SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 0-20882

Standard Management Corporation

(317) 574-6200
(Registrant’s telephone number, including area code)

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 2, 2004, the Registrant had 7,931,113 shares of Common Stock outstanding.

STANDARD MANAGEMENT CORPORATION

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

     The following notes should be read along with the notes to the consolidated financial statements included in the Form 10-K for the year ended December 31, 2003 of Standard Management Corporation (“we”, “our”, “us”, “Standard Management” or the “Company”).

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

Note 1 — Basis of Presentation

     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 accounting principles generally accepted in the United States (“GAAP”). We have also reclassified certain amounts from the prior periods to conform to the 2004 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 February 6, 2004, our wholly owned subsidiary, Apothecary Solutions Corporation (“Apothecary Solutions”), acquired certain assets of Alliance Center, Inc. Apothecary Solutions is an institutional pharmacy. The purchase price was $3.7 million, and additional contingent consideration of up to $175,000 may be paid, based on a percentage of outstanding accounts receivable collected. The purchase was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill and intangibles amount of $1.8 million. Under purchase accounting, we allocated the total purchase price of the assets and liabilities acquired, based on a determination of the fair values, and recorded the excess of acquisition cost over net assets acquired as goodwill.

     Effective April 1, 2004, we sold Medical Care & Outcomes, LLC (“MCO”) back to its original owners. We recognized a loss on the sale of MCO of $964,000 in the first quarter of 2004 in the Health Services segment. MCO was originally purchased with $4 million of common stock and other contingent consideration. The divestiture of MCO resulted in the reversal of the original $4 million purchase price and resulted in a decrease to equity of $4 million in the second quarter of 2004.

Operating Segments

Financial Services

     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.

Health Services

     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 academic institutions, skilled nursing facilities, assisted living facilities, home health care agencies, mental health facilities and consumers. In addition, U.S. Health Services acts as a wholesale distributor/repackager and a pharmacy management solution to various sectors of the veterinary care industry. 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.

Other Services

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

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation (Continued)

Use of Estimates

     The nature of our 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.

Note 2 — Mortgage Payable, Notes Payable and Trust Preferred Securities

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

(1)

Current weighted average rate at June 30, 2004.

As of June 30, 2004, the Company was in violation of one financial covenant (debt leverage) under our senior secured credit agreement. The balance of this indebtedness at June 30, 2004 was $19.5 million. We have obtained from the lender a waiver of this covenant through March 31, 2005. The Company anticipates being in compliance on or before March 31, 2005.

Note 3 — Net Unrealized Gain (Loss) on Securities Available for Sale

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

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4 — Earnings Per Share

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

Note 5 — Stock Option Plan

     During the three months ended June 30, 2004, under our 2002 Stock Incentive Plan, we granted options to purchase 155,000 shares of common stock at a weighted average exercise price of $3.72 per share.

     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):

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 — Stock Option Plan (Continued)

Note 6 – Subsequent Event

     On August 2, 2004, the Company announced that it has, through its U.S. Health Services subsidiary, signed a definitive agreement to acquire SVS Vision Holding Company (“SVS Vision”) for $16 million in cash. SVS Vision is a fully integrated vision network consisting of an insurance entity, manufacturing facilities, 52 retail outlets, and is affiliated with over 500 doctors in the United States. SVS Vision has annual revenues of approximately $35 million with approximately $4 million in earnings before interest, taxes, depreciation, and amortization, and has a 31-year track record in the optical industry. This transaction is expected to close in the third quarter subject to regulatory approval and other conditions. The Company anticipates funding the purchase price with a combination of cash on hand, the net proceeds of private sales of equity or debt securities, a portion of the proceeds from the sale of certain assets of the Company and/or borrowings under a new credit facility currently being negotiated.

     We previously reported that on April 19, 2004 we entered into a non-binding letter of intent with an unaffiliated third party providing for the sale of our principal financial services subsidiary, Standard Life Insurance Company of Indiana. We have subsequently ceased negotiations on the definitive agreements for that transaction and on July 23, 2004, we entered into a new, non-binding letter of intent with one of the parties to the April 19 letter of intent. The new letter of intent contemplates transactions designed to ultimately result in the sale of Standard Life by December 31, 2004. An initial closing would be held by September 30, 2004 and thereafter, the proposed buyer would have the option to acquire all of the stock of Standard Life by December 31, 2004.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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

Recent Developments

     Letter of Intent

     We previously reported that on April 19, 2004 we entered into a non-binding letter of intent with an unaffiliated third party providing for the sale of our principal financial services subsidiary, Standard Life Insurance Company of Indiana. We have subsequently ceased negotiations on the definitive agreements for that transaction and on July 23, 2004, we entered into a new, non-binding letter of intent with one of the parties to the April 19 letter of intent. The new letter of intent contemplates transactions designed to ultimately result in the sale of Standard Life by December 31, 2004. An initial closing would be held by September 30, 2004 and thereafter, the proposed buyer would have the option to acquire all of the stock of Standard Life by December 31, 2004.

     The proposed consideration would consist principally of cash but also an equity interest in an entity formed by the proposed buyer for the purpose of acquiring Standard Life. The closing of the transactions would be subject to numerous conditions including the negotiation and execution of definitive agreements, approval of our shareholders at a meeting called for such purpose, receipt by us of an opinion from our financial advisor that the proposed consideration is fair to us from a financial point of view, consent of the holders of our outstanding trust preferred securities to amendments to the governing instruments of such securities, the receipt of various regulatory approvals and other customary closing conditions.

     There can be no assurance that definitive agreements with respect to the transactions will be entered into, that our shareholders will approve the sale of Standard Life or that any of the other conditions necessary to consummate the proposed transactions will be satisfied. However, if the proposed transactions are consummated, it is the intention of management, as previously stated in connection with the April 19 letter of intent, to exit the financial services business altogether and focus the Company’s operations exclusively on our more growth oriented health services business. This would represent a fundamental shift in the nature of our business. Historically, almost all of our revenue has come from our financial services business. During fiscal 2003, Standard Life accounted for approximately 98% of our total revenues. We only entered the Health Services segment in 2002 and since that time, this business segment has generated substantial net losses and very little revenue, primarily due to its nature as a start-up operation. Management believes, however, that the more growth oriented health services business provides a better opportunity to increase shareholder value over the long-term than the more mature financial services business. If the proposed transactions are consummated, our business without the Financial Services segment would, for a time, have significantly less cash flow from operations, since our financial services business presently accounts for substantially all of our cash flow from operations. However, we anticipate that the transactions will produce substantial cash proceeds and management intends to utilize a significant (but not yet determined) portion of the net cash proceeds from the proposed transactions for the expansion of our health services business and anticipates that such amount will be sufficient to satisfy our liquidity needs for at least the next 24 to 36 months. Management also intends to use the proceeds from the transaction to reduce by at least $10 million our senior credit facility and for general corporate purposes.

     In the event the proposed transactions are not consummated, we will consider a number of alternatives available to us including, without limitation, seeking another buyer for our financial services business, or continuing our business as it currently exists and seeking additional capital through the public or private equity or debt markets.

     Acquisition of SVS Vision

     On August 2, 2004, the Company announced that it has, through its U.S. Health Services subsidiary, signed a definitive agreement to acquire SVS Vision Holding Company (“SVS Vision”) for $16 million in cash. SVS Vision is a fully integrated vision network consisting of an insurance entity, manufacturing facilities, 52 retail outlets, and is affiliated with over 500 doctors in the United States. SVS Vision has annual revenues of approximately $35 million with approximately $4 million in earnings before interest, taxes, depreciation, and amortization, and has a 31-year track record in the optical industry. This transaction is expected to close in the third quarter subject to regulatory approval and other conditions. The acquisition of SVS Vision is a part of the Company’s plan to enhance its health services operations. The Company anticipates funding the purchase price with a combination of cash on hand, the net proceeds of private sales of equity or debt securities, a portion of the proceeds from the sale of certain assets of the Company and/or borrowings under a new credit facility currently being negotiated.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

General

     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, 2003, should be read in conjunction with this Form 10-Q.

Comparison of the Three Month and Six Month Periods Ended June 30, 2004 and June 30, 2003:

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

Consolidated Results and Analysis:

     For the quarter ended June 30, 2004, net loss was $2.5 million compared to net income of $1.0 million for the 2003 quarter.

Financial Services:

     Net income for the current quarter was $.8 million compared to $2.7 million for the 2003 quarter. The decline in net income was primarily due to a decline in net realized gains of $4.4 million (net of amortization) partially offset by an increase in the current quarter’s spread income and favorable mortality experience.

Health Services:

     Net loss for the current quarter was $2.2 million compared to a $.9 million net loss for the 2003 quarter. The 2004 quarter included increased expenses associated with the continued development of this segment’s operating platform of $.2 million, amortization of intangible assets of $.1 million and a tax valuation of $.7 million.

Other Services:

     Net loss for the current quarter was $1.0 million compared to a $.8 million net loss for the 2003 quarter.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Financial Services:

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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 credited to our policyholders), persistency of our in force business, mortality experience and management of our operating expenses.

     Earnings from products accounted for as insurance policy liabilities are primarily generated from the excess of net investment income earned over the interest credited to the policyholder, or the “investment spread”. Our investment spread is summarized as follows for the three and six months ended June 30:

     The weighted average effective credited rate represents interest on interest-sensitive liabilities, including equity-indexed annuities, offset by gains on call option assets used to hedge equity-indexed annuity liabilities.

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.

Quarterly analysis:

•

Premium deposits for interest-sensitive and other financial products for the second quarter of 2004 decreased $61.2 million or 48%, to $65.4 million compared to the second quarter of 2003. Deferred annuities decreased $28.0 million or 68%, to $13.2 million. Deposits from equity-indexed annuities decreased $20.7 million or 54%, to $17.9 million. Single premium immediate annuities decreased $12.5 million or 27%, to $34.2 million. Premium deposits decreased in the second quarter of 2004 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.

Year-to-date analysis:

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Premium deposits for interest-sensitive and other financial products for the first six months of 2004 decreased $114.1 million or 45%, to $137.3 million compared to the first six months of 2003. Deferred annuities decreased $64.9 million or 72%, to $25.5 million. Deposits from equity-indexed annuities decreased $34.1 million or 45%, to $41.4 million. Single premium immediate annuities decreased $15.1 million or 18%, to $70.2 million. Premium deposits decreased in 2004 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.

Quarterly analysis:

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Premium income for the second quarter of 2004 decreased $.6 million or 25%, to $1.8 million compared to the second quarter of 2003, as a result of decreased deposits from ordinary life products and supplemental contracts with life contingencies.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Year-to-date analysis:

•

Premium income for the first six months of 2004 increased $.1 million or 1%, to $4.4 million compared to the first six months of 2003.

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.

Quarterly analysis:

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Policy income for the second quarter of 2004 increased $1.5 million or 55%, to $4.2 million compared to the second quarter of 2003. Policy income increased due to an expected increase in surrenders in response to management actions taken to reduce crediting rates on some of our annuity products. The increase in annuity surrenders generates greater surrender income from early termination charges associated with these products.

Year-to-date analysis:

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Policy income for the first six months of 2004 increased $2.6 million or 53%, to $7.6 million compared to the first six months of 2003. Policy income increased due to an expected increase in surrenders in response to management actions taken to reduce crediting rates on some of our 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.

Quarterly analysis:

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Net investment income for the second quarter of 2004 increased $.1 million to $20.6 million compared to the second quarter of 2003. Net investment income increased as a result of a $135.4 million, or 8.9%, increase in the weighted average invested assets for the period which was mostly offset by a decline in the net investment yield earned on average invested assets to 4.86% for the second quarter of 2004, compared to 5.26% for the second quarter of 2003. 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.

Year-to-date analysis:

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Net investment income for the first six months of 2004 increased $.3 million or 1%, to $42.1 million compared to the first six months of 2003. Net investment income increased as a result of a $155.5 million, or 10.2%, increase in the weighted average invested assets for the period which was mostly offset by a decline in the net investment yield earned on average invested assets to 4.99% for the first six months of 2004, compared to 5.52% for the first six months of 2003. 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.

Net investment income — affiliated includes interest earned on real estate investments with Other Services.

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.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Quarterly analysis:

•

Call option income for the second quarter of 2004 decreased $6.0 million to $.1 million compared to the second quarter of 2003. The call option income decrease resulted from changes in the market value of our call options due to changes in the S&P 500 Index and the DJIA Index.

Year-to-date analysis:

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Call option income for the first six months of 2004 decreased $1.7 million to $1.3 million compared to the first six months of 2003. The call option income decrease 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 consist of fee income related to servicing unaffiliated blocks of business and experience refunds.

Quarterly analysis:

•

Fees and other income for the second quarter of 2004 increased $.1 million to $.1 million compared to the second quarter 2003.

Year-to-date analysis:

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Fees and other income for the first six months of 2004 increased $.1 million to $.2 million compared to the first six months of 2003.

Net realized investment gain fluctuates from period to period and generally arises 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.

Quarterly analysis:

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Net realized investment gain for the second quarter of 2004 decreased $8.2 million to $.1 million, compared to the second quarter of 2003. The decline was largely due to a strategy in 2003 to realize tax benefits from capital loss carryforwards.

Year-to-date analysis:

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Net realized investment gain for the first six months of 2004 decreased $17.1 million to $1.2 million compared to the first six months of 2003. The decline was largely due to a strategy in 2003 to realize tax benefits from capital loss carryforwards.

•

Approximately 99% of our fixed maturity securities are classified as investment grade at June 30, 2004.

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.

Quarterly analysis:

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Benefits and claims for the second quarter of 2004 decreased $1.2 million or 38%, to $2.0 million compared to the second quarter of 2003.

Year-to-date analysis:

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Benefits and claims for the first six months of 2004 decreased $1.3 million or 23%, to $4.3 million compared to the first six months of 2003.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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.

Quarterly analysis:

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Interest credited in the second quarter of 2004 decreased $7.4 million or 35%, to $13.7 million compared to the second quarter of 2003, of which $2.7 million related to equity-indexed annuity products and the remaining $11.0 million related to all other interest-sensitive annuity and life insurance products. Interest credited decreased $8.4 million due to the impact of less favorable market performance on equity products. The decrease was offset by $3.0 million due to an 11% increase in average interest sensitive liabilities of $167.8 million compared to the second quarter of 2003, partially reduced by $2.0 million of reductions due to reduced crediting rates.

•

The weighted average credited rate on interest-sensitive liabilities, including equity-indexed annuities, for the second quarter of 2004 and 2003 was 3.18% and 5.51%, respectively. The decrease in average credited rate was due to the impact of less favorable market performance on equity-indexed annuity crediting rates. When offset by gains on call option assets used to hedge equity-indexed annuity liabilities, the “effective” crediting rates for 2004 and 2003 quarters were 3.15% and 3.89%, respectively, a reduction of ..74%.

Year-to-date analysis:

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Interest credited in the first six months of 2004 decreased $3.9 million or 12%, to $28.9 million compared to the first six months of 2003, of which $6.3 million related to equity-indexed annuity products and the remaining $22.6 million related to all other interest-sensitive annuity and life insurance products. Interest credited decreased $4.9 million due to the impact of less favorable market performance on equity products. The decrease was offset by $4.6 million due to a 13% increase in average interest sensitive liabilities of $197.1 million compared to the first six months of 2003, partially reduced by $3.6 million of reductions due to reduced crediting rates.

•

The weighted average credited rate on interest-sensitive liabilities, including equity-indexed annuities, for the first six months of 2004 and 2003 was 3.38% and 4.39%, respectively. The decrease in average credited rate was due to the impact of less favorable market performance on equity-indexed annuity crediting rates. When offset by gains on call option assets used to hedge equity-indexed annuity liabilities, the “effective” crediting rates for 2004 and 2003 periods were 3.22% and 3.98%, respectively, a reduction of .76%.

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.

Quarterly analysis:

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Amortization for the second quarter of 2004 decreased $1.5 million or 19%, to $6.5 million compared to the second quarter of 2003. This decrease primarily relates to lower net realized gains of $8.2 million, which resulted in a decrease in amortization of $3.8 million related to those gains offset by a $2.3 million increase in amortization of DAC related costs.

Year-to-date analysis:

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Amortization for the six months of 2004 decreased $5.2 million or 29%, to $12.7 million compared to the second quarter of 2003. This decrease primarily relates to lower net realized gains of $17.1 million, which resulted in a decrease in amortization of $9.1 million related to those gains offset by a $3.9 million increase in amortization of DAC related costs.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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

Quarterly analysis:

•

Other operating expenses were $2.0 million for the second quarter 2004 compared to $1.9 million for 2003.

Year-to-date analysis:

•

Other operating expenses for the first six months of 2004 increased $.5 million or 12%, to $4.4 million compared to the first six months of 2003 due to increased salary expense.

Operating expenses — affiliated consist of general operating expenses, including rent and management fees paid to Standard Management and recorded in the Other Services segment.

Quarterly analysis:

•

Affiliated operating expenses for the second quarter 2004 increased $.1 million to $1.5 million compared to the second quarter 2003.

Year-to-date analysis:

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Affiliated operating expenses increased $.2 million or 7% to $2.9 million compared to the first six months of 2003 due to increased rental expense.

Interest expense and financing costs — affiliated represents interest expense incurred on the surplus debentures issued to Standard Management.

Quarterly analysis:

•

Affiliated interest expense and financing costs were $.4 million for the second quarter 2004 and 2003, respectively.

Year-to-date analysis:

•

Affiliated interest expense and financing costs were $.8 million for the second quarter 2004 and 2003, respectively.

Federal income tax expense

Quarterly analysis:

•

Federal income tax expense decreased $1.0 million to $.4 million compared to the second quarter of 2003. The effective tax rate was 34% for the second quarter of 2004 and 2003.

Year-to-date analysis:

•

Federal income tax expense decreased $2.0 million to $1.0 million compared to the first six months of 2003. The effective tax rate was 34% for the first six months of 2004 and 2003.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Health Services:

General: Our Health Services segment consists of revenues earned and expenses incurred from our pharmaceutical operations. Our primary customer base consists of academic institutions, mental health facilities and consumers. 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.

Sales

Quarterly analysis:

•

Sales for the second quarter of 2004 increased $1.1 million or 149%, to $1.8 million compared to the second quarter of 2003, primarily related to the acquisition of Apothecary Solutions in February 2004.

Year-to-date analysis:

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Sales for the first six months of 2004 increased $2.1 million or 144% to $3.5 million compared to the first six months of 2003, primarily related to the acquisition of Apothecary Solutions.

Total expenses

Quarterly analysis:

•

Total expenses for the second quarter of 2004 increased $1.0 million or 58%, to $2.7 million compared to the second quarter of 2003, primarily related to the acquisition of Apothecary Solutions and expenses related to the continued development of this segment’s selling and marketing platform.

Year-to-date analysis:

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Total expenses for the first six months of 2004 increased $3.3 million or 137%, to $5.7 million compared to the first six months of 2003, primarily related to the acquisition of Apothecary Solutions, the realized loss on the sale of MCO and the continued development of this segment’s selling and marketing platform.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Net realized loss on investment

Year-to-date analysis:

•

Net realized loss on investment for the first six months of 2004 increased $1.0 million compared to the first six months of 2003 due to the sale of MCO.

Federal income tax benefit

Quarterly analysis:

•

Federal income tax benefit decreased $.5 million to zero, compared to the second quarter of 2003 due to a 100% valuation allowance on the net loss in 2004.

Year-to-date analysis:

•

Federal income tax benefit decreased $.8 million to zero, compared to the first six months of 2003 due to a 100% valuation allowance on the net loss in 2004.

Net loss

Quarterly analysis:

•

Net loss for the second quarter of 2004 increased $1.3 million or 139%, to $2.2 million compared to the second quarter of 2003. Net loss in the 2004 and 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.

Year-to-date analysis:

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Net loss for the first six months of 2004 increased $3.3 million or 226%, to $4.8 million compared to the first six months of 2003. Net loss in the 2004 and 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.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Other Services:

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

Operating income — affiliated consists of income from the Financial Services segment related to management fees and rental income.

Quarterly analysis:

•

Operating income — affiliated increased $.1 million or 8%, to $1.5 million compared to the second quarter of 2003 due to increased rental income.

Year-to-date analysis:

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Operating income — affiliated increased $.2 million or 8%, to $3.0 million compared to the first six months of 2003 due to increased rental income.

Interest income — affiliated consists of interest income from the Financial Services segment related to the surplus debentures issued by Standard Management.

Quarterly analysis:

•

Interest income — affiliated was $.4 million in the second quarter 2004 and 2003.

Year-to-date analysis:

•

Interest income — affiliated was $.8 million in the first six months of 2004 and 2003.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Net investment expenses — affiliated represent interest expense paid to the Financial Services segment.

Other operating expenses consist of holding company operating expenses, including salaries.

Quarterly analysis:

•

Other operating expenses decreased $.3 million or 16%, to $1.6 million compared to the second quarter of 2003 due to decreased salary expense.

Year-to-date analysis:

•

Other operating expenses decreased $.4 million or 12%, to $3.0 million compared to the first six months of 2003 due to decreased salary expense.

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

Quarterly analysis:

•

Interest expense and financing costs increased $.1 million or 8%, to $1.1 million in the second quarter 2004 and 2003 due to additional debt balances in 2004.

Year-to-date analysis:

•

Interest expense and financing costs increased $.1 million or 3%, to $2.0 million in the first six months of 2004 and 2003 due to additional debt balances in 2004.

Federal income tax benefit

Quarterly analysis:

•

Federal income tax benefit decreased by $.3 million compared to the second quarter of 2003 due to a 100% valuation allowance on the net loss in 2004.

Year-to-date analysis:

•

Federal income tax benefit decreased by $.4 million compared to the first six months of 2003 due to a valuation allowance on a part of the net loss in 2004.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Liquidity and Capital Resources

Liquidity of Standard Management (Parent Company)

     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 these payments in the Financial Services segment 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.

Potential Cash Available for 2004

     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 adequate to meet our anticipated parent company cash requirements for 2004. The following describes our potential sources of cash in 2004.

     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 December 31, 2003 interest rate of 6.0% continues, we expect to receive interest income of $1.6 million from the Surplus Debentures in 2004.

     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 2003, we did not receive dividends from our insurance subsidiaries. In 2004, we could receive dividends of approximately $1.9 million from Standard Life, without regulatory approval and an additional $8.5 million with regulatory approval.

     Any dividends we might receive from U.S. Health Services are not limited by any regulatory authority, although we do not expect that we will receive any dividends from U.S. Health Services during 2004 as we continue to incur losses in the Health Services segment as we continue to develop its operating platform and infrastructure.

     Management Fees: Pursuant to a management services agreement, Standard Life paid $3.6 million during 2003 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. In addition, Dixie Life paid Standard Life $.7 million in 2003 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 2004, we expect to receive management fees of $3.6 million from Standard Life.

     Equipment Rental Fees: In 2003, we charged Standard Life $1.1 million for the use of our equipment. In 2004, 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 leases approximately 43,000 square feet of our corporate headquarters in Indianapolis. During 2003, we received approximately $.8 million in lease income from Standard Life and we expect to receive the same amount in 2004. Also associated with this lease, Standard Life is responsible for its share of building maintenance expenses. During 2003, we were reimbursed $.7 million in maintenance expenses for 2003 and 2002. We expect to be reimbursed $.3 million in maintenance expense in 2004.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

Estimated Cash Required in 2004

     The following are the characteristics of our mortgage payable, notes payable and trust preferred securities, including estimated required payments in 2004.

     Mortgage Payable:

     The following are characteristics of our mortgage payable agreement at June 30, 2004:

•		outstanding balance of $6.7 million;
•		weighted average interest rate of 7.33% per annum;
•		principal and interest payments: $57,000 per month through December 2011;
•		interest payments required in 2004 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.
		Notes Payable:
		The following are characteristics of our promissory notes at June 30, 2004:
•		outstanding balance of $1.6 million;
•		interest rate of 2.52% per annum;
		The following are characteristics of our senior secured credit agreement at June 30, 2004:
•		outstanding balance of $19.5 million;
•		weighted average interest rate of 5.92% per annum;
•		principal payments: $1.5 million to be paid in 2004, $2.0 million to be paid in 2005, $2.1 million to be paid in 2006, and $2.2 million to be paid in 2007. The remaining principal payment of $12.2 million due in 2008.
•		subject to certain restrictions and financial and other covenants;
•		interest payments required in 2004 based on current balances will be $1.2 million.
As of June 30, 2004, the Company was in violation of one financial covenant (debt leverage) under our senior secured credit agreement. The balance of this indebtedness at June 30, 2004 was $19.5 million. We have obtained from the lender a waiver of this covenant through March 31, 2005. The Company anticipates being in compliance on or before March 31, 2005.
		The following are characteristics of our convertible notes at June 30, 2004:
•		outstanding balance of $3.3 million;
•		interest rate of 7% per annum;
•		interest payments required in 2004 based on current balances will be $.1 million.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

     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 June 30, 2004:

•		outstanding balance of $20.7 million;
•		annual distribution rate of 10.25%; distributions may be deferred up to 20 consecutive quarters;
•		matures August 9, 2031;
•		may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;
•		distributions required in 2004 based on current balances will be $2.1 million;
•		distributions are classified as interest expense.

     General: On a consolidated basis we reported net cash provided by operations of $26.9 million and $4.5 million for the first six months of 2004 and 2003, respectively, with increase in 2004 primarily due to a decrease in a deferral of acquisition costs. At July 1, 2004, we had “parent company only” cash and short-term investments of $.1 million that are available for general corporate purposes. Annual parent company operating expenses (not including interest expense) were $5.5 million for both 2003 and 2002.

     Contractual Obligations: During the first six months of 2004, there were no significant changes in our reported payments due under contractual obligations at December 31, 2003.

     Off-Balance Sheet Arrangements: We have no off-balance sheet arrangements.

Liquidity of Financial Services

     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 July 2004, Standard Life received a rating from A.M. Best of (“B”), or “fair” with a stable outlook, a one-category reduction from its previous rating of (“B+”), or “very good” .

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

     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 and in 2004, none of our products 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 2004. As of June 30, 2004, Standard Life had statutory capital and surplus for regulatory purposes of $68.6 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 was $7.5 million for the first six months of 2004 and $92.8 million for the first six months of 2003. The decrease is primarily due to a decline in annuity premium deposits. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.

Liquidity of Health Services

     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 2004. Therefore, this segment is expected to continue to fund its cash needs through internal and external borrowings and capital contributions from Standard Management. In addition, we anticipate funding the purchase price for the SVS Vision acquisition with a combination of cash on hand, the net proceeds of private sales of equity or debt securities, a portion of the proceeds from the sale of certain of our assets and/or borrowings under a new credit facility currently being negotiated. As of June 30, 2004, our Health Services segment had equity of $(9.8) million.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

     As discussed under “Recent Developments,” we have entered into a non-binding letter of intent to sell our principal financial services subsidiary and continue the business of Standard Management solely in the health services sector. Substantially all of the Company’s revenues and cash flows have historically come from our financial services business. The proposed sale is subject to a number of conditions as described under “Recent Developments” and no assurance can be given that the proposed transaction will be consummated. If it is consummated, however, and the Company continues operations solely in the health services sector, the Company would, for a time, have significantly less cash flow from operations. However, we anticipate that the transaction will produce substantial cash proceeds and management intends to utilize a significant (but not yet determined) portion of the net cash proceeds from the proposed transaction for the expansion of our Health Services business and anticipates that such amount will be sufficient to satisfy our liquidity needs for at least the next 24 to 36 months. Management also intends to use the proceeds from the transaction to reduce by at least $10 million our senior secured credit facility and for general corporate purposes.

Forward-looking Statements

     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. Forward-looking statements include, without limitation, statements relating to our ability to consummate the sale of Standard Life, our ability to pay interest on the debentures (and of the Trust to make the corresponding distributions on the preferred securities) following a sale of Standard Life, the prospects of our company after a sale of Standard Life when operating only in the health services segment. 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:

•		Our ability to consummate the sale of Standard Life.
•		Our ability to successfully operate a health services business with limited industry experience.
•		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.
•		Increasing competition in the sale 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 and our ability to identify, acquire and successfully integrate acquisitions in the health services segment.
•		The risk factors or uncertainties listed from time to time in any document incorporated by reference herein.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     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, 2003. There have been no material changes in 2004 to these risks or the management of these risks.

ITEM 4. CONTROLS AND PROCEDURES

     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 June 30, 2004 (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.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     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.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

     On May 18, 2004, we filed a report on Form 8-K with the Commission related to a non-binding letter of intent with an unaffiliated third party providing for the sale of our principal financial services subsidiary Standard Life Insurance Company of Indiana, including its subsidiary Dixie National Life Insurance Company.

     On May 18, 2004, we filed a report on Form 8-K with the Commission related to the release of our financial results for the first quarter of 2004.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

SIGNATURES

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

Dated: August 13, 2004

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