##### 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 March 31, 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
    
    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)
 
 þ o
 o o þ
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##### 



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 INDEX
 Page NumberPart I.
    
    FINANCIAL INFORMATION:Item 1.
    
    Unaudited Financial StatementsConsolidated Balance Sheets 
March 31, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations 
For the Three Months Ended March 31, 2006 and 2005
    
    
    4Consolidated Statements of Shareholders Equity 
For the Three Months Ended March 31, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows 
For the Three Months Ended March 31, 2006 and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17Part II.
    
    OTHER INFORMATION:Item 1A.
    
    Risk Factors
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    18SIGNATURES
    
    
    19EX-10.1 PRIME VENDOR AGREEMENTEX-10.2 AMENDMENT TO PRIME VENDOR AGREEMENTEX-10.3 PROMISSORY NOTEEX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO AND THE 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
  March 31
    
    
    December 312006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,607
    
    
    $
    2,232Accounts receivable, net
    
    
    7,226
    
    
    
    6,543Inventories
    
    
    3,554
    
    
    
    3,880Prepaid and other current assets
    
    
    801
    
    
    
    828Total current assets
    
    
    13,188
    
    
    
    13,483Property and equipment, net
    
    
    10,764
    
    
    
    10,950Assets held for sale
    
    
    1,506
    
    
    
    1,506Deferred financing fees, net
    
    
    1,905
    
    
    
    2,009Officer and other notes receivable, less current portion
    
    
    776
    
    
    
    842Investments in unconsolidated subsidiaries
    
    
    5,160
    
    
    
    5,160Intangible assets, net
    
    
    4,180
    
    
    
    4,305Goodwill
    
    
    12,457
    
    
    
    11,366Other noncurrent assets
    
    
    1,331
    
    
    
    1,388Total assets
    
    $
    51,267
    
    
    $
    51,009LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,144
    
    
    $
    2,201Accrued expenses
    
    
    3,704
    
    
    
    2,392Current portion of long-term debt
    
    
    3,230
    
    
    
    2,533Liabilities of discontinued operations
    
    
    831
    
    
    
    1,069Total current liabilities
    
    
    12,909
    
    
    
    8,195Long-term debt, less current portion
    
    
    36,547
    
    
    
    36,776Other long-term liabilities
    
    
    1,031
    
    
    
    1,095Total liabilities
    
    
    50,487
    
    
    
    46,066Shareholders equity:Common stock, no par value, and additional paid in capital, 60,000,000 shares and
40,000,000 shares authorized, in 2006 and 2005, respectively and 10,712,859
shares issued
    
    
    68,625
    
    
    
    68,537Retained deficit
    
    
    (60,052
    )
    
    
    (55,793
    )Treasury stock, at cost, 1,617,651 shares
    
    
    (7,901
    )
    
    
    (7,901
    )Accumulated other comprehensive income
    
    
    108
    
    
    
    100Total shareholders equity
    
    
    780
    
    
    
    4,943Total liabilities and shareholders equity
    
    $
    51,267
    
    
    $
    51,009
  3




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedMarch 312006
    
    
    2005Net revenues
    
    $
    13,984
    
    
    $
    2,253Cost of sales
    
    
    10,023
    
    
    
    1,781Gross profit
    
    
    3,961
    
    
    
    472Selling, general and administrative expenses
    
    
    6,850
    
    
    
    4,023Depreciation and amortization
    
    
    599
    
    
    
    528Operating loss
    
    
    (3,488
    )
    
    
    (4,079
    )Other income, net
    
    
    220
    
    
    
    Interest expense
    
    
    (991
    )
    
    
    (1,124
    )Loss before income taxes
    
    
    (4,259
    )
    
    
    (5,203
    )Income tax expense (benefit)
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (4,259
    )
    
    
    (5,203
    )Loss from discontinued operations, net of income tax expense (benefit)
of $0 and $(21), respectively
    
    
    
    
    
    
    (33,257
    )Net loss
    
    $
    (4,259
    )
    
    $
    (38,460
    )Loss per share  basic and dilutedLoss from continuing operations
    
    $
    (0.47
    )
    
    $
    (0.66
    )Loss from discontinued operations
    
    
    
    
    
    
    (4.20
    )Net loss
    
    $
    (0.47
    )
    
    $
    (4.86
    )Weighted average shares outstanding
    
    
    9,095,208
    
    
    
    7,921,113
  4




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
  Common stock
    
    
    
    
    
    
    
    
    
    
    Accumulated otherand additional
    
    
    
    
    
    
    
    
    
    
    comprehensive incomeTotal
    
    
    paid in capital
    
    
    Retained deficit
    
    
    Treasury stock
    
    
    (loss)Balance at January 1, 2005
    
    $
    60,032
    
    
    $
    64,369
    
    
    $
    (1,529
    )
    
    $
    (7,703
    )
    
    $
    4,895Comprehensive loss:Net loss
    
    
    (38,460
    )
    
    
    
    
    
    
    (38,460
    )
    
    
    
    
    
    
    Change in unrealized loss on securities, net
of income tax provision of $5,826
    
    
    (11,643
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,643
    )Comprehensive loss
    
    
    (50,103
    )Issuance of warrants
    
    
    166
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options
    
    
    (14
    )

    
    
    (14
    )
    
    

    
    

    
    
    
    
    
    
    Balance at March 31, 2005
    
    $
    10,081
    
    
    $
    64,521
    
    
    $
    (39,989
    )
    
    $
    (7,703
    )
    
    $
    (6,748
    )Balance at January 1, 2006
    
    $
    4,943
    
    
    $
    68,537
    
    
    $
    (55,793
    )
    
    $
    (7,901
    )
    
    $
    100Comprehensive loss:Net loss
    
    
    (4,259
    )
    
    
    
    
    
    
    (4,259
    )
    
    
    
    
    
    
    Change in unrealized gain on securities
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Comprehensive loss
    
    
    (4,251
    )Stock compensation expense
    
    
    18
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants
    
    
    70
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 31, 2006
    
    $
    780
    
    
    $
    68,625
    
    
    $
    (60,052
    )
    
    $
    (7,901
    )
    
    $
    108
  5




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended March 312006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (4,259
    )
    
    $
    (38,460
    )Net loss from discontinued operations
    
    
    
    
    
    
    (33,257
    )Net loss from continuing operations
    
    
    (4,259
    )
    
    
    (5,203
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    599
    
    
    
    528Amortization
of deferred financing costs and debt discount
    
    
    134
    
    
    
    61Non-cash stock compensation expense
    
    
    18
    
    
    
    Provision for bad debts
    
    
    405
    
    
    
    37Change in operating assets and liabilities:Accounts receivable
    
    
    (1,581
    )
    
    
    (405
    )Inventories
    
    
    124
    
    
    
    (221
    )Prepaid and other current assets
    
    
    46
    
    
    
    173Accounts payable
    
    
    3,943
    
    
    
    73Accrued expenses
    
    
    514
    
    
    
    249Other
    
    
    (110
    )
    
    
    42Net cash used in operating activities of continuing operations
    
    
    (167
    )
    
    
    (4,666
    )INVESTING ACTIVITIES:Capital expenditures
    
    
    (174
    )
    
    
    (41
    )Cash paid for business purchased
    
    
    (48
    )
    
    
    Change in other noncurrent assets, net
    
    
    17
    
    
    
    16Net cash used in investing activities of continuing operations
    
    
    (205
    )
    
    
    (25
    )FINANCING ACTIVITIES:Borrowings
    
    
    650
    
    
    
    4,750Net cash received (paid) from discontinued operations
    
    
    (238
    )
    
    
    1,364Exercise of common stock options
    
    
    
    
    
    
    (14
    )Deferred financing costs paid
    
    
    
    
    
    
    (775
    )Repayments of long-term debt
    
    
    (665
    )
    
    
    (1,316
    )Net cash (used in) provided by financing activities of continuing
operations
    
    
    (253
    )
    
    
    4,009Net cash used in operating activities of discontinued operations
    
    
    
    
    
    
    (68,039
    )Net cash provided by investing activities of discontinued operations
    
    
    
    
    
    
    44,453Net cash provided by financing activities of discontinued operations
    
    
    
    
    
    
    11,543Net increase (decrease) in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (12,043
    )Total decrease in cash and cash equivalents
    
    
    (625
    )
    
    
    (12,725
    )Net decrease in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (12,043
    )Net decrease in cash and cash equivalents of continuing operations
    
    
    (625
    )
    
    
    (682
    )Cash and cash equivalents of continuing operations at beginning of period
    
    
    2,232
    
    
    
    1,121Cash and cash equivalents of continuing operations at end of period
    
    $
    1,607
    
    
    $
    439
 See accompanying notes to
consolidated financial statements. 6




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




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 2  Discontinued Operations  Financial Services
     Standard Life
Condensed Consolidated Statement of Operations
 Three Months EndedMarch 312005Revenues
    
    $
    26,362Benefits, claims, interest credited and amortization
    
    
    18,756Operating and other expenses
    
    
    5,884Impairment charge
    
    
    (35,000
    )Income tax benefit
    
    
    21Loss from discontinued operations
    
    $
    (33,257
    )
 8




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 3  Health Services Business Acquisitions
       March 312005Net revenues
    
    $
    12,528Gross profit
    
    
    3,695Operating loss
    
    
    (3,345
    )Net loss from continuing operations
    
    
    (4,628
    )Net loss per share from continuing operations
    
    $
    (0.50
    )Weighted average shares outstanding
    
    
    9,171,114
   9




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 4  Stock Option Plan
 Share-Based Payment Accounting for Stock Based Compensation
  Three months ended March 31, 2005:Reported net loss from continuing operations
    
    $
    (5,203
    )Less: Total stock-based employee compensation expense determined under
fair value based method for all grants
    
    
    (41
    )Pro forma net loss from continuing operations
    
    $
    (5,244
    )Loss per share from continuing operations:Basic and diluted  as reported
    
    $
    (0.66
    )Basic and diluted  pro forma
    
    $
    (0.66
    )
  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
    
    
    (120,067
    )
    
    $
    4.27Outstanding as of March 31, 2006
    
    
    2,102,113
    
    
    $
    4.45
    
    
    
    4.70
    
    
    
    Exercisable at March 31, 2006
    
    
    1,979,613
    
    
    $
    4.47
    
    
    
    4.63
    
    
    
    
  
 (1)
    
    All outstanding stock option exercise prices are above the current market price for the
Companys stock as of March 31, 2006. 10




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 4  Stock Option Plan (continued)
  WeightedAverageNumber of
    
    
    Grant-DateShares
    
    
    Fair ValueNonvested at December 31, 2005
    
    
    129,167
    
    
    $
    1.58Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Canceled
    
    
    (6,667
    )
    
    $
    1.70Nonvested at March 31, 2006
    
    
    122,500
    
    
    $
    1.56
  Note 5  Indebtedness
  Interest
    
    
    March 31
    
    
    December 31Rate(1)
    
    
    2006
    
    
    2005Mortgages payable
    
    
    6.72
    %
    
    $
    5,845
    
    
    $
    5,905Promissory notes
    
    
    6.80
    %
    
    
    3,418
    
    
    
    2,3556% convertible notes
    
    
    6.00
    %
    
    
    2,750
    
    
    
    2,7507% convertible notes
    
    
    7.00
    %
    
    
    3,300
    
    
    
    3,300Other convertible notes
    
    
    9.75
    %
    
    
    3,800
    
    
    
    4,275Subordinated debentures
    
    
    10.25
    %
    
    
    20,700
    
    
    
    20,700Capital lease obligations
    
    
    
    
    
    
    196
    
    
    
    287Total indebtedness
    
    
    
    
    
    
    40,009
    
    
    
    39,572Less debt discount on other convertible notes
    
    
    
    
    
    
    232
    
    
    
    263Less current portion
    
    
    
    
    
    
    3,230
    
    
    
    2,533Total long-term debt, less current portion
    
    
    
    
    
    $
    36,547
    
    
    $
    36,776
 
 (1)
    
    Current weighted average rate at March 31, 2006. 11




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Indebtedness (continued)
          12




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 6  Shareholders Equity
  Warrants OutstandingExercise
    
    
    March 31
    
    
    December 31Expiration Date
    
    Price
    
    
    2006
    
    
    2005October 2007
    
    $
    4.92
    
    
    
    10,000
    
    
    
    10,000March 2010
    
    
    3.28
    
    
    
    175,000
    
    
    
    175,000March 2010
    
    
    3.90
    
    
    
    563,130
    
    
    
    563,130February 2011
    
    
    0.88
    
    
    
    200,000
    
    
    
    948,130
    
    
    
    748,130
 Note 7  Subsequent Events
   13




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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 Months Ended March 31, 2006 and March 31, 2005:
  Continuing Operations:
 Net revenues
 
    
    Sales for the first quarter of 2006 increased $11.7 million or
521% to $14.0 million compared to the first quarter of 2005,
primarily due to $11.3 million of net revenues from our 2005
acquisitions.
 Gross profit
 
    
    Gross profit for the first quarter of 2006 increased by $3.5
million or 739% to $4.0 million compared to the first quarter of
2005, primarily due to $3.6 million of gross profit from our 2005
acquisitions.
 Selling, general and administrative expenses
 
    
    Selling, general and administrative expenses for the first quarter of 2006 increased by $2.9 million or 70% to
$6.9 million compared to the first quarter of 2005, primarily due to $2.9 million of expenses from our 2005
acquisitions.
 Depreciation and amortization
 
    
    Depreciation and amortization was $.6 million and $.5 million in the first quarter of 2006 and 2005, respectively.
 Other income
 
    
    Other income for the first quarter of 2006 of $.2 million is primarily due to the dividends received from
preferred stock the Company received as part of the sale of Standard Life, as well as rental income from leasing
space at the Companys corporate headquarters to the purchaser of Standard Life.
 Interest expense
 
    
    Interest expense for the first quarter of 2006 decreased by $.1 million or 12 % to $1.0 million compared to the
first quarter of 2005, primarily due to the repayment of our senior secured credit facility upon the June 2005
sale of Standard Life offset partially by incurrence of new debt in March 2005.
 Federal income tax expense
 
    
    Provision for federal income tax remained zero due to a 100% valuation allowance on the net losses in the first
quarters of 2006 and 2005.
 14




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Discontinued Operations:
 Loss from Discontinued Operations:
 
    
    Net income from discontinued operations for the first quarter of 2006 was zero compared to
net loss of $33.3 million for the first quarter of 2005. The reported results from
discontinued operations related to our previous domestic financial services business which was
sold in June 2005. The 2005 loss includes a $35 million impairment charge resulting from that
sale for which no tax benefit has been recorded.
 Liquidity and Capital Resources
      
    
    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 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.
    
    On May 5, 2006, we commenced an exchange offer for all or a portion of the
outstanding $20.7 million of Trust Preferred Securities, whereby holders of Trust
Preferred Securities have the right to exchange each Trust Preferred Security for 4.5
shares of our common stock. We believe that the successful completion of the exchange
offer will benefit us by significantly reducing our outstanding indebtedness and
related debt service obligations.
    
    During the 1st quarter 2006 we announced our intention to
issue up to 15 million shares in a private placement of our common stock.
 15




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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
  
    
    Our having sufficient cash on hand, whether generated through operations or financings,
to meet our operating needs and continue our 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.
 16




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
    
    Increasing competition in the sale of our products.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  17




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 
  
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  10.1*
    
    Prime Vendor Agreement by and between Standard Management Corporation and
AmerisourceBergen Drug Corporation dated March 8, 2006 and effective as of March 1, 2006.10.2*
    
    Amendment to Prime Vendor Agreement by and between Standard Management Corporation
and AmerisourceBergen Drug Corporation dated March 24, 2006 and effective as of March 1,
2006.10.3
    
    Promissory Note dated February 23, 2006 between Standard Management Corporation and
Sam and Sheila Schmidt including an amendment thereto dated May 12, 2006.31.1
    
    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.
 
 *
    
    Confidential treatment has been requested for certain confidential portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. In accordance with
this rule, these confidential portions have been omitted from this exhibit and filed separately
with the Securities and Exchange Commission.    18




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
  
 SIGNATURES
  Dated: May 15, 2006STANDARD MANAGEMENT CORPORATION
(Registrant)By: /s/ Ronald D. HunterRonald D. HunterChairman, Chief Executive Officer and President(Principal Executive Officer)By: /s/ Michael B. EdwardsMichael B. EdwardsChief Financial Officer(Principal Financial and Accounting Officer)
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