Health Care and Insurance

Standard Management continues perilous skid: Company reports more losses; stock value sinks

December 11, 2006

Standard Management Corp. stock peaked five days into 2006 at $1.55. It's spent the rest of the year in a free fall that observers believe will culminate with the company's filing for bankruptcy.

The Carmel-based pharmaceuticals distributor reported a $10 million loss in the third quarter, bringing losses for the first nine months of 2006 to $14 million.

The red ink, along with executive turnover and a string of failed acquisitions, has sapped investor confidence. The company's shares, which traded as high as $8.81 in 2002, now fetch about 5 cents.

"Unless they obtain huge profits very soon, they will go bankrupt if they aren't already," said Matthew Will, associate dean of the School of Business at the University of Indianapolis.

The company had not filed for bankruptcy as of Dec. 6.

Former Conseco Inc. executive Ronald Hunter founded Standard Management in 1989, and four years later took it public at $13 a share.

The company focused on life insurance and financial services until 2004, when Hunter, the CEO, started an abrupt shift in strategy.

Encouraged by favorable trends, including the aging U.S. population, Hunter decided to sell off insurance operations and instead focus on distributing pharmaceuticals and other medical products.

"Rarely in life does one have an opportunity to be part of something with such great potential," he said on the company's Web site two years ago.

The company, which operates pharmacies in Tennessee and Indiana, reported revenue for the first nine months of 2006 of $17.7 million.

Hunter, 55, could not be reached for comment on Standard's future, but the company's Securities and Exchange Commission filings paint a gloomy picture.

Standard expects to keep losing money on this pharmacy business "for at least the next year," according to a September filing.

Independent auditors have expressed "substantial doubt" about Standard's ability to continue, according to a separate filing.

"As an investor you ... stay away from those kind of situations, I think," said

Ken Skarbeck, a managing partner of Aldebaran Capital, an Indianapolis money-management firm, and an IBJ columnist.

"In financial statement analysis, when an auditor qualifies their opinion, that's a big red mark."

Growing problems

Standard's troubles began long before 2006.

The company, which had 262 employees as of April, took in $29 million in revenue last year, thanks to four acquisitions. But it also recorded a $20 million operating loss.

That followed $10 million losses in 2003 and 2004.

Its shares traded as high as $4.45 in the first quarter of 2005 before sliding below $2 by the end of the year. Shares have traded over the counter since the company left the NASDAQ exchange in May.

Last year, it sold Standard Life Insurance Company of Indiana to Louisville- based Capital Assurance Corp. for about $80 million. With the deal, Standard Management traded the stable earnings of financial services for the potential company leaders saw in pharmaceuticals.

But the new venture has mostly generated headaches.

Standard opened a pharmacy in June 2005 in a medical office building attached to Carmel's The Heart Center of Indiana. It closed the location in January despite signing a five-year lease, said Brian Morris, chief financial officer for The Care Group LLC, which holds the master lease

on the building.

"I had to call them and say, 'Are you guys paying rent or not?'" he said, adding that Standard paid through April. "They signed a lease, and they basically abandoned the property."

Standard put together a deal to buy San Diego-based In-House Pharmacies Inc. in April. But In-House then canceled the agreement and walked away with Standard's $560,000 deposit after it failed to close by May 22.

Last June, Standard agreed to pay its former president and chief financial officer, P.B. "Pete" Pheffer, $900,000 to settle a severance dispute that arose after Pheffer left because of the focus switch to pharmaceuticals.

In July, lenders called in the $1.5 million balance on a loan Standard took out in 2005 to buy Seattle-based Ranier Home Health Care Pharmacy Inc., after Standard missed an interest-payment deadline.

A month later, Standard sold Ranier to Kentucky-based Omnicare Inc. for more than $13 million, a price that included assumed debt and $12 million in cash, according to an SEC filing.

In October, the company sold another pharmacy it bought in 2005, New Castlebased Long Term Rx Inc., to Omnicare for $4.2 million in cash.

Company officials noted in a September filing that they expect their pharmacy business to continue losing money "until we achieve critical mass through acquisitions and organic growth."

But Standard has sold three pharmacy subsidiaries since August, leaving it with only two, which generate about $13 million in revenue annually, an SEC filing said.

And despite these deals, the company noted in its third-quarter SEC filing that it may not have enough money to "meet our cash requirements" absent a "significant additional cash infusion" in the next several months.

"There can be no assurance that we will ever be able to successfully develop and operate a profitable pharmacy business," Standard stated in a September filing.

More signs of distress

A glance through Standard's latest financials shows other troubling numbers.

The company's assets have decreased from $49 million to $24 million since the end of last year. Liabilities have decreased as well, but at $34 million, they trump assets by $10 million.

"If this company is liquidated tomorrow, they don't have enough assets to pay off their debt," Will said.

Third-quarter financials also show $26 million in long-term debt. Companies typically wind up in bankruptcy when hefty debt like that is combined with Standard's $10.7 million quarterly loss, said Steve Hopkins, an Indianapolis consultant and author of the book "Crafting Solutions for Troubled Businesses."

He also noted that Standard brought in just $4.8 million in revenue for the quarter.

"You can't really restructure the business without doing something to get a deferral of the debt, which is what you do in bankruptcy," he said.

Heavy losses and high debt make bankruptcy seem inevitable, Hopkins said, unless Standard has some asset it could sell to generate a lot of revenue.

The company did sell nearly five acres of land next to its corporate headquarters in May to a company owned by former director Michael Browning. But the $1.1 million it received was poured into a loan payment.

Standard also has received loans totaling $3.3 million from Browning, a local developer. Browning had served as a Standard director until he resigned in July to avoid a conflict of interest regarding the loan, company filings state. Browning did not return calls seeking comment.

Those loans caught the attention of Randy Heron, an associate professor of finance at Indiana University's Kelley School of Business at IUPUI.

Heron said he doesn't follow the company, but borrowing from a former board member indicates Standard has had a hard time finding more lenders.

"Getting capital to continue operations seems to be a challenging prospect," he said. "I would say it's a clear indication they're having a difficult time raising capital from public sources."
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