Health Care and Insurance

Failed deals raise questions: Standard Management calls off two health services acquisitions, delaying strategic shift

January 31, 2005

Standard Management Corp. lost a large chunk of potential revenue and raised more questions about its future when it recently revealed the end of deals to buy two health services companies.

The deals' collapse stifles attempts, at least for now, to shift the company's business focus from life insurance to providing medical services. And it's caught the attention of regulators who are giving the company a close look.

The India n a p o l i s holding company stated Jan. 19 that it ended an agreement to buy Michigan-based SVS Vision Holding Co. for $16 million. Two days later, the company announced the same fate for an agreement to buy Florida-based iCare Medical Supply Inc. for $10 million.

Standard Management announced both acquisitions last August. Chairman and CEO Ronald Hunter said in a statement released then that the deals would add $45 million in revenue to Standard's U.S. Health Services subsidiary.

A company statement announcing the end of the SVS deal states it was terminated "by mutual agreement of all parties." That clause was missing from the statement on the iCare deal.

Representatives from Standard, which has posted five straight quarterly losses, declined to discuss the latest setbacks.

"The company's progress will be noted through the appropriate communication channels," spokeswoman Diane Willis wrote in an e-mailed response to a request for comment.

Standard's leaders also have left questions unanswered about other recent setbacks, and the company's declining performance has drawn the attention of state regulators.

Last fall, the Indiana Department of Insurance blocked the transfer of $430,000 from Standard Management subsidiary Standard Life Insurance Company of Indiana to the parent to pay quarterly interest on notes issued several years ago.

Regulators cited $15 million in loans made from the life insurer to the parent as a reason then. They're still keeping an eye on the company, according to Jim Atterholt, the department's acting commissioner.

"We are in constant contact with Standard Management," he said. "We are monitoring the situation very closely."

The latest setbacks cropped up as the parent company continues its attempt to generate cash by selling Standard Life and shifting its focus to its newer health services subsidiary.

Money from that sale would be used to expand health services and satisfy liquidity needs for about two years, the company has repeatedly stated in documents filed with the U.S. Securities and Exchange Commission.

The company had hoped to finalize a deal to sell Standard Life by Dec. 31, but that deadline, like others before it, passed quietly. Hunter has declined to provide updates.

Standard Management first announced last spring that it planned to sell the life insurance business, even though it generates most of its revenue.

Company leaders see more potential in health services, and they're developing a nationwide network that delivers pharmaceutical, medical and veterinary supplies for it.

Hunter said last fall his company could ring up $200 million to $300 million in revenue over the next three years.

"We see nothing but a 15-year run in that business," he said in a television interview posted on Standard Management's Web site.

He also said during the interview that Standard Management has invested $45 million in health services over the past 2-1/2 years.

Hunter told IBJ last fall that his company has been busy building pharmacies, buying equipment and hiring people.

"Most companies take five years of investment before they ever make a dime," he said then.

The company has little to show for that investment so far. The parent company saw quarterly losses increase from $1.8 million to $2.7 million through the first three quarters of 2004.

Losses in health services decreased from $2.6 million to $1.7 million over the same period. However, the financial services subsidiary moved from a $1.2 million profit to a $100,000 loss.

The company's third-quarter statement showed some sales gains for health services, but the subsidiary also posted a loss of $6.5 million through the first nine months of 2004.

"There's definitely uncertainty there," said Melissa Gannon, vice president of Florida-based Weiss Ratings Co.

Gannon said the health services market has potential, but it's hard to say how Standard Management will fare in it given the company's recent setbacks.

"It's difficult to know until they put some good deals together and really

mature in that market whether they will succeed," she said.

On the insurance side, Weiss rates the financial strength of Standard's insurance subsidiary D+, which Gannon described as "weak."

Another rating agency, New Jerseybased A.M. Best Co., downgraded Standard Life's financial strength from "very good" to "fair" last summer. The agency then placed that rating under review after Standard Management announced its latest attempt to sell the life subsidiary in November.

The company "intends to continue to pursue other acquisitions in order to continue to expand its health care segment," according to the news releases that announced the end of the SVS and iCare purchase agreements.

In the meantime, Standard Management will pay a price for those failed deals. It will have to declare all the costs associated with them as expenses in its next quarterly report, and, as Gannon noted, company officials "don't end up with any type of asset."

If the deals had gone through, those acquisition costs could have been spread out over time.

The company has until March to file its fourth-quarter/end-of-the-year statement with the SEC or request more time.
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