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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED September 30, 2004or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 0-20882 Standard Management Corporation  Indiana
    
    No. 35-1773567(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)10689 N. Pennsylvania Street, Indianapolis, Indiana
    
    46280(Address of principal executive offices)
    
    (Zip Code)
 (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 November 2, 2004, the Registrant had 7,926,113 shares of Common Stock
outstanding.




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STANDARD MANAGEMENT CORPORATION INDEX Page NumberPart I.
    
    FINANCIAL INFORMATION:Item 1.
    
    Unaudited Financial StatementsConsolidated Balance Sheets 
September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income 
For the Three Months and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Shareholders Equity 
For the Nine Months Ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows 
For the Nine Months Ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29Part II.
    
    OTHER INFORMATION:Item 1.
    
    Legal Proceedings
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    30Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30SIGNATURES
    
    
    31EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CHAIRMAN/CEO & PRESIDENT/CFO
  2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
  September 30
    
    December 312004
    
    2003ASSETSInvestments:Securities available for sale:Fixed maturity securities, at fair value (amortized cost $1,628,612 in 2004
and $1,638,048 in 2003)
    
    $
    1,642,054
    
    
    $
    1,644,837Mortgage loans on real estate
    
    
    821
    
    
    
    3,937Policy loans
    
    
    11,069
    
    
    
    12,308Real estate
    
    
    1,753
    
    
    
    1,843Equity-indexed call options
    
    
    6,017
    
    
    
    19,711Other invested assets
    
    
    1,395
    
    
    
    2,690Short-term investments
    
    
    591
    
    
    
    590Total investments
    
    
    1,663,700
    
    
    
    1,685,916Cash and cash equivalents
    
    
    50,967
    
    
    
    17,296Accrued investment income
    
    
    15,118
    
    
    
    17,002Amounts due and recoverable from reinsurers
    
    
    38,012
    
    
    
    36,277Deferred policy acquisition costs
    
    
    162,567
    
    
    
    166,411Present value of future profits
    
    
    14,451
    
    
    
    16,508Goodwill and intangibles
    
    
    9,603
    
    
    
    10,961Property and equipment (less accumulated depreciation of $6,654 in 2004 and $5,286 in
2003)
    
    
    11,980
    
    
    
    12,770Federal income tax recoverable
    
    
    2,051
    
    
    
    6,429Other assets
    
    
    6,734
    
    
    
    5,201Total assets
    
    $
    1,975,183
    
    
    $
    1,974,771LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Insurance policy liabilities
    
    $
    1,842,112
    
    
    $
    1,841,545Accounts payable and accrued expenses
    
    
    15,766
    
    
    
    8,117Obligations under capital lease
    
    
    257
    
    
    
    551Mortgage payable
    
    
    6,660
    
    
    
    6,795Notes payable
    
    
    23,837
    
    
    
    21,000Current income taxes
    
    
    22
    
    
    
    Deferred income taxes
    
    
    1,321
    
    
    
    3,616Payable to subsidiary trust issuer of company-obligated trust preferred
securities
    
    
    20,700
    
    
    
    20,700Total liabilities
    
    
    1,910,675
    
    
    
    1,902,324Shareholders Equity:Common stock no par value and additional paid in capital:Authorized 20,000,000 shares; issued 9,446,191 in 2004 and 9,629,167 in
2003
    
    
    64,370
    
    
    
    68,078Treasury stock, at cost, 1,520,078 shares in 2004 and 1,515,078 shares in 2003
    
    
    (7,687
    )
    
    
    (7,671
    )Accumulated other comprehensive income
    
    
    5,418
    
    
    
    2,702Retained earnings
    
    
    2,407
    
    
    
    9,338Total shareholders equity
    
    
    64,508
    
    
    
    72,447Total liabilities and shareholders equity
    
    $
    1,975,183
    
    
    $
    1,974,771
 See accompanying notes to consolidated financial statements. 3




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Revenues:Premium income
    
    $
    1,508
    
    
    $
    2,612
    
    
    $
    5,870
    
    
    $
    6,913Net investment income
    
    
    20,607
    
    
    
    19,852
    
    
    
    62,701
    
    
    
    61,621Call option income (loss)
    
    
    (2,737
    )
    
    
    1,062
    
    
    
    (1,408
    )
    
    
    4,051Net realized investment gain (loss)
    
    
    (606
    )
    
    
    (232
    )
    
    
    (380
    )
    
    
    18,041Policy income
    
    
    4,965
    
    
    
    2,864
    
    
    
    12,585
    
    
    
    7,837Sales of goods
    
    
    1,872
    
    
    
    825
    
    
    
    5,364
    
    
    
    2,256Fees and other income
    
    
    148
    
    
    
    22
    
    
    
    388
    
    
    
    869Total revenues
    
    
    25,757
    
    
    
    27,005
    
    
    
    85,120
    
    
    
    101,588Benefits and expenses:Benefits and claims
    
    
    2,053
    
    
    
    4,285
    
    
    
    6,338
    
    
    
    9,885Interest credited to interest-sensitive annuities and other financial products
    
    
    10,452
    
    
    
    16,497
    
    
    
    39,428
    
    
    
    49,271Amortization and depreciation
    
    
    8,041
    
    
    
    3,042
    
    
    
    21,909
    
    
    
    20,931Other operating expenses
    
    
    5,342
    
    
    
    5,913
    
    
    
    16,390
    
    
    
    16,382Cost of goods sold
    
    
    1,430
    
    
    
    675
    
    
    
    3,994
    
    
    
    1,917Interest expense and financing costs
    
    
    1,192
    
    
    
    1,039
    
    
    
    3,294
    
    
    
    3,052Total benefits and expenses
    
    
    28,510
    
    
    
    31,451
    
    
    
    91,353
    
    
    
    101,438Income (loss) before federal income tax expense
    
    
    (2,753
    )
    
    
    (4,446
    )
    
    
    (6,233
    )
    
    
    150Federal income tax expense (benefit)
    
    
    (58
    )
    
    
    (1,509
    )
    
    
    698
    
    
    
    44Income (loss) from continuing operations
    
    
    (2,695
    )
    
    
    (2,937
    )
    
    
    (6,931
    )
    
    
    106Loss from the sale of discontinued operations
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    (275
    )Net loss
    
    $
    (2,695
    )
    
    $
    (3,212
    )
    
    $
    (6,931
    )
    
    $
    (169
    )Loss per share:Basic
    
    $
    (.34
    )
    
    $
    (.40
    )
    
    $
    (.87
    )
    
    $
    (.02
    )Diluted
    
    
    (.34
    )
    
    
    (.40
    )
    
    
    (.87
    )
    
    
    (.02
    )Weighted average shares outstanding for basic and diluted earnings per share
    
    
    7,929,863
    
    
    
    8,085,305
    
    
    
    7,991,807
    
    
    
    8,004,266
 See accompanying notes to consolidated financial statements. 4




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
  Commonstock and
    
    
    
    
    
    Accumulatedadditional
    
    
    
    
    
    otherpaid in
    
    Treasury
    
    comprehensive
    
    RetainedTotal
    
    capital
    
    stock
    
    income (loss)
    
    earningsBalance at January 1, 2003
    
    $
    87,734
    
    
    $
    63,857
    
    
    $
    (7,671
    )
    
    $
    11,739
    
    
    $
    19,809Comprehensive loss:Net loss
    
    
    (169
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169
    )Other comprehensive loss:Change in unrealized loss on securities, net
of income tax (benefits) of $(1,621)
    
    
    (3,374
    )
    
    
    
    
    
    
    
    
    
    
    (3,374
    )
    
    
    Comprehensive loss
    
    
    (3,543
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock and warrants
    
    
    221
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    Purchase of MCO
    
    
    4,000
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2003
    
    $
    88,412
    
    
    $
    68,078
    
    
    $
    (7,671
    )
    
    $
    8,365
    
    
    $
    19,640Balance at January 1, 2004
    
    $
    72,447
    
    
    $
    68,078
    
    
    $
    (7,671
    )
    
    $
    2,702
    
    
    $
    9,338Comprehensive loss:Net loss
    
    
    (6,931
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,931
    )Other comprehensive income:Change in unrealized gain on securities, net
of income tax of $1,412
    
    
    2,716
    
    
    
    
    
    
    
    
    
    
    
    2,716
    
    
    
    Comprehensive loss
    
    
    (4,214
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock
    
    
    294
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options and warrants
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Sale of MCO
    
    
    (4,000
    )
    
    
    (4,000
    )
    
    
    
    
    
    
    
    
    
    
    Treasury stock acquired
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    Balance at September 30, 2004
    
    $
    64,508
    
    
    $
    64,370
    
    
    $
    (7,687
    )
    
    $
    5,418
    
    
    $
    2,407
 See accompanying notes to consolidated financial statements. 5




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 302004
    
    2003Operating ActivitiesNet loss
    
    $
    (6,931
    )
    
    $
    (169
    )Loss from the sale of discontinued operations
    
    
    
    
    
    
    275Adjustments to reconcile net loss to net cash provided by operating activities:Amortization of deferred policy acquisition costs
    
    
    20,163
    
    
    
    20,720Deferral of policy acquisition costs paid
    
    
    (16,962
    )
    
    
    (32,644
    )Federal income taxes
    
    
    661
    
    
    
    (6,287
    )Depreciation and amortization
    
    
    976
    
    
    
    1,369Insurance policy liabilities
    
    
    33,117
    
    
    
    43,683Net realized investment gains
    
    
    (611
    )
    
    
    (18,155
    )Net accrual of bond discount
    
    
    7,784
    
    
    
    5,879Change in accrued investment income
    
    
    1,884
    
    
    
    241Other
    
    
    179
    
    
    
    (378
    )Net cash provided by operating activities
    
    
    40,260
    
    
    
    14,534Investing ActivitiesFixed maturity securities available for sale:Purchases
    
    
    (432,043
    )
    
    
    (1,298,163
    )Sales
    
    
    318,630
    
    
    
    828,299Maturities, calls and redemptions
    
    
    124,408
    
    
    
    260,783Change in short-term investments, net
    
    
    12,155
    
    
    
    (5,408
    )Purchase of long-lived assets
    
    
    (2,359
    )
    
    
    Change in other investments, net
    
    
    3,330
    
    
    
    1,093Net cash provided (used) by investing activities
    
    
    24,121
    
    
    
    (213,396
    )Financing ActivitiesIssuance of convertible note
    
    
    3,300
    
    
    
    Borrowings
    
    
    
    
    
    
    3,138Repayments of notes and mortgage payable
    
    
    (1,135
    )
    
    
    (1,330
    )Premiums received on interest-sensitive and other financial products
credited to policyholder account balances, net of premiums ceded
    
    
    196,539
    
    
    
    344,911Return of policyholder account balances on interest-sensitive annuities and
other
financial products
    
    
    (229,416
    )
    
    
    (161,111
    )Issuance of common stock and warrants
    
    
    
    
    
    
    34Net cash provided (used) by financing activities
    
    
    (30,712
    )
    
    
    185,642Net increase (decrease) in cash
    
    
    33,671
    
    
    
    (13,220
    )Cash and cash equivalents at beginning of year
    
    
    17,296
    
    
    
    60,197Cash and cash equivalents at end of period
    
    $
    50,967
    
    
    $
    46,977
 See accompanying notes to consolidated financial statements. 6




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The following notes should be read along with the notes to the
consolidated financial statements included in the Form 10-K, as amended, 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 Services subsidiaries
and b) develops, markets and/or administers annuity and life insurance products
through its Financial Services 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 newly formed 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. Effective April 1, 2004, we sold 95% of Medical Care & Outcomes, LLC
(MCO) back to its original owners. We recognized a loss on the sale and
related severance costs of $964,000 in the first quarter of 2004 in the Health
Services segment. MCO was originally purchased with $4 million of our common
stock. The divestiture of MCO resulted in the return of our common stock and
therefore 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 its subsidiary, 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. As previously reported, on July 23, 2004 we entered into a non-binding
letter of intent with an unaffiliated third party providing for the proposed
sale of our principal financial services subsidiary, Standard Life Insurance
Company of Indiana. That letter of intent contemplated an initial closing by
September 30, 2004 and consummation of the entire transaction by December 31,
2004. As we negotiated toward a definitive agreement with respect to such
transaction, we and the potential buyer began to consider alternative
structures for the transaction. In addition, as permitted by the letter of
intent, we simultaneously engaged in discussions with other, unrelated parties
regarding the sale to them of all or a controlling interest in Standard Life.
As a result of the ongoing nature of the various negotiations, the September
30, 2004 interim closing date contemplated by the letter of intent passed
without a definitive agreement having been entered into. As of the date of this
Report, we continue to engage in discussions with the proposed buyer under the
letter of intent, as well as with other parties, regarding the potential sale
of all or a controlling interest in Standard Life. We have not entered into
any additional letters of intent nor have we entered into any definitive
agreements with respect to such a transaction, although as discussions proceed
our board may authorize such action. The consummation of any such transaction
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 company-obligated trust preferred securities to
amendments to the governing instruments of such securities, the receipt of
various regulatory approvals and other customary closing conditions. 7




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1  Basis of Presentation (continued) There can be no assurance that a definitive agreement with respect to the
proposed sale of all or a controlling interest in Standard Life will be entered
into, that our shareholders will approve such a transaction or that any of the
other conditions necessary to consummate the transaction will be satisfied.
However, if Standard Life is sold in its entirety, it would remain the
intention of management, as previously disclosed, to exit the financial
services business altogether and focus the Companys operations exclusively on
our more growth oriented health services business. Such course of action 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 we sell 100% of
Standard Life, 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 such sale would produce
substantial cash proceeds and management intends to utilize a portion (but not
yet determined) of the net cash proceeds from the proposed transaction for the
expansion of our health services business (for example through the acquisition
of complimentary businesses such as SVS Vision, which acquisition is currently
pending regulatory approval). In addition, management anticipates that the
remaining net proceeds, in combination with other sources of capital, would be
sufficient to satisfy our liquidity needs for approximately the next 24 months.
Management also intends to use the proceeds from the transaction to reduce our
senior credit facility and for general corporate purposes. In the event none of the proposed transactions currently under
consideration are 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/or seeking additional capital through the public or private equity or debt
markets. 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 goods sold) and management of our operating expenses. We announced previously on August 2, 2004 and August 13, 2004 that we
have, through our U.S. Health Services subsidiary, signed definitive agreements
to acquire SVS Vision Holding Company (SVS Vision) and iCare Medical Supply,
Inc. and its affiliated companies. These transactions are expected to close in
the fourth quarter of 2004 subject to regulatory approval and other conditions.
We anticipate 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. Other Services Our Other Services segment consists of revenues and expenses primarily
related to holding company operations and financing costs. 8




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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. Federal income taxes paid for the nine months ended September 30, 2004 and
2003 was $5.9 million and zero, respectively. Note 2  Mortgage Payable, Notes Payable and Company-Obligated Trust Preferred
Securities Our mortgage payable, notes payable and company-obligated trust preferred
securities were as follows (dollars in thousands): Interest
    
    September 30
    
    December 31Rate (1)
    
    2004
    
    2003Mortgage payable
    
    
    7.326
    %
    
    $
    6,660
    
    
    $
    6,795Notes payable:Senior secured credit agreement
    
    
    5.92
    %
    
    
    19,000
    
    
    
    20,000Promissory notes
    
    
    2.52
    %
    
    
    1,537
    
    
    
    1,000Convertible notes
    
    
    7.00
    %
    
    
    3,300
    
    
    
    $
    23,837
    
    
    $
    21,000Company-obligated trust preferred securities
    
    
    10.25
    %
    
    $
    20,700
    
    
    $
    20,700
 (1) Current weighted average rate at September 30, 2004. As of September 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 September 30, 2004 was $19 million. We have
obtained from the lender a waiver of this violation and any similar violation
through March 31, 2005. The Company anticipates being in compliance on or
before March 31, 2005. On February 19, 2004, we sold $3.3 million of our 7% convertible notes due
2009. The notes are convertible at a price equal to $7.00 per share at any time
at the holders options subject to certain conditions. Interest paid for the nine months ended September 30, 2004 and 2003 was
$3.1 million and $2.6 million, respectively. 9




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 3  Net Unrealized Gain on Securities Available for Sale 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 312004
    
    2003Fair value of securities available for sale
    
    $
    1,642,054
    
    
    $
    1,644,837Amortized cost of securities available for sale
    
    
    1,628,612
    
    
    
    1,638,048Gross unrealized gain on securities available for sale
    
    
    13,442
    
    
    
    6,789Adjustments for:Deferred policy acquisition costs
    
    
    (3,066
    )
    
    
    (1,313
    )Present value of future profits
    
    
    (2,062
    )
    
    
    (1,114
    )Deferred federal income tax benefits
    
    
    (2,827
    )
    
    
    (1,512
    )Other
    
    
    (69
    )
    
    
    (148
    )Net unrealized gain on securities available for sale
    
    $
    5,418
    
    
    $
    2,702
 Note 4  Stock Option Plan SFAS No. 123, as amended by SFAS No. 148, allows companies to either
expense the estimated fair value of stock options or to continue the earlier
practice of accounting for stock options 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 loss and pro forma loss
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 EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Reported net loss
    
    $
    (2,695
    )
    
    $
    (3,212
    )
    
    $
    (6,931
    )
    
    $
    (169
    )Add: Stock-based employee
compensation expense
included in reported net
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Total stock-based
employee compensation
expense determined under
fair value based method
for all grants
    
    
    
    
    
    
    5
    
    
    
    362
    
    
    
    253Pro forma net loss
    
    $
    (2,695
    )
    
    $
    (3,217
    )
    
    $
    (7,293
    )
    
    $
    (422
    )Loss per share:Basic  as reported
    
    $
    (.34
    )
    
    $
    (.40
    )
    
    $
    (.87
    )
    
    $
    (.02
    )Basic  pro forma
    
    
    (.34
    )
    
    
    (.40
    )
    
    
    (.91
    )
    
    
    (.07
    )Diluted  as reported
    
    
    (.34
    )
    
    
    (.40
    )
    
    
    (.87
    )
    
    
    (.02
    )Diluted  pro forma
    
    
    (.34
    )
    
    
    (.40
    )
    
    
    (.91
    )
    
    
    (.07
    )
 10




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 5  Operations by Business Segment Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Revenues:Financial Services
    
    $
    24,006
    
    
    $
    26,078
    
    
    $
    80,959
    
    
    $
    98,601Health Services
    
    
    1,872
    
    
    
    825
    
    
    
    5,364
    
    
    
    2,256Other Services
    
    
    1,819
    
    
    
    1,938
    
    
    
    5,242
    
    
    
    6,274Intercompany eliminations
    
    
    (1,940
    )
    
    
    (1,836
    )
    
    
    (6,445
    )
    
    
    (5,543
    )Consolidated revenues
    
    
    25,757
    
    
    
    27,005
    
    
    
    85,120
    
    
    
    101,588Pre-Tax Income (Loss):Financial Services
    
    $
    (171
    )
    
    $
    (1,442
    )
    
    $
    2,783
    
    
    $
    7,331Health Services
    
    
    (1,730
    )
    
    
    (2,430
    )
    
    
    (6,555
    )
    
    
    (4,670
    )Other Services
    
    
    (852
    )
    
    
    (574
    )
    
    
    (2,461
    )
    
    
    (2,511
    )Consolidated pre-tax income (loss)
    
    
    (2,753
    )
    
    
    (4,446
    )
    
    
    (6,233
    )
    
    
    150
 11




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Recent Developments Letter of Intent As previously reported, on July 23, 2004 we entered into a non-binding
letter of intent with an unaffiliated third party providing for the proposed
sale of our principal financial services subsidiary, Standard Life Insurance
Company of Indiana. That letter of intent contemplated an initial closing by
September 30, 2004 and consummation of the entire transaction by December 31,
2004. As we negotiated toward a definitive agreement with respect to such
transaction, we and the potential buyer began to consider alternative
structures for the transaction. In addition, as permitted by the letter of
intent, we simultaneously engaged in discussions with other, unrelated parties
regarding the sale to them of all or a controlling interest in Standard Life.
As a result of the ongoing nature of the various negotiations, the September
30, 2004 interim closing date contemplated by the letter of intent passed
without a definitive agreement having been entered into. As of the date of this
Report, we continue to engage in discussions with the proposed buyer under the
letter of intent, as well as with other parties, regarding the potential sale
of all or a controlling interest in Standard Life. We have not entered into
any additional letters of intent nor have we entered into any definitive
agreements with respect to such a transaction, although as discussions proceed
our board may authorize such action. The consummation of any such transaction
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 company-obligated 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 a definitive agreement with respect to the
proposed sale of all or a controlling interest in Standard Life will be entered
into, that our shareholders will approve such a transaction or that any of the
other conditions necessary to consummate the transaction will be satisfied.
However, if Standard Life is sold in its entirety, it would remain the
intention of management, as previously disclosed, to exit the financial
services business altogether and focus the Companys operations exclusively on
our more growth oriented health services business. Such course of action 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 we sell 100% of
Standard Life, 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 such sale would produce
substantial cash proceeds and management intends to utilize a portion (but not
yet determined) of the net cash proceeds from the proposed transaction for the
expansion of our health services business (for example through the acquisition
of complimentary businesses such as SVS Vision, which acquisition is currently
pending regulatory approval). In addition, management anticipates that the
remaining net proceeds, in combination with other sources of capital, would be
sufficient to satisfy our liquidity needs for approximately the next 24 months.
Management also intends to use the proceeds from the transaction to reduce our
senior credit facility and for general corporate purposes. In the event none of the proposed transactions currently under
consideration are 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/or seeking additional capital through the public or private equity or debt
markets. Acquisitions We announced previously on August 2, 2004 and August 13, 2004 that we
have, through our U.S. Health Services subsidiary, signed definitive agreements
to acquire SVS Vision Holding Company (SVS Vision) and iCare Medical Supply,
Inc. and its affiliated companies. These transactions are expected to close in
the fourth quarter of 2004 subject to regulatory approval and other conditions.
We anticipate 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. 12




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##### Table of Contents



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 Nine Month Periods Ended September 30, 2004
and September 30, 2003: The following table summarizes the consolidated results of our operations
(dollars in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Income (loss) from continuing operations
    
    $
    (2,695
    )
    
    $
    (2,937
    )
    
    $
    (6,931
    )
    
    $
    106Loss from the sale of discontinued operations
    
    
    
    
    
    
    (275
    )
    
    
    
    
    
    
    (275
    )Net loss
    
    $
    (2,695
    )
    
    $
    (3,212
    )
    
    $
    (6,931
    )
    
    $
    (169
    )
 Consolidated Results: For the quarter ended September 30, 2004, net loss was $2.7 million
compared to a net loss of $3.2 million for the 2003 quarter. Financial Services: Net loss for the current quarter was $.1 million compared to a $.9 million
loss for the 2003 quarter. The current quarter was favorably impacted by
increased spread income due to reduced crediting rates. Health Services: Net loss for the current quarter was $1.7 million compared to a $1.6
million net loss for the 2003 quarter. The current quarter showed improved
gross margins associated with increased revenues from our long-term care
business, and lower operating expenses due to reduced development costs. In
addition, no tax benefits were recorded on the current quarter losses. Other Services: Net loss for the current quarter was $.9 million compared to a $.4 million
net loss for the 2003 quarter. The increase in the net loss was due to a $.2
million tax benefit and a $.2 million net realized gain in the same quarter in
2003. 13




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Financial Services: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands)Premiums and Deposits Collected:Deferred annuities
    
    $
    14,735
    
    
    $
    20,999
    
    
    $
    40,247
    
    
    $
    111,429Single premium immediate annuities and other
deposits
    
    
    30,586
    
    
    
    45,149
    
    
    
    100,746
    
    
    
    130,379Equity-indexed annuities
    
    
    15,467
    
    
    
    26,056
    
    
    
    56,882
    
    
    
    101,569Universal and interest-sensitive life
    
    
    114
    
    
    
    115
    
    
    
    377
    
    
    
    413Subtotal  interest-sensitive and other
financial
products financial products
    
    
    60,902
    
    
    
    92,319
    
    
    
    198,252
    
    
    
    343,790Traditional
life
    
    
    1,508
    
    
    
    2,612
    
    
    
    5,870
    
    
    
    6,913Total premiums and deposits collected
    
    $
    62,410
    
    
    $
    94,931
    
    
    $
    204,122
    
    
    $
    350,703Statement of Operations:Revenues:Premium income
    
    $
    1,508
    
    
    $
    2,612
    
    
    $
    5,870
    
    
    $
    6,913Policy income
    
    
    4,965
    
    
    
    2,864
    
    
    
    12,585
    
    
    
    7,837Net investment income
    
    
    20,607
    
    
    
    19,858
    
    
    
    62,685
    
    
    
    61,588Net investment income  affiliated
    
    
    95
    
    
    
    52
    
    
    
    244
    
    
    
    165Call option income (loss)
    
    
    (2,737
    )
    
    
    1,062
    
    
    
    (1,408
    )
    
    
    4,051Fees and other income
    
    
    147
    
    
    
    24
    
    
    
    372
    
    
    
    167Net realized investment gain
(loss)
    
    
    (579
    )
    
    
    (394
    )
    
    
    611
    
    
    
    17,880Total revenues
    
    
    24,006
    
    
    
    26,078
    
    
    
    80,959
    
    
    
    98,601Benefits and expenses:Benefits and claims
    
    
    2,053
    
    
    
    4,285
    
    
    
    6,368
    
    
    
    9,885Interest credited to interest-sensitive annuities
and other financial products
    
    
    10,452
    
    
    
    16,497
    
    
    
    39,346
    
    
    
    49,271Amortization
    
    
    7,872
    
    
    
    3,164
    
    
    
    19,970
    
    
    
    11,360Amortization  net realized investment gain (loss)
    
    
    (372
    )
    
    
    (122
    )
    
    
    193
    
    
    
    9,571Other operating expenses
    
    
    2,285
    
    
    
    1,912
    
    
    
    6,694
    
    
    
    5,828Other operating expenses  affiliated
    
    
    1,456
    
    
    
    1,364
    
    
    
    4,368
    
    
    
    4,091Interest expense and financing costs  affiliated
    
    
    431
    
    
    
    420
    
    
    
    1,237
    
    
    
    1,264Total benefits and expenses
    
    
    24,177
    
    
    
    27,520
    
    
    
    78,176
    
    
    
    91,270Income (loss) before federal income tax expense
    
    
    (171
    )
    
    
    (1,442
    )
    
    
    2,783
    
    
    
    7,331Federal income tax expense (benefit)
    
    
    (58
    )
    
    
    (495
    )
    
    
    948
    
    
    
    2,484Net income (loss)
    
    $
    (113
    )
    
    $
    (947
    )
    
    $
    1,835
    
    
    $
    4,847
 14




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##### Table of Contents



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. Our investment spread is summarized as follows for the three and nine
months ended September 30: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net investment yield on invested assets
    
    
    4.96
    %
    
    
    4.90
    %
    
    
    5.05
    %
    
    
    5.44
    %Weighted average effective crediting rate
    
    
    3.05
    
    
    
    3.78
    
    
    
    3.19
    
    
    
    3.94Investment spread
    
    
    1.91
    
    
    
    1.12
    
    
    
    1.86
    
    
    
    1.50
 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 reduce exposure on equity-indexed annuity
liabilities. Deposits collectedconsist 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:  
    
    Deposits collected for interest-sensitive and other financial
products for the third quarter of 2004 decreased $31.4 million
or 34%, to $60.9 million compared to the third quarter of
2003. Deferred annuities decreased $6.3 million or 30%, to
$14.7 million. Deposits from equity-indexed annuities
decreased $10.6 million or 41%, to $15.5 million. Single
premium immediate annuities decreased $14.6 million or 32%, to
$30.6 million. Deposits collected decreased in the third
quarter of 2004 due to management actions to preserve spread
income in response to market conditions and due to Standard
Lifes A.M. Best rating reduction as described in Liquidity
and Capital Resources  Liquidity of Financial Services.
Management actions included reducing crediting rates, lowering
agent commissions and temporarily suspending sales of selected
products. Year-to-date analysis:  
    
    Deposits collected for interest-sensitive and other financial
products for the first nine months of 2004 decreased $145.5
million or 42%, to $198.3 million compared to the first nine
months of 2003. Deferred annuities decreased $71.2 million or
64%, to $40.2 million. Deposits from equity-indexed annuities
decreased $44.7 million or 44%, to $56.9 million. Single
premium immediate annuities decreased $29.6 million or 23%, to
$100.7 million. Deposits collected decreased in 2004 due to
management actions to preserve spread income in response to
market conditions and due to Standard Lifes A.M. Best rating
reduction as described in Liquidity and Capital Resources -
Liquidity of Financial Services. Management actions
included reducing crediting rates, lowering agent commissions
and temporarily suspending sales of selected products. Premium incomeconsists of premiums earned from 1) traditional life products
and 2) annuity products that incorporate significant mortality features. Quarterly analysis:  
    
    Premium income for the third quarter of 2004 decreased $1.1 million or
42%, to $1.5 million compared to the third quarter of 2003, as a result of
decreased deposits from ordinary life products and supplemental contracts
with life contingencies. 15




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Year-to-date analysis:  
    
    Premium income for the first nine months of 2004 decreased $1.0 million
or 15%, to $5.9 million compared to the first nine months of 2003, as a
result of decreased deposits from ordinary life products and supplemental
contracts with life contingencies. Policy incomerepresents 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:  
    
    Policy income for the third quarter of 2004 increased $2.1
million or 73%, to $5.0 million compared to the third quarter
of 2003. Policy income, principally surrender income,
increased due to the following: 1) reduced crediting rates on
certain of our annuity products, 2) the letter of intent as
described in the Recent Developments section and 3) Standard
Lifes A.M. Best rating reduction as described in Liquidity
and Capital Resources  Liquidity of Financial Services. Year-to-date analysis:  
    
    Policy income for the first nine months of 2004 increased $4.7
million or 61%, to $12.6 million compared to the first nine
months of 2003. Policy income increased due to the following:
1) reduced crediting rates on certain of our annuity products,
2) the letter of intent as described in the Recent
Developments section and 3) Standard Lifes A.M. Best rating
reduction as described in Liquidity and Capital Resources -
Liquidity of Financial Services. Net investment incomeincludes 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:  
    
    Net investment income for the third quarter of 2004 increased
$.8 million to $20.7 million compared to the third quarter of
2003. Net investment income increased as a result of a $42.0
million, or 2.6%, increase in the weighted average invested
assets for the period and an increase in the net investment
yield earned on average invested assets to 4.96% for the third
quarter of 2004, compared to 4.90% for the third quarter of
2003. Year-to-date analysis:  
    
    Net investment income for the first nine months of 2004
increased $1.2 million or 2%, to $62.7 million compared to the
first nine months of 2003. Net investment income increased as
a result of a $137.6 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 5.05% for the first nine months
of 2004, compared to 5.44% for the first nine months of 2003.
The decline in net investment yield is due primarily to the
timing of investing new premium deposits in assets, which
earned lower yields than the average portfolio yield. Call option income (loss)relates to equity-indexed call options we use to
limit risk against unusually high crediting rates on our equity-indexed
financial products 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. Quarterly analysis:  
    
    Call option loss for the third quarter of 2004 was $2.7 million compared
to call option income of $1.1 million for the third quarter of 2003. The
call option loss resulted from changes in the market value of our call
options due to changes in the S&P 500 Index and the DJIA Index. 16




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Year-to-date analysis:  
    
    Call option loss for the first nine months of 2004 was $1.4 million
compared to call option income of $4.1 million the first nine 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 incomeconsist of fee income related to servicing unaffiliated
blocks of business and experience refunds. Quarterly analysis:  
    
    Fees and other income for the third quarter of 2004 increased $.1 million to $.1 million compared to the third quarter 2003. Year-to-date analysis:  
    
    Fees and other income for the first nine months of 2004 increased $.2 million to $.4 million compared to the first nine
months of 2003. Net realized investment gain (loss)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:  
    
    Net realized investment loss for the third quarter of 2004 increased $.2 million to $.6 million, compared to the
third quarter of 2003. Year-to-date analysis:  
    
    Net realized investment gain for the first nine months of 2004 decreased $17.3 million to $.6 million compared to
the first nine months of 2003. The decline was largely due to a strategy in 2003 to realize income tax benefits
from capital loss carryforwards.  
    
    Approximately 99% of our fixed maturity securities are classified as investment grade at September 30, 2004. Benefits and claimsinclude 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:  
    
    Benefits and claims for the third quarter of 2004 decreased $2.2
million or 52%, to $2.1 million compared to the third quarter of 2003.
The decrease in benefits and claims is primarily due to favorable
mortality experience of $1.1 million and lower cost of supplementary
contracts of $.9 million. Year-to-date analysis:  
    
    Benefits and claims for the first nine months of 2004 decreased $3.5
million or 36%, to $6.4 million compared to the first nine months of
2003. The decrease in benefits and claims is primarily due to favorable
mortality experience of $1.3 million and lower cost of supplementary
contracts of $.8 million. 17




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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) changes in the market values of securities underlying
our equity-indexed annuities and 4) the impact of SFAS No. 133, Accounting for
Derivatives Instruments and Hedging Activities. Quarterly analysis:  
    
    Interest credited in the third quarter of 2004 decreased $6.0
million or 37%, to $10.5 million compared to the third quarter
of 2003. Interest credited decreased $5.3 million due to the
impact of less favorable market performance on equity products
and $1.6 million due to lower crediting rates. These
decreases were offset by $.9 million due to a 5% increase in
average interest-sensitive liabilities.  
    
    The weighted average credited rate on interest-sensitive
liabilities, including equity-indexed annuities, for the third
quarter of 2004 and 2003 was 2.40% and 4.05%, respectively.
The decrease in average credited rate was primarily due to the
impact of less favorable market performance on equity-indexed
annuity crediting rates, but also due to reductions in
crediting rates for new and existing business. When offset by
gains on call option assets used to hedge equity-indexed
annuity liabilities, the effective crediting rates for the
2004 and 2003 quarters were 3.05% and 3.78%, respectively, a
reduction of 73 basis points. Year-to-date analysis:  
    
    Interest credited in the first nine months of 2004 decreased
$9.9 million or 20%, to $39.3 million compared to the first
nine months of 2003. Interest credited decreased $10.2
million due to the impact of less favorable market performance
on equity products and $5.4 million due to lower crediting
rates. These decreases were offset by $5.7 million due to a
10.8% increase in average interest-sensitive liabilities of
$164.2 million.  
    
    The weighted average credited rate on interest-sensitive
liabilities, including equity-indexed annuities, for the first
nine months of 2004 and 2003 was 3.07% and 4.30%,
respectively. The decrease in average credited rate was
primarily due to the impact of less favorable market
performance on equity-indexed annuity crediting rates, but
also due to reductions in crediting rates for new and existing
business. When offset by gains on call option assets used to
hedge equity-indexed annuity liabilities, the effective
crediting rates for the 2004 and 2003 periods were 3.19% and
3.94%, respectively, a reduction of 75 basis points. Amortizationincludes 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:  
    
    Amortization for the third quarter of 2004 increased $4.5 million or
145%, to $7.9 million compared to the third quarter of 2003. The
amortization increase is primarily due to an increase in spread income. Year-to-date analysis:  
    
    Amortization for the nine months of 2004 decreased $.8 million or 4%,
to $20.1 million compared to the first nine months of 2003. This
decrease primarily relates to lower net realized gains of $17.1 million,
which resulted in a decrease in amortization of $9.4 million related to
those gains offset by an $8.6 million increase in amortization of DAC
related costs. 18




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Operating expensesconsist of general operating expenses, including salaries,
net of deferrable amounts relating to new insurance business sold. Quarterly analysis:  
    
    Other operating expenses increased $.4 million to $2.3 million
for the third quarter 2004 compared to $1.9 million for the
third quarter 2003. Year-to-date analysis:  
    
    Other operating expenses for the first nine months of 2004
increased $.9 million or 15%, to $6.7 million compared to the
first nine months of 2003 primarily due to increased
consulting expense. Operating expenses  affiliatedconsist 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 third quarter 2004
increased $.1 million to $1.5 million compared to the third
quarter 2003. Year-to-date analysis:  
    
    Affiliated operating expenses for 2004 increased $.3 million
to $4.4 million compared to the first nine months of 2003 due
to increased rental expense. Interest expense and financing costs  affiliatedrepresents interest expense
incurred on the surplus debentures issued to Standard Management. Quarterly analysis:  
    
    Affiliated interest expense and financing costs were $.4 million for the third quarter 2004 and 2003. Year-to-date analysis:  
    
    Affiliated interest expense and financing costs were $1.2 million for the first nine months of 2004 and 2003. Federal income tax expense Quarterly analysis:  
    
    Federal income tax benefit decreased $.4 million to $.1
million compared to the third quarter of 2003. The effective
tax rate was 34% for the third quarter of 2004 and 2003. Year-to-date analysis:  
    
    Federal income tax expense decreased $1.5 million to $.9
million compared to the first nine months of 2003. The
effective tax rate was 34% for the first nine months of 2004
and 2003. 19




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Health Services: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands)Statement of Operations:Sales
    
    $
    1,872
    
    
    $
    825
    
    
    $
    5,364
    
    
    $
    2,256Cost of goods sold
    
    
    1,430
    
    
    
    675
    
    
    
    3,994
    
    
    
    1,917Total gross margin
    
    
    442
    
    
    
    150
    
    
    
    1,370
    
    
    
    339Net realized investment loss
    
    
    
    
    
    
    
    
    
    
    964
    
    
    
    Salaries
    
    
    1,061
    
    
    
    618
    
    
    
    3,590
    
    
    
    1,401Other operating expenses
    
    
    829
    
    
    
    1,868
    
    
    
    2,569
    
    
    
    3,339Other operating expenses   affiliated
    
    
    24
    
    
    
    
    
    
    
    72
    
    
    
    Amortization and depreciation
    
    
    235
    
    
    
    87
    
    
    
    678
    
    
    
    246Interest expense and financing costs
    
    
    23
    
    
    
    7
    
    
    
    52
    
    
    
    23Total expenses
    
    
    2,172
    
    
    
    2,580
    
    
    
    6,961
    
    
    
    5,009Loss before income taxes
    
    
    (1,730
    )
    
    
    (2,430
    )
    
    
    (6,555
    )
    
    
    (4,670
    )Federal income tax (benefit)
    
    
    
    
    
    
    (827
    )
    
    
    
    
    
    
    (1,588
    )Net loss
    
    $
    (1,730
    )
    
    $
    (1,603
    )
    
    $
    (6,555
    )
    
    $
    (3,082
    )
 General:Our Health Services segment consists of revenues earned and expenses
incurred from our pharmaceutical operations. Our primary customer base
consists of academic institutions, skilled nursing facilities, assisted living
facilities, home health care agencies, 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 goods sold) and management of
our operating expenses. Sales Quarterly analysis:  
    
    Sales for the third quarter of 2004 increased $1.0 million or 127%, to $1.9 million compared to the third
quarter of 2003, primarily related to the acquisition of Apothecary Solutions in February 2004. Year-to-date analysis:  
    
    Sales for the first nine months of 2004 increased $3.1 million or 138% to $5.4 million compared to the first
nine months of 2003, primarily related to the acquisition of Apothecary Solutions. Net realized loss on investment Year-to-date analysis:  
    
    Net realized loss on investment for the first nine months of 2004 represents the loss on the sale of MCO. 20




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Total expenses Quarterly analysis:  
    
    Total expenses for the third quarter of 2004 decreased $.4
million or 16%, to $2.2 million compared to the third
quarter of 2003, primarily related to improvements in
processes and procedures that offset the increased expenses
for Apothecary Solutions. Year-to-date analysis:  
    
    Total expenses for the first nine months of 2004 increased
$2.0 million or 39%, to $7.0 million compared to the first
nine months of 2003, primarily related to the increased
expenses for Apothecary Solutions. Federal income tax benefit Quarterly analysis:  
    
    Federal income tax benefit decreased $.8 million to zero,
compared to the third quarter of 2003 due to a 100%
valuation allowance on the net loss in 2004. Year-to-date analysis:  
    
    Federal income tax benefit decreased $1.6 million to zero,
compared to the first nine months of 2003 due to a 100%
valuation allowance on the net loss in 2004. 21




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Other Services: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(dollars in thousands)Statement of Operations:Operating income  affiliated
    
    $
    1,387
    
    
    $
    1,364
    
    
    $
    4,161
    
    
    $
    4,114Interest income  affiliated
    
    
    431
    
    
    
    420
    
    
    
    1,065
    
    
    
    1,264Net realized investment gain
    
    
    
    
    
    
    162
    
    
    
    
    
    
    
    162Fees and other income (loss)
    
    
    1
    
    
    
    (8
    )
    
    
    16
    
    
    
    734Total revenues
    
    
    1,819
    
    
    
    1,938
    
    
    
    5,242
    
    
    
    6,274Net investment expenses  affiliated
    
    
    55
    
    
    
    53
    
    
    
    213
    
    
    
    165Other operating expenses
    
    
    1,447
    
    
    
    1,427
    
    
    
    4,248
    
    
    
    5,589Interest expense and financing costs
    
    
    1,169
    
    
    
    1,032
    
    
    
    3,242
    
    
    
    3,031Total expenses
    
    
    2,692
    
    
    
    2,512
    
    
    
    7,703
    
    
    
    8,785Loss before income taxes
    
    
    (852
    )
    
    
    (574
    )
    
    
    (2,461
    )
    
    
    (2,511
    )Federal income tax benefit
    
    
    
    
    
    
    (187
    )
    
    
    (250
    )
    
    
    (852
    )Net loss
    
    $
    (852
    )
    
    $
    (387
    )
    
    $
    (2,211
    )
    
    $
    (1,659
    )
 General:Our Other Services segment consists of revenues and expenses primarily
related to holding company operations and financing costs. Operating income  affiliatedconsists of income from the Financial Services
segment related to management fees and rental income. Quarterly analysis:  
    
    Operating income  affiliated was $1.4 million in the third quarter of 2004 and 2003. Year-to-date analysis:  
    
    Operating income  affiliated increased $.1 million or 1%, to $4.2 million compared to the first nine months of
2003 due to increased rental income. Interest income  affiliatedconsists 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 third quarter of 2004 and 2003. Year-to-date analysis:  
    
    Interest income  affiliated decreased $.2 million or 2% to $1.1 million compared to the first nine months of 2003. 22




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Net investment expenses  affiliatedrepresent interest expense paid to the
Financial Services segment. Other operating expensesconsist of holding company operating expenses,
including salaries. Quarterly analysis:  
    
    Other operating expenses was at $1.4 million in the third quarter of
2004 and 2003. Year-to-date analysis:  
    
    Other operating expenses decreased $1.3 million or 24%, to $4.2
million compared to the first nine months of 2003 primarily due to
decreased salary expense. Interest expense and financing costsrepresents interest expense incurred and
the amortization of debt issuance costs. Quarterly analysis:  
    
    Interest expense and financing costs increased $.1 million or 13%, to
$1.2 million compared to the third quarter of 2003 due to additional
debt balances in 2004 as a result of the issuance of $3.3 million of
convertible notes on February 19, 2004. Year-to-date analysis:  
    
    Interest expense and financing costs increased $.2 million or 7%, to
$3.2 million compared to the first nine months of 2003 due to additional
debt balances in 2004 as a result of the issuance of $3.3 million of
convertible notes on February 19, 2004. Federal income tax benefit Quarterly analysis:  
    
    Federal income tax benefit decreased by $.2 million compared to the
third 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 $.6 million compared to the
first nine months of 2003 due to a valuation allowance on a majority of
the net loss in 2004. 23




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Discontinued Operations: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2003(dollars in thousands)Loss from the sale of Discontinued Operations
    
    $
    
    
    
    $
    (275
    )
    
    $
    
    
    
    $
    (275
    )
 General:Our International Operations (discontinued operations) were sold in
2002. Loss from the sale of discontinued operations  
    
    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. 24




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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:The parent company 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
(Commissioner). For the quarter ended September 30, 2004 the Commissioner had
not yet approved our request of $.4 million in interest payments. Assuming the
approvals are granted and the December 31, 2003 interest rate of 6.0%
continues, we expect the parent company to receive interest income of $1.6
million from the Surplus Debentures in 2004. Dividendspaid 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, 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, the parent company did not receive dividends from our
insurance subsidiaries. In 2004, we could receive dividends of approximately
$6.4 million from Standard Life, without regulatory approval and an additional
$4.0 million with regulatory approval; however, no such dividends have been
paid to date. Any dividends the parent company might receive from U.S. Health Services
are not limited by any regulatory authority, although the parent company does
not expect that we will receive any dividends from U.S. Health Services during
2004 as the parent company continues to fund the losses in the Health Services
segment as it continues 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, the parent company expects 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, the parent company expects to receive $1.1
million of equipment rental fees from Standard Life. Lease Income:Effective January 1, 2002, the parent company 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,
the parent company received approximately $.8 million in lease income from
Standard Life and expects 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, the parent company was reimbursed $.7
million in maintenance expenses for 2003 and 2002. The parent company expects
to be reimbursed $.3 million in maintenance expense in 2004. 25




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES Estimated Cash Required in 2004 As of September 30, 2004, there were no significant changes in our
estimated cash required for our mortgage payable, notes payable and
company-obligated trust preferred securities at December 31, 2003 as described
in our previous periodic reports except for the following paragraph. As of September 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 September 30, 2004 was $19 million. We have
obtained from the lender a waiver of this violation and any similar violation
through March 31, 2005. The Company anticipates being in compliance on or
before March 31, 2005. General:On a consolidated basis we reported net cash provided by
operations of $40.3 million and $14.5 million for the first nine months of 2004
and 2003, respectively with the increase in 2004 primarily due to a decrease in
the loss on net realized investment gains and in a deferral of acquisition
costs partially offset by a decrease in insurance policy liabilities. Contractual Obligations:During the first nine 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, advances to parent, 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 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 . 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. 26




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 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. We believe that the operational cash flow of Standard Life will be
sufficient to meet our anticipated needs for 2004. As of September 30, 2004,
Standard Life had statutory capital and surplus for regulatory purposes of
$67.3 million. As the annuity business produced by Standard Life increases,
Standard Life expects to satisfy statutory capital and surplus requirements
through statutory profits and through additional capital contributions by
Standard Management. Net cash flow from operations on a statutory basis of
Standard Life was $(33.5) million and $112.1 million for the first nine months
of 2004 and 2003, respectively. 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 and
2005. Therefore, this segment is expected to fund its cash needs through
external borrowings and capital contributions from Standard Management. In
addition, we anticipate funding the purchase price for the SVS Vision and iCare
Medical Supply, Inc, acquisitions 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 September 30, 2004, our
Health Services segment had a retained deficit of $11.1 million. As described under Recent Developments, we are engaged in discussions
with respect to the sale of all or a controlling interest in our principal
financial services subsidiary. If we sell 100% of such subsidiary, we intend
to continue the business of Standard Management solely in the Health Services
segment. Substantially all of the Companys revenues and cash flows have
historically come from our financial services business. No definitive
agreements have been entered into with respect to such a transaction. Any such
transaction would be 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 segment, the Company
would, for a time, have significantly less cash flow from operations. However,
we anticipate that the transaction would produce substantial cash proceeds and
management intends to utilize a portion (but not yet determined) 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 approximately the next 24 months. 27




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES 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 all or a portion 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. 28




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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 September 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. 29




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##### Table of Contents



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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Stockholders held on July 9, 2004, the following
individuals were elected to the Board of Directors: Shares For
    
    Shares WithheldRonald D. Hunter
    
    
    6,069,753
    
    
    
    793,636James H. Steane II
    
    
    6,153,021
    
    
    
    710,368
 A total of 6,863,389 shares were present in person or by proxy at the Annual
Meeting of Stockholders. 
 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 August 3, 2004, we filed a report on Form 8-K with the Commission
related to the execution of a definitive agreement for the purchase of SVS
Vision. On August 13, 2004, we filed a report on Form 8-K with the Commission
related to Regulation FD disclosure regarding the proposed sale of Standard
Life. On August 13, 2004, we filed a report on Form 8-K with the Commission
related to the release of our financial results for the second quarter of 2004. On August 16, 2004, we filed a report on Form 8-K with the Commission
related to the execution of a Stock Purchase Agreement for the purchase of iCare
Medical Supply, Inc, and its affiliated companies. 30




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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: November 12, 2004 STANDARD MANAGEMENT CORPORATION(Registrant)By: /s/ Ronald D. HunterRonald D. HunterChairman of the Board andChief Executive Officer(Principal Executive Officer)By: /s/ Michael B. EdwardsMichael B. EdwardsVice President and Corporate Controller(Chief Accounting Officer)
 31