##### 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 JUNE 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
    
    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
  o þ




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##### 



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 INDEX
 Page NumberPart I.
    
    FINANCIAL INFORMATION:Item 1.
    
    Unaudited Financial StatementsConsolidated Balance Sheets 
June 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations 
For the Three Months and Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Shareholders Equity 
For the Six Months Ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Cash Flows 
For the Six Months Ended June 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
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II.
    
    OTHER INFORMATION:Item 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior Notes
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26SIGNATURES
    
    
    28EX-10.1 OMNIBUS AMENDMENT AND WAIVER LAURUS MASTER FUNDEX-10.2 SECURED PROMISSORY NOTE DATED JULY 27, 2006EX-10.3 GUARANTY DATED JULY 27,2006EX-10.4 PLEDGE AGREEMENT RANIER HOME HEALTHCARE PHARMACY INC. DATED JULY 27, 2006EX-10.5 PLEDGE AGREEMENT U.S. HEALTHSERVICES CORPORATION DATED JULY 27, 2006EX-10.6 SECURITY AGREEMENT DATED JULY 27, 2006EX-10.7 ASSET PURCHASE AGREEMENT DATED JULY 27, 2006EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF 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
  June 30
    
    
    December 312006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    977
    
    
    $
    2,232Accounts receivable, net
    
    
    6,475
    
    
    
    6,543Inventories
    
    
    3,495
    
    
    
    3,880Prepaid and other current assets
    
    
    722
    
    
    
    828Total current assets
    
    
    11,669
    
    
    
    13,483Property and equipment, net
    
    
    10,414
    
    
    
    10,950Assets held for sale
    
    
    942
    
    
    
    1,506Deferred financing fees, net
    
    
    1,073
    
    
    
    2,009Officer and other notes receivable, less current portion
    
    
    826
    
    
    
    842Investments in unconsolidated subsidiaries
    
    
    160
    
    
    
    5,160Intangible assets, net
    
    
    3,825
    
    
    
    4,305Goodwill
    
    
    12,457
    
    
    
    11,366Other noncurrent assets
    
    
    1,332
    
    
    
    1,388Total assets
    
    $
    42,698
    
    
    $
    51,009LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,905
    
    
    $
    2,201Accrued expenses
    
    
    4,226
    
    
    
    2,392Current portion of long-term debt
    
    
    6,273
    
    
    
    2,533Liabilities of discontinued operations
    
    
    
    
    
    
    1,069Total current liabilities
    
    
    15,404
    
    
    
    8,195Long-term debt, less current portion
    
    
    22,722
    
    
    
    36,776Other long-term liabilities
    
    
    1,152
    
    
    
    1,095Total liabilities
    
    
    39,278
    
    
    
    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 18,270,490
and 10,712,859 shares issued in 2006 and 2005, respectively
    
    
    70,790
    
    
    
    68,537Retained deficit
    
    
    (59,460
    )
    
    
    (55,793
    )Treasury stock, at cost, 1,653,322 and 1,617,651 shares in 2006 and 2005, respectively
    
    
    (8,018
    )
    
    
    (7,901
    )Accumulated other comprehensive income
    
    
    108
    
    
    
    100Total shareholders equity
    
    
    3,420
    
    
    
    4,943Total liabilities and shareholders equity
    
    $
    42,698
    
    
    $
    51,009
  3




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    12,622
    
    
    $
    2,489
    
    
    $
    26,606
    
    
    $
    4,691Cost of sales
    
    
    8,845
    
    
    
    1,957
    
    
    
    18,868
    
    
    
    3,738Gross profit
    
    
    3,777
    
    
    
    532
    
    
    
    7,738
    
    
    
    953Selling, general and administrative
expenses
    
    
    8,008
    
    
    
    3,451
    
    
    
    14,858
    
    
    
    7,423Depreciation and
amortization
    
    
    604
    
    
    
    486
    
    
    
    1,203
    
    
    
    1,014Operating
loss
    
    
    (4,835
    )
    
    
    (3,405
    )
    
    
    (8,323
    )
    
    
    (7,484
    )Other income, net
    
    
    7,078
    
    
    
    
    
    
    
    7,298
    
    
    
    Interest expense
    
    
    (1,351
    )
    
    
    (1,186
    )
    
    
    (2,342
    )
    
    
    (2,310
    )Income (loss) before income
taxes
    
    
    892
    
    
    
    (4,591
    )
    
    
    (3,367
    )
    
    
    (9,794
    )Income tax expense
(benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) from continuing
operations
    
    
    892
    
    
    
    (4,591
    )
    
    
    (3,367
    )
    
    
    (9,794
    )Loss from discontinued operations, net of income tax expense (benefit)
of $0, $233, $0, and $212,
respectively
    
    
    (300
    )
    
    
    (772
    )
    
    
    (300
    )
    
    
    (34,029
    )Net income
(loss)
    
    $
    592
    
    
    $
    (5,363
    )
    
    $
    (3,667
    )
    
    $
    (43,823
    )Income (loss) per share:Basic:Income (loss) from continuing
operations
    
    $
    0.09
    
    
    $
    (0.58
    )
    
    $
    (0.36
    )
    
    $
    (1.23
    )Income (loss) from discontinued
operations
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.03
    )
    
    $
    (4.29
    )Net income
(loss)
    
    $
    0.06
    
    
    $
    (0.68
    )
    
    $
    (0.39
    )
    
    $
    (5.52
    )Weighted average shares
outstanding
    
    
    9,508,135
    
    
    
    7,954,446
    
    
    
    9,302,812
    
    
    
    7,937,780Diluted:Income (loss) from continuing
operations
    
    $
    0.09
    
    
    $
    (0.58
    )
    
    $
    (0.36
    )
    
    $
    (1.23
    )Income (loss) from discontinued
operations
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.03
    )
    
    $
    (4.29
    )Net income
(loss)
    
    $
    0.06
    
    
    $
    (0.68
    )
    
    $
    (0.39
    )
    
    $
    (5.52
    )Weighted average shares
outstanding
    
    
    12,296,464
    
    
    
    7,954,446
    
    
    
    9,302,812
    
    
    
    7,937,780
  4




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##### Table of Contents



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
    
    
    (43,823
    )
    
    
    
    
    
    
    (43,823
    )
    
    
    
    
    
    
    Change in unrealized loss on securities, net
of income tax provision of $2,670
    
    
    (4,827
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,827
    )Comprehensive loss
    
    
    (48,650
    )Adjustments due to stock price contingency
    
    
    (84
    )
    
    
    (84
    )

    

    
    
    
    
    
    
    
    Issuance of warrants
    
    
    518
    
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options
    
    
    (14
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2005
    
    $
    11,802
    
    
    $
    64,789
    
    
    $
    (45,352
    )
    
    $
    (7,703
    )
    
    $
    68Balance at January 1, 2006
    
    $
    4,943
    
    
    $
    68,537
    
    
    $
    (55,793
    )
    
    $
    (7,901
    )
    
    $
    100Comprehensive loss:Net loss
    
    
    (3,667
    )
    
    
    
    
    
    
    (3,667
    )
    
    
    
    
    
    
    Change in unrealized gain on securities
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Comprehensive loss
    
    
    (3,659
    )Stock compensation expense
    
    
    35
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Exchange  Trust Preferred
    
    
    1,802
    
    
    
    1,802
    
    
    
    
    
    
    
    
    
    
    
    Issuance of warrants
    
    
    123
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    Sale of common stock, net of issuance
costs
    
    
    293
    
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    Treasury stock acquired
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    (117
    )
    
    
    Balance at June 30, 2006
    
    $
    3,420
    
    
    $
    70,790
    
    
    $
    (59,460
    )
    
    $
    (8,018
    )
    
    $
    108
  5




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 302006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (3,667
    )
    
    $
    (43,823
    )Net loss from discontinued operations
    
    
    (300
    )
    
    
    (34,029
    )Net loss from continuing operations
    
    
    (3,367
    )
    
    
    (9,794
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,203
    
    
    
    1,014Amortization and writeoff of deferred financing costs and debt discount
    
    
    433
    
    
    
    215Gain on Trust Preferred exchange
    
    
    (9,194
    )
    
    
    Non-cash stock compensation expense
    
    
    35
    
    
    
    Provision for bad debts
    
    
    824
    
    
    
    78Net loss related to sale of assets
    
    
    2,148
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (1,315
    )
    
    
    (205
    )Inventories
    
    
    204
    
    
    
    (606
    )Prepaid and other current assets
    
    
    236
    
    
    
    219Accounts payable
    
    
    3,116
    
    
    
    549Accrued expenses
    
    
    1,619
    
    
    
    (838
    )Other
    
    
    3
    
    
    
    (980
    )Net cash used in operating activities of continuing operations
    
    
    (4,055
    )
    
    
    (10,348
    )INVESTING ACTIVITIES:Capital expenditures
    
    
    (188
    )
    
    
    (342
    )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 paid for business purchased
    
    
    (548
    )
    
    
    (84
    )Change in other noncurrent assets, net
    
    
    17
    
    
    
    517Net cash provided by investing activities of continuing operations
    
    
    1,564
    
    
    
    47,305FINANCING ACTIVITIES:Borrowings
    
    
    3,450
    
    
    
    4,750Net cash received from discontinued operations
    
    
    
    
    
    
    3,649Exercise of common stock options
    
    
    
    
    
    
    (14
    )Proceeds from sale of stock and warrants, net
    
    
    319
    
    
    
    Purchase of treasury stock
    
    
    (117
    )
    
    
    Deferred financing costs paid
    
    
    
    
    
    
    (660
    )Repayments of long-term debt
    
    
    (2,416
    )
    
    
    (19,831
    )Net cash provided by (used in) financing activities of continuing operations
    
    
    1,236
    
    
    
    (12,106
    )Net cash used in operating activities of discontinued
operations
    
    
    
    
    
    
    (70,894
    )Net cash provided by investing activities of discontinued
operations
    
    
    
    
    
    
    37,854Net cash provided by financing activities of discontinued
operations
    
    
    
    
    
    
    9,463Net decrease in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (23,577
    )Total
increase (decrease) in cash and cash equivalents
    
    
    (1,255
    )
    
    
    48,428Net decrease in cash and cash equivalents of discontinued operations
    
    
    
    
    
    
    (23,577
    )Net increase
(decrease) in cash and cash equivalents of continuing operations
    
    
    (1,255
    )
    
    
    24,851Cash and cash equivalents of continuing operations at beginning of
period
    
    
    2,232
    
    
    
    1,121Cash and cash equivalents of continuing operations at end of
period
    
    $
    977
    
    
    $
    25,972
 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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##### Table of Contents



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




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 2  Discontinued Operations  Financial Services (continued)
 Standard Life
Condensed Consolidated Statement of Operations
 Six Months EndedJune 302005Revenues
    
    $
    40,796Benefits, claims, interest credited and amortization
    
    
    33,307Operating and other expenses
    
    
    4,700Impairment charge
    
    
    (36,606
    )Income tax expense
    
    
    (212
    )Loss from discontinued
operations
    
    $
    (34,029
    )
 Note 3  Health Services Business Acquisitions
      9




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 3  Health Services Business Acquisitions (continued)
  June 302005Net revenues
    
    $
    24,994Gross profit
    
    
    7,251Operating loss
    
    
    (6,217
    )Net loss from continuing operations
    
    
    (8,843
    )Net loss per share from continuing operations
    
    $
    (0.50
    )Weighted average shares outstanding
    
    
    9,187,781
    10




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##### Table of Contents



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
    
    
    Six Months EndedJune 30
    
    
    June 302005
    
    
    2005Reported net loss from continuing
operations
    
    $
    (4,591
    )
    
    $
    (9,794
    )Less: Total stock-based employee compensation expense
determined under fair
value based method for all
grants
    
    
    (41
    )
    
    
    (362
    )Pro forma net loss from continuing
operations
    
    $
    (4,632
    )
    
    $
    (10,156
    )Loss per share from continuing operations:Basic and diluted  as
reported
    
    $
    (0.58
    )
    
    $
    (1.23
    )Basic and diluted  pro
forma
    
    $
    (0.58
    )
    
    $
    (1.28
    )
  AverageWeighted
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Average
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    Value (1)Outstanding at December 31, 2005
    
    
    2,222,180
    
    
    $
    4.44Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (782,180
    )
    
    $
    4.84Outstanding as of June 30, 2006
    
    
    1,440,000
    
    
    $
    3.60
    
    
    
    5.86
    
    
    
    
  
 (1)
    
    All outstanding stock option exercise prices are above the current market price for the
Companys stock as of June 30, 2006. 11




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##### Table of Contents



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
    
    
    (75,833
    )
    
    $
    1.57Canceled
    
    
    (6,667
    )
    
    $
    1.70Nonvested at June 30, 2006
    
    
    46,667
    
    
    $
    1.57
  Note 5  Indebtedness
  Interest
    
    
    June 30
    
    
    December 31Rate(1)
    
    
    2006
    
    
    2005Mortgages payable
    
    
    7.20
    %
    
    $
    5,786
    
    
    $
    5,905Promissory notes
    
    
    6.42
    %
    
    
    2,628
    
    
    
    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 note
    
    
    8.25
    %
    
    
    2,800
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    112
    
    
    
    287Total indebtedness
    
    
    
    
    
    
    29,354
    
    
    
    39,572Less debt discount on other convertible notes
    
    
    
    
    
    
    359
    
    
    
    263Less current portion
    
    
    
    
    
    
    6,273
    
    
    
    2,533Total long-term debt, less current portion
    
    
    
    
    
    $
    22,722
    
    
    $
    36,776
 
 (1)
    
    Current weighted average rate at June 30, 2006. 12




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Indebtedness (continued)
          13




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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 5  Indebtedness (continued)
  Note 6  Shareholders Equity
  Warrants Outstanding
    
    Warrant Pricing AssumptionsExercise
    
    June 30
    
    December 31
    
    Dividend
    
    Expected
    
    Risk-free
    
    ExpectedExpiration
    
    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
    
    
    
    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
    
    
    0.88
    
    
    
    189,043
    
    
    
    
    
    
    
    0
    %
    
    
    0.646
    
    
    
    5.07
    %
    
    
    4.0June 2011
    
    
    0.88
    
    
    
    20,548
    
    
    
    
    
    
    
    0
    %
    
    
    0.646
    
    
    
    5.07
    %
    
    
    4.01,257,721
    
    
    
    748,130
   Note 7  Sale of Real Estate
   14




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 7  Sale of Real Estate (continued)
  Note 8  Pheffer Settlement
  Note 9  Laurus Amendment
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 10  Earnings (Loss) Per Share Data
   Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Earnings (loss):Net income (loss)
from continuing
operations 
basic
    
    $
    892
    
    
    $
    (4,591
    )
    
    $
    (3,367
    )
    
    $
    (9,794
    )Effect of dilutive
convertible debt
(interest
expense)
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    Net income from
continuing
operations 
diluted
    
    
    1,083
    
    
    
    (4,591
    )
    
    
    (3,367
    )
    
    
    (9,794
    )Loss from
discontinued
operations  basic
and
diluted
    
    
    (300
    )
    
    
    (772
    )
    
    
    (300
    )
    
    
    (34,029
    )Net income
(loss)
    
    $
    592
    
    
    $
    (5,363
    )
    
    $
    (3,667
    )
    
    $
    (43,823
    )Shares:Weighted average
shares outstanding 
basic
    
    
    9,508,135
    
    
    
    7,954,446
    
    
    
    9,302,812
    
    
    
    7,937,780Dilutive effect of
stock options and
warrants
    
    
    224,115
    
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of
convertible
debentures
    
    
    2,564,215
    
    
    
    
    
    
    
    
    
    
    
    Weighted average
shares outstanding 
diluted
    
    $
    12,296,465
    
    
    $
    7,954,446
    
    
    $
    9,302,812
    
    
    $
    7,937,780Income (loss) per share:Basic:Income (loss) from
continuing
operations
    
    $
    0.09
    
    
    $
    (0.58
    )
    
    $
    (0.36
    )
    
    $
    (1.23
    )Income (loss) from
discontinued
operations
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.03
    )
    
    $
    (4.29
    )Net income
(loss)
    
    $
    0.06
    
    
    $
    (0.68
    )
    
    $
    (0.39
    )
    
    $
    (5.52
    )Diluted:Income (loss) from
continuing
operations
    
    $
    0.09
    
    
    $
    (0.58
    )
    
    $
    (0.36
    )
    
    $
    (1.23
    )Income (loss) from
discontinued
operations
    
    $
    (0.03
    )
    
    $
    (0.10
    )
    
    $
    (0.03
    )
    
    $
    (4.29
    )Net income
(loss)
    
    $
    0.06
    
    
    $
    (0.68
    )
    
    $
    (0.39
    )
    
    $
    (5.52
    )
   16




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 11  Prime Vendor Agreement
  Note 12  Subsequent Events
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (cont.)
 Note 12  Subsequent Events (continued)
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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 Six Months Ended June 30, 2006 and June 30, 2005:
  Continuing Operations:
 Net revenues
 Quarterly analysis:
 
    
    Sales for the second quarter of 2006 increased
$10.1 million or 407%
to $12.6 million compared to the second quarter of 2005, primarily due to $10.7
million of net revenues from our 2005 acquisitions partially offset by a
decline in revenue in our base of business existing prior to the 2005
acquisitions, primarily at our Apothecary Solutions operations.
 Year-to-date analysis:
 
    
    Sales for the first six months of 2006 increased $21.9 million or
467% to $26.6 million compared to the second quarter of 2005, primarily due to
$22.0 million of net revenues from our 2005 acquisitions partially offset by a
decline in revenue 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 second quarter of 2006 increased by $3.2
million or 610% to $3.8 million compared to the second quarter of 2005,
primarily due to $3.3 million of gross profit from our 2005 acquisitions.Year-to-date analysis:
 
    
    Gross profit for the first six months of 2006 increased by $6.8
million or 712% to $7.7 million compared to the second quarter of 2005,
primarily due to $6.9 million of gross profit from our 2005 acquisitions.
 Selling, general and administrative expenses
 Quarterly analysis:
 
    
    Selling, general and administrative expenses for the second quarter
of 2006 increased by $4.6 million or 132% to $8.0 million compared to the
second quarter of 2005, primarily due to $3.0 million of expenses from our 2005
acquisitions; $.9 million provided for the Pheffer settlement (see Note 8 to
the Notes to 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 3 to the Notes to the
Consolidated Financial Statements)
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 Year-to-date analysis:
 
    
    Selling, general and administrative expenses for the first six
months of 2006 increased by $7.4 million or 100% to $14.9 million compared to
the second quarter of 2005, primarily due to $6.1 million of expenses from our
2005 acquisitions $.9 million provided for the Pheffer settlement (see Note 8
to the Notes to 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 3 to the Notes to the
Consolidated Financial Statements).
 Depreciation and amortization
 Quarterly analysis:
 
    
    Depreciation and amortization was $.6 million and $.5 million in the
second quarter of 2006 and 2005, respectively primarily due to expenses from
our 2005 acquisitions.
 Year-to-date analysis:
 
    
    Depreciation and amortization for the first six months of 2006 was
$1.2 million and $1.0 million in the second quarter of 2006 and 2005,
respectively primarily due to expenses from our 2005 acquisitions.
 Other income
 Quarterly analysis:
 
    
    Other income for the second quarter of 2006 of $7.1 million is due
primarily to the following: $.5 million of income from the sale of real estate
(see Note 7 to the Notes to the Consolidated Financial Statements), $9.2
million of income from the exchange offer for the Trust Preferred Securities
(see Note 5 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 $.2 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.
 Year-to-date analysis:
 
    
    Other income for the first six months of 2006 of $7.3 million is due
primarily to the following: $.5 million of income from the sale of real estate
(see Note 7 to the Notes to the Consolidated Financial Statements), $9.2
million of income from the exchange offer for the Trust Preferred Securities
(see Note 5 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:
 
    
    Interest expense for the second quarter of 2006 increased by $.2
million or 14% to $1.4 million compared to the second quarter of 2005, primarily
due to our senior note issued in the second quarter of 2006 and additional new
debt in 2005, partially offset by the repayment of our senior secured credit
facility upon the June 2005 sale of Standard Life.
 Year-to-date analysis:
 
    
    Interest expense for the first six months of 2006 remained steady at
$2.3 million, primarily due to our senior note issued in the second quarter of
2006 and additional new debt in 2005, partially offset by the repayment of our
senior secured credit facility upon the June 2005 sale of Standard Life.
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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 second quarter of 2006
was $.3 million compared to net loss of $.8 million for the second quarter of
2005. The reported results from discontinued operations related to our
previous domestic financial services business which was sold in June 2005. The
2006 loss consists of a $.3 million loss from discontinued operations upon
settlement of the purchase price adjustment dispute with Capital Assurance.
 Year-to-date analysis:
 
    
    Net loss from discontinued operations for the first six months of 2006 was $.3 million
compared to net loss of $34 million for the first six months of 2005. The reported results
from discontinued operations related to our previous domestic financial services business
which was sold in June 2005. The 2006 loss consists of a $.3 million loss from discontinued
operations upon settlement of the purchase price adjustment dispute with Capital Assurance.
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
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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 5 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 then partially
retired with proceeds from the sale of the Rainier Business (see Note 2 and Note 12 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 7 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).
    
    On June 30, 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 5
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 June 30, 2006, we
issued 698,636 shares for $.5 million.
    
    On August 11, 2006, we sold certain rights, properties and assets of its Rainier and
Holland subsidiaries (the Rainier Business), pursuant to an Asset Purchase Agreement
(the Agreement) with Omnicare, Inc. (Omnicare). The revenues and net loss of the
Rainier Business for the six months ended June 30, 2006 were $13.4 million and $.6
million, respectively. Total assets of the Rainier Business as of June 30, 2006 were
$16.4 million, including $10.4 million of intangible assets and goodwill. At
the closing, Omnicare agreed to pay us an
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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 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 $.7 million payment may be made within 30 days of the four month
anniversary of the closing, and (3) within 30 days of December 31, 2006, a contingent
payment of up to $520,000 may be made based on a calculation defined in the Agreement.
We expect to record a loss
on the sale of approximately $3.4 million. We retained approximately $3.5 million in net
cash proceeds from the closing after payment of certain indebtedness and transaction
costs.
  Estimated Cash Required in 2006
  Contractual Obligations :
 Off-Balance Sheet Arrangements :
  Cautionary Notice Regarding Forward-Looking Statements
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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 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
  24




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTRED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 5. OTHER INFORMATION
  25




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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
   
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  10.1
    
    Omnibus Amendment and Waiver by and between Standard Management Corporation and
Laurus Master Fund, Ltd. dated May 23, 2006.10.2
    
    Secured Promissory Note dated July 27, 2006 in favor of Michael G. Browning.10.3
    
    Guaranty by and among Rainier Home Health Care Pharmacy, Inc., Precision Healthcare,
Inc. Long Term Rx, Inc., Home Med Channel, Inc., Holland Drug Store, Inc. and Michael G.
Browning dated July 27, 2006.10.4
    
    Pledge Agreement by and between Rainier Home Health Care Pharmacy, Inc. and Michael
G. Browning dated July 27, 2006.10.5
    
    Pledge Agreement by and between U.S. Health Services Corporation and Michael G.
Browning dated July 27, 2006.10.6
    
    Security Agreement by and among Rainier Home Health Care Pharmacy, Inc., Precision
Healthcare, Inc. Long Term Rx, Inc., Home Med Channel, Inc., Holland Drug Store, Inc. and
Michael G. Browning dated July 27, 2006.10.7
    
    Asset Purchase Agreement by and among Standard Management Corporation, Rainier Home
Health Care Pharmacy, Inc., Holland Compounding Pharmacy, Inc., Holland Drug Store, Inc.
and Omnicare, Inc. dated July 28, 2006.10.8
    
    Redemption Agreement, dated as of June 29, 2006, by and between Standard Management
Corporation and Capital Assurance Corporation (incorporated by reference to the Companys
Current Report on Form 8-K dated July 6, 2006, File No. 0-20882).10.9
    
    Settlement Agreement and Mutual Release, dated June 30, 2006, by and between Standard
Management Corporation and Paul B. (Pete) Pheffer (incorporated by reference to the
Companys Current Report on Form 8-K dated July 6, 2006, File No. 0-20882).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, Chief Executive Officer and President(Principal Executive Officer)By:
    
    /s/ Michael B. EdwardsMichael B. EdwardsChief Financial Officer(Principal Financial and Accounting Officer)
 28