Health Care and Insurance

Standard Life sale leads to lawsuit over price: Kentucky buyer claims $652,000 refund is owed

November 21, 2005

Standard Management Corp. last week disclosed a new round of financial challenges and was hit with a lawsuit by a Kentucky company that bought its Standard Life Insurance subsidiary earlier this year.

Louisville-based Capital Assurance Corp. accuses Standard Management of breaching terms of the contract to sell Standard Life and seeks a $652,126 refund, according to the lawsuit filed Nov. 14 in federal court in Indianapolis.

Standard claims it owes only $43,000 in what it deems a "purchase-price adjustment dispute," according to its quarterly report filed with the Securities and Exchange Commission. The two companies completed the $79.8 million sale last June.

Capital Assurance filed its lawsuit the same day Standard reported a $3.9 million loss for the third quarter. It was the ninth straight quarter the Indianapolis-based company reported a loss topping $1 million.

The company, which turned its focus to health care services after selling Standard Life, said in the SEC filing that it believes "operational cash flow" will not meet needs for 2005. As a result, the company said it plans to borrow additional money or attract additional investment.

"They really can't sustain a loss like that on and on," said George Farra, a principal at Indianapolis-based Woodley Farra Manion Portfolio Management Inc., after reviewing the report. He said that's why the stock price is about $1.60, down 50 percent for the year.

However, Standard Management Senior Accountant Ron Hungerford said he thinks the company has the money to pay its bills and keep operating. He said it needs capital only if it makes additional acquisitions.

"There's a few out in the fire, but there's nothing specific," Hungerford said.

Standard's health services business distributes pharmaceutical products. Its customers include skilled nursing facilities, home health care agencies, academic institutions and consumers.

Its latest purchases in the field include Nashville, Tenn.-based Precision Healthcare Inc. and two firms in Washington state, Holland Drug Store and Rainier Home Health Care Pharmacy Inc.

Standard will continue to make acquisitions and grow its existing business, CEO Ronald Hunter said in a prepared statement. He said the company might reach $300 million in annual revenue by the end of 2008. Revenue in the third quarter was $10 million.

However, Farra said finding money to make acquisitions might prove difficult. At the stock's current price, the company would have to sell millions of shares to raise significant capital. Doing so would have the effect of diluting the ownership stake of existing shareholders.

"They're going to have a tough time pulling it off," he said. "A bank is not going to lend them money. They don't have many assets to borrow against. ... It's just going to be very difficult for them to survive."

Standard's legal headaches extend beyond the Capital Assurance case. Earlier this year, the company became embroiled in a severance dispute with former President and Chief Financial Officer P.B. "Pete" Pheffer, who left in May. Pheffer claims his contract entitled him to $3.8 million in severance, plus other payments. Standard contends it owes only $50,000.

That case is in arbitration, with a hearing scheduled for July.

The Capital Assurance dispute focuses on final adjustments to the sale price calculated 60 days after the deal's closing.

Both Standard Management and Capital Assurance representatives declined to discuss the lawsuit.
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