##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 2005or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 0-20882
 Standard Management Corporation
  Indiana
(State or other jurisdiction
of incorporation or organization)
    
    No. 35-1773567
(I.R.S. Employer Identification No.)10689 N. Pennsylvania Street, Indianapolis, Indiana
(Address of principal executive offices)
    
    46280
(Zip Code)
 
 þ o
  o þ
  o þ




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STANDARD MANAGEMENT CORPORATION
 INDEX
 Page NumberPart I. FINANCIAL INFORMATION:Item 1. Unaudited Financial StatementsConsolidated Balance Sheets  September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations  For the Three Months and Nine Months Ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Shareholders Equity  For the Nine Months Ended September 30, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows  For the Nine Months Ended September 30, 2005 and 2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Part II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits and Reports on Form 8-K
    
    
    27SIGNATURE
    
    
    28EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  September 30
    
    
    December 312005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,521
    
    
    $
    1,121Accounts receivable, net
    
    
    5,651
    
    
    
    1,109Inventories
    
    
    3,387
    
    
    
    748Prepaid and other current assets
    
    
    400
    
    
    
    1,009Assets of discontinued operations
    
    
    
    
    
    
    1,921,550Total current assets
    
    
    18,959
    
    
    
    1,925,537Property and equipment, net
    
    
    11,722
    
    
    
    11,299Assets held for sale
    
    
    738
    
    
    
    738Deferred financing fees, net
    
    
    2,113
    
    
    
    1,767Officer and other notes receivable, less current portion
    
    
    859
    
    
    
    912Investments in unconsolidated subsidiaries
    
    
    5,160
    
    
    
    160Intangible assets, net
    
    
    6,271
    
    
    
    1,312Goodwill
    
    
    12,293
    
    
    
    3,725Other noncurrent assets
    
    
    1,327
    
    
    
    2,295Total assets
    
    $
    59,442
    
    
    $
    1,947,745LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,550
    
    
    $
    401Accrued expenses
    
    
    2,460
    
    
    
    2,236Current portion of long-term debt
    
    
    2,728
    
    
    
    3,597Liabilities of discontinued operations
    
    
    1,337
    
    
    
    1,829,606Total current liabilities
    
    
    9,075
    
    
    
    1,835,840Long-term debt, less current portion
    
    
    37,360
    
    
    
    50,714Other long-term liabilities
    
    
    1,148
    
    
    
    1,159Total liabilities
    
    
    47,583
    
    
    
    1,887,713Shareholders equity:Common stock, no par value, and additional paid in capital, 40,000,000 shares
and
20,000,000 shares authorized, 10,729,525 shares and 9,446,191 shares issued in
2005 and 2004, respectively
    
    
    68,862
    
    
    
    64,369Retained deficit
    
    
    (49,194
    )
    
    
    (1,529
    )Treasury stock, at cost, 1,605,151 shares and 1,525,078 shares in 2005
and 2004, respectively
    
    
    (7,877
    )
    
    
    (7,703
    )Accumulated other comprehensive income from continuing operations
    
    
    68
    
    
    
    68Accumulated other comprehensive income from discontinued operations
    
    
    
    
    
    
    4,827Total shareholders equity
    
    
    11,859
    
    
    
    60,032Total liabilities and shareholders equity
    
    $
    59,442
    
    
    $
    1,947,745
  3




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    10,106
    
    
    $
    1,872
    
    
    $
    14,797
    
    
    $
    5,364Cost of sales
    
    
    7,228
    
    
    
    1,430
    
    
    
    10,966
    
    
    
    3,994Gross profit
    
    
    2,878
    
    
    
    442
    
    
    
    3,831
    
    
    
    1,370Selling, general and administrative expenses
    
    
    5,561
    
    
    
    2,940
    
    
    
    13,023
    
    
    
    9,469Depreciation and amortization
    
    
    556
    
    
    
    542
    
    
    
    1,570
    
    
    
    1,600Loss related to sale of a business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    964Operating loss
    
    
    (3,239
    )
    
    
    (3,040
    )
    
    
    (10,762
    )
    
    
    (10,663
    )Other income
    
    
    313
    
    
    
    
    
    
    
    392
    
    
    
    Interest expense
    
    
    1,012
    
    
    
    1,193
    
    
    
    3,322
    
    
    
    3,376Loss before income taxes
    
    
    (3,938
    )
    
    
    (4,233
    )
    
    
    (13,692
    )
    
    
    (14,039
    )Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (3,938
    )
    
    
    (4,233
    )
    
    
    (13,692
    )
    
    
    (14,039
    )Income (loss) from discontinued operations, net of income tax
expense (benefit) of $50, ($58), $262 and $698, respectively
    
    
    56
    
    
    
    1,536
    
    
    
    (33,973
    )
    
    
    7,108Net loss
    
    $
    (3,882
    )
    
    $
    (2,697
    )
    
    $
    (47,665
    )
    
    $
    (6,931
    )Loss per share  basic and dilutedLoss from continuing operations
    
    $
    (0.44
    )
    
    $
    (0.53
    )
    
    $
    (1.66
    )
    
    $
    (1.76
    )Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    0.19
    
    
    
    (4.12
    )
    
    
    0.89Net loss available to common shareholders
    
    $
    (0.43
    )
    
    $
    (0.34
    )
    
    $
    (5.78
    )
    
    $
    (0.87
    )Weighted average shares outstanding
    
    
    8,895,592
    
    
    
    7,929,863
    
    
    
    8,250,631
    
    
    
    7,991,807
  4




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
  Common stock
    
    
    Retained
    
    
    
    
    
    
    Accumulated otherand additional
    
    
    earnings
    
    
    
    
    
    
    comprehensive incomeTotal
    
    
    paid in capital
    
    
    (deficit)
    
    
    Treasury stock
    
    
    (loss)Balance at January 1, 2004
    
    $
    72,447
    
    
    $
    68,078
    
    
    $
    9,338
    
    
    $
    (7,671
    )
    
    $
    2,702Comprehensive loss:Net loss
    
    
    (6,931
    )
    
    
    
    
    
    
    (6,931
    )
    
    
    
    
    
    
    Change in unrealized gain on securities, net
of income tax provision of $1,412
    
    
    2,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,716Comprehensive loss
    
    
    (4,215
    )Issuance of common stock in business acquisitions
    
    
    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
    
    
    $
    2,407
    
    
    $
    (7,687
    )
    
    $
    5,418Balance at January 1, 2005
    
    $
    60,032
    
    
    $
    64,369
    
    
    $
    (1,529
    )
    
    $
    (7,703
    )
    
    $
    4,895Comprehensive loss:Net loss
    
    
    (47,665
    )
    
    
    
    
    
    
    (47,665
    )
    
    
    
    
    
    
    Change in unrealized loss on securities, net
of income tax benefits of $2,670
    
    
    (4,827
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,827
    )Comprehensive loss
    
    
    (52,492
    )Adjustment due to stock price contingency
    
    
    (84
    )
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in business acquisitions
    
    
    4,100
    
    
    
    4,100Issuance of warrants
    
    
    518
    
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options
    
    
    (14
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    Stock compensation adjustment
    
    
    (27
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    Treasury stock acquired
    
    
    (174
    )
    
    
    
    
    
    
    
    
    
    
    (174
    )
    
    
    Balance at September 30, 2005
    
    $
    11,859
    
    
    $
    68,862
    
    
    $
    (49,194
    )
    
    $
    (7,877
    )
    
    $
    68
  5




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 302005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (47,665
    )
    
    $
    (6,931
    )Net income (loss) from discontinued operations
    
    
    (33,973
    )
    
    
    7,108Net loss from continuing operations
    
    
    (13,692
    )
    
    
    (14,039
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,570
    
    
    
    1,600Amortization of deferred financing costs and debt discount
    
    
    299
    
    
    
    107Provision for bad debts
    
    
    275
    
    
    
    115Net realized loss on sale of a business
    
    
    
    
    
    
    964Change in operating assets and liabilities excluding affect of business acquisitions:Accounts receivable
    
    
    (1,814
    )
    
    
    30Inventories
    
    
    (525
    )
    
    
    (287
    )Prepaid and other current assets
    
    
    693
    
    
    
    (754
    )Accounts payable
    
    
    (395
    )
    
    
    (688
    )Accrued expenses
    
    
    (282
    )
    
    
    1,281Other
    
    
    (436
    )
    
    
    (462
    )Net cash used in operating activities of continuing operations
    
    
    (14,307
    )
    
    
    (12,133
    )INVESTING ACTIVITIES:Capital expenditures
    
    
    (456
    )
    
    
    (595
    )Proceeds from the sale of Standard Life
    
    
    47,214
    
    
    
    Cash paid for health services acquisitions, net of cash acquired
    
    
    (11,157
    )
    
    
    (823
    )Cash paid for health service sold
    
    
    
    
    
    
    (800
    )Change in other noncurrent assets, net
    
    
    1,022
    
    
    
    (891
    )Net cash provided by (used in) investing activities of
continuing operations
    
    
    36,623
    
    
    
    (3,109
    )FINANCING ACTIVITIES:Borrowings
    
    
    4,750
    
    
    
    3,300Net cash received from discontinued operations
    
    
    2,459
    
    
    
    13,458Purchase of common stock for treasury
    
    
    (174
    )
    
    
    (16
    )Exercise of common stock options
    
    
    (14
    )
    
    
    (2
    )Deferred financing costs paid
    
    
    (685
    )
    
    
    (522
    )Repayments of long-term debt
    
    
    (20,252
    )
    
    
    (1,429
    )Net cash provided by (used in) financing activities of
continuing operations
    
    
    (13,916
    )
    
    
    14,789Net increase (decrease) in cash and cash equivalents of continuing operations
    
    
    8,400
    
    
    
    (453
    )Cash and cash equivalents at beginning of period
    
    
    1,121
    
    
    
    1,337Cash and cash equivalents at end of period
    
    $
    9,521
    
    
    $
    884
  6




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
     Note 2  Summary of Significant Accounting Policies
 Revenue Recognition / Contractual Allowances
   7




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 2  Summary of Significant Accounting Policies (continued)
 Cash Equivalents
  Allowance for Doubtful Accounts
    Inventories and Cost of Revenues
     Deferred Financing Costs
  8




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 2  Summary of Significant Accounting Policies (continued)
 Assets Held For Sale
  Investments in Unconsolidated Subsidiaries
  Other Noncurrent Assets
  Other Long-Term Liabilities
  Legal fees
  Treasury stock
  Net Loss Per Common Share
  Note 3  Discontinued Operations  Financial Services
   9




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 3  Discontinued Operations  Financial Services (continued)
       10




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 3  Discontinued Operations  Financial Services (continued)
  Standard Life
Unaudited Condensed Consolidated Balance Sheet
 September 30
    
    
    December 312005
    
    
    2004Assets:Total investments
    
    $
    
    
    
    $
    1,686,396Deferred policy acquisition costs and present value of
future profits
    
    
    
    
    
    
    174,172Other assets
    
    
    
    
    
    
    60,982Assets of
discontinued
operations
    
    $
    
    
    
    $
    1,921,550Liabilities:Insurance policy liabilities
    
    $
    
    
    
    $
    1,824,736Accounts payable and
accrued expenses
    
    
    1,337
    
    
    
    4,870Liabilities of
discontinued
operations
    
    $
    1,337
    
    
    $
    1,829,606
 Standard Life
Unaudited Condensed Consolidated Income Statement
 September 30
    
    
    September 302005
    
    
    2004Revenues
    
    $
    40,796
    
    
    $
    80,891Benefits, claims, interest
credited and amortization
    
    
    (33,307
    )
    
    
    (65,877
    )Operating and other expenses
    
    
    (4,700
    )
    
    
    (7,208
    )Impairment charge and loss
on sale
    
    
    (36,550
    )
    
    
    Income tax (expense)
    
    
    (212
    )
    
    
    (698
    )Income (loss)
from
discontinued
operations
    
    $
    (33,973
    )
    
    $
    7,108
 Note 4  Health Services Business Acquisitions
   11




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 4  Health Services Business Acquisitions (continued)
        Cash
    
    $
    1,330Accounts receivable
    
    
    3,003Inventories
    
    
    2,114Other current assets
    
    
    83Property and equipment
    
    
    703Intangible assets
    
    
    5,352Goodwill
    
    
    8,567Accounts payable and accrued expenses
    
    
    (3,153
    )Total purchase price
    
    $
    17,999
 12




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 4  Health Services Business Acquisitions (continued)
  September 302005
    
    
    2004Net revenues
    
    $
    40,438
    
    
    $
    27,859Gross profits
    
    
    11,366
    
    
    
    8,692Operating loss
    
    
    (8,853
    )
    
    
    (8,628
    )Net loss from continuing operations
    
    
    (12,234
    )
    
    
    (13,540
    )Net loss per share from continuing operations
    
    $
    (1.33
    )
    
    $
    (1.47
    )Weighted average shares outstanding
    
    
    9,183,347
    
    
    
    9,241,808
  Note 5  Stock Option Plan
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302005
    
    
    2004
    
    
    2005
    
    
    2004Reported net loss from continuing operations
    
    $
    (3,938
    )
    
    $
    (4,233
    )
    
    $
    (13,692
    )
    
    $
    (14,039
    )Add: Stock-based employee compensation expense (income)
determined under intrinsic value based method for all
grants
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )
    
    
    Less: Total stock-based employee compensation
expense determined under fair value based
method for all grants
    
    
    444
    
    
    
    
    
    
    
    782
    
    
    
    362Pro forma net loss from continuing operations
    
    $
    (4,409
    )
    
    $
    (4,233
    )
    
    $
    (14,501
    )
    
    $
    (14,401
    )Loss per share from continuing operations:Basic and diluted  as reported
    
    $
    (0.44
    )
    
    $
    (0.53
    )
    
    $
    (1.66
    )
    
    $
    (1.76
    )Basic and diluted  pro forma
    
    $
    (0.50
    )
    
    $
    (0.53
    )
    
    $
    (1.76
    )
    
    $
    (1.80
    )
 13




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Stock Option Plan (continued)
  Share-Based Payment
 Note 6  Indebtedness
  Interest
    
    
    September 30
    
    
    December 31Rate (1)
    
    
    2005
    
    
    2004Mortgages payable
    
    
    6.72
    %
    
    $
    5,963
    
    
    $
    6,607Senior secured credit facility
    
    
    
    
    
    
    
    
    
    
    18,500Promissory notes
    
    
    4.22
    %
    
    
    2,561
    
    
    
    1,8836% convertible notes
    
    
    6.00
    %
    
    
    2,750
    
    
    
    2,7507% convertible notes
    
    
    7.00
    %
    
    
    3,300
    
    
    
    3,300Other convertible notes
    
    
    7.41
    %
    
    
    4,750
    
    
    
    Subordinated debentures
    
    
    10.25
    %
    
    
    20,700
    
    
    
    20,700Capital lease obligations
    
    
    
    
    
    
    358
    
    
    
    571Total indebtedness
    
    
    
    
    
    
    40,382
    
    
    
    54,311Less debt discount on other convertible notes
    
    
    
    
    
    
    294
    
    
    
    Less current portion
    
    
    
    
    
    
    2,728
    
    
    
    3,597Total long-term debt, less current portion
    
    
    
    
    
    $
    37,360
    
    
    $
    50,714
 
 (1)
    
    Current weighted average rate at September 30, 2005.   14




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 6  Indebtedness (continued)
        15




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANACIAL STATEMENTS (UNAUDITED) (cont.)
 Note 7  Shareholders Equity
  Warrants OutstandingExercise
    
    
    September 30
    
    
    December 31Issue Date
    
    Expiration
    
    Price
    
    
    2005
    
    
    2004January 2002
    
    January 2005
    
    $
    6.02
    
    
    
    
    
    
    
    287,000June 2002
    
    June 2005
    
    
    7.61
    
    
    
    
    
    
    
    89,500October 2002
    
    October 2007
    
    
    4.92
    
    
    
    10,000
    
    
    
    10,000March 2005
    
    March 2010
    
    
    3.28
    
    
    
    175,000
    
    
    
    March 2005
    
    March 2010
    
    
    3.90
    
    
    
    563,130
    
    
    
    748,130
    
    
    
    386,500
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Recent Developments  Health Services Business Acquisitions
       Recent Developments  Discontinued Operations
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Comparison of the Three and Nine Month Periods Ended September 30, 2005 and September 30,
2004:
  Continuing Operations:
 Net revenues
 Quarterly analysis:
 
    
    Sales for the third quarter of 2005 increased $8.2 million or 440% to $10.1 million compared to the
third quarter of 2004, primarily due to $7.4 million of net revenues from our 2005 acquisitions.
 Year-to-date analysis:
 
    
    Sales for the first nine months of 2005 increased $9.4 million or 176% to $14.8 million compared to the
first nine months of 2004, primarily due to $7.4 million of net revenues from our 2005 acquisitions,
with the remaining increase attributable to the growth in our long-term care line of business.
 Gross profit
 Quarterly analysis:
 
    
    Gross profit for the third quarter of 2005 increased by $2.4 million or 551% to $2.9 million compared to
the third quarter of 2004, primarily due to $2.2 million of gross profits from our 2005 acquisitions.
 Year-to-date analysis:
 
    
    Gross profit for the first nine months of 2005 increased by $2.5 million or 180% to $3.8 million
compared to the first nine months of 2004, primarily due to $2.2 million of gross profits from our 2005
acquisitions.
 Selling, general and administrative expenses
 Quarterly analysis:
 
    
    Selling, general and administrative expenses for the third quarter of 2005 increased by $2.6 million or
89% to $5.6 million compared to the third quarter of 2004, primarily due to $1.9 million of expenses
from our 2005 acquisitions.
 Year-to-date analysis:
 
    
    Selling, general and administrative expenses for the first nine months of 2005 increased by $3.6 million
or 38% to $13.0 million compared to the first nine months of 2004, primarily due to $1.9 million of
expenses from our 2005 acquisitions, with the remaining increase attributable to the growth in our
long-term care line of business.
 Depreciation and amortization
 Quarterly analysis:
 
    
    Depreciation and amortization was $0.6 million and $0.5 million in the third quarter of 2005 and 2004,
respectively.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Year-to-date analysis:
 
    
    Depreciation and amortization was $1.6 million for the first nine months of 2005 and 2004.
 Loss related to sale of business
 Year-to-date analysis:
 
    
    Loss related to sale of business in the first nine months of
2004 represents the loss on the sale of MCO as more fully
disclosed in Note 4 to the unaudited consolidated financial
statements.
 Other income
 Quarterly analysis:
 
    
    Interest and dividend income for the third quarter of 2005
increased by $0.3 million or 100% to $0.3 million compared
to the third quarter of 2004, primarily due to the dividends
received from preferred stock and interest on the proceeds
from the sale of Standard Life, as well as rental income
from our leasing of space at our corporate headquarters.
 Year-to-date analysis:
 
    
    Interest and dividend income for the first nine months of
2005 increased by $0.4 million or 100% to $0.4 million
compared to the first nine months of 2004, primarily due to
the dividends received from preferred stock and interest on
the proceeds from the sale of Standard Life, as well as
rental income from our leasing of space at our corporate
headquarters.
 Interest expense
 Quarterly analysis:
 
    
    Interest expense for the third quarter of 2005 decreased by
$0.2 million or 15.2% to $1.0 million compared to the third
quarter of 2004, primarily due to the repayment of our
senior secured credit facility upon the sale of Standard
Life offset partially by incurrence of new debt.
 Year-to-date analysis:
 
    
    Interest expense for the first nine months of 2005 decreased
by $0.1 million or 1.6% to $3.3 million compared to the
first nine months of 2004, primarily due to the repayment of
our senior secured credit facility after the sale of
Standard Life offset partially by incurrence of new debt.
 Federal income tax benefit
 Quarterly analysis:
 
    
    Provision for federal income tax remained zero due to a 100%
valuation allowance on the net losses in the third quarters
of 2005 and 2004.
 Year-to-date analysis:
 
    
    Provision for federal income tax remained zero due to a 100%
valuation allowance on the net losses in the first nine
months of 2005 and 2004.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Discontinued Operations:
 Income (loss) from Discontinued Operations:
 Quarterly analysis:
 
    
    Net income for the third quarter of 2005 was $0.1 million
compared to net income of $1.5 million for the third quarter
or 2004. The 2005 quarter income primarily represents net
adjustments to litigation claim reserves and newly-identified
reserve requirements related to the discontinued financial
services operations which were sold in the second quarter of
2005. The 2004 quarter income represents normal operating
results for this business.
 Year-to-date analysis:
 
    
    Net loss for the nine months ended September 30, 2005 was
$34.0 million compared to net income of $7.1 million for the
nine months ended September 30, 2004. The 2005 period was
negatively impacted by a $36.6 million loss related to the
sale of Standard Life in 2005.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Liquidity and Capital Resources
 Liquidity of Standard Management
    Potential Cash Available for 2005
     Estimated Cash Required in 2005
  Cash Flows
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
  Contractual Obligations :
 Off-Balance Sheet Arrangements :
 Forward-looking Statements
  
    
    The ability of our management team to successfully operate a health services business
with limited experience in that industry.
    
    Our ability to expand our health services business both organically and through
acquisitions, including our ability to identify suitable acquisition candidates, acquire
them at favorable prices and successfully integrate them into our business.
    
    General economic conditions and other factors, including prevailing interest rate
levels, and stock market performance, which may affect our ability to obtain additional
capital when needed and on favorable terms.
    
    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.
    
    Increasing competition in the sale of our products.
    
    The risk factors or uncertainties listed in our Annual Report on Form 10-K for the year
ended December 31, 2004 and any document incorporated by reference therein.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Shares For
    
    
    Shares WithheldClass IDainforth B. French Jr.
    
    
    6,189,941
    
    
    
    1,052,771Class IIIMichael G. Browning
    
    
    6,177,703
    
    
    
    1,065,009
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
   2.1
    
    Agreement and Plan of Merger, dated July 22, 2005, among the Registrant, Rainier
Acquisition Corporation, Rainier Home Health Care Pharmacy, Inc., and John Tac Hung Tran,
Cynthia J. Wareing-Tran and The Jonathan Tran Irrevocable Trust, u/a/d 8/23/2004
(incorporated by reference to Current Report on Form 8-K filed on July 27, 2005).2.2
    
    Agreement and Plan of Merger, dated July 28, 2005, among the Registrant, Precision
Health Care Acquisition Corporation, Precision Healthcare, Inc., Jose A. Trespalacios, as
Voting Trustee, Teresa Fox-Morgan, Robert R. Buehler, Krista K. Trespalacios, and Jose A.
Trespalacios, in his individual capacity (incorporated by reference to Current Report on
Form 8-K filed on August 3, 2005).2.3
    
    Agreement and Plan of Merger, dated July 29, 2005, among the Registrant, Long Term Rx
Acquisition Company, Long Term Rx, Inc., The Craig W. Trobaugh Revocable Trust, dated
September 7, 2000, The Lorenda K. Trobaugh Revocable Trust, dated September 7, 2000, Craig
W. Trobaugh, and Lorenda K. Trobaugh (incorporated by reference to Current Report on Form
8-K filed on August 3, 2005).10.1
    
    Amendment to Employment Agreement by and between Standard Management Corporation and
Ronald D. Hunter dated as of August 25, 2005 (incorporated by reference to Current Report
on Form 8-K filed on August 26, 2005).10.2
    
    Employment Contract by and between Standard Management Corporation and Stephen M.
Coons dated as of August 25, 2005 (incorporated by reference to Current Report on Form 8-K
filed on August 26, 2005).10.3
    
    Employment Agreement by and between Standard Management Corporation and Michael B.
Edwards dated as of August 25, 2005 (incorporated by reference to Current Report on Form
8-K filed on August 26, 2005).31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Interim 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.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 SIGNATURES
   STANDARD MANAGEMENT CORPORATION
(Registrant)By:
    /s/ Ronald D. HunterRonald D. HunterChairman of the Board, Chief
Executive Officer and President

(Principal Executive Officer) By:
    /s/ Michael B. EdwardsMichael B. EdwardsInterim Chief Financial Officer
(Chief Accounting Officer) 28