on Form 10-K (File No. 0-20882)).
</TABLE>


                                       37
<PAGE>   38

<TABLE>
<CAPTION>
Exhibit
Number            Description of Document
-------           -----------------------
<S>               <C>
10.1              Third Amended and Restated Employment Contract by and between SMC and
                  Ronald D. Hunter, dated and effective, as amended, July 1, 1999
                  (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
                  No. 0-20882) for the quarter ended September 30, 1999).

10.2              Third Amended and Restated Employment Contract by and between SMC and
                  Edward T. Stahl, dated and effective, as amended, July 1, 1999
                  (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
                  No. 0-20882) for the quarter ended September 30, 1999).

10.3              Third Amended and Restated Employment contract by and between SMC and
                  Raymond J. Ohlson, dated and effective, as amended, July 1, 1999
                  (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
                  No. 0-20882) for the quarter ended September 30, 1999).

10.4              Second Amended and Restated Employment Contract by and between SMC and
                  Stephen M. Coons dated and effective, as amended, July 1, 1999
                  (incorporated by reference to SMC's Quarterly Report on Form 10-Q (File
                  No. 0-20882) for the quarter ended September 30, 1999).

10.5              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).

10.6              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.

10.7              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).

10.8              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 (incorporated by reference to SMC's Annual Report on
                  Form 10-K (File No. 0-20882)).

10.9              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).

10.10             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).

10.11             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).

10.12             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).

10.13             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).

10.14             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).
</TABLE>


                                       38
<PAGE>   39

<TABLE>
<CAPTION>
Exhibit
Number            Description of Document
-------           -----------------------
<S>               <C>
10.15             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).

10.16             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).

10.17             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).

10.18             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).

10.19             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).

10.20             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)).

10.21             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)).

10.22             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)).

10.23             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).

10.24             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).

10.25             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)).

10.26             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)).

10.27             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).

10.28             Reinsurance Agreement between Standard Life and Life Reassurance
                  Corporation of America effective September 1, 1997 (incorporated by
                  reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
                  the year ended December 31, 1997).

10.29             Reinsurance Agreement between Standard Life and Business Men's
                  Assurance Company of America effective September 1, 1997 (incorporated
                  by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
                  the year ended December 31, 1997).
</TABLE>


                                       39
<PAGE>   40

<TABLE>
<CAPTION>
Exhibit
Number            Description of Document
-------           -----------------------
<S>               <C>
10.30             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).

10.31             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).

10.32             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).

10.33             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).

10.34             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).

10.35             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 (incorporated by reference to SMC's Annual Report on
                  Form 10-K (File No. 0-20882) for the year ended December 31, 1998).

10.36             Plan and Agreement of Merger of Savers Life into Standard Life
                  effective as of December 31, 1998 dated October 30, 1998 (incorporated
                  by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
                  the year ended December 31, 1998).

10.37             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 (incorporated by reference to SMC's Annual
                  Report on Form 10-K (File No. 0-20882) for the year ended December 31,
                  1998).

10.38             Plan and Agreement of Merger of Midwestern Life into Standard Life
                  effective as of December 31, 1998 dated October 30, 1998 (incorporated
                  by reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
                  the year ended December 31, 1998).

10.39             Amended and Restated note Agreement dated as of September 24, 1998
                  between SMC and Fleet National Bank in the amount of $26,000,000
                  (incorporated by reference to SMC's Annual Report on Form 10-K (File
                  No. 0-20882) for the year ended December 31, 1998).

10.40             Amendment No. 2 to Amended and Restated Revolving Line of Credit
                  Agreement dated as of September 24, 1998 between SMC and Fleet National
                  Bank (incorporated by reference to SMC's Annual Report on Form 10-K
                  (File No. 0-20882) for the year ended December 31, 1998).

10.41             Amended and Restated Registration Rights Agreement dated as of August
                  19, 1998 between SMC and Fleet National Bank (incorporated by reference
                  to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
                  ended December 31, 1998).

10.42             Amended and Restated Pledge Agreement dated as of September 23, 1998,
                  between SMC and Fleet National Bank (incorporated by reference to SMC's
                  Annual Report on Form 10-K (File No. 0-20882) for the year ended
                  December 31, 1998).
</TABLE>



                                       40
<PAGE>   41

<TABLE>
<CAPTION>
Exhibit
Number            Description of Document
-------           -----------------------
<S>               <C>
10.43             Warrant to purchase common stock of SMC dated August 19, 1998 entitling
                  Fleet National Bank to purchase 20,000 shares (incorporated by
                  reference to SMC's Annual Report on Form 10-K (File No. 0-20882) for
                  the year ended December 31, 1998).

10.44             Guaranty dated October 1, 1998 made by SMC in favor of Fleet National
                  Bank (incorporated by reference to SMC's Annual Report on Form 10-K
                  (File No. 0-20882) for the year ended December 31, 1998).

10.45             Surplus debenture dated as of December 31, 1998 by and between SMC and
                  Standard Life in the amount of $8.0 million (incorporated by reference
                  to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
                  ended December 31, 1998).

10.46             Surplus debenture dated as of December 31, 1998 by and between SMC and
                  Standard Life in the amount of $6.0 million (incorporated by reference
                  to SMC's Annual Report on Form 10-K (File No. 0-20882) for the year
                  ended December 31, 1998).

10.47             Employment Agreement between Standard Management Corporation and P.B.
                  (Pete) Pheffer dated and effective July 1, 1999, (incorporated by
                  reference to SMC's Quarterly Report on Form 10-Q (File No. 0-20882) for
                  the quarter ended September 30, 1999).

10.48*            Note Agreement dated October 31, 2000 by and between SMC and Zurich
                  Capital Markets, Inc. in the amount of $11.0 million. Included as an
                  exhibit to this note agreement is an Investment Advisory Agreement
                  dated December 1, 2000 by and between SMC and Scudder Kemper
                  Investments, Inc.

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. (FOR SEC USE ONLY)
</TABLE>

----------------------
*Previously filed with the initial filing of this Form 10-K on March 29, 2001.

         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

None

(b) Reports on Form 8-K filed during the fourth quarter of 2000.

         No reports on Form 8-K were filed with the Commission in the fourth
quarter of 2000.


                                       41
<PAGE>   42

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: July 23, 2001
                                        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 July 23, 2001 by the following persons on
behalf of the Registrant and in the capacities indicated.

<TABLE>
<S>                                         <C>
/s/  Ronald D. Hunter
------------------------------              -----------------------------------------------
Ronald D. Hunter                            Chairman, President and Chief Executive Officer
                                            (Principal Executive Officer)

  *
------------------------------              -----------------------------------------------
P.B. (Pete) Pheffer                         Director, Executive Vice President, and
                                            Chief Financial Officer
                                            (Principal Financial Officer)

  *
------------------------------              -----------------------------------------------
Gerald R. Hochgesang                        Senior Vice President - Finance and Treasurer
                                            (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
</TABLE>


                                       42


<PAGE>   43
                           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, 2000

                         STANDARD MANAGEMENT CORPORATION

                              INDIANAPOLIS, INDIANA











<PAGE>   44




                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

               INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
                                                                                                       PAGE
                                                                                                       ----

<S>                                                                                                    <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors..................................................................        F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999....................................        F-4

Consolidated Statements of Income for the Years Ended
     December 31, 2000, 1999 and 1998...........................................................        F-5

Consolidated Statements of Shareholders' Equity for the Years Ended
     December 31, 2000, 1999 and 1998...........................................................        F-6

Consolidated Statements of Cash Flows for the Years Ended
     December 31, 2000, 1999 and 1998...........................................................        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, 2000, 1999 and 1998......................       F-29

Schedule IV -- Reinsurance for the Years Ended December 31, 2000, 1999 and 1998.................       F-32

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.
</TABLE>


                                      F-1
<PAGE>   45



                         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, 2000 and
1999, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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, 2000 and 1999 or the
consolidated statements of operations, shareholder's equity and cash flows for
each of the three years in the period ended September 30, 2000 of Standard
Management International S.A. and subsidiaries, a wholly owned subsidiary group,
which financial statements reflect assets totaling approximately 37% and 29% of
the Company's consolidated assets at December 31, 2000 and 1999 and revenues
totaling approximately 11%, 6% and 8% of consolidated revenues for each of the
three years in the period ended December 31, 2000. Those financial statements,
which as explained in Note 1, are included in the Company's consolidated balance
sheets at December 31, 2000 and 1999, 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, 2000, 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. 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.


                                             /s/ Ernst & Young LLP




Indianapolis, Indiana
February 9, 2001


                                      F-2
<PAGE>   46



                         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 its subsidiaries as at September 30, 2000 and 1999 and
the related consolidated statements of operations, shareholder's equity and
comprehensive income, and cash flows for each of the years in the three year
period ended September 30, 2000 (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 the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion the financial statements referred to above present
fairly, in all material aspects, the consolidated financial position of Standard
Management International S.A. and its subsidiaries as at September 30, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the years in the three year period ended September 30, 2000 in
conformity with generally accepted accounting principles in the United States of
America.



Luxembourg City, Luxembourg



January 15, 2001
/s/ KPMG Audit


                                      F-3
<PAGE>   47


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                                         December 31
                                                                                               -------------------------------
                                                                                                   2000                1999
                                                                                               -----------         -----------
<S>                                                                                            <C>                 <C>
                                              ASSETS

Investments:
   Securities available for sale:
       Fixed maturity securities, at fair value (amortized cost: $742,597 in 2000
         and $646,284 in 1999) ........................................................        $   718,912         $   606,907
       Equity securities, at fair value (cost: $538 in 2000 and $565 in 1999) .........                362                 378
   Mortgage loans on real estate ......................................................              4,778               8,131
   Policy loans .......................................................................             14,280              14,033
   Real estate ........................................................................              8,847               3,233
   Other invested assets ..............................................................                776                 845
   Short-term investments .............................................................             12,489              14,976
                                                                                               -----------         -----------
          Total investments ...........................................................            760,444             648,503
Cash ..................................................................................              1,840               3,659
Accrued investment income .............................................................             12,298              11,105
Amounts due and recoverable from reinsurers ...........................................             43,158              58,230
Deferred acquisition costs ............................................................             91,855              67,811
Present value of future profits .......................................................             26,343              30,688
Goodwill ..............................................................................              5,430               5,636
Other assets ..........................................................................              8,650               5,372
Assets held in separate accounts ......................................................            520,439             319,973
                                                                                               -----------         -----------
          Total assets ................................................................        $ 1,470,457         $ 1,150,977
                                                                                               ===========         ===========

                               LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Insurance policy liabilities .......................................................        $   837,345         $   727,189
   Accounts payable and accrued expenses ..............................................              7,347               9,076
   Notes payable ......................................................................             31,500              34,500
   Deferred federal income taxes ......................................................              4,397                 349
   Liabilities related to separate accounts ...........................................            520,439             319,973
                                                                                               -----------         -----------
          Total liabilities ...........................................................          1,401,028           1,091,087

Series A convertible redeemable preferred stock, par value $100 per share .............              6,530               6,530

Shareholders' Equity:
   Preferred stock, no par value ......................................................                 --                  --
   Common stock, no par value .........................................................             63,019              62,152
   Treasury stock, at cost ............................................................             (7,589)             (6,802)
   Accumulated other comprehensive income (loss):
       Unrealized gain (loss) on securities available for sale, net tax benefits of
            $4,977 in 2000 and $8,196 in 1999 .........................................             (9,643)            (15,859)
       Unrealized gain on other investments, net taxes of $1 in 2000 and $8 in 1999 ...                  3                  15
       Foreign currency translation adjustment ........................................             (2,368)               (862)
   Retained earnings ..................................................................             19,477              14,716
                                                                                               -----------         -----------
          Total shareholders' equity ..................................................             62,899              53,360
                                                                                               -----------         -----------
          Total liabilities and shareholders' equity ..................................        $ 1,470,457         $ 1,150,977
                                                                                               ===========         ===========
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   48




                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                   Year Ended December 31
                                                                             ---------------------------------
                                                                               2000          1999        1998
                                                                             --------      -------     -------
<S>                                                                          <C>           <C>         <C>
Revenues:
   Premium income ......................................................     $ 15,470      $13,090     $14,479
   Net investment income ...............................................       50,776       43,612      33,589
   Call option gains (losses) ..........................................       (7,603)       1,209         632
   Net realized investment gains (losses) ..............................       (4,492)          78         353
   Policy income .......................................................        8,204        6,826       6,529
   Negative goodwill amortization ......................................           --           --       1,388
   Separate account fees ...............................................        7,728        3,941       2,884
   Fee and other income ................................................        5,980        4,207       3,421
                                                                             --------      -------     -------
       Total revenues ..................................................       76,063       72,963      63,275
                                                                             --------      -------     -------

Benefits and expenses:
   Benefits and claims .................................................       20,080       14,376      13,270
   Interest credited to interest-sensitive annuities
       and other financial products ....................................       21,080       25,728      19,775
   Amortization ........................................................        9,436        7,471       5,413
   Other operating expenses ............................................       15,646       14,605      15,551
   Interest expense and financing costs ................................        3,417        3,385       2,955
                                                                             --------      -------     -------
       Total benefits and expenses .....................................       69,659       65,565      56,964
                                                                             --------      -------     -------

Income before federal income taxes, extraordinary loss and preferred
       stock dividends .................................................        6,404        7,398       6,311
Federal income tax expense .............................................          778        2,126       1,630
                                                                             --------      -------     -------

Income before extraordinary loss and preferred stock dividends .........        5,626        5,272       4,681
Extraordinary loss, net tax benefits of $185 ...........................          359           --          --
                                                                             --------      -------     -------
Net income .............................................................        5,267        5,272       4,681
Preferred stock dividends ..............................................          506          506         180
                                                                             --------      -------     -------
Earnings available to common shareholders ..............................     $  4,761      $ 4,766     $ 4,501
                                                                             ========      =======     =======

Earnings per share - basic:
   Income before extraordinary loss and preferred stock dividends ......     $    .73      $   .69     $   .68
   Extraordinary loss ..................................................          .05           --          --
                                                                             --------      -------     -------
   Net income ..........................................................          .68          .69         .68
   Preferred stock dividends ...........................................          .06          .07         .03
                                                                             --------      -------     -------
   Earnings available to common shareholders ...........................     $    .62      $   .62     $   .65
                                                                             ========      =======     =======


Earnings per common share - diluted:
   Income before extraordinary loss and preferred stock dividends ......     $    .70      $   .65     $   .62
   Extraordinary loss ..................................................          .04           --          --
                                                                             --------      -------     -------
   Net income ..........................................................          .66          .65         .62
   Preferred stock dividends ...........................................          .05          .05         .02
                                                                             --------      -------     -------
   Earnings available to common shareholders ...........................     $    .61      $   .60     $   .60
                                                                             ========      =======     =======
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   49


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                                          Common         Treasury      comprehensive       Retained
                                                           Total          stock           stock        income (loss)       earnings
                                                          --------       --------        --------      -------------       ---------
<S>                                                       <C>            <C>             <C>           <C>                 <C>
Balance at January 1, 1998 .............................  $ 43,313       $ 40,646         $(4,572)        $  1,698         $ 5,541
Comprehensive income:
  Net income ...........................................     4,681                                                           4,681
  Other comprehensive income (loss):
     Change in unrealized gain (loss) on securities,
          net tax benefits of $251 .....................      (488)                                           (488)
     Change in foreign currency translation ............       477                                             477
                                                          --------
       Other comprehensive loss ........................       (11)
                                                          --------

         Comprehensive income ..........................     4,670

Issuance of common stock for Savers Life acquisition ...    15,024         15,024
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 stock ........         4              4
Reissuance of treasury stock in connection with
   exercise of stock options ...........................         2                             54                              (52)
Preferred stock dividends ..............................      (180)                                                           (180)
                                                          --------       --------         -------         --------         -------
Balance at December 31, 1998 ...........................  $ 66,042       $ 60,586         $(6,220)        $  1,687         $ 9,989

Comprehensive income (loss):
  Net income ...........................................     5,272                                                           5,272
  Other comprehensive income (loss):
    Change in unrealized gain (loss) on securities,
      net tax benefits of $8,961 .......................   (17,527)                                        (17,527)
    Change in foreign currency translation .............      (866)                                           (866)
                                                          --------
      Other comprehensive loss .........................   (18,393)
                                                          --------

         Comprehensive loss ............................   (13,121)

Issuance of common stock warrants ......................     1,566          1,566
Treasury stock acquired ................................      (582)                          (582)
Exercise of stock options ..............................       (39)                                                            (39)
Preferred stock dividends ..............................      (506)                                                           (506)
                                                          --------       --------         -------         --------         -------
Balance at December 31, 1999 ...........................  $ 53,360       $ 62,152         $(6,802)        $(16,706)        $14,716
</TABLE>

                          (continued on following page)

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>   50


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                                          Common         Treasury      comprehensive    Retained
                                                           Total          stock           stock        income (loss)    earnings
                                                          --------       --------        --------      -------------    ---------
<S>                                                       <C>            <C>             <C>           <C>              <C>
Balance December 31, 1999 (carried forward from
    prior page)........................................   $ 53,360        $62,152         $(6,802)       $(16,706)      $ 14,716

Comprehensive income:
   Net income..........................................      5,267                                                         5,267
   Other comprehensive income:
      Change in unrealized gain (loss) on securities,
           net taxes of $3,219.........................      6,204                                          6,204
      Change in foreign currency translation...........     (1,506)                                        (1,506)
                                                          --------
        Other comprehensive income.....................      4,698
                                                          --------
              Comprehensive income.....................      9,965

Issuance of common stock warrants......................        867            867
Treasury stock acquired................................       (787)                          (787)
Preferred stock dividends..............................       (506)                                                         (506)
                                                          --------        -------         -------        --------       --------
Balance at December 31, 2000...........................   $ 62,899        $63,019         $(7,589)       $(12,008)      $ 19,477
                                                          ========        =======         =======        ========       ========
</TABLE>


           See accompanying notes to consolidated financial statements


                                      F-7
<PAGE>   51



                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                  Year Ended December 31
                                                                                         ---------------------------------------
                                                                                            2000           1999           1998
                                                                                         ---------      ---------      ---------
<S>                                                                                      <C>            <C>            <C>
OPERATING ACTIVITIES
Net income .........................................................................     $   5,267      $   5,272      $   4,681
Adjustments to reconcile net income to net cash provided by operating
  activities:
   Amortization of deferred acquisition costs ......................................         6,419          4,580          2,658
   Deferral of acquisition costs ...................................................       (35,138)       (27,818)       (13,542)
   Deferred federal income taxes ...................................................           829          2,005            957
   Depreciation and amortization ...................................................         3,671          3,889          1,209
   Insurance policy liabilities ....................................................        16,337         14,530          6,400
   Net realized investment (gains) losses ..........................................         4,492            (78)          (353)
   Accrued investment income .......................................................        (1,194)        (1,541)        (1,451)
   Other ...........................................................................           252          2,014           (352)
                                                                                         ---------      ---------      ---------
          Net cash provided by operating activities ................................           935          2,853            207

INVESTING ACTIVITIES

Fixed maturity securities available for sale:
   Purchases .......................................................................      (290,117)      (236,969)      (261,744)
   Sales ...........................................................................       180,402        116,511        162,503
   Maturities, calls and redemptions ...............................................         7,466         19,006         32,570
Short-term investments, net ........................................................         2,487         (3,350)        44,460
Other investments, net .............................................................        (6,872)         2,270            320
Purchase of Savers Life Insurance Company, less cash acquired of $518 ..............            --             --        (18,039)
Purchase of Midwestern National Life Insurance Company of Ohio, less cash
   acquired of $1,026 ..............................................................            --             --        (13,104)
                                                                                         ---------      ---------      ---------
          Net cash used by investing activities ....................................      (106,634)      (102,532)       (53,034)

FINANCING ACTIVITIES
Borrowings, net of debt issuance costs of  $206 in 1998 ............................        11,000            300         11,794
Repayments on notes payable ........................................................       (14,000)          (800)        (3,141)
Premiums received on interest-sensitive annuities and other financial products
   credited to policyholder account balances, net of premiums ceded ................       196,489        165,750         81,858
Return of policyholder account balances on interest-sensitive annuities and other
   financial products ..............................................................       (89,183)       (75,981)       (52,934)
Issuance of Series A redeemable preferred stock ....................................            --             --          6,389
Proceeds from common and treasury stock sales ......................................            --             --            234
Issuance of common stock and warrants ..............................................           867          1,566         19,935
Purchase of common stock for treasury ..............................................          (787)          (582)        (1,702)
Dividends on preferred stock .......................................................          (506)          (506)          (180)
                                                                                         ---------      ---------      ---------
          Net cash provided by financing activities ................................       103,880         89,747         62,253
                                                                                         ---------      ---------      ---------
Net increase (decrease) in cash ....................................................        (1,819)        (9,932)         9,426
Cash at beginning of year ..........................................................         3,659         13,591          4,165
                                                                                         ---------      ---------      ---------
Cash at end of year ................................................................     $   1,840      $   3,659      $  13,591
                                                                                         =========      =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>   52



                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2000


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, 2000 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 accounting principles generally accepted in the United States
("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, 2000 and 1999 and for each of the three years in the period ended September
30, 2000, are included in the Company's consolidated balance sheets at December
31, 2000 and 1999 and for each of the three years in the period ended December
31, 2000.

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
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 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 ("U.S.")
government (although generally not by the full faith and credit of the U.S.
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.


                                      F-9
<PAGE>   53


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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 3.0% to 12.5% in 2000 and 3.0% to 12.3% in 1999.

         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 6.2% to 7.5%. Mortality is based upon various actuarial tables,
principally the 1965-1970 or the 1975-1980 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.


                                      F-10
<PAGE>   54


                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
operations 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 consolidated return for 1999 and
plan to file a consolidated return for 2000. SMC 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 0.5% 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.

Deferred 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 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 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 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.

         The Company reviews the recoverability of the carrying value of the
deferred 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.

Present Value of Future Profits

         Present value of future profits are 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 or the expected premium pattern over a period of
approximately 20 years.


                                      F-11
<PAGE>   55


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

Goodwill

         The excess of the cost to acquire purchased companies over the fair
value of net assets acquired ("goodwill") 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 $1.2 million and $.9 million at December 31, 2000 and 1999, respectively.
The Company continually monitors the 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.

Negative Goodwill

         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, was amortized into earnings
on a straight-line basis over a five year period. Negative goodwill was fully
amortized at December 31, 1998.

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.

Reclassifications

         Certain amounts in the 1999 and 1998 consolidated financial statements
and notes have been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on previously reported shareholders' equity or
net income in the periods presented.

Recently Issued Professional Accounting Standards

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (the Standard). The Standard requires companies to record
derivatives on the new balance sheet as assets and or liabilities measured at
fair value. The Company adopted the Standard on January 1, 2001. Adoption of the
Standard will be recorded as a cumulative effect of a change in accounting
principle and will not result in restatement of previously issued financial
statements. The adoption of the Standard is expected to have an immaterial
impact to net income. Additionally, its application may increase the volatility
of other income and expense.

2.       ACQUISITIONS

         On March 12, 1998, SMC acquired Savers Life Insurance Company ("Savers
Life"). Each of the 1.8 million 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.

         On October 30, 1998, SMC acquired Midwestern National Life Insurance
Company of Ohio ("Midwestern Life"). SMC issued .7 million shares of its common
stock valued at $4.6 million, increased its bank debt by $6.0 million on
restructured terms, 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


                                      F-12
<PAGE>   56

                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Life, respectively. SMC merged Savers Life and Midwestern Life into Standard
Life effective December 31, 1998, with Standard Life as the surviving entity.

3.       INVESTMENTS

         The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available for sale are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                             DECEMBER 31, 2000
                                                         -----------------------------------------------------------
                                                                            GROSS          GROSS
                                                         AMORTIZED       UNREALIZED      UNREALIZED           FAIR
                                                            COST            GAINS          LOSSES             VALUE
                                                         ---------       ----------      ----------          -------
<S>                                                      <C>             <C>             <C>                 <C>
Securities available for sale:
   Fixed maturity securities:
       United States Treasury securities and
          obligations of United States
          government agencies ..................          $ 18,098          $  140          $     9          $ 18,230
       Obligations of states and political
          subdivisions .........................             2,116              59               --             2,175
       Foreign government securities ...........             3,348              17              162             3,203
       Utilities ...............................            26,603              75            1,093            25,585
       Corporate bonds .........................           484,012           3,832           25,689           462,154
       Mortgaged-backed securities .............           202,890           1,905            2,405           202,390
       Redeemable preferred stock ..............             5,530              --              355             5,175
                                                          --------          ------          -------          --------
          Total fixed maturity securities ......           742,597           6,028           29,713           718,912
   Equity securities ...........................               538               4              180               362
                                                          --------          ------          -------          --------
       Total securities available for sale .....          $743,135          $6,032          $29,893          $719,274
                                                          ========          ======          =======          ========
</TABLE>



<TABLE>
<CAPTION>
                                                                       December 31, 1999
                                                      -----------------------------------------------------
                                                                       Gross        Gross
                                                      Amortized     Unrealized    Unrealized         Fair
                                                         Cost          Gains        Losses          Value
                                                      ---------     ----------    ----------       --------
<S>                                                   <C>           <C>           <C>              <C>
Securities available for sale:
   Fixed maturity securities:
       United States Treasury securities and
          obligations of United States
          government agencies ..................        $ 20,455        $  7        $   517        $ 19,945
       Obligations of states and political
          subdivisions .........................           3,997          50             87           3,960
       Foreign government securities ...........           3,489          50            274           3,265
       Utilities ...............................          29,068          --          2,284          26,784
       Corporate bonds .........................         479,332         308         32,658         446,982
       Mortgaged-backed securities .............         104,413          70          3,629         100,854
       Redeemable preferred stock ..............           5,530          --            413           5,117
                                                        --------        ----        -------        --------
          Total fixed maturity securities ......         646,284         485         39,862         606,907
   Equity securities ...........................             565           6            193             378
                                                        --------        ----        -------        --------
       Total securities available for sale .....        $646,849        $491        $40,055        $607,285
                                                        ========        ====        =======        ========
</TABLE>

         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



                                      F-13
<PAGE>   57


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



discounting expected future cash flows using a current market rate applicable to
the coupon rate, credit rating, and maturity of the investments.

3.       INVESTMENTS (CONTINUED)

         The amortized cost and estimated fair value of fixed maturity
securities at December 31, 2000 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.

<TABLE>
<CAPTION>
                                                    AMORTIZED           FAIR
                                                       COST             VALUE
                                                    ---------          --------
<S>                                                 <C>                <C>
Due in one year ...........................          $ 13,321          $ 13,329
Due after one year through five years .....           143,580           141,957
Due after five years through ten years ....           200,824           193,120
Due after ten years .......................           176,452           162,941
                                                     --------          --------
    Subtotal ..............................           534,177           511,347
Redeemable preferred stock ................             5,530             5,175
Mortgage-backed securities ................           202,890           202,390
                                                     --------          --------
    Total fixed maturity securities .......          $742,597          $718,912
                                                     ========          ========
</TABLE>

         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, 2000, 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):


<TABLE>
<CAPTION>
                                                   Year Ended December 31
                                          -----------------------------------------
                                           2000             1999             1998
                                          -------          -------          -------

<S>                                       <C>              <C>              <C>
Fixed maturity securities ..........      $48,623          $39,625          $29,852
Common stocks ......................           --               17               46
Mortgage loans on real estate ......          930              947              679
Policy loans .......................          925              960              654
Real estate ........................           30               33              135
Short-term investments and other ...          847            2,602            2,932
                                          -------          -------          -------
   Gross investment income .........       51,355           44,184           34,298
Less: investment expenses ..........          579              572              709
                                          -------          -------          -------
   Net investment income ...........      $50,776          $43,612          $33,589
                                          =======          =======          =======
</TABLE>

Net realized investment gains (losses) were attributable to the following (in
thousands):


<TABLE>
<CAPTION>
                                                                       Year Ended December 31
                                                            -------------------------------------------
                                                              2000              1999              1998
                                                            -------           -------           -------
<S>                                                         <C>               <C>               <C>
Fixed maturity securities available for sale:
   Gross realized gains ..........................          $ 1,545           $ 2,000           $ 2,570
   Gross realized losses .........................           (1,854)           (1,415)             (964)
   Other than temporary decline in fair value ....           (3,048)              (15)           (1,110)
                                                            -------           -------           -------
        Net ......................................           (3,357)              570               496
   Real estate ...................................               --                 9                --
   Other losses ..................................           (1,135)             (501)             (143)
                                                            -------           -------           -------
        Net realized investment gains (losses) ...          $(4,492)          $    78           $   353
                                                            =======           =======           =======
</TABLE>


                                      F-14
<PAGE>   58

                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



3.       INVESTMENTS (CONTINUED)

         Life insurance companies are required to maintain certain amounts of
assets with state or other regulatory authorities. At December 31, 2000, fixed
maturity securities of $7.9 million and cash and short-term investments of $.5
million were held on deposit by various state regulatory authorities in
compliance with statutory regulations. Additionally, fixed maturity securities
of $.7 million, short-term investments of $5.9 million and account assets of SMI
were held by a custodian bank approved by the Luxembourg regulatory authorities
to comply with local insurance laws.

         Comprehensive income excludes reclassification adjustments for net
realized investment gains (losses) after income taxes (benefits) of ($2.2)
million, $.4 million and $.3 million in 2000, 1999 and 1998, respectively. The
income tax rate used for comprehensive income is 34%.

4.       DEFERRED ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS

         The activity related to the deferred acquisition costs is summarized as
follows (in thousands):


<TABLE>
<CAPTION>
                                                                        Year Ended December 31
                                                                 --------------------------------------
                                                                   2000           1999           1998
                                                                 --------       --------       --------
<S>                                                              <C>            <C>            <C>
Balance, beginning of year ................................      $ 67,811       $ 32,946       $ 21,435
   Additions ..............................................        35,138         27,817         14,200
   Amortization ...........................................        (6,419)        (4,580)        (3,316)
   Adjustment relating to net unrealized (gain) loss on
       securities available for sale ......................        (4,675)        11,628            627
                                                                 --------       --------       --------
Balance, end of year ......................................      $ 91,855       $ 67,811       $ 32,946
                                                                 ========       ========       ========
</TABLE>

          The activity related to the present value of future profits is
summarized as follows (in thousands):


<TABLE>
<CAPTION>
                                                                         Year Ended December 31
                                                                 --------------------------------------
                                                                   2000           1999           1998
                                                                 --------       --------       --------
<S>                                                              <C>            <C>            <C>
Balance, beginning of year ................................      $ 30,688       $ 28,793       $ 20,537
   Amounts and adjustments related to acquisitions
        and disposals .....................................            --           (949)        10,401
   Interest accreted on unamortized balance ...............         3,472          3,890          4,223
   Amortization ...........................................        (6,226)        (6,517)        (6,088)
   Adjustments relating to net unrealized (gain) loss on
       securities available for sale ......................        (1,591)         5,471           (280)
                                                                 --------       --------       --------
Balance, end of year ......................................      $ 26,343       $ 30,688       $ 28,793
                                                                 ========       ========       ========
</TABLE>

         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, are expected to be between 8% and 10% in each of
the years 2001 through 2005. Future net amortization is based on the present
value of future profits at December 31, 2000 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, 2000,
ranged from 7.5% to 18%. The Company used discount rates of 13% and 15% to
calculate the present value of future profits of the Savers Life and Midwestern
Life acquisitions, respectively.


                                      F-15
<PAGE>   59


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



5.       NOTES PAYABLE

         Notes payable were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                 Interest     ------------------------
                                                                   Rate         2000           1999
                                                                 --------     --------       --------
<S>                                                              <C>          <C>            <C>
Borrowings under revolving credit agreements ..............        9.86%(1)   $ 20,500       $ 24,500
Senior subordinated notes .................................       10.00%        11,000         10,000
                                                                              $ 31,500       $ 34,500
</TABLE>

(1)      Current weighted average rate at December 31, 2000.

Borrowings Under Revolving Credit Agreements

         Standard Management has outstanding borrowings at December 31, 2000
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. 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 London Inter-Bank Offered
Rate ("LIBOR") plus 3.25%. The repayment schedule includes $3.2 million due
March 2001 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 $1.5 million, with no borrowings in
connection with this line of credit in 2000 or 1999.

Senior Subordinated Note

         On October 31, 2000, the Company issued a Senior Subordinated Note due
October 31, 2007 in the principal amount of $11 million. The note bears interest
equal to i) a fixed rate of 10% per annum; or ii) six month LIBOR plus 150 basis
points; whichever is higher. Interest payments are payable in cash semi-annually
on April 30 and October 31 of each year. The note may be prepaid in whole or in
part at the option of SMC commencing on November 1, 2001 at a redemption price
equal to 105% of the principal amount (plus accrued interest) and declining to
l00% of the principal amount (plus accrued interest) on November 1, 2005. The
note may be prepaid beginning November 1, 2001 at a redemption price equal to
l00% of the principal amount (plus accrued interest) under certain limited
circumstances. The note is subject to certain restrictions and covenants
substantially similar to those in the Amended Credit Agreement. The holder also
received a warrant to purchase 220,000 shares of the Company's common stock at a
purchase price of $4.00 per share for a period of seven years.

         The proceeds of the Senior Subordinated Note were used to repay the
Senior Subordinated Convertible Notes of $10 million at a redemption price of
105% of the principal balance plus accrued interest. The extraordinary loss of
$.4 million, net of tax, in 2000 reflects the early extinguishment of the Senior
Subordinated Convertible Notes. These notes were convertible at any time at the
option of the note holders into SMC common stock at the rate of $5.747 per share
or a total of 1,740,038 shares.

Interest Paid

         Cash paid for interest was $3.6 million, $3.4 million, and $2.7 million
in 2000, 1999 and 1998, respectively.


                                      F-16
<PAGE>   60




                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6.       INCOME TAXES

         The components of the federal income tax expense, applicable to pre-tax
income before extraordinary loss, were as follows (in thousands):



<TABLE>
<CAPTION>
                                                                        Year Ended December 31
                                                                 --------------------------------------
                                                                   2000           1999           1998
                                                                 --------       --------       --------

<S>                                                              <C>            <C>            <C>
Current taxes .............................................      $     --       $    151       $    673
Deferred taxes ............................................           778          1,975            957
                                                                 --------       --------       --------
                                                                 $    778       $  2,126       $  1,630
                                                                 ========       ========       ========
</TABLE>

         The effective tax rate on pre-tax income is lower than the statutory
corporate federal income tax rate as follows (in thousands):



<TABLE>
<CAPTION>
                                                                        Year Ended December 31
                                                                 --------------------------------------
                                                                   2000           1999           1998
                                                                 --------       --------       --------
<S>                                                              <C>            <C>            <C>
Federal income tax expense at statutory rates (34%) .......      $  2,177       $  2,515       $  2,146
Operating income in SMC consolidated return offset by NOL
    carryforwards .........................................        (1,152)          (219)           (83)
Amortization of negative goodwill .........................            --             --           (472)
Other items, net ..........................................          (247)          (170)            39
                                                                 --------       --------       --------
    Federal income tax expense ............................      $    778       $  2,126       $  1,630
                                                                 ========       ========       ========
Effective tax rate ........................................            12%            29%            26%
                                                                 ========       ========       ========
</TABLE>

         The Company recovered $.3 million, $.4 million and $1.7 million in
federal income taxes in 2000, 1999 and 1998, respectively, and paid federal
income taxes of $.1 million and $.7 million in 1999 and 1998, 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):


<TABLE>
<CAPTION>
                                                                             December 31
                                                                        -----------------------
                                                                          2000           1999
                                                                        --------       --------
<S>                                                                     <C>            <C>
Deferred income tax assets:
   Future policy benefits ........................................      $ 18,898       $ 15,867
   Unrealized loss on securities available for sale ..............        10,220         12,037
   Capital and net operating loss carryforwards ..................         3,042          5,659
   Other-net .....................................................         1,298          1,435
                                                                        --------       --------
       Gross deferred tax assets .................................        33,458         34,998
   Valuation allowance for deferred tax assets ...................        (5,653)        (7,858)
                                                                        --------       --------
       Deferred income tax assets, net of valuation allowance ....        27,805         27,140
Deferred income tax liabilities:
   Present value of future profits ...............................        (8,956)       (10,435)
   Deferred policy acquisition costs .............................       (23,246)       (17,054)
                                                                        --------       --------
       Total deferred income tax liabilities .....................       (32,202)       (27,489)
                                                                        --------       --------
   Net deferred income tax liabilities ...........................      $ (4,397)      $   (349)
                                                                        ========       ========
</TABLE>


                                      F-17
<PAGE>   61

                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 $1.6 million at December
31, 2000 with respect to deferred tax assets and net tax operating loss carry
forwards of acquired companies.

         As of December 31, 2000, Standard Management and its noninsurance
subsidiaries had consolidated net operating loss carryforwards of approximately
$6.3 million for tax return purposes, which expire from 2007 through 2018. These
carryforwards will only be available to reduce the taxable income of Standard
Management. At December 31, 2000, the Standard Life consolidated return had net
operating loss carryforwards of approximately $2.2 million which expire in 2010,
2012 and 2019. These carryforwards will only be available to reduce the taxable
income of the Standard Life consolidated return. At December 31, 2000, Premier
Life (Luxembourg) had accumulated corporate income tax loss carryforwards of
approximately $.4 million, all of which may be carried forward indefinitely.

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.

         The Company has authorized 130,000 shares of preferred stock 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). 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 11.765 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.

Common Stock

         The Company repurchased 240,000, 92,124, and 308,465 shares of Common
Stock for $.8 million, $.6 million, and $1.7 million in 2000, 1999 and 1998,
respectively under its stock repurchase program. At December 31, 2000, the
Company was authorized to purchase an additional 724,790 shares under this
program.

         THE FOLLOWING TABLE REPRESENTS OUTSTANDING WARRANTS TO PURCHASE COMMON
STOCK AS OF DECEMBER 31, 2000:

<TABLE>
<CAPTION>
                                                            EXERCISE                WARRANTS
             ISSUE DATE          EXPIRATION DATE              PRICE               OUTSTANDING
             --------------      ------------------         --------              -----------
             <S>                 <C>                        <C>                   <C>

             NOVEMBER 1995       NOVEMBER 2002               4.5238                  31,500
             JULY 1996           JULY 2003                   4.3750                  30,000
             APRIL 1997          APRIL 2004                  5.1250                  12,000
             JUNE 1998           JUNE 2001                   7.5000                  25,000
             AUGUST 1998         AUGUST 2005                 7.1250                  20,000
             OCTOBER 1998        OCTOBER 2001                8.0000                  75,000
             JANUARY 1999        JANUARY 2002                6.6250                  89,750
             JANUARY 2000        JANUARY 2003                4.8750                 166,500
             OCTOBER 2000        OCTOBER 2003                4.0000                  15,000
             OCTOBER 2000        OCTOBER 2007                4.0000                 220,000
                                                                                  ---------
                                                                                    684,750
                                                                                  =========
</TABLE>


                                      F-18
<PAGE>   62


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



7.       SHAREHOLDERS EQUITY (CONTINUED)

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:

<TABLE>
<CAPTION>
                                                                 2000                  1999                   1998
                                                              ----------            ----------             ---------
<S>                                                           <C>                   <C>                    <C>
Common Stock (Authorized - 20,000,000 shares):
     Balance, beginning of year                                9,038,134             8,802,313             5,752,499
         Issuance of common stock                                     --               235,821             3,049,814
                                                              ----------            ----------             ---------
     Balance, end of year                                      9,038,134             9,038,134             8,802,313
                                                              ==========            ==========             =========

Treasury Stock:
     Balance, beginning of year                               (1,252,978)           (1,160,854)             (876,009)
         Treasury stock acquired                                (240,000)              (92,124)             (308,465)
         Reissuance of treasury stock in connection
           with exercise of stock options                             --                    --                23,620
                                                              ----------            ----------            ----------
     Balance, end of year                                     (1,492,978)           (1,252,978)           (1,160,854)
                                                              ==========            ==========            ==========
</TABLE>


Unrealized Gain (Loss) on Securities

         The components of the balance sheet caption "Unrealized gain (loss) on
securities available for sale" in shareholders' equity are summarized as follows
(in thousands):


<TABLE>
<CAPTION>
                                                                                 December 31
                                                                           -------------------------
                                                                              2000            1999
                                                                           ---------       ---------
<S>                                                                        <C>             <C>
Fair value of securities available for sale .........................      $ 719,274       $ 607,285
Amortized cost of securities available for sale .....................        743,135         646,849
                                                                           ---------       ---------
   Gross unrealized gain (loss) on securities available for sale ....        (23,861)        (39,564)
Adjustments for:
   Deferred acquisition costs .......................................          5,852          10,527
   Present value of future profits ..................................          3,389           4,982
   Deferred federal income taxes ....................................          4,977           8,196
                                                                           ---------       ---------
       Net unrealized gain (loss) on securities available for sale ..      $  (9,643)      $ (15,859)
                                                                           =========       =========
</TABLE>

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 75,820 shares are available for future issuance for the
Plan as of December 31, 2000.

         The provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", 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):


                                      F-19
<PAGE>   63



                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



8.       STOCK OPTION PLAN (CONTINUED)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31
                                                                           ---------------------------------------
                                                                              2000           1999           1998
                                                                           ---------      ---------      ---------

<S>                                                                        <C>            <C>            <C>
Net income ..........................................................      $   4,328      $   3,640      $   3,094
Earnings per share ..................................................            .49            .41            .43
Earnings per share, assuming dilution ...............................            .49            .41            .43
</TABLE>

         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:


<TABLE>
<CAPTION>
                                            2000                1999                1998
                                           ------              -------             -------
<S>                                        <C>                 <C>                 <C>

Risk-free interest rates..............        6.2%                5.6%                5.6%
Volatility factors....................         .57                 .59                 .55
Weighted average expected life........     7 years             7 years             7 years
</TABLE>


         The Black-Scholes option-valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. 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, 2000, 1999 and 1998 is as follows:



<TABLE>
<CAPTION>
                                                      2000                        1999                        1998
                                            ------------------------   --------------------------   --------------------------
                                                           WEIGHTED-                    Weighted-                    Weighted-
                                                            AVERAGE                      Average                      Average
                                                           EXERCISE                     Exercise                     Exercise
                                             SHARES          PRICE       Shares           Price      Shares            Price
                                            ---------      ---------   ----------       ---------   ---------        ---------
<S>                                         <C>            <C>         <C>              <C>         <C>              <C>
Options outstanding, beginning of year      2,411,882        $6.10      1,891,287         $6.15     1,916,820          $6.08
Exercised..............................          (525)        4.17        (19,163)         4.45       (97,988)          5.23
Granted................................         7,500         4.58        633,300          6.15        79,950           6.94
Expired or forfeited...................       (20,599)        5.98        (93,542)         7.91        (7,495)          6.75
                                            ---------                  ----------                   ---------
Options outstanding, end of year.......     2,398,258         6.09      2,411,882          6.10     1,891,287           6.15
                                            =========                  ==========                   =========
Options exercisable, end of year.......     2,190,658                   1,973,799                   1,664,153
                                            =========                  ==========                   =========
Weighted-average fair value of options
   granted during the year.............     $    2.93                  $     3.94                   $    4.42
                                            =========                  ==========                   =========
</TABLE>


                                      F-20
<PAGE>   64


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



8.       STOCK OPTION PLAN (CONTINUED)

         Information with respect to stock options outstanding at December 31,
2000 is as follows:



<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                      --------------------------------------------          --------------------------------
                                        WEIGHTED-
                                          AVERAGE         WEIGHTED-                                WEIGHTED-
      RANGE OF                           REMAINING         AVERAGE                                  AVERAGE
      EXERCISE           NUMBER         CONTRACTUAL       EXERCISE             NUMBER               EXERCISE
       PRICES         OUTSTANDING       LIFE (YEARS)        PRICE           EXERCISABLE              PRICE
      --------        -----------       ------------      ---------         -----------            ----------
      <S>             <C>               <C>               <C>               <C>                    <C>
        $3-5             338,025             5             $  4.43             334,025              $  4.43
         5-7           1,587,850             7                6.07           1,384,250                 6.06
         7-9             454,533             5                7.28             454,533                 7.28
         9-11             17,850             3                9.43              17,850                 9.43
                       ---------                                             ---------
                       2,398,258                                             2,190,658
                       =========                                             =========
</TABLE>

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, and
provide additional capacity for future growth. 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 $4.8 million, $23.3
million and $17.0 million in 2000, 1999 and 1998, respectively. Reinsurance
ceded has reduced benefits and claims incurred by $6.3 million, $2.7 million and
$10.5 million in 2000, 1999 and 1998, 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, 2000 the Company's largest annuity reinsurer, which is
rated "A+" (Superior) by A.M. Best, represented $22.7 million, or 56.6% of total
reinsurance recoverable.

         On July 1, 1998, Savers Life's Medicare supplement business was sold to
Oxford Life Insurance Company ("Oxford Life") through a quota share reinsurance
agreement. Under the terms of the reinsurance agreement, Standard Life
administered the Medicare supplement business through October 1, 1999 and
received 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.
Effective December 1, 1999, the assumption of the business was effected by
Oxford Life.

10.      RELATED PARTY TRANSACTIONS

         On October 28, 1997, SMC made an interest-free loan to an officer and
director of SMC. The principal balance of the loan was $775,000 at December 31,
2000 and 1999, respectively. 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.

         Certain officers and directors have 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 guaranteed.


                                      F-21
<PAGE>   65



                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, $1.1 million, and $1.0 million in 2000, 1999 and 1998, 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, 2000, are as follows (in thousands):

<TABLE>
                <S>                                            <C>
                2001   ................................        $   729
                2002   ................................            227
                2003   ................................            196
                2004   ................................            101
                2005   ................................            101
                                                               -------
                TOTAL MINIMUM LEASE PAYMENTS...........        $ 1,354
                                                               =======
</TABLE>


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 1,852,880 shares at December 31, 2000.

Real Estate

         Real estate at December 31, 2000 includes $5.6 million for construction
in progress of the Company's new home office.


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 that would entitle him to receive certain benefits
following a termination of his employment with SMC under certain circumstances.
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 was argued by SMC as a
complete defense to all claims asserted by the former officer. On January 12,
2001, the trial court ruled on motions for summary judgment filed by both SMC
and the former officer. The court ruled that the officer was entitled to a
severance benefit in the amount of $.4 million plus interest thereon calculated
as of July 15, 1997. The court dismissed all of the former officer's other
claims, including his request for additional damages up to $3.3 million. On
February 12, 2001, the former officer filed a notice of appeal of the trial
court's ruling as to the dismissal of all additional damages, and the former
officer is in the process of perfecting the appeal. Currently, SMC plans to
cross-appeal the $.4 million in damages awarded, as well as aggressively pursue
its counterclaim which is still pending in the trial court. Management believes
that the conclusion of such litigation will not have a material adverse effect
on SMC's consolidated financial conditions.

          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.


                                      F-22
<PAGE>   66


                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 $43.9 million and $43.7 million at December 31,
2000 and 1999, respectively. Consolidated net income of the Company's life
insurance subsidiaries on a statutory basis, after elimination of subsidiaries'
intercompany accounts was $1.5 million, $.9 million, and $1.7 million for the
years ended December 31, 2000, 1999 and 1998, respectively. Minimum statutory
capital and surplus required by the Indiana Insurance Code was $.5 million as of
December 31, 2000.

         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, 2000, the RBC Ratios of
Standard Life and Dixie Life were both at least two times greater than the
levels at which company action is required.

         The statutory capital and surplus for Premier Life (Luxembourg) was
$6.5 million and $6.9 million at fiscal years ended 2000 and 1999, respectively,
and minimum capital and surplus under local insurance regulations was $2.2
million and $2.6 million at fiscal years ended 2000 and 1999, respectively. The
statutory capital and surplus for Premier Life (Bermuda) was $3.8 million and
$2.2 million at fiscal years ended 2000 and 1999, respectively, and minimum
capital and surplus under local insurance regulations was $.3 million at fiscal
years ended 2000 and 1999. 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 2000 and 1999 due to
accumulated losses.

         The National Association of Insurance Commissioners ("NAIC") has
codified statutory accounting practices ("Codification") to be implemented
January 1, 2001. Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Management believes that the impact of codification will not be
material to the Company's statutory-basis financial statements.

         SMC loaned $27.0 million 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, 2000 and 1999
of $27.0 million is classified as a part of capital and surplus of Standard
Life. The interest and principal payments are subject to quarterly approval by
the IDOI 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 IDOI.

         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 2000, Standard Life paid
dividends of $2.0 million to SMC. During 2001, 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 ten days
prior to payment.


                                      F-23
<PAGE>   67


                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



14.      OPERATIONS BY BUSINESS SEGMENT


         The Company's reportable segments are as follows:

         Domestic Operations includes revenues earned and expenses incurred from
United States operations and includes deposits and/or income from annuity
products (primarily flexible premium deferred annuities ("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):



<TABLE>
<CAPTION>
                                                                              Year Ended December 31
                                                                     ----------------------------------------
                                                                        2000            1999           1998
                                                                     ----------      ----------      --------
<S>                                                                  <C>             <C>             <C>
Revenues:
  Domestic ....................................................      $   67,796      $   68,477      $ 58,055
  International ...............................................           8,267           4,486         5,220
                                                                     ----------      ----------      --------
      Consolidated Revenues ...................................      $   76,063      $   72,963      $ 63,275
                                                                     ==========      ==========      ========

Net Investment Income:
  Domestic ....................................................      $   42,675      $   44,376      $ 33,721
  International ...............................................             498             445           500
                                                                     ----------      ----------      --------
      Consolidated Net Investment Income ......................      $   43,173      $   44,821      $ 34,221
                                                                     ==========      ==========      ========
Interest Credited to Interest Sensitive Annuities and Other
  Financial Products (All Domestic) ...........................      $   21,080      $   25,728      $ 19,775
                                                                     ==========      ==========      ========
Pre-tax Income:
  Domestic ....................................................      $    3,276      $    6,132      $  4,053
  International ...............................................           3,128           1,266         2,258
                                                                     ----------      ----------      --------
      Consolidated Pre-tax Income .............................      $    6,404      $    7,398      $  6,311
                                                                     ==========      ==========      ========

Assets:
   Domestic ...................................................      $  921,727      $  811,653      $750,683
   International ..............................................         548,730         339,324       205,467
                                                                     ----------      ----------      --------
       Consolidated Assets ....................................      $1,470,457      $1,150,977      $956,150
                                                                     ==========      ==========      ========
</TABLE>

         Revenues by product have not been disclosed because it is impracticable
for the Company to provide this information. Although premiums and deposits
collected by product are available on a statutory basis, it is impracticable to
disclose revenues by product on a GAAP basis because the Company does not
allocate certain components of revenues such as net investment income, net
realized investment gains (losses) and fee and other income to its products.

15.      DERIVATIVE FINANCIAL INSTRUMENTS

         Standard Life offers equity-indexed annuity products that 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 and Dow Jones Industrial Average Call Options (collectively known as
"the options") in an effort to hedge potential increases to policyholder
benefits resulting from increases in the S&P 500 and Dow Jones Indexes to which
the product's return is linked. The cost of the options is included in the
pricing of the equity-indexed annuity products. The changes in the value of the
options are reflected in net investment income and fluctuate in relation to
changes in interest credited to policyholder account balances for these
annuities. Premiums paid to purchase these instruments are deferred and
amortized over their term.


                                      F-24
<PAGE>   68

                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



15.      DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

         Total revenues include ($7.6) million, $1.2 million and $.6 million in
2000, 1999 and 1998, respectively, related to changes in the fair value of the
options. Such investment income (loss) was substantially offset by amounts
credited to policyholder account balances. The fair value of the options was
$1.9 million, $5.3 million and $1.8 million at December 31, 2000, 1999 and 1998,
respectively. The notional amounts at December 31, 2000 and 1999 were $123.4
million and $69.2 million, respectively.

         If the counterparties 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, 2000, all
of the counterparties were rated "A" or higher by Standard & Poor's.


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, 2000 and 1999. 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, 2000 and 1999.
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.


                                      F-25
<PAGE>   69



                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



16.      FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         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, 2000 and 1999 (in thousands). Refer to Note 3 for additional information
relating to the fair value of investments.


<TABLE>
<CAPTION>
                                                                                  December 31
                                                          --------------------------------------------------------------
                                                                   2000                                1999
                                                          --------------------------          --------------------------
                                                            Fair            Carrying           Fair             Carrying
                                                           Value             Amount            Value             Amount
                                                          --------          --------          --------          --------
<S>                                                       <C>               <C>               <C>               <C>
Assets:
   Investments:
       Securities available for sale:
          Fixed maturity securities .................     $718,912          $718,912          $606,907          $606,907
          Equity securities .........................          362               362               378               378
       Mortgage loans on real estate ................        4,931             4,778             8,392             8,131
       Policy loans .................................       13,591            14,280            13,357            14,033
       Other invested assets ........................          776               776               845               845
       Short-term investments .......................       12,489            12,489            14,976            14,976
   Cash .............................................        1,840             1,840             3,659             3,659
   Assets held in separate accounts .................      520,439           520,439           319,973           319,973
Liabilities:
   Insurance liabilities for investment contracts ...      695,475           695,475           595,388           595,388
   Notes payable ....................................       31,500            31,500            34,500            34,500
   Liabilities related to separate accounts .........      520,439           520,439           319,973           319,973
</TABLE>


17.      EARNINGS PER SHARE

         A reconciliation of income and shares used to calculate basic and
diluted earnings per share is as follows (dollars in thousands):



<TABLE>
<CAPTION>
                                                                                        2000              1999              1998
                                                                                    -----------       -----------       -----------
<S>                                                                                 <C>               <C>               <C>
Income:
   Net Income ................................................................      $     5,267       $     5,272       $     4,681
   Preferred stock dividends .................................................             (506)             (506)             (180)
                                                                                    -----------       -----------       -----------
   Income available to common shareholders for basic earnings per share ......            4,761             4,766             4,501
   Effect of dilutive securities:
       Preferred stock dividends .............................................               --                --               180
       Interest on subordinated convertible debt .............................              833             1,000             1,000
                                                                                    -----------       -----------       -----------
   Income available to common shareholders for diluted earnings per share ....      $     5,594       $     5,766       $     5,681
                                                                                    ===========       ===========       ===========

Shares:

     Weighted average shares outstanding for basic earnings per share ........        7,727,344         7,583,086         6,846,335
     Effect of dilutive securities:
           Stock options .....................................................            6,081           136,656           263,636
           Stock warrants ....................................................              492            93,951           211,989
           Subordinated convertible debt .....................................        1,450,032         1,740,038         1,740,038
           Series A convertible preferred stock ..............................               --                --           301,765
                                                                                    -----------       -----------       -----------
           Dilutive potential common shares ..................................        1,456,605         1,970,645         2,517,428
                                                                                    -----------       -----------       -----------

     Weighted average shares outstanding for diluted earnings per share ......        9,183,949         9,553,731         9,363,763
                                                                                    ===========       ===========       ===========
</TABLE>


                                      F-26
<PAGE>   70

                STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



18.      QUARTERLY FINANCIAL DATA (UNAUDITED) (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.



<TABLE>
<CAPTION>
                                                                     2000 QUARTERS
                                                 -----------------------------------------------------
                                                   FIRST         SECOND          THIRD         FOURTH
                                                 --------       --------       --------       --------

<S>                                              <C>            <C>            <C>            <C>
Total revenues ............................      $ 19,201       $ 17,617       $ 20,528       $ 18,717
                                                 ========       ========       ========       ========
Components of net income:
   Operating income .......................      $  1,628       $  1,523       $  1,976       $  2,206
   Net realized investment losses .........          (263)          (515)          (220)          (709)
                                                 --------       --------       --------       --------

   Income before extraordinary loss .......         1,365          1,008          1,756          1,497
   Extraordinary loss .....................            --             --             --            359
                                                 --------       --------       --------       --------
   Net Income .............................      $  1,365       $  1,008       $  1,756       $  1,138
                                                 ========       ========       ========       ========

Net income per common share ...............      $    .18       $    .13       $    .23       $    .14
                                                 ========       ========       ========       ========
Net income per common share, assuming
   dilution ...............................      $    .17       $    .13       $    .20       $    .16
                                                 ========       ========       ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                                     1999 Quarters
                                                 -----------------------------------------------------
                                                   First         Second          Third         Fourth
                                                 --------       --------       --------       --------

<S>                                              <C>            <C>            <C>            <C>
Total revenues ............................      $ 16,941       $ 17,341       $ 16,770       $ 21,911
                                                 ========       ========       ========       ========
Components of net income:
   Operating income .......................      $  1,275       $  1,397       $  1,468       $  1,081
   Net realized investment gains (losses) .            22              4           (164)           189
                                                 --------       --------       --------       --------

   Net income .............................      $  1,297       $  1,401       $  1,304       $  1,270
                                                 ========       ========       ========       ========

Net income per common share ...............      $    .17       $    .19       $    .17       $    .17
                                                 ========       ========       ========       ========
Net income per common share, assuming
   dilution ...............................      $    .16       $    .17       $    .16       $    .16
                                                 ========       ========       ========       ========
</TABLE>

         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.


                                      F-27
<PAGE>   71



          SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                         STANDARD MANAGEMENT CORPORATION
                                (PARENT COMPANY)

                            CONDENSED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                                                       December 31
                                                                                                -------------------------
                                                                                                   2000            1999
                                                                                                ---------       ---------
<S>                                                                                             <C>             <C>

                                     ASSETS

Investments:
      Investment in subsidiaries .........................................................      $  71,728       $  64,120
      Surplus debenture due from Standard Life ...........................................         27,000          27,000
      Fixed maturity securities, at fair value (amortized cost: $900 in 2000 and 1999) ...            775             775
      Equity securities available for sale, at fair value (cost: $35 in 2000 and $20
        in 1999) .........................................................................              8              35
      Real estate ........................................................................            123             124
      Notes receivable from officers and directors .......................................            776             845
                                                                                                ---------       ---------
         Total investments ...............................................................        100,410          92,899

Cash .....................................................................................            305             641
Property and equipment, less depreciation of $1,518 in 2000 and $1,033 in 1999 ...........          1,148           1,097
Note receivable from affiliate ...........................................................          2,858           2,858
Amounts receivable from subsidiaries .....................................................          3,868           2,654
Other assets .............................................................................              9           1,390
                                                                                                ---------       ---------
         Total assets ....................................................................      $ 108,598       $ 101,539
                                                                                                =========       =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Notes payable .........................................................................      $  31,500       $  34,500
   Note payable to affiliate .............................................................          2,858           2,858
   Amounts due to subsidiaries ...........................................................          2,414           2,134
   Other liabilities .....................................................................          2,397           2,157
                                                                                                ---------       ---------
         Total liabilities ...............................................................         39,169          41,649

Class A convertible redeemable preferred stock, par value $100 per share; ................          6,530           6,530

Shareholders' Equity:
   Preferred stock, no par value .........................................................             --              --
                                                                                                                   63,019
   Common stock and additional paid-in capital, no par value .............................         62,152
   Treasury stock, at cost ...............................................................         (7,589)         (6,802)
   Accumulated other comprehensive income (loss):
       Unrealized gain (loss) on securities of subsidiaries ..............................         (9,640)        (15,844)
       Foreign currency translation adjustment of subsidiaries ...........................         (2,368)           (862)
   Retained earnings .....................................................................         19,477          14,716
                                                                                                ---------       ---------
         Total shareholders' equity ......................................................         62,899          53,360
                                                                                                ---------       ---------
         Total liabilities and shareholders' equity ......................................      $ 108,598       $ 101,539
                                                                                                =========       =========
</TABLE>

            See accompanying notes to condensed financial statements.


                                      F-28
<PAGE>   72



    SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)

                         STANDARD MANAGEMENT CORPORATION
                                (PARENT COMPANY)

                         CONDENSED STATEMENTS OF INCOME
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                        Year Ended December 31
                                                                -----------------------------------
                                                                  2000          1999          1998
                                                                -------       -------       -------
<S>                                                             <C>           <C>           <C>
 Revenues:
   Net investment loss ...................................      $   (31)      $   (23)      $   (26)
   Interest income from subsidiaries .....................        3,209         2,837         1,709
   Net realized investment losses ........................         (820)         (250)         (100)
   Other income ..........................................          440           149           118
   Rental income from subsidiaries .......................        1,100         1,040           995
   Management fees from subsidiaries .....................        3,850         3,575         2,850
                                                                -------       -------       -------
      Total revenues .....................................        7,748         7,328         5,546

Expenses:
   Other operating expenses ..............................        4,487         4,763         3,134
   Interest expense and financing costs ..................        3,416         3,380         2,850
   Interest expense on note payable to affiliate .........          179           142           160
                                                                -------       -------       -------
      Total expenses .....................................        8,082         8,285         6,144
                                                                -------       -------       -------

Loss before federal income taxes, equity in earnings
   of consolidated subsidiaries, extraordinary loss and
   preferred stock dividends .............................         (334)         (957)         (598)
Federal income tax expense (benefit) .....................       (1,145)         (417)           30
                                                                -------       -------       -------

Income (loss) before equity in earnings of consolidated
   subsidiaries, extraordinary loss and
   preferred stock dividends .............................          811          (540)         (628)
Equity in earnings of consolidated subsidiaries ..........        4,815         5,812         5,309
                                                                -------       -------       -------
Income before extraordinary loss and
    preferred stock dividends ............................        5,626         5,272         4,681
Extraordinary loss .......................................          359            --            --
                                                                -------       -------       -------
Net income ...............................................        5,267         5,272         4,681
Preferred stock dividends ................................          506           506           180
                                                                -------       -------       -------
Earnings available to common shareholders ................      $ 4,761       $ 4,766       $ 4,501
                                                                =======       =======       =======
</TABLE>

         See accompanying notes to condensed financial statements.


                                      F-29
<PAGE>   73



    SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)

                         STANDARD MANAGEMENT CORPORATION
                                (PARENT COMPANY)

                       CONDENSED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                                             Year Ended December 31
                                                                                      -------------------------------------
                                                                                         2000          1999           1998
                                                                                      --------       -------       --------
<S>                                                                                   <C>            <C>           <C>
OPERATING ACTIVITIES
Net income .....................................................................      $  5,267       $ 5,272       $  4,681
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
   Depreciation and amortization ...............................................           650           645            536
   Equity in earnings of subsidiaries ..........................................        (4,815)       (5,812)        (5,309)
   Accrued interest payable ....................................................          (440)         (203)           197
   Dividends ...................................................................         2,500            --             --
   Other .......................................................................           351           733           (608)
                                                                                      --------       -------       --------
      Net cash provided (used) by operating activities .........................         3,513           635           (503)

INVESTING ACTIVITIES
Investments, net ...............................................................            98           (46)        (1,685)
Purchase of property and equipment, net ........................................        (1,004)         (866)          (385)
Purchase of Savers Life, less cash acquired
   of $518 .....................................................................            --            --        (18,039)
Purchase of Midwestern Life, less cash acquired of $1,026 ......................            --            --        (13,104)
                                                                                      --------       -------       --------
      Net cash used by investing activities ....................................          (906)         (912)       (33,213)

FINANCING ACTIVITIES

Borrowings, net of debt issuance costs of $206 in 1998 .........................        11,000           300         11,794
Repayments on notes payable ....................................................       (14,000)         (800)        (3,141)
Issuance of convertible preferred stock, net of issuance costs of
   $141 in 1998 ................................................................            --            --          6,389
Proceeds from common and treasury stock sales ..................................            --            --            234
Issuance of common stock and warrants ..........................................           867         1,566         19,935
Purchase of common stock for treasury ..........................................          (304)         (582)        (1,702)
Dividends on preferred stock ...................................................          (506)         (506)          (180)
                                                                                      --------       -------       --------
      Net cash provided (used) by financing activities .........................        (2,943)          (22)        33,329
                                                                                      --------       -------       --------
Net decrease in cash ...........................................................          (336)         (299)          (387)
Cash at beginning of year ......................................................           641           940          1,327
                                                                                      --------       -------       --------
Cash at end of year ............................................................      $    305       $   641       $    940
                                                                                      ========       =======       ========
</TABLE>


         See accompanying notes to condensed financial statements.


                                      F-30
<PAGE>   74




     SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                         STANDARD MANAGEMENT CORPORATION
                                (PARENT COMPANY)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                DECEMBER 31, 2000


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 $2.5 million of dividends from subsidiaries in 2000 and
zero in 1999 and 1998, respectively.


                                      F-31
<PAGE>   75



                           SCHEDULE IV -- REINSURANCE

                         STANDARD MANAGEMENT CORPORATION

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                                                      Percentage
                                                                      Ceded to        Assumed                          of Amount
                                                     Gross              Other        from Other                         Assumed
                                                     Amount           Companies       Companies        Net Amount       to Net
                                                   ----------        ----------      ----------        ----------     ----------
<S>                                                <C>               <C>             <C>               <C>            <C>
YEAR ENDED DECEMBER 31, 2000
LIFE INSURANCE IN FORCE ........................   $1,739,302        $  787,590        $ 90,854        $1,042,566         8.71%
                                                   ==========        ==========        ========        ==========         ====
PREMIUMS:
   LIFE INSURANCE AND ANNUITIES ................   $   17,630        $    4,783        $    937        $   13,784
   ACCIDENT AND HEALTH INSURANCE ...............          128                12              --               116
      SUPPLEMENTARY CONTRACT AND OTHER FUNDS
      ON DEPOSIT ...............................        1,570                --              --             1,570
                                                   ----------        ----------        --------        ----------
         TOTAL PREMIUMS ........................   $   19,328        $    4,795        $    937        $   15,470
                                                   ==========        ==========        ========        ==========

YEAR ENDED DECEMBER 31, 1999
Life insurance in force ........................   $2,079,568        $  837,155        $125,120        $1,367,533         9.15%
                                                   ==========        ==========        ========        ==========         ====
Premiums:
   Life insurance and annuities ................   $   16,489        $    4,908        $    904        $   12,485
   Accident and health insurance ...............       18,710            18,365              --               345
   Supplementary contract and other funds
      on deposit ...............................          260                --              --               260
                                                   ----------        ----------        --------        ----------
         Total premiums ........................   $   35,459        $   23,273        $    904        $   13,090
                                                   ==========        ==========        ========        ==========

YEAR ENDED DECEMBER 31, 1998
Life insurance in force ........................   $2,388,428        $1,117,393        $132,129        $1,403,164         9.42%
                                                   ==========        ==========        ========        ==========         ====
Premiums:
   Life insurance and annuities ................   $   12,169        $    4,705        $    991        $    8,455
   Accident and health insurance ...............       18,333            12,341              --             5,992
   Supplementary contract and other funds
      on deposit ...............................           32                --              --                32
                                                   ----------        ----------        --------        ----------
         Total premiums ........................   $   30,534        $   17,046        $    991        $   14,479
                                                   ==========        ==========        ========        ==========
</TABLE>


                                      F-32