STANDARD MANAGEMENT CORP - 10-Q Quarterly Report

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes o No þ

As of August 14, 2003, the Registrant had 8,069,089 shares of Common Stock outstanding.


		Page Number

Part I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets — June 30, 2003 (Unaudited) and December 31, 2002 (Audited)		3
	Consolidated Statements of Income — For the Six Months Ended June 30, 2003 and 2002 (Unaudited)		4
	Consolidated Statements of Shareholders’ Equity — For the Six Months Ended June 30, 2003 and 2002 (Unaudited)		6
	Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2003 and 2002 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32
Item 4.	Controls and Procedures		32
Part II.	OTHER INFORMATION:
Item 1.	Legal Proceedings		33
Item 2.	Changes in Securities and Use of Proceeds		33
Item 4.	Submission of Matters to a Vote of Securities Holders		33
Item 6.	Exhibits and Reports on Form 8-K		33
	SIGNATURES		34


				June 30			December 31
				2003			2002

				(Unaudited)			(Audited)
ASSETS
Investments:
	Securities available for sale:
		Fixed maturity securities at fair value (amortized cost $1,561,242 in 2003 and $1,350,961 in 2002)		$	1,608,387		$	1,379,792
	Mortgage loans on real estate				4,672			6,348
	Policy loans				12,470			12,722
	Real estate				1,006			1,252
	Equity-indexed call options				11,882			3,904
	Short-term investments				650			713
	Other invested assets				981			1,076

		Total investments			1,640,048			1,405,807
Cash and cash equivalents					14,450			60,197
Accrued investment income					16,252			16,255
Amounts due and recoverable from reinsurers					37,341			38,951
Deferred policy acquisition costs					157,513			153,954
Present value of future profits					11,442			14,949
Goodwill					10,910			6,417
Property and equipment (less accumulated depreciation of $4,485 in 2003 and $3,903 in 2002)					12,837			12,832
Other assets					8,024			5,785

		Total assets		$	1,908,817		$	1,715,147

			LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
	Insurance policy liabilities			$	1,744,486		$	1,570,348
	Accrued expenses and other payables				6,754			5,561
	Obligations of capital lease				618			804
	Mortgage payable				6,881			6,757
	Notes payable				15,250			13,000
	Current income taxes				1,246			3,811
	Deferred federal income taxes				10,817			6,432

		Total liabilities			1,786,052			1,606,713

Company-obligated trust preferred securities					20,700			20,700
Shareholders’ Equity:
	Preferred stock, no par value:
		Authorized 870,000 shares; none issued and outstanding			—			—
	Common stock and additional paid in capital, no par value:
		Authorized 20,000,000 shares; issued 9,572,167 in 2003 and 9,369,752 in 2002			67,856			63,857
	Treasury stock, at cost, 1,515,078 shares in 2003 and 2002				(7,671	)		(7,671	)
	Accumulated other comprehensive income				19,029			11,739
	Retained earnings				22,851			19,809

		Total shareholders’ equity			102,065			87,734

		Total liabilities and shareholders’ equity		$	1,908,817		$	1,715,147


			Three Months Ended					Six Months Ended
			June 30					June 30

			2003		2002			2003		2002

Revenues:
	Premium income		$	2,424	$	1,838		$	4,301	$	4,222
	Net investment income			20,623		18,493			41,769		35,644
	Call option gains (losses)			6,087		(5,598	)		2,989		(6,991	)
	Net realized investment gains (losses)			8,347		(8,624	)		18,274		(8,898	)
	Policy income			2,740		1,946			4,973		3,723
	Fees and other income			167		266			516		1,082

		Total revenues from continuing operations		40,388		8,321			72,822		28,782
Benefits and expenses:
	Benefits and claims			3,246		2,482			5,600		4,774
	Interest credited to interest-sensitive annuities and other financial products			21,123		10,240			32,774		18,133
	Amortization			8,010		2,140			17,889		6,128
	Commission expenses			6		(174	)		74		403
	Other operating expenses			5,466		2,390			9,876		5,115
	Interest expense and financing costs			988		1,123			2,013		2,234

		Total benefits and expenses from continuing operations		38,839		18,201			68,226		36,787
Income (loss) before federal income taxes				1,549		(9,880	)		4,596		(8,005	)
Federal income tax expense (benefit)				517		(6,017	)		1,554		(5,633	)

Income (loss) from continuing operations				1,032		(3,863	)		3,042		(2,372	)
Discontinued operations:
	Income from discontinued operations (less taxes of $0, $285, $0, and $550)			—		556			—		1,068
	Gain from the sale of discontinued operations (less taxes of $0, $2,169, $0 and $2,169)			—		4,210			—		4,210

Total discontinued operations				—		4,766			—		5,278
Cumulative effect of accounting change for goodwill impairment				—		—			—		(1,212	)

Net income			$	1,032	$	903		$	3,042	$	1,694

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, Dollars in Thousands, Except Per Share Amounts)


			Three Months Ended					Six Months Ended
			June 30					June 30

			2003		2002			2003		2002

Earnings per share – basic:
	Income (loss) from continuing operations		$	.13	$	(.50	)	$	.38	$	(.31	)
	Discontinued operations:
		Income from discontinued operations		—		.07			—		.14
		Gain from the sale of discontinued operations		—		.55			—		.55

	Total discontinued operations			—		.62			—		.69

Cumulative effect of accounting change for goodwill impairment				—		—			—		(.16	)

Net income			$	.13	$	.12		$	.38	$	.22

Earnings per share – diluted:
	Income (loss) from continuing operations		$	.13	$	(.48	)	$	.38	$	(.29	)
	Discontinued operations:
		Income from discontinued operations		—		.07			—		.13
		Gain from the sale of discontinued operations		—		.52			—		.52

	Total discontinued operations			—		.59			—		.65

Cumulative effect of accounting change for goodwill impairment				—		—			—		(.15	)

Net income			$	.13	$	.11		$	.38	$	.21

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited, Dollars in Thousands)


							Common
							stock and						Accumulated
							additional						other
							paid in			Treasury			comprehensive			Retained
				Total			capital			stock			income (loss)			earnings

Balance at January 1, 2002				$	70,189		$	63,011		$	(7,589	)	$	(6,172	)	$	20,939
	Comprehensive loss:
		Net income			1,694												1,694
		Other comprehensive income:
			Change in unrealized gain (loss) on securities, net taxes (benefits) of $1,542		2,885									2,885
		Change in foreign currency translation			(521	)								(521	)

			Other comprehensive income		2,364
			Comprehensive income		4,058
	Issuance of common stock and warrants				837			837
	Exercise of common stock options				(251	)		(251	)
	Preferred stock dividends				(5	)					(5	)

Balance at June 30, 2002				$	74,828		$	63,597		$	(7,594	)	$	(3,808	)	$	22,633

Balance at January 1, 2003				$	87,734		$	63,857		$	(7,671	)	$	11,739		$	19,809
Comprehensive income:
	Net income				3,042												3,042
	Other comprehensive income:
		Change in unrealized gain (loss) on securities, net taxes (benefits) of $3,854			7,290									7,290

			Other comprehensive income		7,290
			Comprehensive income		10,332
	Issuance of common stock and warrants				3,999			3,999

Balance at June 30, 2003				$	102,065		$	67,856		$	(7,671	)	$	19,029		$	22,851


			Six Months Ended
			June 30

			2003			2002

Operating Activities
Net income			$	3,042		$	1,694
Net income from discontinued operations				—			(1,068	)
Gain from the sale of discontinued operations				—			(4,210	)
Adjustments to reconcile net income to net cash provided by operating activities:
	Amortization of deferred acquisition costs			17,889			5,161
	Deferral of acquisition costs			(25,124	)		(31,312	)
	Federal income taxes			(4,377	)		(7,339	)
	Depreciation and amortization			683			1,691
	Insurance policy liabilities			27,084			30,189
	Net realized investment (gains) losses			(18,274	)		8,898
	Net accrual of bond discount			3,014			727
	Accrued investment income			3			(3,581	)
	Cumulative effect of accounting change for goodwill impairment			—			1,212
	Other			517			(431	)

		Net cash provided by operating activities		4,457			1,631

Investing Activities
Fixed maturity securities available for sale:
	Purchases			(1,032,774	)		(518,024	)
	Sales			695,099			259,195
	Maturities, calls and redemptions			142,692			6,500
Short-term investments, net				(4,924	)		6,982
Other investments, net				1,861			(1,709	)

		Net cash used by investing activities		(198,046	)		(247,056	)

Financing Activities
Borrowings (repayments) on notes payable				2,167			(666	)
Premiums received on interest-sensitive and other financial products credited to policyholder account balances, net of premiums ceded				250,016			307,016
Return of policyholder account balances on interest-sensitive annuities and other financial products				(104,341	)		(72,491	)
Issuance of common stock and warrants				—			530

	Net cash provided by financing activities			147,842			234,389

Net increase (decrease) in cash and cash equivalents				(45,747	)		(11,036	)
Cash and cash equivalents at beginning of period				60,197			18,144

Cash and cash equivalents at end of period			$	14,450		$	7,108

STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following notes should be read along with the notes to the consolidated financial statements included in the 2002 Form 10-K of Standard Management Corporation, (“we”, “our”, “us”, “Standard Management” or the “Company”).

Standard Management is a holding company that a) develops, markets and/or administers annuity and life insurance products and b) distributes pharmacy goods and services through its health subsidiary.

Our unaudited, consolidated financial statements reflect normal recurring adjustments that are necessary to present fairly Standard Management’s financial position and results of operations on a basis consistent with that of our prior audited consolidated financial statements. As permitted by rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). We have also reclassified certain amounts from the prior periods to conform to the 2003 presentation. These reclassifications have no effect on net income or shareholders’ equity. Results for interim periods are not necessarily indicative of the results that may be expected for a full year.

Effective September 17, 2002 we concluded the sale of our International Operations (discontinued operations). We have included in our consolidated statements of income for the period ended June 30, 2002 the results from discontinued operations.

Effective March 25, 2003, we acquired for 200,000 shares of our common stock, Medical Care & Outcomes, LLC, (“MCO”). MCO provides an innovative tool for our health services segment to acquire real-time patient data on compliance and therapeutic outcomes following an office visit or hospital stay. The purchase price included contingent consideration, based on a targeted closing sales price of our common stock on the anniversary date of the acquisition over each of the next four years. The contingent consideration has been recognized as additional paid in capital in our June 30, 2003 consolidated financial statements. The purchase was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill amount of $3.9 million. Under purchase accounting, we 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.

Effective June 11, 2003, we acquired from Roche Diagnostics Corporation the business assets of MyDoc.com. MyDoc.com is the first virtual healthcare service where board-certified, state-licensed physicians are available online, 24 hours per day / 7 days per week to diagnose and treat common ailments and provide prescriptions. The purchase price was $645,000 and additional contingent consideration of up to $500,000 may be paid, based on a percentage of gross revenue generated from the MyDoc.com service. The contingent consideration has not been recognized in the June 30, 2003 consolidated financial statements and would be recorded in the future periods upon achievements of the gross revenue targets. The purchase was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill amount of $553,000. Under purchase accounting, we 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.

We revised our operating segments as of January 1, 2003. The prior period operating segments have been reclassified to reflect the current period classification. The former Domestic Operations segment is categorized into the following three continuing operating segments.

Our Financial Services segment consists of revenues earned and expenses incurred from our insurance operations, particularly Standard Life Insurance Company of Indiana (“Standard Life”) and Dixie National Life Insurance Company (“Dixie Life”). Our primary insurance products include deferred annuities, single premium immediate annuities and equity-indexed annuities. The profitability of this segment is primarily a function of net investment spread (the difference between the investment income earned on our investments less the interest we credit to our policyholders), persistency of our in force business, mortality experience and management of our operating expenses.

Our Health Services segment, which was formed in 2002, and is conducted primarily through our subsidiary U.S. Health Services Corporation, develops and distributes retail and third party reimbursed pharmaceutical products and services through direct-to-consumer as well as institutional channels. Our primary customer base consists of consumers, academic institutions, skilled nursing facilities, assisted living facilities, home health care agencies and mental health facilities. The profitability of this segment is primarily a function of gross margin on sales (the difference between sales and cost of sales) and management of our operating expenses.

Our Other Services segment consists of revenues and expenses primarily related to corporate operations and financing costs.

Our International Operations (discontinued operations) were sold in the last half of 2002. The 2002 results included revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on our deposits from unit-linked assurance products. The profitability of this segment primarily was dependent on the amount of separate account assets under management, the management fee charged on those assets and management of our operating expenses.

The nature of the insurance business requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. For example, we use significant estimates and assumptions in calculating deferred policy acquisition costs, present value of future profits, goodwill, future policy benefits and deferred federal income taxes. If future actual experience differs from these estimates and assumptions, our financial statements could be materially affected.

The activity related to goodwill is summarized as follows (dollars in thousands):

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 Accounting for Certain Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150) which establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. We are required to adopt the provisions of SFAS No. 150 in the third quarter of 2003 and management is currently evaluating the impact of the adoption, with an emphasis on the application to our Trust Preferred Securities.

Our mortgage payable, notes payable and trust preferred securities were as follows (dollars in thousands):

The components of the net unrealized gain on securities available for sale in shareholders’ equity are summarized as follows (dollars in thousands):


			June 30			December 31
			2003			2002

Fair value of securities available for sale			$	1,608,387		$	1,379,792
Amortized cost of securities available for sale				1,561,242			1,350,961

		Gross unrealized gain on securities available for sale		47,145			28,831
Adjustments for:
	Deferred policy acquisition costs			(11,407	)		(6,942	)
	Present value of future profits			(6,831	)		(4,113	)
	Deferred federal income tax benefits			(9,929	)		(6,075	)
	Other			51			38

		Net unrealized gain on securities available for sale	$	19,029		$	11,739

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


		Three Months Ended					Six Months Ended
		June 30					June 30

		2003		2002			2003		2002

Income (loss):
Income (loss) from continuing operations		$	1,032		($3,863	)	$	3,042		($2,372	)
Income from discontinued operations			—		4,766			—		5,278
Cumulative effect of accounting change for goodwill impairment			—		—			—		(1,212	)

Net income – basic earnings per share			1,032		903			3,042		1,694

Net income – diluted earnings per share		$	1,032	$	903		$	3,042	$	1,694

Shares:
Weighted average shares outstanding for basic earnings per share			8,057,089		7,613,479			7,963,694		7,610,705
Effect of dilutive securities:
	Stock options		75,422		292,351			40,365		198,052
	Stock warrants		32,959		258,574			28,695		207,503

	Dilutive potential common shares		108,381		550,925			69,060		405,555

Weighted average shares outstanding for diluted earnings per share			8,165,470		8,164,404			8,032,754		8,016,260

Effective June 12, 2002, our shareholders approved our 2002 Stock Incentive Plan that authorizes the granting of options to employees, directors and consultants of the Company of up to 990,000 shares of our common stock at a price not less than market value on the date the option is granted. The number of shares of stock available for issuance pursuant to the Plan is automatically increased on the first trading day of each calendar year beginning January 1, 2003, by an amount equal to 3% of the shares of stock outstanding on the trading day immediately preceding January 1. Options may not be granted under the 2002 Stock Incentive Plan on a date that is more than ten years from the date of its adoption. The options may become exercisable immediately or over a period of time. Any shares subject to an option which for any reason expires or is terminated unexercised may again be subject to an option under the Plan. The 2002 Stock Incentive Plan also permits granting of stock appreciation rights and restricted stock awards. During the six months ended June 30, 2003, we granted options to purchase 605,000 shares of common stock at a weighted average exercise price of $3.93 per share.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, was issued in December 2002. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to require more prominent disclosure in both annual and interim financial statements. Adoption of SFAS No. 148 will not impact our financial position or results of operation. SFAS No. 123, as amended by SFAS No. 148, 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. We have elected to continue our practice of recognizing compensation expense using the intrinsic value based method of accounting and to provide the required pro forma information. The compensation cost based on fair value at the grant date, which is consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, would result in pro forma net income and pro forma earnings per share of the following for the three and six months ended June 30 (in thousands, except per share amounts):


		Three Months Ended				Six Months Ended
		June 30				June 30

		2003		2002		2003		2002

Reported net income		$	1,032	$	903	$	3,042	$	1,694
Add: Stock-based employee compensation expense included in reported net income			—		—		—		—
Less: Total stock-based employee compensation expense determined under fair value based method for all grants			205		41		249		82

Pro forma net income		$	827	$	862	$	2,793	$	1,612

Earnings per share:
	Basic – as reported	$	.13	$	.12	$	.38	$	.22
	Basic – pro forma		.10		.11		.35		.21
	Diluted – as reported		.13		.11		.38		.21
	Diluted – pro forma		.10		.11		.35		.20

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the material factors affecting the results of operations and the significant changes in balance sheet items. Notes to the consolidated financial statements included in this report and the notes to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2002 should be read in conjunction with this Form 10-Q.

Comparison of the Three Month and Six Month Periods Ended June 30, 2003 and June 30, 2002:

The following table summarizes the results of our operations (dollars in thousands):


	Three Months Ended					Six Months Ended
	June 30					June 30

	2003		2002			2003		2002

Income (loss) from continuing operations	$	1,032	$	(3,863	)	$	3,042	$	(2,372	)
Discontinued operations:
Operating income from discontinued operations (less taxes of $0, $285, $0 and $550)	$	—	$	556		$	—	$	1,068
Gain from the sale of discontinued operations (less taxes of $0 and $2,169, $0 and $2,169)		—		4,210			—		4,210

Income from discontinued operations		—		4,766			—		5,278

Cumulative effect of accounting change for goodwill impairment		—		—			—		(1,212	)

Net income	$	1,032	$	903		$	3,042	$	1,694

For the quarter ended June 30, 2003, income from continuing operations was $1.0 million, or $.13 per diluted share, compared to a loss of $3.9 million, or $.48 per diluted share for the second quarter of 2002.

Net income for the current quarter end was $3.9 million, or $.47 per diluted share, compared to a $3.9 million net loss or $.48 per diluted share for the comparable prior year quarter. The current period net income included net realized investment gains of $3.0 million, or $.36 per diluted share, while the comparable prior year quarter included net realized investment losses of $5.7 million, or $.70 per diluted share. The current quarter as compared to the prior year quarter was negatively affected by reduced spread income of $.16 per diluted share due to the decline in the net investment income yield, which has declined faster than we were able to reduce credited rates, and increased legal expenses of $.02 per diluted share. The prior year quarter was negatively affected by a net $.20 per diluted share for reserve strengthening and was positively affected by $.17 per diluted share from a lower effective tax rate resulting from the use of tax loss carryforwards.

Current period net loss per diluted share was $.11, compared to a $.01 loss in the comparable prior year period. The current period loss included additional expenses associated with the continued development of U.S. Health Services operating platform and infrastructure.

Current period net loss per diluted share was $.23, compared to the prior period net income of $.01 per diluted share. The prior period was positively impacted by $.12 per diluted share from a lower effective tax rate resulting from the use of tax loss carryforwards.


			Three Months Ended						Six Months Ended
			June 30						June 30

			2003			2002			2003			2002

			(Dollars in thousands)						(Dollars in thousands)
Premiums and Deposits Collected:
	Traditional life		$	2,424		$	1,838		$	4,301		$	4,222

	Deferred annuities			41,162			82,366			90,430			170,997
	Single premium immediate annuities and other deposits			46,721			44,777			85,230			81,210
	Equity-indexed annuities			38,300			32,048			74,058			54,507
	Universal and interest-sensitive life			146			142			298			302

		Subtotal – interest-sensitive and other financial products		126,329			159,333			250,016			307,016

	Total premiums and deposits collected		$	128,753		$	161,171		$	254,317		$	311,238

Statement of Operations:
Premium income			$	2,424		$	1,838		$	4,301		$	4,222
Policy income				2,740			1,946			4,973			3,723

	Total policy related income			5,164			3,784			9,274			7,945
Net investment income				20,587			18,534			41,731			35,679
Call option losses				6,087			(5,598	)		2,989			(6,991	)
Fees and other income				21			(190	)		136			(84	)

	Total revenues			31,859			16,530			54,130			36,549
Benefits and claims				3,246			2,482			5,600			4,774
Interest credited to interest-sensitive annuities and other financial products				21,123			10,240			32,774			18,133
Amortization				4,173			2,118			8,196			6,106
Commission expenses				(42	)		(203	)		(45	)		160
Other operating expenses				1,968			1,338			3,888			2,811

	Total benefits and expenses			30,468			15,975			50,413			31,984

	Operating income before income taxes			1,391			555			3,717			4,565
Federal income tax expense (benefit)				472			(1,210	)		1,265			151

	Operating income after income taxes			919			1,767			2,452			4,414
Net realized investment gains (losses), net of related amortization and income taxes				2,976			(5,692	)		5,664			(5,873	)
Cumulative effect of accounting change for goodwill impairment				—			—			—			(1,212	)

	Net income (loss)		$	3,895		$	(3,925	)	$	8,116		$	(2,671	)

General: Our financial services segment consists of revenues earned and expenses incurred from our insurance operations. Our primary products include deferred annuities, single premium immediate annuities and equity-indexed annuities. The profitability of this segment is primarily a function of net investment spread (the difference between the investment income earned on our investments less the interest we credit to our policyholders), persistency of our in force business, mortality experience and management of our operating expenses.

Premium deposits consist of deposits from our annuity products and other financial products that do not incorporate significant mortality features. For GAAP purposes, these premium deposits are not shown as premium income in the income statement. A change in premium deposits in a single period does not directly cause our operating income to change, although continued increases or decreases in premiums may affect the growth rate of assets on which investment spreads are earned.

•

Premium deposits for the second quarter of 2003 decreased $33.0 million or 21%, to $126.3 million, compared to the second quarter of 2002. Deferred annuities decreased $41.2 million or 50%, to $41.2 million. Single premium immediate annuities increased $1.9 million, or 4%, to $46.7 million. Deposits from equity-indexed annuities increased $6.3 million or 20%, to $38.3 million.

•

Premium deposits for the first six months of 2003 decreased $57.0 million or 19%, to $250.0 million, compared to the first six months of 2002. Deferred annuities decreased $80.6 million or 47%, to $90.4 million. Single premium immediate annuities increased $4.0 million, or 5%, to $85.2 million. Deposits from equity-indexed annuities increased $19.6 million or 36%, to $74.1 million.

Premium deposits decreased in the 2003 period primarily due to management actions to preserve spread income in response to market conditions. Management actions included reducing crediting rates, lowering agent commissions, and temporarily suspending sales of selected products.

Premium income consists of premiums earned from 1) traditional life products and 2) annuity products that incorporate significant mortality features.

•

Premium income for the second quarter of 2003 increased by $.6 million or 32%, to $2.4 million compared to the second quarter of 2002 as a result of a decline in premiums ceded to reinsurers.

•

Premium income for the first six months of 2003 increased by $.1 million or 2%, to $4.3 million compared to the first six months of 2002 as a result of a decline in premiums ceded to reinsurers.

Policy income represents 1) mortality income and administrative fees earned on universal life products and 2) surrender income earned on terminated universal life and annuity policies.

•

Policy income for the second quarter of 2003 increased $.8 million or 41%, to $2.7 million compared to the second quarter of 2002.

•

Policy income for the first six months of 2003 increased $1.3 million or 34%, to $5.0 million compared to the first six months of 2002.

Policy income increased due to an expected increase in surrenders in response to management actions taken on crediting rates on some of our deferred annuity products. The increase in annuity surrenders generates greater surrender income from early termination charges associated with these products.

Net investment income includes interest earned on invested assets which fluctuates with changes in 1) the amount of average invested assets supporting insurance liabilities and 2) the average yield earned on those invested assets.

•

Net investment income for the second quarter of 2003 increased by $2.1 million or 11%, to $20.6 million compared to the second quarter of 2002. Net investment income increased as a result of a $393.2 million or 35%, increase in the weighted average invested assets for the period, which was partially offset by a decrease in the net investment yields earned on average invested assets of 5.38% for the second quarter of 2003 compared to 6.60% for the second quarter 2002. The decline in net investment yields is due primarily to the timing of investing new premium deposits in assets which currently earn lower yields than the portfolio yield.

•

Net investment income for the first six months of 2003 increased by $6.1 million or 17%, to $41.7 million compared to the first six months of 2002. Net investment income increased as a result of a $407.8 million or 39%, increase in the weighted average invested assets for the period, which was partially offset by a decrease in the net investment yields earned on average invested assets of 5.61% for the first six months of 2003 compared to 6.71% for the first six months 2002. The decline in net investment yields is due primarily to the timing of investing new premium deposits in assets which currently earn lower yields than the portfolio yield.

See also “Call option income” and “Interest credited to interest sensitive annuities and other financial products” for information regarding the impact of our equity-indexed products.

Call option income relates to equity-indexed products that 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 fluctuates from period to period and are substantially offset by amounts credited to policyholder account balances.

•

Call option income for the second quarter of 2003 increased by $11.7 million or 209%, to $6.1 million compared to the second quarter of 2002.

•

Call option income for the first six months of 2003 increased by $10.0 million or 143%, to $3.0 million compared to the first six months of 2002.

Call option income for the first six months of 2003 resulted from changes in the market value of our call options due to changes in the S&P 500 Index and the DJIA Index.

Fees and other income consists of fee income related to servicing unaffiliated blocks of business and experience refunds.

•

Fees and other income increased $.2 million to $21,000 primarily due to an increase in mortality associated with experience refunds.

•

Fees and other income increased $.2 million to $.1 million primarily due to an increase in mortality associated with experience refunds.

Benefits and claims include 1) mortality experience, 2) benefits from other policies that incorporate significant mortality features and 3) changes in future policy reserves. Throughout our history, we have experienced periods of higher and lower benefit claims. This volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claims experience tend to offset periods of lower claim experience.

•

Benefits and claims for the second quarter of 2003 increased $.8 million or 31%, to $3.2 million compared to the second quarter of 2002.

•

Benefits and claims for the first six months of 2003 increased $.8 million or 17%, to $5.6 million compared to the first six months of 2002.

Benefits and claims were higher in 2003 primarily due to increased death claims and annuity benefits for our in-force life policies and single-premium immediate annuities.

Interest credited to interest sensitive annuities and other financial products represents interest credited to insurance liabilities of the deferred annuities, single premium immediate annuities, equity-indexed annuities and other financial products. This expense fluctuates with changes in 1) the average interest sensitive insurance liabilities, 2) the average credited rate on those liabilities, 3) the market value fluctuations of call options and 4) the impact of SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities.

•

During the second quarter of 2003, interest credited increased $10.9 million or 106%, to $21.1 million compared to the second quarter of 2002. This increase is primarily due to an $11.7 million increase in the change in market value of insurance policy liabilities supporting equity indexed annuity products. The growth in average interest sensitive liabilities of $422.2 million or 39%, compared to the second quarter of 2002, also contributed to the increase in credited interest.

•

The weighted average credited rates for the second quarter of 2003 and 2002 were 3.95% and 5.39%, respectively. The decline in average credited rates is due to rate reductions taken by management to maintain spread income over the same period.

•

During the first six months of 2003, interest credited increased $14.6 million or 81%, to $32.8 million compared to the first six months of 2002. This increase is primarily due to a $10.0 million of increase in the market value of insurance policy liabilities supporting our equity indexed annuity products. The growth in average interest sensitive liabilities of $440.8 million or 44%, compared to the first six months of 2002, also contributed to the increase in credited interest.

•

The weighted average credited rates for the first six months of 2003 and 2002 were 4.00% and 4.95%, respectively. The decline in average credited rates is due to rate reductions taken by management to maintain spread income over the same period.

Amortization includes 1) amortization related to the present value of our policies purchased from our acquired insurance business and 2) amortization of deferred acquisition costs related to capitalized costs of our insurance business sold.

•

Amortization for the second quarter of 2003 was $4.2 million, an increase of $2.1 million or 97% compared to the second quarter of 2002. The increase in amortization primarily relates to the effects of reduced spread income and the remainder relates to a $.8 million impact of SFAS No. 133.

•

Amortization for the first six months of 2003 was $8.2 million, an increase of $2.1 million or 34% compared to the first six months of 2002. The increase in amortization primarily relates to the effects of reduced spread income and is partially offset by a $.1 million decrease due to the impact of SFAS No. 133.

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

•

Other operating expenses for the second quarter of 2003 increased $.6 million or 47%, to $2.0 million compared to the second quarter of 2002. Other operating expenses increased due to increased marketing costs and increased legal costs for non-material proceedings in the normal course of business involving claims under insurance policies or other contracts. Favorable dispositions of several claims and proceedings occurred during the current quarter resulting in increased legal expenses.

•

Other operating expenses for the first six months of 2003 increased $1.1 million or 38%, to $3.9 million compared to the first six months of 2002. Other operating expenses increased due to increased marketing costs and increased legal costs for non-material proceedings in the normal course of business involving claims under insurance policies or other contracts. Favorable dispositions of several claims and proceedings occurred during the first six months of 2003 resulting in increased legal expenses. These items were offset by a decrease in salary expense resulting from realigning personnel between business segments.

See also “Other operating expenses” in the other services segment for corresponding increase in salary expense.

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 present value of future profits.

•

Net realized investment gains, net of related amortization, were $3.0 million in the second quarter of 2003 compared to net realized investment losses of $(5.7) million in the second quarter of 2002, largely resulting from a strategy to realize tax basis capital loss carryforwards. Net realized investment gains for the second quarter of 2003 include an other-than-temporary writedown of $.5 million for certain fixed maturity securities.

•

Net realized investment gains, net of related amortization, were $5.7 million in the first six months of 2003 compared to net realized investment losses of $(5.8) million in the first six months of 2002, largely resulting from a strategy to realize tax basis capital loss carryforwards. Net realized investment gains for the first six months of 2003 include an other-than-temporary writedown of $1.7 million for certain fixed maturity securities.

•

Approximately 98% of our fixed maturity securities are classified as investment grade at June 30, 2003.

•

Federal income tax expense increased $1.6 million or 139%, to $.5 million compared to the second quarter of 2002. This increase is due to a higher effective tax rate of 34% in 2003. In the 2002 period there was a lower effective tax rate resulting from the utilization of net operating loss carryforwards of $1.4 million.

•

Federal income tax expense increased $1.1 million or 732%, to $1.3 million compared to the six months of 2002. This increase is due to a higher effective tax rate of 34% in 2003. In the 2002 period there was a lower effective tax rate resulting from the utilization of net operating loss carryforwards of $1.4 million.


				Three Months Ended						Six Months Ended
				June 30						June 30

				2003			2002			2003			2002

				(Dollars in thousands)						(Dollars in thousands)
Gross Margin on Sales:
	Sales			$	739		$	21		$	1,431		$	43

	Cost of Goods Sold				669			19			1,242			32
	Fulfillment costs:
		Processing costs			270			—			471			—
		Shipping costs			22			—			48			—

			Total cost of sales		961			19			1,761			32

	Gross margin on sales			$	(222	)	$	2		$	(330	)	$	11

Statement of Operations:
Gross margin on sales				$	(222	)	$	2		$	(330	)	$	11
Other income					24			—			37			—

	Total gross margin and other income				(198	)		2			(293	)		11
Marketing and sales expenses					88			—			210			—
Commission expenses					12			—			34			—
Other operating expenses					1,094			57			1,688			70
Interest expense and financing costs					7			8			15			8

	Total expenses				1,201			65			1,947			78

	Loss before income taxes				(1,399	)		(63	)		(2,240	)		(67	)
Federal income tax benefit					(475	)		(21	)		(761	)		(23	)

	Net loss			$	(924	)	$	(42	)	$	(1,479	)	$	(44	)

General: Our Health Services segment consists of revenues earned and expenses incurred from our pharmaceutical operations. Our primary customer base consists of consumers, academic institutions and mental health facilities. The profitability of this segment is primarily a function of gross margin on sales (the difference between sales and cost of sales and fulfillment costs) and management of our operating expenses.

•

Net loss for the second quarter of 2003 increased by $.9 million to $.9 million compared to the second quarter of 2002.

•

Net loss for the first six months of 2003 increased by $1.4 million to $1.4 million compared to the first six months of 2002.

Net loss in 2003 periods is due to additional expenses associated with the continued development of the Health Services segment's operating platform and infrastructure since its organization in 2002.


		Three Months Ended						Six Months Ended
		June 30						June 30

		2003			2002			2003			2002

		(Dollars in thousands)						(Dollars in thousands)

Statement of Operations:
Net investment income		$	36		$	(41	)	$	38		$	(35	)
Commission income			339			451			657			1,143
Fees and other income			5			3			16			12

	Total revenues		380			413			711			1,120
Commission expenses			36			29			85			243
Other operating expenses			2,316			1,009			4,090			2,256
Interest expense and financing costs			981			1,123			1,998			2,226

	Total expenses		3,333			2,161			6,173			4,725

	Loss before income taxes		(2,953	)		(1,748	)		(5,462	)		(3,605	)
Federal income tax benefit			(1,014	)		(1,852	)		(1,867	)		(2,736	)

	Net income (loss)	$	(1,939	)	$	104		$	(3,595	)	$	(869	)

General: Our Other Services segment consists of revenues and expenses incurred primarily related to corporate operations and financing costs.

Commission income consists of fee income related to servicing unaffiliated blocks of business.

•

Commission income decreased $.1 million or 25%, to $.3 million compared to the second quarter of 2002. Commission income decreased due to a change in the product mix administrated through our marketing services.

•

Commission income decreased $.5 million or 43%, to $.7 million compared to the first six months of 2002. Commission income decreased due to a change in the product mix administrated through our marketing services.

Commission expenses represent commission expenses related to servicing unaffiliated blocks of business.

•

Commission expenses increased $6,000 or 24%, to $36,000 compared to the second quarter of 2002. Commission expense increased due to a change in product mix administrated through our marketing services.

•

Commission expenses decreased $.2 million or 65%, to $85,000 compared to the first six months of 2002. Commission expense decreased due to a change in product mix administrated through our marketing services.

Other operating expenses consist of corporate operating expenses, including salaries.

•

Other operating expenses increased $1.3 million or 130%, to $2.3 million compared to the second quarter of 2002. Operating expenses increased primarily due to salary expense resulting from realigning personnel between segments.

•

Other operating expenses increased $1.8 million or 81%, to $4.1 million compared to the first six months of 2002. Other operating expenses increased primarily due to salary expense resulting from realigning personnel between segments.

See also “Other operating expenses” in the Financial Services segment for the corresponding decrease.

Interest expense and financing costs represents interest, deferred debt costs, and distributions for the Trust Preferred securities issued by the company.

•

Interest expense and financing costs decreased $.1 million or 13%, to $1.0 million compared to the second quarter of 2002. This decrease is due to lower interest rates.

•

Interest expense and financing costs decreased $.2 million or 10%, to $2.0 million compared to the first six months of 2002. This decrease is due to lower interest rates.

•

Federal income tax benefit decreased $.8 million or 45%, to $1.0 million compared to the second quarter of 2002. This decrease is due to a higher effective tax rate of 34% in 2003. In the prior period there was a lower effective tax rate resulting from the utilization of net operating loss carryforwards of $1.0 million.

•

Federal income tax benefit decreased $.9 million or 32%, to $1.8 million compared to the first six months of 2002. This decrease is due to a higher effective tax rate of 34% in 2003. In the prior period there was a lower effective tax rate resulting from the utilization of net operating loss carryforwards of $1.0 million.


		Three Months Ended					Six Months Ended
		June 30					June 30

		2003		2002			2003		2002

		(Dollars in thousands)					(Dollars in thousands)
Statement of Operations:
Premium income		$	—	$	4		$	—	$	18
Net investment income			—		22			—		103
Separate account fees			—		1,688			—		3,569

	Total revenues		—		1,714			—		3,690
Benefits and claims			—		(246	)		—		(186	)
Amortization			—		133			—		272
Commission expenses			—		43			—		97
Other operating expenses			—		943			—		1,889

	Total benefits and expenses		—		873			—		2,072

	Income before income taxes		—		841			—		1,618
Federal income benefit expense			—		285			—		550

	Income before gain on sale of discontinued operations		—		556			—		1,068
Gain from the sale of discontinued operations (less taxes of $0 and $2,169)			—		4,210			—		4,210

	Net income	$	—	$	4,766		$	—	$	5,278

General: Our International Operations (discontinued operations) were sold in the last half of 2002. The 2002 results included revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on our deposits from unit-linked assurance products. The profitability of this segment primarily was dependant on the amount of separate account assets under management, the management fee charged on those assets and management of our operating expenses.

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

•

Net investment income for the second quarter of 2002 was $22,000. Corporate assets averaged $8.0 million for the second quarter of 2002 and primarily consist of cash and short-term investments.

•

The net investment yields earned on average invested assets were 2.60% for the second quarter of 2002.

•

Net investment income for the first six months of 2002 was $.1 million. Corporate assets averaged $7.9 million for the first six months of 2002 and primarily consist of cash and short-term investments.

•

The net investment yields earned on average invested assets were 1.10% for the period ending June 30, 2002.

Fees from separate accounts represent the net fees earned on our unit-linked assurance products. The fees include asset based administrative fees, premium based administrative fees and the amortization of front end loads (deferred revenue) into income. Asset based fees fluctuate in relation to separate account assets, and premium based fees fluctuate in relation to premium collections for certain products. Deferred revenue amortization fluctuates subject to the amortization rules of SFAS No. 97.

•

Fees from separate accounts for the second quarter of 2002 were $1.7 million. Separate account assets averaged $426 million for the second quarter of 2002.

•

Fees from separate accounts for the first six months of 2002 were $3.6 million. Separate account assets averaged $420 million for the six months of 2002.

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

•

Commission expenses for the second quarter of 2002 were $43,000. Due to the nature of our business, most incurred commissions are deferred.

•

Commission expenses for the first six months of 2002 were $.1 million. Due to the nature of our business, most incurred commissions are deferred.

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

•

Other operating expenses for the first six months of 2002 were $1.9 million.

Foreign currency translation for the first six months of 2002 was impacted by the strengthening and weakening of the United States dollar relative to foreign currencies, primarily the Euro. The impact of these translations has been quantified on fees from separate accounts and amortization.

•

Gain from the sale of discontinued operations was $4.2 million due to the sale of the portfolio of Premier’s business in Bermuda in 2002.

Standard Management is a financial and health services holding company whose liquidity requirements are met through payments received from our subsidiaries. These payments include 1) surplus debenture interest, 2) dividends, 3) management fees, 4) equipment rental fees, 5) lease income and 6) allocation of taxes through a tax sharing agreement, all of which are subject to restrictions under applicable insurance laws and are used to pay our operating expenses and meet our 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.

We anticipate that available cash from our existing working capital, surplus debenture interest, dividends, management fees, equipment rental fees, lease income and tax sharing payments will be more than adequate to meet our anticipated parent company cash requirements for 2003. The following describes our potential sources of cash in 2003.

Surplus Debenture Interest: We loaned $27.0 million to Standard Life pursuant to unsecured surplus debenture agreements (“Surplus Debentures”), which requires Standard Life to make quarterly interest payments at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. The interest and principal payments are subject to quarterly approval by the Indiana Department of Insurance, depending upon satisfaction of certain financial tests relating to levels of Standard Life’s capital and surplus and general approval of the Commissioner of the Indiana Department of Insurance. We currently anticipate that these quarterly approvals will be granted. Assuming the approvals are granted and the July 1, 2003 interest rate of 6.00% continues, we expect to receive interest income of $1.7 million from the Surplus Debentures in 2003.

Dividends paid from Standard Life are limited by laws applicable to insurance companies. As an Indiana domiciled insurance company, Standard Life may pay a dividend or distribution from its surplus profits, without the prior approval of the Commissioner of the Indiana Department of Insurance, if the dividend or distribution, together with all other dividends and distributions paid within the preceding twelve months, does not exceed the greater of 1) net gain from operations or 2) 10% of surplus, in each case as shown in its preceding annual statutory financial statements. In 2002, we did not receive dividends from our insurance subsidiaries. In 2003, we could receive dividends of approximately $5.6 million from Standard Life, without regulatory approval; however, payment of dividends will require approval from SCOR Life U.S. Insurance Company, a reinsurer of Standard Life.

Management Fees: Pursuant to a management services agreement, Standard Life paid $3.0 million during 2002 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. In addition, Dixie Life paid Standard Life $1.1 million in 2002 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. In 2003, we expect to receive management fees of $3.6 million from Standard Life.

Equipment Rental Fees: In 2002, we charged subsidiaries $1.1 million for the use of our equipment. In 2003, we expect to receive $1.1 million of equipment rental fees from Standard Life.

Lease Income: Effective January 1, 2002, we entered into a lease agreement with Standard Life whereby Standard Life will lease approximately 43,000 square feet of our corporate headquarters located in Indianapolis. In 2003, we expect to receive lease income of $.8 million from Standard Life.

Tax Sharing Payments: Effective January 1, 2000, we entered into a tax sharing agreement with Savers Marketing and Standard Management International that allocates the consolidated federal income tax liability. During 2002, Savers Marketing paid $.1 million and Standard Management International paid $.6 million in accordance with this agreement. Standard Management International terminated its participation in this agreement with the sale of our International Operations in the last half of 2002. We do not expect tax sharing payments in 2003 to be material.

The following are the characteristics of our mortgage payable, promissory note, notes payable and Trust Preferred securities, including estimated required payments in 2003.

The following are characteristics of our mortgage payable agreement at June 30, 2003:

•

interest payments required in 2003 based on current balances will be $.5 million;

•

note may be prepaid on or before January, 2005 at 105% and declining to 101% after December, 2008.

•

principal and interest payments: $30,000 interest per year in 2003 and 2004; principal payments thereafter beginning in 2005 through 2007;

•

interest payments required in 2003 based on current balances will be $30,000.

The following are characteristics of our amended credit agreement at June 30, 2003:

•

principal payments: The remaining principal payment of $3.75 million is due in September 2003.

•

interest payments required in 2003 based on current balances will be $.1 million.

The following are characteristics of our subordinated debt agreement at June 30, 2003:

•

interest rate is greater of 1) 10% per annum or 2) six month London Inter-Bank Offered Rate (“LIBOR”) plus 1.5%;

•

interest payments required in 2003 based on current balances will be $1.1 million.

Trust Preferred Securities: These securities represent an undivided beneficial interest in the assets of SMAN Capital Trust I, a Delaware business trust organized to purchase our junior subordinated debentures and issue preferred securities. The assets of the Trust consist solely of the debentures which were purchased by the Trust with the proceeds of the offering. On August 9, 2001, the Trust completed a public offering of $20.7 million of its 10.25% preferred securities. The Trust used the proceeds of this offering to purchase our 10.25% junior subordinated debentures. Net proceeds from the sale of the debentures of approximately $19.3 million were used to redeem our Series A preferred stock of $6.5 million and repay $7.3 million of our notes payable. The remaining proceeds were used for general corporate purposes.

The following are characteristics of our Trust Preferred securities at June 30, 2003:

•

annual distribution rate of 10.25%; distributions may be deferred up to 20 consecutive quarters;

•

may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;

•

distributions required in 2003 based on current balances will be $2.1 million;

General: On a consolidated basis we reported net cash provided by operations of $4.5 million and $1.6 million for the second quarter of 2003 and 2002, respectively. At August 1, 2003, we had “parent company only” cash and short-term investments of $.1 million that are available for general corporate purposes. Parent company operating expenses (not including interest expense) were $3.4 million and $2.0 million for the first six months of 2003 and 2002, respectively.

Insurance Operations: The principal liquidity requirements of Standard Life are its 1) contractual obligations to policyholders, 2) Surplus Debenture interest, dividends, management fees and rental fees to Standard Management and 3) 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 annuity products. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits, 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 and events in the industry that affect policyholders’ confidence. In August 2002, Standard Life received a rating from A.M. Best of (“B+”), or “very good” category, a one-category reduction from its previous rating of (“B++”) (Very Good). A.M. Best cited “rapid growth in the annuity business, modest risk-adjusted capitalization and high exposure to below investment grade bonds as a percentage of capital and surplus,” as the primary reasons for the rating change.

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 our 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 our earnings if we were required to sell investments at reduced values to meet liquidity demands. We manage our asset and liability portfolios in order to minimize the adverse earnings effect of changing market interest rates. We seek assets that have duration characteristics similar to the liabilities that they support. We also prepare cash flow projections and perform cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. Our 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 National Association of Insurance Commissioners as modified by the Indiana Department of Insurance, or the state in which our 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: 1) acquisition costs (primarily commissions and policy issue costs) and 2) 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 or surplus strain in the year written for many insurance products. We design our products to minimize such first-year losses, but certain products continue to cause a statutory loss in the year written. Our long-term growth goals contemplate continued growth in our insurance businesses. To achieve these growth goals, our insurance subsidiaries will need to increase statutory surplus. Additional statutory surplus may be secured through various sources such as internally generated statutory earnings, infusions with funds generated through our debt or equity offerings, or mergers with other life insurance companies. If additional capital is not available from one or more of these sources, we believe that we could reduce surplus strain through the use of reinsurance or through reduced writing of new business.

We believe that the operational cash flow of Standard Life will be sufficient to meet our anticipated needs for 2003. As of June 30, 2003, Standard Life had statutory capital and surplus for regulatory purposes of $58.3 million. As the annuity business produced by Standard Life increases, Standard Life expects 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 $92.8 million for the second quarter of 2003 and $228.8 million for the second quarter of 2002. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.

All statements, trend analyses, and other information contained in this quarterly report on Form 10-Q or any document incorporated by reference herein relative to markets for our products and trends in our 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 our ability to sell products, the market value of our investments and the lapse rate and profitability of our policies.

•

Our 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 our insurance products.

•

Changes in the federal income tax laws and regulation which may affect the relative tax advantages of some of our 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, including our ability to integrate any acquired companies.

•

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

Our market risks and the way they are managed are summarized in our discussion and analysis of financial condition and results of operations in our Form 10-K for the year ended December 31, 2002. There have been no material changes in 2003 to these risks or the management of these risks.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-4c under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and effective. There were no significant changes in our internal controls or in other factors that could significantly affect disclosure controls and procedures subsequent to the Evaluation Date.

We are involved in various legal proceedings in the normal course of business. In most cases, these proceedings involve claims under insurance policies or other contracts. The outcome of these legal proceedings are not expected to have a material adverse effect on the consolidated financial position, liquidity, or future results of our operations based on our current understanding of the relevant facts and law.

On March 25, 2003, we issued 200,000 shares of common stock in exchange for all of the member units of Medical Care & Outcomes, LLC. We issued the securities to 13 persons pursuant to a private offering on reliance in the exemption from registration under the Securities Act of 1933 provided by Section 4(2). An appropriate legend was affixed to the share certificates issued in the transition.

At our Annual Meeting of Stockholders held on June 11, 2003, the following individuals were elected to the Board of Directors:

A total of 6,538,836 shares were present in person or by proxy at the Annual Meeting of Stockholders.

On April 1, 2003, we filed a report on Form 8-K with the Commission related to the appointment of an officer.

On May 14, 2003, we filed a report on Form 8-K with the Commission related to the announcement of our financial results for the first quarter of 2003.

On August 11, 2003 we filed a report on Form 8-K with the Commission related to the announcement of our financial results for the second quarter of 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE QUARTERLY PERIOD ENDED June 30, 2003 or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Indiana		No. 35-1773567
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)


10689 N. Pennsylvania Street, Indianapolis, Indiana		46280
(Address of principal executive offices)		(Zip Code)


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


		Interest			June 30		December 31
		Rate			2003		2002

Mortgage payable			7.33	%	$	6,881	$	6,757

Notes payable:
	Promissory note		6.00	%		500		500
	Borrowings under revolving credit agreements		4.76	%⁽¹⁾		3,750		1,500
	Senior subordinated notes		10.00	%		11,000		11,000

					$	15,250	$	13,000

Trust preferred securities			10.25	%	$	20,700	$	20,700

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	Shares For		Shares Withheld

Stephen M. Coons		6,189,288		349,548
Martial R. Knieser		6,164,819		374,017
P.B. (“Pete”) Pheffer		6,159,230		379,606
James H. Steane II		6,454,420		84,416


31.1		Rule 13a – 14(a)/15d – 14(a) Certification by Chief Executive Officer
31.2		Rule 13a – 14(a)/15d – 14(a) Certification by Chief Financial Officer
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350
32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350


		STANDARD MANAGEMENT CORPORATION
		(Registrant)

		By: /s/ RONALD D. HUNTER

		Ronald D. Hunter Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

		By: /s/ GERALD R. HOCHGESANG

		Gerald R. Hochgesang Senior Vice President and Treasurer (Chief Accounting Officer)