##### 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, 2006 or
 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 o þ
 o þ




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##### 



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 INDEX
 Page NumberPart I. FINANCIAL INFORMATION:Item 1. Unaudited Financial StatementsConsolidated Balance Sheets
September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations 
For the Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Shareholders Equity 
For the Nine Months Ended September 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows 
For the Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II. OTHER INFORMATION:Item 1A Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Notes
    
    
    26Item 6. Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    28EX-10.4 SECURED PROMISSORY NOTE DATED SEPTEMBER 28, 2006EX-10.5 LOAN DOCUMENT MODIFICATION AGREEMENT DATED SEPTEMBER 28, 2006EX-10.6 ASSET PURCHASE AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO
  2




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED BALANCE SHEETS
  September 30
    
    
    December 312006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    614
    
    
    $
    1,876Accounts receivable, net
    
    
    2,557
    
    
    
    3,549Inventories
    
    
    1,594
    
    
    
    1,841Prepaid and other current assets
    
    
    1,093
    
    
    
    782Assets of discontinued operations
    
    
    
    
    
    
    14,373Total current assets
    
    
    5,858
    
    
    
    22,421Property and equipment, net
    
    
    9,428
    
    
    
    10,141Assets held for sale
    
    
    942
    
    
    
    1,506Deferred financing fees, net
    
    
    1,095
    
    
    
    2,009Officer and other notes receivable, less current portion
    
    
    809
    
    
    
    842Investments in unconsolidated subsidiaries
    
    
    160
    
    
    
    5,160Intangible assets, net
    
    
    1,281
    
    
    
    1,870Goodwill
    
    
    3,334
    
    
    
    4,050Other noncurrent assets
    
    
    1,337
    
    
    
    1,388Total assets
    
    $
    24,244
    
    
    $
    49,387LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,984
    
    
    $
    1,143Accrued expenses
    
    
    2,482
    
    
    
    1,830Current portion of long-term debt
    
    
    4,097
    
    
    
    2,532Liabilities of discontinued operations
    
    
    439
    
    
    
    1,068Total current liabilities
    
    
    10,002
    
    
    
    6,573Long-term debt, less current portion
    
    
    22,551
    
    
    
    36,776Other long-term liabilities
    
    
    1,886
    
    
    
    1,095Total liabilities
    
    
    34,439
    
    
    
    44,444Shareholders equity:Common stock, no par value, warrants and additional paid in capital, 60,000,000 shares
and 40,000,000 shares authorized in 2006 and 2005, respectively, and 18,944,700
and 10,712,859 shares issued in 2006 and 2005, respectively
    
    
    70,770
    
    
    
    68,537Retained deficit
    
    
    (70,245
    )
    
    
    (55,793
    )Treasury stock, at cost, 2,840,173 and 1,617,651 shares in 2006 and 2005, respectively
    
    
    (10,828
    )
    
    
    (7,901
    )Accumulated other comprehensive income
    
    
    108
    
    
    
    100Total shareholders equity
    
    
    (10,195
    )
    
    
    4,943Total liabilities and shareholders equity
    
    $
    24,244
    
    
    $
    49,387
  3




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    4,883
    
    
    $
    5,461
    
    
    $
    17,688
    
    
    $
    9,707Cost of sales
    
    
    3,845
    
    
    
    4,150
    
    
    
    13,541
    
    
    
    7,590Gross profit
    
    
    1,038
    
    
    
    1,311
    
    
    
    4,147
    
    
    
    2,117Selling, general and administrative expenses
    
    
    3,846
    
    
    
    4,321
    
    
    
    14,302
    
    
    
    11,526Goodwill Impairment
    
    
    950
    
    
    
    
    
    
    
    950
    
    
    
    Depreciation and amortization
    
    
    408
    
    
    
    451
    
    
    
    1,282
    
    
    
    1,449Operating loss
    
    
    (4,166
    )
    
    
    (3,461
    )
    
    
    (12,387
    )
    
    
    (10,858
    )Other income, net
    
    
    169
    
    
    
    392
    
    
    
    7,467
    
    
    
    392Interest expense
    
    
    (1,739
    )
    
    
    (1,012
    )
    
    
    (4,064
    )
    
    
    (3,322
    )Income (loss) before income taxes
    
    
    (5,736
    )
    
    
    (4,081
    )
    
    
    (8,984
    )
    
    
    (13,788
    )Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (5,736
    )
    
    
    (4,081
    )
    
    
    (8,984
    )
    
    
    (13,788
    )Income (loss) from discontinued operations, net of income tax expense
of $0, $50, $0, and $212, respectively
    
    
    (5,049
    )
    
    
    239
    
    
    
    (5,468
    )
    
    
    (33,877
    )Net loss
    
    $
    (10,785
    )
    
    $
    (3,842
    )
    
    $
    (14,452
    )
    
    $
    (47,665
    )Income (loss) per share:Basic and diluted:Loss from continuing operations
    
    $
    (0.35
    )
    
    $
    (0.46
    )
    
    $
    (0.77
    )
    
    $
    (1.67
    )Income (loss) from discontinued operations
    
    $
    (0.31
    )
    
    $
    0.03
    
    
    $
    (0.47
    )
    
    $
    (4.11
    )Net loss
    
    $
    (0.66
    )
    
    $
    (0.43
    )
    
    $
    (1.24
    )
    
    $
    (5.78
    )Weighted average shares outstanding
    
    
    16,243,844
    
    
    
    8,895,592
    
    
    
    11,641,923
    
    
    
    8,250,631
  4




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
  Common stock,
    
    
    
    
    
    
    
    
    
    
    Accumulatedwarrants and
    
    
    
    
    
    
    
    
    
    
    otheradditional paid
    
    
    
    
    
    
    
    
    
    
    comprehensiveTotal
    
    

in capital
    
    
    Retained deficit
    
    
    Treasury stock
    
    
    incomeBalance 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 provision of $2,670
    
    
    (4,827
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,827
    )Comprehensive loss
    
    
    (52,492
    )Treasury stock acquired
    
    
    (174
    )
    
    
    
    
    
    
    
    
    
    
    (174
    )Issuance of common stock in business acquisitions
    
    
    4,100
    
    
    
    4,100
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation adjustment
    
    
    (27
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    Adjustments due to stock price contingency
    
    
    (84
    )
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants
    
    
    518
    
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options
    
    
    (14
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2005
    
    $
    11,859
    
    
    $
    68,862
    
    
    $
    (49,194
    )
    
    $
    (7,877
    )
    
    $
    68Balance at January 1, 2006
    
    $
    4,943
    
    
    $
    68,537
    
    
    $
    (55,793
    )
    
    $
    (7,901
    )
    
    $
    100Comprehensive loss:Net loss
    
    
    (14,452
    )
    
    
    
    
    
    
    (14,452
    )
    
    
    
    
    
    
    Change in unrealized gain on securities
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Comprehensive loss
    
    
    (14,444
    )Stock-based compensation expense
    
    
    36
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    Exchange  Trust Preferred
    
    
    1,802
    
    
    
    1,802
    
    
    
    
    
    
    
    
    
    
    
    Reclassification of warrants to liabilities
    
    
    (140
    )
    
    
    (140
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants
    
    
    123
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    Sale of common stock, net of issuance costs
    
    
    412
    
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    Treasury stock acquired
    
    
    (2,927
    )
    
    
    
    
    
    
    
    
    
    
    (2,927
    )
    
    
    Balance at September 30, 2006
    
    $
    (10,195
    )
    
    $
    70,770
    
    
    $
    (70,245
    )
    
    $
    (10,828
    )
    
    $
    108
  5




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 302006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    
    (14,452
    )
    
    $
    (47,665
    )Net loss from discontinued operations
    
    
    (5,468
    )
    
    
    (33,877
    )Net loss from continuing operations
    
    
    (8,984
    )
    
    
    (13,788
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,231
    
    
    
    1,473Amortization and writeoff of deferred financing costs and debt discount
    
    
    511
    
    
    
    253Gain on Trust Preferred exchange
    
    
    (9,194
    )
    
    
    Non-cash stock compensation expense
    
    
    36
    
    
    
    105Provision for bad debts
    
    
    960
    
    
    
    275Warrant valuation adjustment
    
    
    (237
    )
    
    
    Net gain related to sale of assets
    
    
    2,148
    
    
    
    (27
    )Change in operating assets and liabilities, net of impact of business acquisitions:Accounts receivable
    
    
    126
    
    
    
    (1,264
    )Inventories
    
    
    247
    
    
    
    (647
    )Prepaid and other current assets
    
    
    (283
    )
    
    
    707Accounts payable
    
    
    1,841
    
    
    
    (148
    )Accrued expenses
    
    
    930
    
    
    
    (707
    )Other
    
    
    2
    
    
    
    181Net cash used in operating activities of continuing operations
    
    
    (9,666
    )
    
    
    (13,587
    )INVESTING ACTIVITIES:Capital expenditures
    
    
    (175
    )
    
    
    (723
    )Receipt (refund) of proceeds from sale of Standard Life
    
    
    (300
    )
    
    
    47,214Proceeds from sale of assets held for sale
    
    
    1,083
    
    
    
    Redemption of preferred stock
    
    
    1,500
    
    
    
    Cash received for sale of businesses
    
    
    12,000
    
    
    
    Cash paid for business purchased
    
    
    
    
    
    
    (11,157
    )Change in other noncurrent assets, net
    
    
    8
    
    
    
    750Net cash provided by investing activities of continuing operations
    
    
    14,116
    
    
    
    36,084FINANCING ACTIVITIES:New borrowings
    
    
    7,555
    
    
    
    4,750Net cash received from discontinued operations
    
    
    (2,355
    )
    
    
    (493
    )Proceeds from sale of stock and warrants, net
    
    
    412
    
    
    
    (14
    )Purchase of treasury stock
    
    
    (2,927
    )
    
    
    (174
    )Deferred financing costs paid
    
    
    (55
    )
    
    
    (480
    )Repayments of long-term debt
    
    
    (8,342
    )
    
    
    (18,752
    )Net cash used in financing activities of continuing operations
    
    
    (5,712
    )
    
    
    (15,163
    )Net cash used in operating activities of discontinued operations
    
    
    (2,624
    )
    
    
    73,010Net cash
(used by) provided by investing activities of discontinued operations
    
    
    (88
    )
    
    
    9,463Net cash provided by financing activities of discontinued operations
    
    
    2,355
    
    
    
    40,806Net decrease in cash and cash equivalents of discontinued operations
    
    
    (357
    )
    
    
    (22,741
    )Total decrease in cash and cash equivalents
    
    
    (1,619
    )
    
    
    (15,407
    )Net decrease in cash and cash equivalents of discontinued operations
    
    
    (357
    )
    
    
    (22,741
    )Net
(decrease) increase in cash and cash equivalents of continuing operations
    
    
    (1,262
    )
    
    
    7,334Cash and cash equivalents of continuing operations at beginning of period
    
    
    1,876
    
    
    
    1,101Cash and cash equivalents of continuing operations at end of period
    
    $
    614
    
    
    $
    8,435
  6




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
       7




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 1  Basis of Presentation (cont.)
  Note 2  Discontinued Operations  Financial Services
     8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Note 2  Discontinued Operations  Financial Services (continued)
 Standard Life
Condensed Consolidated Statement of Operations
 Nine Months EndedSeptember 302005Revenues
    
    $
    40,796Benefits, claims, interest credited and amortization
    
    
    33,307Operating and other expenses
    
    
    4,700Impairment charge
    
    
    (36,550
    )Income tax expense
    
    
    (212
    )Loss from discontinued operations
    
    $
    (33,973
    )
 Note 3  Pharmacy Business Acquisitions
      9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Note 3  Pharmacy Business Acquisitions (continued)
   Note 4  Discontinued Operations  Pharmacy Services
    10




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
   September 30
    
    
    December 312006
    
    
    2005Current assets
    
    $
    
    
    
    $
    5,434Property and equipment, net
    
    
    
    
    
    
    808Intangible assets, net
    
    
    
    
    
    
    9,752Current liabilities
    
    
    
    
    
    
    (1,621
    )Net assets of discontinued operations
    
    
    
    
    
    
    14,373Liabilities retained
    
    $
    439
    
    
    $
    
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    3,360
    
    
    $
    4,645
    
    
    $
    17,162
    
    
    $
    5,090Cost of sales
    
    
    2,129
    
    
    
    3,078
    
    
    
    11,300
    
    
    
    3,376Selling, general and administrative expenses
    
    
    1,037
    
    
    
    1,278
    
    
    
    5,419
    
    
    
    1,504Depreciation and amortization
    
    
    59
    
    
    
    98
    
    
    
    385
    
    
    
    114Impairment charge and loss on sale
    
    
    5,206
    
    
    
    
    
    
    
    5,206
    
    
    
    Interest expense
    
    
    5
    
    
    
    
    
    
    
    19
    
    
    
    Net income (loss) from discontinued operations
    
    $
    (5,076
    )
    
    $
    191
    
    
    $
    (5,167
    )
    
    $
    96
  11




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Stock Option Plan
 Share-Based Payment Accounting for Stock Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Reported net loss from continuing operations
    
    $
    (4,081
    )
    
    $
    (13,788
    )Less: Total stock-based employee compensation expense
determined under fair value based method for all grants
    
    
    (471
    )
    
    
    (809
    )Pro forma net loss from continuing operations
    
    $
    (4,552
    )
    
    $
    (14,597
    )Loss per share from continuing operations:Basic and diluted  as reported
    
    $
    (0.46
    )
    
    $
    (1.67
    )Basic and diluted  pro forma
    
    $
    (0.52
    )
    
    $
    (1.77
    )
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    Value (1)Outstanding at December 31, 2005
    
    
    2,222,180
    
    
    $
    4.44Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (832,180
    )Outstanding
as of September 30, 2006
    
    
    1,390,000
    
    
    $
    3.63
    
    
    
    5.38
    
    
    
    
  
 (1)
    
    All outstanding stock option exercise prices are above the current market price for the
Companys stock as of September 30, 2006. 12




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Stock Option Plan (continued)
  WeightedAverageNumber of
    
    Grant-DateShares
    
    Fair ValueNonvested at December 31, 2005
    
    
    129,167
    
    
    $
    1.58Granted
    
    
    
    
    
    
    Vested
    
    
    (59,166
    )
    
    $
    1.29Canceled
    
    
    (56,667
    )
    
    $
    1.09Nonvested at
September 30, 2006
    
    
    13,334
    
    
    $
    0.93
  Note 6  Indebtedness
  Interest
    
    
    September 30
    
    
    December 31Rate(1)
    
    
    2006
    
    
    2005Mortgages payable
    
    
    7.20
    %
    
    
    5,726
    
    
    $
    5,905Promissory notes
    
    
    6.33
    %
    
    
    2,124
    
    
    
    2,3557% convertible notes
    
    
    7.00
    %
    
    
    3,300
    
    
    
    3,3006% convertible notes
    
    
    6.00
    %
    
    
    2,750
    
    
    
    2,750Other convertible notes
    
    
    10.25
    %
    
    
    2,401
    
    
    
    4,275Subordinated debentures
    
    
    10.25
    %
    
    
    9,577
    
    
    
    20,700Senior notes
    
    
    12.00
    %
    
    
    1,000
    
    
    
    6% new convertible notes
    
    
    6.00
    %
    
    
    700
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    84
    
    
    
    287Total indebtedness
    
    
    
    
    
    
    27,663
    
    
    
    39,572Less debt discount on other convertible notes
    
    
    
    
    
    
    1,015
    
    
    
    264Less current portion
    
    
    
    
    
    
    4,097
    
    
    
    2,532Total long-term debt, less current portion
    
    
    
    
    
    $
    22,551
    
    
    $
    36,776
 
 (1)
    
    Current weighted average rate at September 30, 2006. 13




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 6  Indebtedness (continued)
         14




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 6  Indebtedness (continued)
       Note 7  Shareholders Equity
  15




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 7  Shareholders Equity (continued)
  Warrants Outstanding
    
    Warrant Pricing AssumptionsExercise
    
    September 30
    
    December 31
    
    Dividend
    
    Expected
    
    Risk-free
    
    ExpectedExpiration Date
    
    Price
    
    2006
    
    2005
    
    Yield
    
    Volatility
    
    Interest Rate
    
    Life (Yrs)October 2007
    
    $
    4.92
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    0
    %
    
    
    0.615
    
    
    
    3.22
    %
    
    
    5.0March 2010
    
    
    3.28
    
    
    
    175,000
    
    
    
    175,000
    
    
    
    0
    %
    
    
    0.345
    
    
    
    3.54
    %
    
    
    4.0March 2010
    
    
    0.01
    (a)
    
    
    532,511
    
    
    
    532,511
    
    
    
    0
    %
    
    
    0.646
    
    
    
    5.07
    %
    
    
    4.0March 2010
    
    
    3.90
    
    
    
    30,619
    
    
    
    30,619
    
    
    
    0
    %
    
    
    0.345
    
    
    
    3.54
    %
    
    
    4.0February 2011
    
    
    0.88
    
    
    
    200,000
    
    
    
    
    
    
    
    0
    %
    
    
    0.488
    
    
    
    4.74
    %
    
    
    4.0May 2011
    
    
    0.73
    
    
    
    100,000
    
    
    
    
    
    
    
    0
    %
    
    
    0.488
    
    
    
    4.74
    %
    
    
    4.0May 2011
    
    
    0.36
    
    
    
    150,005
    
    
    
    
    
    
    
    0
    %
    
    
    0.646
    
    
    
    5.07
    %
    
    
    4.0June 2011
    
    
    0.36
    
    
    
    50,000
    
    
    
    
    
    
    
    0
    %
    
    
    0.646
    
    
    
    5.07
    %
    
    
    4.0August 2011
    
    
    0.36
    
    
    
    100,000
    
    
    
    
    
    
    
    0
    %
    
    
    0.718
    
    
    
    5.04
    %
    
    
    5.0September 2013
    
    
    0.60
    
    
    
    3,000,000
    
    
    
    
    
    
    
    0
    %
    
    
    0.814
    
    
    
    4.67
    %
    
    
    7.04,348,135
    
    
    
    748,130
 
 (a)
    
    As amended on May 23, 2006. See Note 10.     Note 8  Sale of Real Estate
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 8
 Sale
of Real Estate (continued)
  Note 9  Pheffer Settlement
  Note 10  Laurus Amendment
       17




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 11  Earnings (Loss) Per Share Data
  Note 12  Prime Vendor Agreement
  Note 13  Subsequent Events
    18




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Comparison of the three and nine Months Ended September 30, 2006 and September 30, 2005:
  Continuing Operations:
 Net revenues
 Quarterly analysis:
 
    
    Sales for the third quarter of 2006 decreased $.6 million or
11% to $4.9 million compared to the third quarter of 2005,
primarily due a decline in revenue of $1.9 million or 77% in
our base of business existing prior to the 2005 business
acquisitions (due to the loss of a major customer) offsetting
the $1.3 million increase in sales from our third quarter 2005
business acquisitions.
 Year-to-date analysis:
 
    
    Sales for the first nine months of 2006 increased $8.0 million
or 82% to $17.7 million compared to the first nine months of
2005, due to a $10.0 million increase in net revenues from our
third quarter 2005 business acquisitions partially offset by a
$2.0 million decline in revenue (due to the loss of a major
customer) in our base of business existing prior to the 2005
acquisitions, primarily at our Apothecary Solutions
operations.
 Gross profit
 Quarterly analysis:
 
    
    Gross profit for the third quarter of 2006 decreased by $.3
million or 21% to $1.0 million compared to the third quarter
of 2005, primarily due to a $.6 million decrease of gross
profit from our base of business existing prior to the 2005
business acquisitions, primarily at our Apothecary Solutions
operations, partially offset by a $.3 million increase due to
our third quarter 2005 business acquisitions.
 Year-to-date analysis:
 
    
    Gross profit for the first nine months of 2006 increased by
$2.0 million or 96% to $4.1 million compared to the first nine
months of 2005, due to $2.8 million increase in gross profit
from our third quarter 2005 business acquisitions partially
offset by a $.8 million decrease in gross profit in our base
of business existing prior to the 2005 business acquisitions.
 Selling, general and administrative expenses
 Quarterly analysis:
  Year-to-date analysis:
 
    
    Selling, general and administrative expenses for the first nine months of 2006 increased by $2.8 million or 24%
to $14.3 million compared to the first nine months of 2005, primarily due to $2.0 million of expenses from our
third quarter 2005 business acquisitions, $.9 million provided for the Pheffer settlement in the second quarter
of 2006 (see Note 9 to the Notes to
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 the Consolidated Financial Statements); and $1.0 million of previously
deferred costs related to potential acquisitions and financings and the In-House acquisition termination fee (see
Note 4 to the Notes to the Consolidated Financial Statements) offset by decreases at our base of business
existing prior to the 2005 business acquisitions.
 Depreciation and amortization
 Quarterly analysis:
 
    
    Depreciation and amortization was $.4 million and $.5 million in the third quarter of 2006 and 2005, respectively.
 Year-to-date analysis:
 
    
    Depreciation and amortization for the first nine months of 2006 and 2005 was $1.3 million and $1.4 million,
respectively.Goodwill Impairment
 Quarterly analysis:
 
    
    The Company incurred a $1 million dollar goodwill impairment charge in our base of business existing prior to the
2005 business acquisitions.
 Other income
 Quarterly analysis:
 
    
    Other income for the third quarter of 2006 was
$.2 million versus $.4 million for the third quarter of
2005, both primarily representing dividend income from a preferred stock investment we had from June 2005 to June 2006 and
rental income related to space in our corporate headquarters.
 Year-to-date analysis:
 
    
    Other income for the first nine months of 2006 of $7.5 million is due primarily to the following: $.5 million of
income from the sale of real estate (see Note 8 to the Notes to the Consolidated Financial Statements), $9.2
million of income from the exchange offer for the Trust Preferred Securities (see Note 6 to the Notes to the
Consolidated Financial Statements), $2.8 million of loss from the sale the Series A Preferred Stock (see Note 2
to the Notes to the Consolidated Financial Statements ) and $.4 million of income due to the dividends received
from the Series A Preferred Stock, as well as rental income from leasing space at the Companys corporate
headquarters to the purchaser of Standard Life.
 Interest expense
 Quarterly analysis:
  Year-to-date analysis:
  20




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Federal income tax expense
 
    
    Provision for federal income tax remained zero due to a
100% valuation allowance on the year-to-date net losses in
2006 and 2005.
 Discontinued Operations:
 Quarterly analysis:
 
    
    Net loss from discontinued operations for the third quarter
of 2006 was $5.0 million compared to net gain of $.2 million
for the third quarter of 2005. Included in the 2006 results
is a $.3 million loss related to the settlement of the
purchase price adjustment dispute with Capital Assurance in
regards to our June 2005 sale of Standard Life and $4.7
million of losses related to Rainier, Holland and PCA,
including necessary impairment charges. The 2005 balance
includes only the operating results of Rainer, Holland and
PCA since their third quarter 2005 acquisition dates.
 Year-to-date analysis:
 
    
    Net loss from discontinued operations for the first nine
months of 2006 was $5.5 million compared to net loss of $33.9
million for the first nine months of 2005. Included in the
2006 results is a $.3 million loss related to the settlement
of the purchase price adjustment dispute with Capital
Assurance in regards to our June 2005 sale of Standard Life
and $5.2 million of losses related to Rainier, Holland and
PCA, including necessary impairment charges. The 2005
balance includes the operating results of Rainer, Holland and
PCA since their third quarter 2005 acquisition dates as well
as losses related to Standard Life, including a $35 million
impairment charge resulting from that sale for which no tax
benefit has been recorded.
 Liquidity and Capital Resources
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
   
    
    On March 8, 2006, we announced that we elected to defer distributions, beginning
March 31, 2006, on the 10.25% preferred securities (the Trust Preferred Securities)
of our subsidiary SMAN Capital Trust I for up to two years. As a result of this
deferral, we will retain for corporate use approximately $530,000 per quarter (prior to
the impact of the exchange offer described in Note 6 to the Notes to the Consolidated
Financial Statements) until distributions are resumed. All unpaid distributions will
accrue interest at the rate of 10.25% annually until paid.
    
    On April 13, 2006, we entered into a senior loan agreement with one of our officers
for $2.8 million, which we have subsequently refinanced into a new senior loan
agreement with one of our former board members for $2.8 million and have since retired
this and another $500,000 note with proceeds from the sale of the Rainier Business and
Long Term Rx (see Note 4 and Note 13 to the Notes to the Consolidated Financial
Statements).
    
    In May 2006, we sold 4.52 acres of unimproved real estate south of our corporate
headquarters in Indianapolis, Indiana. The gross selling price was $1.1 million. The
$1.1 million in net cash received from the sale was immediately transferred to Laurus
Master Fund, Ltd. as repayment of outstanding principal on a convertible loan. With
this payment, the Company was deemed to have satisfied its obligation to make payments
of the principal portion of the monthly amounts due for the months of June 2006 through
November 2006 and a portion of the principal portion due December 2006 (see Note 8 to
the Notes to the Consolidated Financial Statements).
    
    On June 29, 2006, we entered into a Redemption Agreement with Capital Assurance
whereby for a gross payment of $1.5 million to us (a net of $1.0 million after the
deduction of certain agreed upon amounts), the parties agreed upon the terms for the
redemption of the Series A Preferred Stock. The net redemption price of $1.0 million
was paid to us by Capital Assurance in June 2006. As additional consideration for the
redemption, Capital Assurance agreed to release and discharge us from any further
indemnification obligations relating to all pending legal actions against Standard
Life. The agreement to release us from the indemnification obligations for these legal
actions allowed us to remove approximately $800,000 in legal reserves from our
financial statements as of June 30, 2006. We and Capital Assurance also agreed to
resolve all issues with respect to a pending action concerning an adjustment to the
purchase price for the sale of Standard Life and to dismiss the action with prejudice
(see Note 2 to the Notes to the Consolidated Financial Statements).
    
    In June 2006, we completed an exchange offer for 53.7% of the outstanding $20.7
million of Trust Preferred Securities, whereby holders of Trust Preferred Securities
exchanged each Trust Preferred Security for six shares of our common stock (see Note 6
to the Notes to the Consolidated Financial Statements).
    
    During the first quarter of 2006 we announced our intention to issue up to 15
million shares in a private placement of our common stock. As of September 30, 2006,
we issued 1,000,017 shares for $.4 million.
    
    During the third quarter of 2006, the Companys management and Board of Directors
authorized the sale of certain rights, properties and assets of its Rainier and Holland
subsidiaries (the Rainier Business). Such sale was subsequently negotiated and
closed on August 11, 2006 pursuant to an Asset Purchase Agreement (the Rainier
Agreement) with Omnicare, Inc. (Omnicare). At the closing, Omnicare agreed to pay
the Company an aggregate purchase price of up to $13.22 million and assumed certain
liabilities of the Rainier Business valued at $750,000. Of the purchase price, (1) $12
million in cash was paid by Omnicare at the closing, (2) up to an additional $700,000
payment may be made within 30 days of the four month anniversary of the closing, and
(3) within 30 days of
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 December 31, 2006, a contingent payment of up to $520,000 may be
made based on a calculation defined in the Rainier Agreement. The $700,000 payment was
held back pending a potential post-closing adjustment to be measured against a
specified historical value of the purchased net assets. Should the finally determined
net assets be less than the specified amount, the holdback payment will be reduced on a
dollar-for-dollar basis, potentially resulting in a refund. The Company also agreed
to grant Omnicare a three year right of first refusal for the purchase of any other
pharmacy businesses of the Company. The Company recorded a loss on the sale of $3.6
million, including its estimate of the eventual holdback payment to be received or paid
and without consideration of the contingent purchase price of $520,000.
    
    Concurrently with the sale of the Rainier business, on August 11, 2006, the Company
entered into a Settlement Agreement with John Tac Hung Tran, Cynthia J. Wareing-Tran
and The Jonathan Tran Irrevocable Trust (collectively, the Trans), who were the former owners of Rainier. The Settlement Agreement resolved
all disputes among the parties with respect to, among other matters, a promissory note
granted by the Company to the Trans as part of the consideration for the acquisition, the
amount of bonus and earn-out payments owed to Mr. Tran under the terms of his Employment
Agreement with Rainier and certain leases entered into with the Trans as part of the
acquisition. Under the settlement, the Company has paid the Trans approximately $5.5
million, of which approximately $1.5 million was for the repayment of the promissory
note, $1.0 million for the disputed earn-out payments, $150,000 for the disputed bonus
payment, $2.5 million to redeem all 762,195 shares of common stock of the Company issued
to the Trans as part of the acquisition at their guaranteed price, and $310,000 to redeem
all of the shares purchased by the Trans and other associates of the Trans in May 2006 as
part of the Companys private placement at the acquisition price. In exchange for this
payment, the Company received a full and absolute release of any and all claims and liens
made by the Trans against the Company. The Company also agreed to release the Trans from
any and all claims it had against them pertaining to these matters. Finally, the Company
agreed to dismiss with prejudice all litigation currently pending pertaining to these
matters. The $1.150 million of earn-out and bonus payments are reflected as expenses of
discontinued operations in the three and nine month periods ended September 30, 2006.
    
    On July 25, 2006 the Company sold the assets of PCA to Indiana Life Sciences (a
company owned by one of the Companys executive officers) for $1 and a commitment to
purchase $100,000 of the Companys stock currently being offered through an existing
private placement offering. That investment was made in August 2006. The Company
recorded a loss on the sale of $428,000.
    
    During the third quarter of 2006, the Company restructured some of its executive
management team, resulting in the termination or retirement of four key executives and, if
applicable, their related employment agreements. Related severance expenses and
post-termination consulting fees of $0.4 million are reflected as additional selling,
general and administrative expenses in the three and nine months ended September 30,
2006. As of September 30, 2006, $135,000 of accrued severance payments are expected to
be paid by December 29, 2006. New members of key management do not have currently have
employment contracts.
    
    On October 20, 2006, the Company completed the sale of certain rights, properties
and assets of Long Term Rx to Omnicare, Inc. pursuant to an Asset Purchase Agreement
(the LTRX Agreement). The contract purchase price was for $4.914
million. Of the purchase price, (1) $4.164 million in cash was paid by Omnicare at the
closing, (2) up to an additional $750,000 payment may be made within 30 days of the six
month anniversary of the closing, and (3) within 10 days of Omnicare providing services
to a Contingent Payment Facility, as defined in the LTRX Agreement, and prior to
January 1, 2007, a contingent payment of up to $225,000 may be made based on a
calculation defined in the LTRX Agreement. The $750,000 payment was held back pending a
potential post-closing adjustment to be measured against a specified historical value
of the purchased net assets. Should the finally determined net assets be less than the
specified amount, the holdback payment will be reduced on a dollar-for-dollar basis,
potentially resulting in a refund. The Company expects to record a gain on the sale of
approximately $1.2 million (prior to the contingent payment of $225,000) after an
expense related to the buy out of a portion of the remaining lease for space no longer
needed at our operating facility in Indianapolis.
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
   Estimated Cash Required in 2006
  Contractual
Obligations
 Off-Balance Sheet Arrangements :
  Cautionary Notice Regarding Forward-Looking Statements
  24




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
  
    
    Our having sufficient cash on hand, whether generated through operations or financings,
to meet our operating needs and continue our operations or acquisition program.
    
    The ability of our management team to successfully operate a pharmacy business with
limited experience in that industry.
    
    Our ability to expand our pharmacy 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.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  25




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  10.1
    
    Securities Purchase Agreement dated September 8, 2006 by and among Standard
Management Corporation, AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC
and New Millennium Capital Partners II, LLC (incorporated by reference to the Companys
Registration Statement on Form S-1 dated September 27, 2006).10.2
    
    Security Agreement dated September 8, 2006 among the Company and AJW Partners, LLC,
AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millennium Capital Partners II,
LLC (incorporated by reference to the Companys Registration Statement on Form S-1 dated
September 27, 2006).10.3
    
    Registration Rights Agreement dated September 8, 2006 among the Company
and AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millennium
Capital Partners II, LLC (incorporated by reference to the Companys Registration
Statement on Form S-1 dated September 27, 2006).10.4
    
    Secured Promissory Note dated September 28, 2006 in favor of Michael G. Browning.10.5
    
    Loan Document Modification Agreement dated September 28, 2006 which encompasses the
Guaranty by and among Precision Healthcare, Inc., Long Term Rx, Inc., Home Med Channel,
Inc. and Michael G. Browning dated September 28, 2006, the Pledge Agreement by and
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 among
Precision Healthcare, Inc., Long Term Rx, Inc., Home Med Channel, Inc. and Michael G.
Browning dated September 28, 2006, and the Security Agreement by and among Precision
Healthcare, Inc. Long Term Rx, Inc., Home Med Channel, Inc. and Michael G. Browning dated
September 28, 2006.10.6
    
    Asset Purchase Agreement by and among Standard Management Corporation, Long Term Rx,
Inc. and Omnicare, Inc. dated October 20, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Accounting 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, Chief Executive Officer and President(Principal Executive Officer)By: /s/ Daniel K CalvertDaniel K CalvertChief Accounting Officer(Principal Financial and Accounting Officer)
 28