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 November 14, 2003, the Registrant had 8,114,196 shares of Common Stock outstanding.


		Page Number

Part I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Balance Sheets — September 30, 2003 (Unaudited) and December 31, 2002 (Audited)	3
	Consolidated Statements of Income — For the Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited)	4
	Consolidated Statements of Shareholders’ Equity — For the Nine Months Ended September 30, 2003 and 2002 (Unaudited)	6
	Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2003 and 2002 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
Part II.	OTHER INFORMATION:
Item 1.	Legal Proceedings	31
Item 5.	Other Information	31
Item 6.	Exhibits and Reports on Form 8-K	31
	SIGNATURES	32

September 30

December 31

2003

2002

(Unaudited)

(Audited)

ASSETS

Investments:

Securities available for sale:

Fixed maturity securities at fair value (amortized cost $1,580,601 in 2003 and $1,350,961 in 2002)

1,601,124

1,379,792

Mortgage loans on real estate

4,141

6,348

Policy loans

12,431

12,722

Real estate

831

1,252

Equity-indexed call options

13,406

3,904

Short-term investments

670

713

Other invested assets

1,331

1,076

Total investments

1,633,934

1,405,807

Cash and cash equivalents

46,977

60,197

Accrued investment income

16,013

16,255

Amounts due and recoverable from reinsurers

36,815

38,951

Deferred policy acquisition costs

169,172

153,954

Present value of future profits

14,881

14,949

Goodwill

11,101

6,417

Property and equipment (less accumulated depreciation of $4,851 in 2003 and $3,903 in 2002)

12,613

12,832

Other assets

8,849

5,785

Total assets

1,950,355

1,715,147

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Insurance policy liabilities

1,799,745

1,570,348

Accrued expenses and other payables

14,791

5,561

Obligations of capital lease

538

804

Current federal income taxes

—

3,811

Deferred federal income taxes

4,079

6,432

Mortgage payable

6,840

6,757

Notes payable

15,250

13,000

Total liabilities

1,841,243

1,606,713

Company-obligated trust preferred securities

20,700

20,700

Shareholders’ Equity:

Preferred stock, no par value:

No shares issued and outstanding

—

Common stock and additional paid in capital, no par value:

Authorized 20,000,000 shares; issued 9,629,274 in 2003 and 9,369,752 in 2002

68,078

63,857

Treasury stock, at cost, 1,515,078 shares in 2003 and 2002

(7,671

)

(7,671

)

Accumulated other comprehensive income

8,365

11,739

Retained earnings

19,640

19,809

Total shareholders’ equity

88,412

87,734

Total liabilities and shareholders’ equity

1,950,355

1,715,147


			Three Months Ended						Nine Months Ended
			September 30						September 30

			2003			2002			2003			2002

Revenues:
	Premium income		$	2,612		$	1,732		$	6,913		$	5,955
	Net investment income			19,852			19,785			61,621			55,429
	Call option gains (losses)			1,062			(3,049	)		4,051			(10,040	)
	Net realized investment gains (losses)			(232	)		(3,672	)		18,041			(12,570	)
	Policy income			2,864			2,139			7,837			5,862
	Fees and other income			(480	)		392			37			2,100

		Total revenues from continuing operations		25,678			17,327			98,500			46,736
Benefits and expenses:
	Benefits and claims			4,285			2,577			9,885			7,351
	Interest credited to interest-sensitive annuities and other financial products			16,497			11,009			49,271			29,142
	Amortization			3,042			8,325			20,931			14,453
	Commission expenses			44			156			118			1,188
	Other operating expenses			5,217			4,002			15,093			9,114
	Interest expense and financing costs			1,039			1,102			3,052			3,336

		Total benefits and expenses from continuing operations		30,124			27,171			98,350			64,584
Income (loss) before federal income taxes				(4,446	)		(9,844	)		150			(17,848	)
Federal income tax expense (benefit)				(1,509	)		(3,007	)		44			(8,639	)

Income (loss) from continuing operations				(2,937	)		(6,837	)		106			(9,209	)
Discontinued operations:
	Income from discontinued operations (less taxes of $550)			—			—			—			1,068
	Gain (loss) from the sale of discontinued operations (less taxes of $0, $1,956, $0 and $2,169)			(275	)		2,662			(275	)		6,872

Total discontinued operations				(275	)		2,662			(275	)		7,940
Cumulative effect of accounting change for goodwill impairment				—			—			—			(1,212	)

Net loss			$	(3,212	)	$	(4,175	)	$	(169	)	$	(2,481	)

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


			Three Months Ended						Nine Months Ended
			September 30						September 30

			2003			2002			2003			2002

Earnings per share — basic:
	Income (loss) from continuing operations		$	(.37	)	$	(.90	)	$	.01		$	(1.21	)
	Discontinued operations:
		Income from discontinued operations		—			—			—			.14
		Gain (loss) from the sale of discontinued operations		(.03	)		.35			(.03	)		.90

	Total discontinued operations			—			.35			—			1.04

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

Net loss			$	(.40	)	$	(.55	)	$	(.02	)	$	(.33	)

Earnings per share — diluted:
	Income (loss) from continuing operations		$	(.36	)	$	(.85	)	$	.01		$	(1.15	)
	Discontinued operations:
		Income from discontinued operations		—			—			—			.13
		Gain (loss) from the sale of discontinued operations		(.03	)		.33			(.03	)		.86

	Total discontinued operations			—			.33			—			.99

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

Net loss			$	(.39	)	$	(.52	)	$	(.02	)	$	(.31	)

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 income:
		Net loss			(2,481	)		—			—			—			(2,481	)
		Other comprehensive income:
			Change in unrealized gain (loss) on securities, net taxes (benefits) of $6,292		12,183			—			—			12,183			—
		Change in foreign currency translation			2,246			—			—			2,246			—

			Other comprehensive income		14,429			—			—			—			—
			Comprehensive income		11,948			—			—			—			—
	Issuance of common stock and warrants				837			837			—			—			—
	Exercise of common stock options				(251	)		(251	)		—			—			—
	Preferred stock dividends				(5	)		—			(5	)		—			—

Balance at September 30, 2002				$	82,718		$	63,597		$	(7,594	)	$	8,257		$	18,458

Balance at January 1, 2003				$	87,734		$	63,857		$	(7,671	)	$	11,739		$	19,809
Comprehensive loss:
	Net loss				(169	)		—			—			—			(169	)
	Other comprehensive loss:
		Change in unrealized gain (loss) on securities, net taxes (benefits) of $(1,621)			(3,374	)		—			—			(3,374	)		—

			Other comprehensive loss		(3,374	)		—			—			—			—
			Comprehensive loss		(3,543	)		—			—			—			—
Issuance of common stock and warrants					4,221			4,221			—			—			—

Balance at September 30, 2003				$	88,412		$	68,078		$	(7,671	)	$	8,365		$	19,640


			Nine Months Ended
			September 30

			2003			2002

Operating Activities
Net income from continuing operations			$	(169	)	$	(2,481	)
Net income from discontinued operations				—			(1,068	)
(Gain) loss from the sale of discontinued operations				275			(6,872	)
Adjustments to reconcile net income to net cash provided by operating activities:
	Amortization of deferred acquisition costs			20,720			14,725
	Deferral of acquisition costs			(32,644	)		(50,487	)
	Federal income taxes			(6,287	)		(10,472	)
	Depreciation and amortization			1,369			1,121
	Insurance policy liabilities			43,683			43,203
	Net realized investment (gains) losses			(18,155	)		12,570
	Net accrual of bond discount			5,879			1,432
	Accrued investment income			241			(2,802	)
	Cumulative effect of accounting change for goodwill impairment			—			1,212
	Other			(378	)		(4,815	)

		Net cash provided (used) by operating activities		14,534			(4,734	)

Investing Activities
Fixed maturity securities available for sale:
	Purchases			(1,298,163	)		(1,310,081	)
	Sales			828,299			871,118
	Maturities, calls and redemptions			260,783			69,458
Short-term investments, net				(5,408	)		6,477
Other investments, net				1,093			(2,201	)

		Net cash used by investing activities		(213,396	)		(365,229	)

Financing Activities
Proceeds from the sale of discontinued operations				—			25,690
Borrowings (repayments) on notes payable				1,808			(4,454	)
Premiums received on interest-sensitive and other financial products credited to policyholder account balances, net of premiums ceded				344,911			448,197
Return of policyholder account balances on interest-sensitive annuities and other financial products				(161,111	)		(97,935	)
Issuance of common stock and warrants				34			530

	Net cash provided by financing activities			185,642			372,028

Net increase (decrease) in cash and cash equivalents				(13,220	)		2,065
Cash and cash equivalents at beginning of period				60,197			18,144

Cash and cash equivalents at end of period			$	46,977		$	20,209

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 through its insurance subsidiaries and b) distributes pharmaceutical products 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).

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 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 the business assets of MyDoc.com (renamed as HomeDoc Corporation) from Roche Diagnostics Corporation. HomeDoc Corporation 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 HomeDoc service. The contingent consideration has not been recognized in the consolidated financial statements and would be recorded in the future periods upon achievement 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 $622,000. 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 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):

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

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. We are required to adopt the provisions of Interpretation No. 46 in the fourth quarter of 2003. Management is currently evaluating the impact of the adoption, with an emphasis on the application to our Trust Preferred Securities.

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


			September 30			December 31
			2003			2002

Fair value of securities available for sale			$	1,601,124		$	1,379,792
Amortized cost of securities available for sale				1,580,601			1,350,961

		Gross unrealized gain on securities available for sale		20,523			28,831
Adjustments for:
	Deferred policy acquisition costs			(4,746	)		(6,942	)
	Present value of future profits			(3,084	)		(4,113	)
	Deferred federal income tax benefits			(4,377	)		(6,075	)
	Other			49			38

		Net unrealized gain on securities available for sale	$	8,365		$	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						Nine Months Ended
		September 30						September 30

		2003			2002			2003			2002

Income (loss):
Income (loss) from continuing operations		$	(2,937	)	$	(6,837	)	$	106		$	(9,209	)
Income (loss) from discontinued operations			(275	)		2,662			(275	)		7,940
Cumulative effect of accounting change for goodwill impairment			—			—			—			(1,212	)

Net loss – basic and diluted earnings per share		$	(3,212	)	$	(4,175	)	$	(169	)	$	(2,481	)

Shares:
Weighted average shares outstanding for basic earnings per share			8,085,305			7,613,479			8,004,266			7,611,629
Effect of dilutive securities:
	Stock options		128,958			196,003			69,896			197,369
	Stock warrants		55,583			215,997			37,658			210,335

	Dilutive potential common shares		184,541			412,000			107,554			407,704

Weighted average shares outstanding for diluted earnings per share			8,269,846			8,025,479			8,111,820			8,019,333

Effective June 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. 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 nine months ended September 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 did 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 nine months ended September 30 (in thousands, except per share amounts):


		Three Months Ended						Nine Months Ended
		September 30						September 30

		2003			2002			2003			2002

Reported net loss		$	(3,212	)	$	(4,175	)	$	(169	)	$	(2,481	)
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			5			7			253			89

Pro forma net loss		$	(3,217	)	$	(4,182	)	$	(422	)	$	(2,570	)

Earnings per share:
	Basic — as reported	$	(.40	)	$	(.55	)	$	(.02	)	$	(.33	)
	Basic — pro forma		(.40	)		(.55	)		(.07	)		(.34	)
	Diluted — as reported		(.39	)		(.52	)		(.02	)		(.31	)
	Diluted — pro forma		(.39	)		(.52	)		(.07	)		(.32	)

On November 13, 2003 the Company replaced its current $3.75 million senior facility and $11 million senior subordinated debt with a $20 million senior secured credit facility. The new senior facility is composed of a $10 million five year loan with a fixed rate of 6.63%, and a $10 million revolving line of credit with a floating rate equal to 90 day LIBOR plus 395 basis points.

In addition to the repayment of indebtedness described above, a portion of the proceeds will be used for a $5 million capital contribution to Standard Life, and general corporate activities within our Financial Services segment.

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 Nine Month Periods Ended September 30, 2003 and September 30, 2002:

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


	Three Months Ended						Nine Months Ended
	September 30						September 30

	2003			2002			2003			2002

Income (loss) from continuing operations	$	(2,937	)	$	(6,837	)	$	106		$	(9,209	)
Discontinued operations:
Operating income from discontinued operations (less taxes of $550)		—			—			—			1,068
Gain (loss) from the sale of discontinued operations (less taxes of $0, $1,956, $0 and $4,125)		(275	)		2,662			(275	)		6,872

Income (loss) from discontinued operations		(275	)		2,662			(275	)		7,940

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

Net loss	$	(3,212	)	$	(4,175	)	$	(169	)	$	(2,481	)

For the quarter ended September 30, 2003, loss from continuing operations was $2.9 million, or $.36 per diluted share, compared to a loss of $6.8 million, or $.85 per diluted share for the third quarter of 2002.

Net income for the current quarter was $.2 million, or $.02 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 losses of $.2 million, or $.02 per diluted share, and reduced spread income of $1.0 million, or $.12 per diluted share due to a decline in net investment income yield, which has declined faster than we were able to reduce credited rates. The comparable prior year quarter included net realized investment losses of $.7 million, or $.09 per diluted share, and charges of $5.1 million, or $.64 per diluted share from the accelerated amortization of deferred acquisition costs (“DAC”), and $.5 million, or $.06 per diluted share from the write-off and legal costs related to the recovery of agency receivable balances.

Current period net loss was $1.6 million, or $.19 per diluted share, compared to a $.3 million net loss, or $.04 per diluted share for the comparable prior year period. The current period loss included additional expenses associated with the continued development of U. S. Health Service’s operating platform and infrastructure, as well as ongoing concentrated marketing initiatives.

Other Services:
Current period net loss was $1.5 million, or $.19 per diluted share, compared to a $2.6 million loss, or $.33 per diluted share for the comparable prior year period. The current period was positively impacted by a $.1 million or $.01 per diluted share from net realized investment gains. The prior period was negatively impacted by a $.7 million or $.08 per diluted share net realized investment loss.


		Three Months Ended						Nine Months Ended
		September 30						September 30

		2003			2002			2003			2002

		(Dollars in thousands)						(Dollars in thousands)
Premiums and Deposits Collected:
Deferred annuities		$	20,999		$	76,478		$	111,443		$	247,476
Single premium immediate annuities and other deposits			45,149			33,353			130,365			114,562
Equity-indexed annuities			24,503			31,189			98,562			85,696
Universal and interest-sensitive life			114			151			412			453

Subtotal — interest-sensitive and other financial products premium deposits			90,765			141,171			340,782			448,187
Traditional life			2,612			2,153			6,913			6,884

Total premiums and deposits collected		$	93,377		$	143,324		$	347,695		$	455,071

Statement of Operations:
Premium income		$	2,612		$	2,153		$	6,913		$	6,884
Policy income			2,864			2,139			7,837			5,862

	Total policy related income		5,476			4,292			14,750			12,746
Net investment income			19,857			19,762			61,588			55,441
Call option gains (losses)			1,062			(3,049	)		4,051			(10,039	)
Fees and other income (losses)			20			27			156			(57	)

	Total revenues		26,415			21,032			80,545			58,091
Benefits and claims			4,285			2,998			9,885			8,280
Interest credited to interest-sensitive annuities and other financial products			16,497			11,009			49,271			29,142
Amortization			3,164			9,907			11,360			16,013
Commission expenses			30			121			(15	)		281
Other operating expenses			1,876			1,781			5,764			4,592

	Total benefits and expenses		25,852			25,816			76,265			58,308

	Operating income (losses) before income taxes		563			(4,784	)		4,280			(217	)
Federal income tax expense (benefit)			191			(1,626	)		1,455			(1,475	)

	Operating income (loss) after income taxes		372			(3,158	)		2,825			1,258
Net realized investment gains (losses), net of related amortization and income taxes			(180	)		(733	)		5,484			(6,606	)
Cumulative effect of accounting change for goodwill impairment			—			—			—			(1,212	)

	Net income (loss)	$	192		$	(3,891	)	$	8,309		$	(6,560	)

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 interest sensitive and other financial products for the third quarter of 2003 decreased $50.4 million or 36%, to $90.8 million, compared to the third quarter of 2002. Deferred annuities decreased $55.5 million or 73%, to $21.0 million. Single premium immediate annuities increased $11.8 million, or 35%, to $45.1 million. Deposits from equity-indexed annuities decreased $6.7 million or 21%, to $24.5 million.

•

Premium deposits for interest sensitive and other financial products for the first nine months of 2003 decreased $107.4 million or 24%, to $340.8 million, compared to the first nine months of 2002. Deferred annuities decreased $136.0 million or 55%, to $111.4 million. Single premium immediate annuities increased $15.8 million, or 13.8%, to $130.4 million. Deposits from equity-indexed annuities increased $12.9 million or 15%, to $98.6 million.

Premium deposits decreased in 2003 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 third quarter of 2003 increased by $0.5 million or 21%, to $2.6 million compared to the third quarter of 2002 as a result of increased deposits from supplemental contracts with life contingencies.

•

Premium income for the first nine months of 2003 was $6.9 million compared to $6.9 million for the first nine months of 2002.

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 third quarter of 2003 increased $.7 million or 34%, to $2.9 million compared to the third quarter of 2002.

•

Policy income for the first nine months of 2003 increased $2.0 million or 34%, to $7.8 million compared to the first nine months of 2002.

Policy income increased due to an expected increase in surrenders in response to management actions taken to reduce 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 third quarter of 2003 increased by $0.1 million or 1%, to $19.9 million compared to the third quarter of 2002. Net investment income increased as a result of a $359.7 million or 28%, increase in the weighted average invested assets for the period, which was partially offset by a decrease in the net investment yield earned on average invested assets of 4.89% for the third quarter of 2003 compared to 6.25% for the third quarter 2002. The decline in net investment yield is due primarily to the timing of investing new premium deposits in assets, which currently earn lower yields than the portfolio yield, and to prepayments on the Company’s mortgage backed securities, which reduced the current quarter yield by 14 basis points.

•

Net investment income for the first nine months of 2003 increased by $6.1 million or 11%, to $61.6 million compared to the first nine months of 2002. Net investment income increased as a result of a $368.0 million or 32%, increase in the weighted average invested assets for the period, which was partially offset by a decrease in the net investment yield earned on average invested assets of 5.43% for the first nine months of 2003 compared to 6.47% for the first nine months 2002. The decline in net investment yield is due primarily to the timing of investing new premium deposits in assets, which currently earn lower yields than the portfolio yield, and to prepayments on the Company’s mortgage backed securities.

Also see “Call option income” and “Interest credited to interest sensitive annuities and other financial products” for additional 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 is substantially offset by amounts credited to policyholder account balances.

•

Call option income for the third quarter of 2003 increased by $4.1 million or 135%, to $1.1 million compared to the third quarter of 2002.

•

Call option income for the first nine months of 2003 increased by $14.1 million or 140%, to $4.1 million compared to the first nine months of 2002.

Call option income for the 2003 periods 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 decreased $7,000 to $20,000 primarily due to an increase in mortality associated with experience refunds.

•

Fees and other income increased $.2 million to $.2 million primarily due to a decrease 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 third quarter of 2003 increased $1.3 million or 43%, to $4.3 million compared to the third quarter of 2002.

•

Benefits and claims for the first nine months of 2003 increased $1.6 million or 19%, to $9.9 million compared to the first nine months of 2002.

Benefits and claims were higher in 2003 primarily due to increased death claims and other benefits for our in-force life policies and increased benefit payments for our supplemental contracts including life contingencies.

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 third quarter of 2003, interest credited increased $5.5 million or 50%, to $16.5 million compared to the third quarter of 2002. $4.1 million of the increase is due to the changes in the market value of call options on equity-indexed annuities. The remainder is due to an overall increase in interest sensitive liabilities.

•

The weighted average credited rate for the third quarter of 2003 and 2002 was 3.64% and 4.52%, respectively. The decline in average credited rate is due to rate reductions taken by management to maintain spread income over the same period.

•

During the first nine months of 2003, interest credited increased $20.1 million or 69%, to $49.3 million compared to the first nine months of 2002. $14.1 million of the increase is due to the changes in the market value of call options on equity-indexed annuities. The remainder is due to an overall increase in interest sensitive liabilities.

•

The weighted average credited rate for the first nine months of 2003 and 2002 was 3.73% and 4.86%, respectively. The decline in average credited rate is due to rate reductions taken by management to maintain spread income over the same period.

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

•

Amortization for the third quarter of 2003 was $3.2 million, a decrease of $6.7 million or 68% compared to the third quarter of 2002. This decrease primarily relates to a $7.8 million acceleration of DAC amortization due to DAC unlocking recorded in 2002.

Amortization for the first nine months of 2003 was $11.4 million, a decrease of $4.7 million or 29% compared to the first nine months of 2002. This decrease primarily relates to a $7.8 million acceleration of DAC amortization due to DAC unlocking recorded in 2002.

•

Commission expenses decreased $.1 million to $30,000 compared to the third quarter of 2002.

•

Commission expenses decreased $.3 million to $(15,000) compared to the first nine months of 2002.

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

•

Other operating expenses for the third quarter of 2003 increased $.1 million or 5%, to $1.9 million compared to the third quarter of 2002

•

Other operating expenses for the first nine months of 2003 increased $1.2 million or 26%, to $5.8 million compared to the first nine months of 2002. Other operating expenses increased primarily 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 nine months of 2003 resulting in increased legal expenses.

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 losses, net of related amortization, were $.2 million in the third quarter of 2003 compared to net realized investment losses of $.7 million in the third quarter of 2002.

•

Net realized investment gains, net of related amortization, were $5.5 million in the first nine months of 2003 compared to net realized investment losses of $6.6 million in the first nine months of 2002, largely resulting from a strategy to realize tax benefits from capital loss carryforwards during 2003. Net realized investment gains for the first nine months of 2003 are net of an other-than-temporary write-down of $1.7 million for certain fixed maturity securities.

•

Approximately 98.6% of our fixed maturity securities are classified as investment grade at September 30, 2003.

•

Federal income tax expense increased $1.8 million to $.2 million compared to the third quarter of 2002.

•

Federal income tax expense increased $2.9 million to $1.5 million compared to the nine 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						Nine Months Ended
		September 30						September 30

		2003			2002			2003			2002

		(Dollars in thousands)						(Dollars in thousands)
Gross Margin (loss) on Sales:
Sales		$	825		$	14		$	2,256		$	57

Cost of Goods Sold			675			18			1,917			50
Fulfillment costs:
	Processing costs		626			—			1,098			—
	Shipping costs		26			—			73			—

	Total cost of sales		1,327			18			3,088			50

Gross margin (loss) on sales		$	(502	)	$	(4	)	$	(832	)	$	7

Statement of Operations:
Gross margin (loss) on sales		$	(502	)	$	(4	)	$	(832	)	$	7
Other income			4			—			41			—

	Total gross margin (loss) and other income		(498	)		(4	)		(791	)		7
Marketing and sales expenses			96			—			306			—
Commission expenses			14			—			48			—
Other operating expenses			1,815			480			3,503			558
Interest expense and financing costs			7			8			22			8

	Total expenses		1,932			488			3,879			566

	Loss before income taxes		(2,430	)		(492	)		(4,670	)		(559	)
Federal income tax benefit			(827	)		(167	)		(1,588	)		(190	)

	Net loss	$	(1,603	)	$	(325	)	$	(3,082	)	$	(369	)

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 third quarter of 2003 increased by $1.3 million to $1.6 million compared to the third quarter of 2002.

•

Net loss for the first nine months of 2003 increased by $2.7 million to $3.1 million compared to the first nine months of 2002.

Net loss in 2003 periods is due to additional salary expense and marketing costs associated with the continued development of the Health Services segment’s operating platform and infrastructure, as well as ongoing concentrated marketing initiatives since its organization in 2002.


		Three Months Ended						Nine Months Ended
		September 30						September 30

		2003			2002			2003			2002

		(Dollars in thousands)						(Dollars in thousands)
Statement of Operations:
Net investment income (losses)		$	(5	)	$	23		$	33		$	(12	)
Commission income			—			338			657			1,481
Fees and other income (losses)			(2	)		2			15			11

	Total revenues		(7	)		363			705			1,480
Commission expenses			—			5			86			247
Other operating expenses			1,431			1,709			5,519			3,963
Interest expense and financing costs			1,032			1,102			3,031			3,328

	Total expenses		2,463			2,816			8,636			7,538

	Operating loss before income taxes		(2,470	)		(2,453	)		(7,931	)		(6,058	)
Federal income tax benefit			(728	)		(493	)		(2,704	)		(3,227	)

	Operating loss after income taxes		(1,632	)		(1,960	)		(5,227	)		(2,831	)
Net realized investment gain (losses), net of income taxes			106			(661	)		106			(661	)

	Net loss	$	(1,526	)	$	(2,621	)	$	(5,121	)	$	(3,492	)

General: Our Other Services segment consists of revenues and expenses primarily related to corporate operations and financing costs. During the third quarter 2003, the Company sold the assets of our marketing services company, Savers Marketing Corporation for a $200,000 note receivable. The sale led to a reduction in the quarterly commission income, commission expenses and operating expenses.

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

•

Commission income decreased to $0 compared to the third quarter of 2002. Commission income decreased due to the sale of the assets of Savers Marketing.

•

Commission income decreased $.8 million or 56%, to $.7 million compared to the first nine months of 2002. Commission income decreased due to the sale of Savers Marketing.

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

Commission expenses decreased to $0 compared to the third quarter of 2002. Commission expense decreased due to the sale of the assets of Savers Marketing.

•

Commission expenses decreased $.2 million or 66%, to $86,000 compared to the first nine months of 2002. Commission expense decreased due to the sale of the assets of Savers Marketing.

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

•

Other operating expenses decreased $.3 million or 16%, to $1.4 million compared to the third quarter of 2002. Other operating expense decreased due to the sale of the assets of Savers Marketing.

•

Other operating expenses increased $1.6 million or 39%, to $5.5 million compared to the first nine months of 2002. Other operating expenses increased primarily due to salary expense resulting from realigning personnel between segments.

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 6%, to $1.0 million compared to the third quarter of 2002. This decrease is due to lower interest rates.

•

Interest expense and financing costs decreased $.2 million or 9%, to $3.0 million compared to the first nine months of 2002. This decrease is due to lower interest rates.

•

Federal income tax benefit increased $.3 million or 73%, to $.8 million compared to the third quarter of 2002. This increase is due to a higher effective tax rate of 34% in 2003.

•

Federal income tax benefit decreased $.6 million or 17%, to $2.6 million compared to the first nine months of 2002. This decrease is due to a higher effective tax rate of 34% in 2003. The prior period utilized a net operating loss carryforward of $1.0 million.


		Three Months Ended					Nine Months Ended
		September 30					September 30

		2003			2002		2003			2002

		(Dollars in thousands)					(Dollars in thousands)
Income before gain on sale of discontinued operations		$	—		$	—	$	—		$	1,068
Gain (loss) from the sale of discontinued operations (less taxes of $0, $1,956, $0 and $2,169)			(275	)		2,662		(275	)		6,872

	Net income	$	(275	)	$	2,662	$	(275	)	$	7,940

General: Our International Operations (discontinued operations) were sold in 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.

Income before gain on sale of discontinued operations consist of general operating expenses, including salaries, net of deferrable amounts.

•

Income before gain on sale of discontinued operations declined due to the sale of the portfolio of Premier Life (Bermuda), Ltd and the sale of Premier Life (Luxembourg) S.A. in 2002.

•

Gain from the sale of discontinued operations in 2002 resulted from the sale of the portfolio of Premier Life (Bermuda), Ltd and the sale of Premier Life (Luxembourg) S.A. in 2002.

•

Loss from the sale of discontinued operations in 2003 is due to the Company settling a purchase price adjustment resulting in a $275,000 charge.

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.

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 2002. Savers Marketing terminated its participation in this agreement with the sale of the assets of Savers Marketing on July 1, 2003. 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 September 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 September 30, 2003:

•

principal payments: remaining principal payment of $3.75 million paid in October 2003.

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

•

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

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.

The following are characteristics of our Trust Preferred securities at September 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 $14.5 million and $(4.7) million for the third quarter of 2003 and 2002, respectively. At November 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 $4.8 million and $3.4 million for the first nine months of 2003 and 2002, respectively.

Financial Services: 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 October 2003, A.M. Best confirmed Standard Life’s rating of (“B+”), or “very good”.

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 September 30, 2003, Standard Life had statutory capital and surplus for regulatory purposes of $57.5 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 $112.9 million for the third quarter of 2003 and $343.6 million for the third 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.

Health Services: The principal liquidity requirements of our Health Services segment are its 1) cost of goods sold, 2) operating expenses, and 3) future acquisitions. The primary source of funding for these obligations has been cash flow from 1) pharmaceutical sales, 2) internal and external borrowings, and 3) capital contributions from Standard Management. The liquidity requirements of our Health Services segment have significantly exceeded cash flow from pharmaceutical sales.

We believe that the operational cash flow of our Health Services segment will not be sufficient to meet our anticipated operational needs for 2003. Therefore, this segment is expected to continue to fund its cash needs through internal and external borrowings and capital contributions from Standard Management. As of September 30, 2003, our Health Services subsidiary had equity of $2.9 million.

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 November 13, 2003 the Company replaced its $3.75 million senior facility and $11 million senior subordinated debt with a $20 million senior secured credit facility. The new senior facility is composed of a $10 million five year loan with a fixed rate of 6.63%, and a $10 million revolving line of credit with a floating annual rate equal to 90 day LIBOR plus 395 basis points. In addition to the repayment of indebtedness described above, a portion of the proceeds will be used for a $5 million capital contribution to Standard Life, and general corporate activities within our Financial Services segment.

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

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 September 30, 2003 or

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


PART I — FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
	PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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			September 30		December 31
		Rate			2003		2002

Mortgage payable			7.33	%	$	6,840	$	6,757

Notes payable:
	Promissory note		6.00	%		500		500
	Borrowings under revolving credit agreements		5.00	%⁽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


Dated: November 14, 2003

		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)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


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


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