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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-QSB   (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to __________ Commission File Number: 000-50348   NATIONSHEALTH, INC. (Exact name of Small Business Issuer as specified in its charter)
 Delaware
(State or other jurisdiction of incorporation)
    
    06-1688360
(I.R.S. Employer Identification No.)13650 NW 8th Street, Sunrise, FL
(Address of principal executive offices)
    
    33325
(Zip Code)
 Issuerss telephone number, including area code: 954-903-5000   Indicate by check mark whether the Small Business Issuer: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x   No o As of the close of business on November 10, 2004, the issuer had
26,174,700 shares of common stock, $0.0001 par value issued and outstanding.




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NATIONSHEALTH, INC. QUARTERLY REPORT ON FORM 10-QSB INDEX PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated and Combined Balance Sheets  As of
September 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Condensed Consolidated and Combined Statements of Operations (Unaudited) 
For the Three Months and Nine Months Ended September 30, 2004 and
September 30, 2003
    
    
    4Condensed Consolidated and Combined Statements of Cash Flows (Unaudited) 
For the Nine Months Ended September 30, 2004 and
September 30, 2003
    
    
    5Notes to Condensed Consolidated and Combined Financial Statements
(Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Controls and Procedures
    
    
    34PART II  OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 6. Exhibits and Reports on Form 8-K
    
    
    35SIGNATURES
    
    
    36Stock Option AgreementCERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO & CFO PURSUANT TO SECTION 906




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements NATIONSHEALTH, INC. 
 CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    5,433
    
    
    $
    1,412Certificate of deposit
    
    
    100
    
    
    
    Accounts receivable, net of allowance of approximately $11,324
and $3,526, respectively
    
    
    5,439
    
    
    
    2,761Inventories
    
    
    1,574
    
    
    
    834Costs related to billings in process, net
    
    
    1,522
    
    
    
    854Investment held in trust
    
    
    2,000
    
    
    
    Prepaid expenses and other
    
    
    255
    
    
    
    32Total current assets
    
    
    16,323
    
    
    
    5,893Property and equipment, net
    
    
    1,502
    
    
    
    684Other assets
    
    
    312
    
    
    
    52Total assets
    
    $
    18,137
    
    
    $
    6,629LIABILITIES AND STOCKHOLDERS EQUITY /
MEMBERS DEFICIENCYCurrent Liabilities:Accounts payable
    
    $
    5,267
    
    
    $
    4,124Accounts payable, related party
    
    
    3,673
    
    
    
    954Accrued expenses
    
    
    2,055
    
    
    
    1,063Refundable deposit
    
    
    75
    
    
    
    100Total current liabilities
    
    
    11,070
    
    
    
    6,241Long-Term Debt:Lines of credit
    
    
    2,706
    
    
    
    800Notes payable to members
    
    
    
    
    
    
    1,343Total long-term debt
    
    
    2,706
    
    
    
    2,143Commitments and contingenciesStockholders Equity / Members Deficiency:Common stock
    
    
    3
    
    
    
    Additional paid-in capital
    
    
    18,483
    
    
    
    Preferred
members interests  voting
    
    
    
    
    
    
    400Preferred members interests  nonvoting
    
    
    
    
    
    
    3,741Class B interests
    
    
    
    
    
    
    35Accumulated deficit
    
    
    (14,125
    )
    
    
    (5,931
    )Total stockholders equity / members deficiency
    
    
    4,361
    
    
    
    (1,755
    )Total liabilities and stockholders equity / members deficiency
    
    $
    18,137
    
    
    $
    6,629
 The accompanying notes are an integral part of these condensed consolidated and
combined financial statements. 3




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##### Table of Contents



NATIONSHEALTH, INC. 
 CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Net sales
    
    $
    19,383
    
    
    $
    5,384
    
    
    $
    50,078
    
    
    $
    15,098Prescription card fees, net
    
    
    704
    
    
    
    186
    
    
    
    1,893
    
    
    
    36220,087
    
    
    
    5,570
    
    
    
    51,971
    
    
    
    15,460Cost of Sales
    
    
    6,688
    
    
    
    1,720
    
    
    
    17,582
    
    
    
    7,267Gross Profit
    
    
    13,399
    
    
    
    3,850
    
    
    
    34,389
    
    
    
    8,193Operating Expenses:Customer acquisition and related
costs
    
    
    4,188
    
    
    
    1,642
    
    
    
    15,490
    
    
    
    3,346Personnel costs
    
    
    3,478
    
    
    
    1,225
    
    
    
    10,162
    
    
    
    2,991Provision for doubtful accounts
    
    
    3,533
    
    
    
    982
    
    
    
    9,128
    
    
    
    1,976Selling, general and administrative
    
    
    2,559
    
    
    
    744
    
    
    
    6,759
    
    
    
    1,611Depreciation and amortization
    
    
    139
    
    
    
    34
    
    
    
    334
    
    
    
    7113,897
    
    
    
    4,627
    
    
    
    41,873
    
    
    
    9,995Loss from Operations
    
    
    (498
    )
    
    
    (777
    )
    
    
    (7,484
    )
    
    
    (1,802
    )Other Income (Expenses):Interest income
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    Interest expense
    
    
    (390
    )
    
    
    (50
    )
    
    
    (712
    )
    
    
    (127
    )(390
    )
    
    
    (50
    )
    
    
    (710
    )
    
    
    (127
    )Net Loss
    
    $
    (888
    )
    
    $
    (827
    )
    
    $
    (8,194
    )
    
    $
    (1,929
    )Net income per weighted average share:Basic
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.31
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.31
    )
    
    $
    (0.07
    )Weighted average shares outstanding:Basic
    
    
    26,150
    
    
    
    26,150
    
    
    
    26,150
    
    
    
    26,150Diluted
    
    
    26,150
    
    
    
    26,150
    
    
    
    26,150
    
    
    
    26,150
 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 4




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NATIONSHEALTH, INC. 
 CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 For the Nine Months EndedSeptember 30,2004
    
    2003Cash Flows from Operating Activities:Net loss
    
    $
    (8,194
    )
    
    $
    (1,929
    )Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:Depreciation and amortization
    
    
    334
    
    
    
    71Provision for doubtful accounts
    
    
    9,128
    
    
    
    1,976Changes in operating assets and liabilities:(Increase) in:Accounts receivable
    
    
    (11,806
    )
    
    
    (3,227
    )Inventories
    
    
    (740
    )
    
    
    (517
    )Costs related to billings in process
    
    
    (668
    )
    
    
    (365
    )Prepaid expenses and other assets
    
    
    (483
    )
    
    
    (13
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    2,128
    
    
    
    2,853Accounts payable, related party
    
    
    2,719
    
    
    
    387Refundable deposit
    
    
    (25
    )
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (7,607
    )
    
    
    (764
    )Cash Flows from Investing Activities:Purchase of certificate of deposit
    
    
    (100
    )
    
    
    Investment of funds held in trust
    
    
    (2,000
    )
    
    
    Acquisition of property and equipment
    
    
    (1,152
    )
    
    
    (450
    )Net cash and cash equivalents used in investing activities
    
    
    (3,252
    )
    
    
    (450
    )Cash Flows from Financing Activities:Proceeds from reverse merger
    
    
    20,270
    
    
    
    Payments for conversion of membership interests
    
    
    (3,000
    )
    
    
    Payments for merger costs, net
    
    
    (2,953
    )
    
    
    Proceeds from member notes payable
    
    
    
    
    
    
    1,541Principal payments on member notes payable
    
    
    (1,343
    )
    
    
    (842
    )Net draws on overadvance facility and lines of credit
    
    
    1,906
    
    
    
    428Net cash and cash equivalents provided by financing
activities
    
    
    14,880
    
    
    
    1,127Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    4,021
    
    
    
    (87
    )Cash and Cash Equivalents, Beginning
    
    
    1,412
    
    
    
    91Cash and Cash Equivalents, Ending
    
    $
    5,433
    
    
    $
    4
 The accompanying notes are an integral part of these condensed consolidated and combined financial statements. 5




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NATIONSHEALTH, INC. 
 NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated and combined financial
statements of NationsHealth, Inc. (the Company), formerly Millstream
Acquisition Corporation, and the notes thereto have been prepared in accordance
with the instructions for Form 10-QSB and Item 310(b) of Regulation S-B of the
Securities and Exchange Commission, or SEC. These unaudited condensed
consolidated and combined financial statements do not include all of the
information and disclosures required by accounting principles generally
accepted in the United States of America. However, such information reflects
all adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods
presented. The Company manages its business as one reportable segment. The results of operations for the three and nine months ended September
30, 2004 are not necessarily indicative of annual results. The unaudited
condensed consolidated and combined financial statements included herein should
be read in conjunction with the audited condensed consolidated and combined
financial statements of NationsHealth Holdings, LLC and the notes thereto that
are included in the definitive proxy materials that were filed with the SEC on
August 17, 2004. 2. BUSINESS OPERATIONS The Company provides direct home delivery of diabetes, respiratory and
ostomy supplies reimbursable by Medicare under Part B of the Medicare Program.
To date, the supply of diabetes, respiratory and ostomy products has
represented approximately 97% of the Companys revenues. The Company also has a discount prescription card program, with over
1,900,000 individuals currently enrolled, which entitles cardholders to receive
a discount on certain prescription drugs at their local pharmacy. The Company
receives a fee, net of an administrative and processing fee, of $0.70 each time
a cardholder saves money with the card. The revenue is presented net of related
costs in the accompanying financial statements. These costs were approximately
$264,000 and $80,000 for the three months ended September 30, 2004 and 2003,
respectively, and approximately $750,000 and $177,000 for the nine months ended
September 30, 2004 and 2003, respectively. In May 2004, the Company began offering Medicare-eligible customers the
opportunity to participate in the Medicare-approved prescription drug card
program, called PrecisionDiscounts, through its arrangement with WellPoint
Pharmacy Management (Wellpoint). There are currently over 200,000 individuals
enrolled in the Precision Discounts program. The Company is responsible for
many aspects of the Precision 6




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Discounts program including: verifying Medicare eligibility of members;
handling enrollment and disenrollment of members; handling fulfillment of
enrollment cards; operating a call center to handle all customer service
functions; and handling all direct-to-consumer advertising and marketing for
the program 3. ORGANIZATION AND CAPITALIZATION Millstream Acquisition Corporation (Millstream) was formed on April 11,
2003 to serve as a vehicle to effect a merger, capital stock exchange, asset
acquisition or other similar business combination. On August 28, 2003,
Millstreams initial public offering (the Offering) was consummated. Of the
approximately $21,418,000 in net proceeds raised by Millstream in the Offering,
$20,685,000 was placed in trust for a potential business combination and the
remaining proceeds were available for business, legal and accounting due
diligence on prospective acquisitions and continuing general and administrative
expenses. 4. MERGER AND ACCOUNTING TREATMENT On March 9, 2004, Millstream entered into a definitive merger agreement
with NationsHealth Holdings, L.L.C. (NationsHealth Holdings), a privately
held company based in Sunrise, Florida. On August 30, 2004, the shareholders of
Millstream voted to approve the merger agreement. Upon consummation of the
merger on August 31, 2004, Millstream changed its name to NationsHealth, Inc.
(NationsHealth), and the membership interests in NationsHealth Holdings were
converted into a total of 21,375,000 shares of the Companys common stock, or
approximately 81.7% of the subsequently outstanding common stock of the
combined company. Immediately prior to the merger, the amount held in trust for
purposes of completing a business combination was $20,882,000. After payments
totaling $3,186,000 for professional fees and other costs related to the
merger, $3,000,000 to NationsHealth Holdings members, $2,873,000 to repay debt
and $2,000,000 placed in an escrow account to satisfy any damages under an
indemnification agreement to existing stockholders of Millstream as of prior to
the consummation of the merger, approximately $9,823,000 remained available to
the combined company for working capital purposes. Subsequent to the closing
of the merger the Company used a significant portion of these proceeds to pay
vendors, thereby reducing payables by over $5,000,000 from the balance as of
June 30, 2004. The merger was accounted for under the purchase method of accounting as a
reverse acquisition. Under this method of accounting, NationsHealth Holdings
was treated as the acquiring company for financial reporting purposes. In
accordance with guidance applicable to these circumstances, this merger was
considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the merger was treated as the equivalent of NationsHealth
Holdings issuing stock for the net monetary assets of Millstream, consisting of
$11,823,000 of cash and escrow funds, accompanied by a recapitalization. The
net monetary assets of the Company were stated at their fair value, essentially
equivalent to historical costs, with no goodwill or other intangible assets
recorded. The financial position, operations and cash flows reflected in this
document as of the dates and 7




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for the periods prior to the merger are those of NationsHealth Holdings. The
accumulated deficit of NationsHealth Holdings was carried forward to the
combined company. 5. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to the
current period presentation. 6. REVENUE RECOGNITION Revenue related to product sales is recognized upon shipment to customers
who have placed orders, provided that risk of loss has passed to the customer
and we have received and verified the required written forms, if applicable, to
bill Medicare, other third-party payors, and customers. Revenue is recorded at
amounts expected to be collected from Medicare, other third-party payors, and
directly from customers. Revenue is not recognized for product shipments until
that period in which we have collected and verified the required documentation.
The costs related to these billings in process are deferred and charged to
expense at the time the related revenue is recognized. Revenue for Medicare reimbursement is calculated based on
government-determined prices for Medicare-covered items and is recognized at
such reimbursement amounts. Revenue amounts billed in excess of the
government-determined reimbursement prices are excluded from revenue and,
therefore, contractual allowances are not significant. Medicare reimbursements
are subject to review by appropriate government regulators. Medicare reimburses
at 80% of the government-determined reimbursement prices for reimbursable
products. We bill the remaining balance based upon the government-determined
pricing to either third-party payors or directly to customers. Amounts due from
customers represent a disproportionately higher amount of our bad debts.
Revenue from Medicare represents approximately 75% of net revenue in our 2004
financial statements. Pursuant to our discount prescription drug card program, we receive a
transaction-based fee, net of an administrative and processing fee, of $0.70
from the retailer each time a cardholder saves money with the card. Revenue is
recognized in the month the transaction occurs and is presented net of related
costs in our financial statements. Beginning in the third quarter of 2004, we
also began recognizing revenue from manufacturer rebates for customer purchases
of certain drugs using the card. 7. ACCOUNTS RECEIVABLE The Company does business and extends credit based on an evaluation of the
financial condition of the third party payors and customers generally without
requiring collateral. Exposure to losses on receivables is expected to vary by
customer due to the financial condition of each customer. A significant portion
of accounts receivable is owed by Medicare, substantially all of which is
expected to be collected in full. The balance of accounts receivable is
primarily due from third party payors or customers and is subject to credit
risk. The Company monitors exposure to credit losses and maintains allowances
for anticipated losses considered necessary under the circumstances based on
historical 8




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collection, write-off experience, current trends, credit policy, and an
analysis of accounts receivable by category. 8. INVENTORY Inventories are comprised of diabetes and respiratory medical supplies and
are stated at the lower of cost, as determined on the average cost method, or
market. 9. COSTS RELATED TO BILLINGS IN PROCESS Due to the medical nature of the products the Company provides, customers,
on occasion, request supplies before the Company has received the required
written forms, if applicable, to bill Medicare and other third party payors. As
a result, the Company has deferred the costs related to such billings in
process. This includes the cost of the inventory shipped to customers for which
the Company has received an order, has not yet received required written
documents and, therefore, has not recognized revenue. These costs are presented
net of a valuation allowance ($333,000 as of September 30, 2004 and $183,000 as
of December 31, 2003) based upon the Companys historical experience with the
collection of documents required to bill Medicare and other customers, and are
charged to cost of sales at the time the related revenue is recognized. 10. INVESTMENT HELD IN TRUST Investment held in trust, as of September 30, 2004, was comprised of cash
placed in an escrow account with a bank to satisfy any damages under an
indemnification agreement to existing stockholders of Millstream as of prior to
the consummation of the merger. If there are no such claims, the funds will be
released to the Company from escrow on August 31, 2005. 11. RELATED PARTY TRANSACTIONS Medical Benefit Distribution Agreement Effective October 1, 2003, NationsHealth Holdings entered into a
distribution agreement with a vendor who subsequently acquired a membership
interest in NationsHealth Holdings on October 30, 2003, which was subsequently
converted into common stock of the combined Company. The agreement requires the
Company to make minimum annual purchases of diabetes supplies over the term of
the agreement, which expires on December 31, 2006 (see Note 13). For the three-month and nine-month periods ended September 30, 2004, the
Company had total purchases from this vendor of approximately $2,249,000 and
$7,545,000, respectively, and approximately $856,000 and $311,000 in inventory
as of September 30, 2004 and December 31, 2003, respectively. Additionally, the
Company had accounts payable to this vendor of approximately $3,673,000 and
$954,000 as of September 30, 2004 and December 31, 2003, respectively. 9




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Notes Payable to Members As of December 31, 2003 NationsHealth Holdings had notes payable to
members of $1,343,000. These notes, with interest of 12% per annum, were
unsecured and due on October 30, 2006. The Company incurred interest expense on
these notes of approximately $58,000 and $42,000 for the three-month periods
ended September 30, 2004 and September 30, 2003, respectively, and
approximately $230,000 and $105,000 for the nine-month periods ended September
30, 2004, and September 30, 2003, respectively. Upon consummation of the
merger, these notes were repaid in full. 12. LINES OF CREDIT September 30,
    
    December 31,2004
    
    2003(in thousands)$10,000,000 maximum revolving
credit agreement, limited by a
borrowing base. Interest is the
higher of prime plus 2.5% or
4.0%, plus certain additional
fees and charges. See additional
terms below.
    
    $
    2,706
    
    
    $
    $500,000 secured line of credit
with a bank. Interest was at
prime plus 1%, payable monthly.
The line was repaid with the
proceeds from the new revolving
credit facility and terminated
on April 30, 2004.
    
    
    
    
    
    
    400$400,000 secured line of credit
with a bank. Interest was stated
at 2.5%, payable monthly. The
line was repaid with the
proceeds from the new revolving
credit facility and terminated
on April 30, 2004.
    
    
    
    
    
    
    400$
    2,706
    
    
    $
    800
 The lines of credit existing as of December 31, 2003 were repaid in full
with the proceeds from a new revolving credit agreement entered into on April
30, 2004, which was subsequently amended in June, August and November. Under
the amended agreement, the available funding is limited by a borrowing base,
which is comprised of a percentage of eligible accounts receivable and
inventory, as defined, up to a maximum of $10,000,000, maturing on April 30,
2007. The revolving line bears interest at the higher of prime plus 2.5% or
4.0%. The line is secured by substantially all assets of the Company and
requires the maintenance of minimum EBITDA as defined, and fixed charge
coverage ratios, as well as minimum monthly cash collections of accounts
receivable and minimum available cash balances, as defined. 13. COMMITMENTS AND CONTINGENCIES Purchase Commitments The Company has entered into distribution agreements with certain vendors.
The agreements require the vendors to provide medical supplies to the Company
for sale to Medicare eligible customers. The agreements expire at various times
through 10




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December 31, 2006, provide for pricing allowances based on purchase volumes and
require the Company to make minimum annual purchase commitments. The agreements
restrict the Company from selling medical supplies to other distributors and
wholesalers. In certain instances, the Company was not in compliance with
certain of these provisions; however, the Company believes that it currently
has a good relationship with these vendors and is presently in substantial
compliance with the terms of the agreements. The Company met its purchase
commitments for 2004 and has future purchase commitment requirements as follows
(in thousands): Related
    
    OtherYear ending December 31:
    
    Party (See Note 11)
    
    Vendors
    
    Total2005
    
    $
    14,301
    
    
    $
    925
    
    
    $
    15,2662006
    
    
    28,931
    
    
    
    
    
    
    
    28,931$
    43,232
    
    
    $
    925
    
    
    $
    44,157
 Letter of Credit In February 2004, a major supplier required the Company to provide an
irrevocable standby letter of credit in the amount of $100,000. The letter of
credit is secured by a certificate of deposit. The certificate of deposit
matures on January 14, 2005 and pays interest at 1.44%. Operating Leases The Company leases its operating facilities and certain equipment under
non-cancelable operating leases expiring at various dates through September 1,
2010. Rent will be recognized on a straight-line basis over the life of the
lease. Future minimum lease payments as of September 30, 2004, are as follows
(in thousands): Year ending December 31:2004
    
    $
    2462005
    
    
    9932006
    
    
    8062007
    
    
    7312008
    
    
    707Thereafter
    
    
    1,201$
    4,684
 Rent expense was $196,000 and $31,000 for the three-month periods ended
September 30, 2004 and September 30, 2003, respectively, and $341,000 and
$80,000 for the nine-month periods ended September 30, 2004 and September 30,
2003, respectively. 11




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Employment Agreements The Company has employment agreements with three of its executive
officers. In addition to salary, bonuses and benefits, these agreements also
provide for termination benefits if the agreement is terminated by the Company
for reasons other than cause or by the executive for good reason or disability,
each as defined in the agreement. In these cases, then the executive is
entitled to:  
    
    an amount equal to base salary for twenty-four months;  
    
    in the event of the executives disability, medical insurance
during the period the executives spouse or the executive is eligible
to receive benefits under COBRA;  
    
    immediately vest all stock options or restricted stock previously
granted to the executive; and  
    
    require the Company to purchase from the executive up to $3,000,000
worth of shares of the Companys common stock. In lieu of a cash
payment, the Company may arrange the sale of the shares to a third
party or register the resale of the shares, in which case the executive
shall receive at least $3,000,000. If the Company decides to purchase
the shares from the executive and one or both of the other executives
exercises their rights to sell at the same time, then the Company may
pay the funds to the executives over two or three years, as
appropriate, in equal amounts pro-rata among the executives. 14. STOCKHOLDERS EQUITY The Offering On August 28, 2003, Millstream sold 4,025,000 units (Units) in the
Offering, which included the 525,000 Units subject to the underwriters
over-allotment option. Each Unit consists of one share of the Companys common
stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants
(Warrants). Each Warrant entitles the holder to purchase from the Company one
share of common stock at an exercise price of $5.00. The Warrants, which expire
August 25, 2007, are redeemable at a price of $.01 per Warrant upon 30 days
notice, only in the event that the last sale price of the common stock is at
least $8.50 per share for any 20 trading days within a 30 trading day period
ending on the third day prior to the date on which notice of redemption is
given. In connection with the Offering, Millstream issued an option for $100 to
the representative of the underwriters to purchase 350,000 Units at an exercise
price of $9.90 per Unit. The warrants underlying such Units are exercisable at
$6.00 per share, but otherwise have the same terms and conditions as the
Warrants. Separate trading of the Common Stock and Warrants underlying the
Companys Units commenced on September 9, 2003. 12




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Warrants On March 9, 2004, Millstream granted warrants, which expire on August 31,
2011, to purchase an aggregate of 45,000 shares of common stock at an exercise
price of $8.50 per share to three consultants who assisted in the due diligence
investigation of NationsHealth Holdings and other aspects of the merger. The
consultants were all employed by companies affiliated with directors of
Millstream. Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock,
par value $.0001 per share, with such designations, voting and other rights and
preferences as may be determined from time to time by the Board of Directors.
As of September 30, 2004, no shares of preferred stock have been issued. Common Stock Reserved The Company has 9,145,000 shares of common stock reserved for issuance
upon exercise of the Warrants and the underwriters option. Stock Option Plan On August 30, 2004, the shareholders of the Company voted to adopt the
NationsHealth, Inc. 2004 Stock Option Plan (the Plan). The purpose of the
stock option plan is to enable the Company to offer directors, officers and
other key employees and consultants stock options in the Company, thereby
attracting, retaining, and rewarding these participants and strengthening the
mutuality of interests between these participants and the Companys
stockholders. A total of 1,900,000 shares of the Companys common stock have
been reserved for issuance under the Plan. As of September 30, 2004, no options
had been granted. On October 22, 2004, options were granted to employees and
directors to purchase 1,208,125 shares at the closing price for that day of
$6.87. The Company accounts for its stock options plan under the intrinsic value
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations. Under
this method, compensation cost for stock options granted to directors or
employees is measured as the excess, if any, of the estimated market price of
the Companys stock at the date of the grant of the amount an employee must pay

to acquire the stock. The Company provides additional disclosures required
under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation as amended by Statement of Financial Accounting
Standards No. 148 Accounting for Stock-Based Compensation  Transition and
Disclosure. 13




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The Financial Accounting Standards Board recently issued a Proposed
Statement of Financial Accounting Standards entitled Share-Based Payment.
This Proposed Statement would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25, and
generally would require instead that such transactions be accounted for using a
fair-value-based method. The company intends to monitor developments in the
process of adoption of the Proposed Statement, and to implement such changes in
its accounting for stock-based compensation as may be required upon the
adoption of the final statement. 15. EARNINGS PER SHARE As discussed in Note 4, Merger and Accounting Treatment, the historical
results prior to September 1, 2004, reflected in these unaudited condensed
consolidated and combined financial statements are those of NationsHealth
Holdings, for which there was no common stock outstanding. To provide
comparability of all periods presented for earnings per share amounts, the
total shares outstanding immediately after consummation of the merger were
deemed to be outstanding from the beginning of all periods presented. Since the
exercise of the warrants and underwriters option would have had an
antidilutive effect, diluted earnings per share did not include common stock
equivalents. 16. SHIPPING COSTS Shipping costs, which are included in selling, general and administrative
expenses in the accompanying unaudited condensed consolidated and combined
financial statements, were $1,085,000 and $361,000 for the three-month periods
ended September 30, 2004 and September 30, 2003, respectively, and $3,093,000
and $777,000 for the nine-month periods ended September 30, 2004 and September
30, 2003, respectively. 14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations. This Quarterly Report onForm 10-QSBcontains forward-looking statements.
The forward-looking statements are not historical facts, but rather are based
on current expectations, estimates, assumptions and projections about our
industry, business and future financial results. We use words such as
anticipates, believes, plans, expects, future, intends, may,
will, should, estimates, predicts, potential, continue and similar
expressions to identify these forward-looking statements. These statements
involve risks and uncertainties that may cause results to differ materially
from those set forth in the statements. No forward-looking statement can be
guaranteed, and actual results may differ materially from those projected. We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. Our actual
results could differ materially from the results contemplated by these
forward-looking statements due to a number of factors, including, but not
limited to, those listed in the section entitled Risk Factors contained
elsewhere in this document. Background Millstream Acquisition Corporation (Millstream) was formed on April 11,
2003 to serve as a vehicle to effect a merger, capital stock exchange, asset
acquisition or other similar business combination. On August 28, 2003,
Millstreams initial public offering was consummated. Of the approximately
$21,418,000 in net proceeds from the offering, $20,685,000 was placed in trust
to be used for a potential business combination and the remaining proceeds were
available for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. On March 9, 2004, Millstream entered into a definitive merger agreement
with NationsHealth Holdings, L.L.C. (NationsHealth Holdings), a
privately-held company based in Sunrise, Florida. On August 30, 2004, the
shareholders of Millstream voted to approve the merger agreement. Upon
consummation of the merger on August 31, 2004, Millstream changed its name to
NationsHealth, Inc. (NationsHealth or the Company), and the membership
interests in NationsHealth Holdings were converted into a total of 21,375,000
shares of the Companys common stock, or approximately 81.7%, of the
subsequently outstanding common stock of the combined company. Immediately
prior to the merger, the amount held in trust for purposes of completing the
combination was $20,882,000. After payments totaling $3,186,000 for
professional fees and other costs related to the merger, $3,000,000 to
NationsHealth Holdings members, $2,873,000 to repay debt and $2,000,000 placed
in an escrow account to satisfy any damages under an indemnification agreement
to existing stockholders of Millstream as of prior to the consummation of the
merger, approximately $9,823,000 remained available to the combined company for
working capital purposes. Subsequent to the closing of the merger the Company
used a significant portion of these proceeds to pay vendors, thereby reducing
payables by over $5,000,000 from the balance as of June 30, 2004. 15




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Merger Accounting Treatment The merger was accounted for under the purchase method of accounting as a
reverse acquisition. Under this method of accounting, NationsHealth Holdings
was treated as the acquiring company for financial reporting purposes. In
accordance with guidance applicable to these circumstances, this merger was
considered to be a capital transaction in substance. Accordingly, for
accounting purposes, the merger was treated as the equivalent of NationsHealth
Holdings issuing stock for the net monetary assets of Millstream, consisting of
$11,823,000 of cash and escrow funds, accompanied by a recapitalization. The
net monetary assets of the Company were stated at their fair value, essentially
equivalent to historical costs, with no goodwill or other intangible assets
recorded. The financial position, operations and cash flows reflected in this
document as of the dates and for the periods prior to the merger are those of
NationsHealth Holdings. The accumulated deficit of NationsHealth Holdings was
carried forward to the combined company. Business We are a growing provider of prescription discount services and direct
home delivery of diabetes, respiratory and ostomy supplies reimbursable by
Medicare under Part B of the Medicare Program. We focus on providing services
and supplies to the approximately 40 million Medicare beneficiaries in the
United States without prescription drug coverage. Our proprietary information
system enables us to individually enroll customers and proactively manage their
prescription and select medical supply needs. To date, the supply of diabetes,
respiratory and ostomy products has represented approximately 97% of our
revenues. This business has grown rapidly, primarily from our television
advertising program. Our continued future growth over the next six to twelve
months will depend, to a large extent, on the amount we spend on television
advertising. Other opportunities to expand our business include our recently
launched relationship with Wellpoint Pharmacy Management (Wellpoint) and
retail initiative, both of which are described below. Additionally, we have
recently expanded our product line to include ostomy supplies and plan further
expansion to include specialty pharmaceuticals. Conversely, we expect revenues
from respiratory supplies to be negatively impacted by significant reductions
in Medicare reimbursement rates to become effective January 1, 2005. Discount Prescription Cards In addition to providing direct home delivery of diabetes, respiratory and
ostomy supplies, we have a discount prescription card business, with over
1,900,000 individuals currently enrolled. These United States Pharmaceutical
Group Prescription Cards entitle cardholders to save on prescriptions at their
local pharmacy. We receive a fee, net of an administrative and processing fee,
of $0.70 each time a customer saves money with the card. We also offer
Medicare-eligible customers the opportunity to participate in the
Medicare-approved prescription drug card program, called PrecisionDiscounts,
through our relationship with Wellpoint. There are currently over 200,000
individuals enrolled in the PrecisionDiscounts program. We are responsible for
many aspects of the PrecisionDiscounts discount card program including:
verifying Medicare eligibility of members; handling enrollment and
disenrollment of members; handling fulfillment of enrollment cards; operating a
call center to handle all customer service functions; and 16




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handling all direct-to-consumer television advertising for the program.
Through September 30, 2004, revenue from the PrecisionDiscounts program has not
been significant. Retail Initiative Recognizing an opportunity to expand our customer base and improve
accessibility of diabetes products, we launched our retail initiative in April
of 2004. Traditionally, Medicare beneficiaries purchasing diabetes supplies at
retail pharmacies pay up-front for the supplies and then must seek
reimbursement from Medicare and other third-party payors. Under our retail initiative, Medicare beneficiaries have the convenience
of purchasing our diabetes supplies from a retail pharmacy, just as they would
their medications. They do not, however, incur any up-front expense for their
diabetes supplies, and we seek reimbursement from Medicare and other
third-party payors subject to any customer co-pay and/or deductible. We have
combined our expertise in Medicare billing and regulatory compliance with the
accessibility of nationwide pharmacies to create an additional convenient,
consumer-friendly mechanism for Medicare beneficiaries to receive their
diabetes supplies at retail locations. We recently entered into our first distribution agreement under this
retail initiative with Kmart. Pursuant to the agreement, we supply diabetes
products and provide Medicare reimbursement services at specified store
locations nationwide. We are examining opportunities to expand the types of
products offered under our retail initiative. Subject to our satisfying certain
volume requirements, the term of the agreement is for three years. We expect
to begin recognizing revenue from this initiative during the fourth quarter of
2004. Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated and combined financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. To prepare these financial statements
we are required to make significant estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These items are regularly
monitored and analyzed by management for changes in facts and circumstances,
and material changes in these estimates could occur in the future. These
estimates include assessing the allowance for doubtful accounts, determination
of appropriate Medicare reimbursement rates, the valuation of inventories, and
the costs related to billings in process and related allowance. Changes in
estimates are recorded in the period in which they become known. We base our
estimates on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from the estimates if past experience or other assumptions do not
turn out to be substantially accurate. 17




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The following summaries should be read in conjunction with the audited
financial statements and the related notes included in our definitive proxy
statement filed with the Securities and Exchange Commission on August 17, 2004.
While all accounting policies impact the financial statements, certain policies
may be viewed as critical. Critical accounting policies are those that are both
most important to the portrayal of financial condition and results of
operations and that require managements most subjective or complex judgments
and estimates. We believe the policies that fall within this category are the
policies on revenue recognition, accounts receivable and the allowance for
doubtful accounts, costs related to billings in process, inventories, and
advertising and promotion expenses. Revenue Recognition We recognize revenue related to product sales upon shipment to customers
who have placed orders, provided that risk of loss has passed to the customer
and we have received and verified the required written forms, if applicable, to
bill Medicare, other third-party payors, and customers. Revenue is recorded at
amounts expected to be collected from Medicare, other third-party payors, and
directly from customers. Revenue is not recognized for product shipments until
that period in which we have collected and verified the required documentation.
The costs related to these billings in process are deferred and charged to
expense at the time the related revenue is recognized. Revenue for Medicare reimbursement is calculated based on
government-determined prices for Medicare-covered items and is recognized at
such reimbursement amounts. Revenue amounts billed in excess of the
government-determined reimbursement prices are excluded from revenue and,
therefore, contractual allowances are not significant. Medicare reimbursements
are subject to review by appropriate government regulators. Medicare reimburses
at 80% of the government-determined reimbursement prices for reimbursable
products. We bill the remaining balance based upon the government-determined
pricing to either third-party payors or directly to customers. Amounts due from
customers represent a disproportionately higher amount of our bad debts.
Revenue from Medicare represents approximately 75% of net revenue in our 2004
financial statements. Pursuant to our discount prescription drug card program, we receive a
transaction-based fee, net of an administrative and processing fee, of $0.70
from the retailer each time a cardholder saves money with the card. Revenue is
recognized in the month the transaction occurs and is presented net of related
costs in our financial statements. Beginning in the third quarter of 2004, we
also began recognizing a minimal amount of revenue from manufacturer rebates
for customer purchases of certain drugs using the card. These rebates are
included in prescription card fees in the accompanying unaudited condensed
consolidated and combined financial statements. 18




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Accounts Receivable and Allowance for Doubtful Accounts The valuation of accounts receivable is based upon the credit-worthiness
of customers and third-party payors as well as our historical collection
experience. A significant portion of accounts receivable are owed by Medicare.
We base our estimates of accounts receivable collectibility on our historical
collection and write-off experience, current trends, our credit policy, and our
analysis of accounts receivable by aging category. Changes in judgment
regarding these factors will cause the allowance for doubtful accounts to be
adjusted. Our accounts receivable are generally due from Medicare, other third party
payors and our customers. The collection process is time consuming and complex
and typically involves the submission of claims to multiple payors whose
payment of claims may be contingent upon the payment of another payor. As a
result, our collection efforts may be active up to 18 months from the initial
billing date. In accordance with applicable regulatory requirements, we make
reasonable and appropriate efforts to collect our accounts receivable,
including deductible and co-payment amounts, in a consistent manner for all
payor classes. Costs Related to Billings in Process Customers, on occasion, request supplies before we have received the
required written forms, if applicable, to bill Medicare and other third party
payors. As a result, we classify the costs related to such billings as billings
in process. This includes the cost of inventory shipped to customers for which
we have received a written order, but have not yet received required written
documents to bill Medicare and other payors. These costs are presented net of a
valuation allowance based upon our historical experience with the collection of
documents required to bill Medicare and other payors. These costs are charged
to cost of sales at the time the related revenue is recognized. Inventories Inventories are comprised of diabetes and respiratory medical supplies and
are stated at the lower of cost, determined on the average cost method, or
market. Changes in judgment regarding the recoverability of inventories,
primarily the carrying value of inventory shipped to customers where the order
is shipped prior to the receipt of the required billing forms, could result in
the recording of additional income or expense. Customer Acquisition and Related Costs We expense our customer acquisition and related costs as incurred because
these costs are indirect in nature. This accounting results in those expenses
being a charge to earnings in the period when incurred, as opposed to
capitalizing the amount of such costs which would allow the amount to be
classified as an asset and amortized over time. 19




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Recent Developments Medicare Modernization Act On December 8, 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the MMA) became law. The MMA contains provisions
affecting the coverage and reimbursement for products we provide. The MMA revised Medicare reimbursement rates for certain items of durable
medical equipment, including diabetes testing supplies and respiratory drugs.
In 2004, Medicare reimbursement amounts for diabetic supplies consisting of
testing strips and lancets were frozen at the rates in effect for the 2003
calendar year. Commencing January 1, 2005, reimbursement rates for diabetes
test strips and lancets will be reduced by the percentage difference between
the median amounts paid by the Federal Employees Health Benefit Program in the
2002 calendar year and the amount reimbursed by the Medicare program in the
2002 calendar year. Under this provision, reimbursement rules will be reduced
by approximately 4.1% for diabetic test strips and 5.4% for lancets. Beginning
January 1, 2004, reimbursement for respiratory drugs was reduced from 95% of
the average wholesale price (AWP) to 80% of the AWP. Beginning January 1,
2005, the law currently in effect would reduce reimbursement for inhalation
drugs to 106% of the average price of sales by manufacturers (ASP), a new
benchmark that will be determined by sales data submitted by the drug
manufacturers. On August 5, 2004, the Centers for Medicare and Medicaid
Services (CMS) published a proposed rule to implement the ASP payment
methodology for inhalation drugs. Under this proposed rule, CMS estimates that
payment for albuterol and ipratropium, the most common inhalation drugs, will
decrease by approximately 89% beginning January 1, 2005. The proposed rule
states that CMS expects to increase the dispensing fee it pays to suppliers for
dispensing inhalation drugs, from the $5.00 presently in effect. Beginning in 2007, the Centers for Medicare & Medicaid Services is
required by MMA to begin reimbursing for durable medical equipment, including
diabetes testing supplies, furnished in certain geographic areas pursuant to a
competitive acquisition program, whereby reimbursement rates will be based on
bids submitted by suppliers, and only certain suppliers will be reimbursed for
items furnished to program beneficiaries. In combination, we expect the above
changes, particularly the reduction in reimbursement rates for respiratory
drugs contemplated by the MMA, to have a significant negative impact on our
revenues, gross margins, net income and operating cash flows beginning January
1, 2005. In addition, beginning January 1, 2005, Medicare coverage will be provided
for an initial physical examination for new Medicare beneficiaries and for
regular diabetes screening tests for at-risk individuals, which should increase
the incidence of diagnosis of diabetes and potentially expand the Medicare
market for testing supplies and other diabetes products. The new benefits are
subject to certain coverage limitations, and will not be available to all
Medicare beneficiaries. This may result in a positive effect on our revenues,
although given coverage limitations, the magnitude of the effect is difficult
to predict. 20




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The MMA created a Medicare-approved prescription drug discount card
program that became available to Medicare beneficiaries in the spring of 2004.
This benefit is voluntary and available to certain Medicare beneficiaries who
do not have an existing outpatient prescription drug benefit. Sponsors of these
cards will offer Medicare beneficiaries access to outpatient prescription drugs
at discounted prices. We contracted with Wellpoint to be its exclusive
subcontractor for the provision of enrollment, disenrollment, prescription card
fulfillment and customer service for its Medicare-approved discount
prescription card program. The MMA also establishes a voluntary prescription drug benefit under the
Medicare program. Beginning in calendar year 2006, coverage for certain
prescription drugs will be available through both prescription drug plans and
Medicare Advantage prescription plans. This new benefit will include coverage
for insulin and syringes, as well as other prescription drugs. Separate and apart from our participation with Wellpoint in providing a
Medicare-endorsed Prescription Drug Discount Card, we began distributing our
own non-Medicare drug discount card to customers in June 2002. We continue to
distribute our card, which allows our customers to obtain discounts for
purchases at approximately 48,000 participating pharmacies. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities
(Interpretation No. 46), that clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Interpretation No. 46 was applicable immediately
for variable interest entities created after January 31, 2003. For variable
interest entities created prior to January 31, 2003, the provisions of
Interpretation No. 46 were applicable no later than July 1, 2003.
Interpretation No. 46 did not have an effect on the financial statements. The FASB recently issued a Proposed Statement of Financial Accounting
Standards entitled Share-Based Payment. This Proposed Statement would
eliminate the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, and generally would require
instead that such transactions be accounted for using a fair-value-based
method. We intend to monitor developments in the process of adoption of the
Proposed Statement, and to implement such changes in our accounting for
stock-based compensation as may be required upon the adoption of the final
statement. Stock Option Plan On August 30, 2004, the shareholders of the Company voted to adopt the
NationsHealth, Inc. 2004 Stock Option Plan (the Plan). The purpose of the
stock option plan is to enable the Company to offer directors, officers and
other key employees and consultants stock options in the Company, thereby
attracting, retaining, and rewarding 21




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these participants and strengthening the mutuality of interests between these
participants and the Companys stockholders. A total of 1,900,000 shares of the
Companys common stock have been reserved for issuance under the Plan. As of
September 30, 2004, no options had been granted. On October 22, 2004, options
were granted to employees and directors to purchase 1,208,125 shares at the
closing price for that day of $6.87. RESULTS OF OPERATIONS Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003 Total net revenues increased 261% to $20,087,000 in the three months ended
September 30, 2004, as compared to $5,570,000 in the three months ended
September 30, 2003. This increase was principally the result of the growth in
the revenues from sales of diabetic and respiratory supplies and, to a lesser
extent, prescription card fees in the three months ended September 30, 2004, as
compared with the three months ended September 30, 2003. The growth in
revenues was attributable to the increase in customer reorders and the number
of new customers acquired as a result of our advertising program. The Companys 8% sequential revenue growth for the third quarter was lower
than the sequential revenue growth for the two prior quarters of 2004. The
Company believes this decline in revenue growth resulted primarily from a
decrease in advertising expenditures in the third quarter, pending the closing
of the merger. Cost of sales consists primarily of the cost of medical supplies. Cost of
goods sold increased 289% to $6,688,000 in the three months ended September 30,
2004, as compared to $1,720,000 in the three months ended September 30, 2003.
This increase was primarily the result of significantly increased product
sales. Overall gross margins were 66.7% in the three months ended September 30,
2004, as compared with 69.1% in the three months ended September 30, 2003. This
decrease in gross margins was primarily the result of a lower percentage of
revenues in the third quarter of 2004 from respiratory supplies, which carry
higher margins. Customer acquisition and related costs increased 155% to $4,188,000 in the
three months ended September 30, 2004, as compared to $1,642,000 in the three
months ended September 30, 2003. Customer acquisition and related costs were
higher primarily due to increased spending for advertising, call center
services and fulfillment services. As a percentage of total net revenues,
customer acquisition and related costs were 20.8% in the three months ended
September 30, 2004, as compared with 29.5% in the three months ended September
30, 2003. The decrease as a percentage of total net revenues was primarily
attributable to a higher level of customer reorders, which carry lower customer
acquisition and related costs. Advertising rates may fluctuate during the year,
which may affect our advertising spending and acquisition of new customers. We
may purchase less advertising when rates are higher, which generally occurs in
November and December. As a result, the acquisition of new customers in the
months following this period is generally reduced and net revenues may
fluctuate accordingly. 22




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Personnel costs increased 184% to $3,478,000 in the three months ended
September 30, 2004, as compared to $1,225,000 in the three months ended
September 30, 2003. This increase was primarily the result of a substantial
increase in the number of employees. As a percentage of total net revenues,
personnel expenses were 17.3% in the three months ended September 30, 2004, as
compared with 22.0% in the three months ended September 30, 2003. This decrease
in personnel expenses as a percentage of net revenues was primarily
attributable to economies of scale associated with our expanded revenue base
partially offset by the substantial increase in the number of employees
necessary to enable the launch of new products and services in 2004 and 2005. The provision for doubtful accounts increased 260% to $3,533,000 in the
three months ended September 30, 2004, as compared to $982,000 in the three
months ended September 30, 2003. The increase was due to higher sales revenue.
As a percentage of total net revenues, the provision for doubtful accounts
remained at 17.6% for both three-month periods ended September 30, 2004 and
September 30, 2003. The provision for doubtful accounts is estimated based upon
an assessment of the exposure to credit risk inherent in the composition of the
accounts receivable, and is primarily dependent upon the estimate of the
Medicare allowable amount as it applies to the accounts receivable from
Medicare, third party payors and other customers of NationsHealth. Selling, general and administrative expenses increased 244% to $2,559,000
in the three months ended September 30, 2004, as compared to $744,000 in the
three months ended September 30, 2003. This increase was primarily due to
higher shipping costs from increased sales volume as well as higher occupancy
costs and professional fees primarily attributable to expanding infrastructure
needed for the launch of new products and services in 2004 and 2005. As a
percentage of total net revenues, general and administrative expenses were
12.7% in the three months ended September 30, 2004, as compared with 13.4% in
the three months ended September 30, 2003. Depreciation and amortization increased 309% to $139,000 in the three
months ended September 30, 2004, as compared to $34,000 in the three months
ended September 30, 2003. The increase in depreciation and amortization was
primarily due to investments in computer software and hardware. As a percentage
of total net revenues, depreciation and amortization were 0.7% in the three
months ended September 30, 2004, as compared with 0.6% in the three months
ended September 30, 2003. Interest expense increased 680% to $390,000 in the three months ended
September 30, 2004, as compared to $50,000 in the three months ended September
30, 2003. The increase in interest expense was due to higher average debt
balances during the period. We experienced a net loss of $888,000 and $827,000 in the three-month
periods ended September 30, 2004 and 2003, respectively. These net losses are
primarily attributable to the expenditures required to establish and grow our
operations, including costs associated with the acquisition of new customers
and the development and offering of new products and services such as the
PrecisionDiscounts Program, our retail initiative, and ostomy supplies. 23




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Nine Months Ended September 30, 2004 Compared to Nine Months Ended
September 30, 2003 Total net revenues increased 236% to $51,971,000 in the nine months ended
September 30, 2004, as compared to $15,460,000 in the nine months ended
September 30, 2003. This increase was the result of the growth in the revenues
from sales of diabetic and respiratory supplies and, to a lesser extent,
prescription card fees in the nine months ended September 30, 2004, as compared
with the nine months ended September 30, 2003. The growth in revenues was
attributable to the increase in customer reorders and the number of new
customers acquired as a result of our advertising program Cost of goods sold increased 142% to $17,582,000 in the nine months ended
September 30, 2004, as compared to $7,267,000 in the nine months ended
September 30, 2003. This increase was primarily the result of significantly
increased product sales. As a percentage of total net revenues, overall gross margins were 66.2% in
the nine months ended September 30, 2004, as compared with 53.0% in the nine
months ended September 30, 2003. This increase in gross margins was primarily
the result of obtaining volume-based discounts on purchases of medical products
and a higher percentage of revenues from respiratory supplies, which carry
higher margins, in the nine months ended September 30, 2004, compared to the
same period in 2003. We expect gross margin percentages will not continue to
improve, and will likely decline, in future periods due to, among other
factors, decreases in Medicare reimbursement rates, particularly with respect
to respiratory supplies. Customer acquisition and related costs increased 363% to $15,490,000 in
the nine-month period ended September 30, 2004, as compared to $3,346,000 in
the nine-month period ended September 30, 2003. Customer acquisition and
related costs were higher primarily due to increased spending for advertising,
call center services and fulfillment services. As a percentage of total net
revenues, customer acquisition and related costs were 29.8% in the nine months
ended September 30, 2004, as compared with 21.6% in the nine months ended
September 30, 2003. The increase in customer acquisition and related costs as a
percentage of total net revenues was primarily attributable to managements
decision to accelerate our advertising campaign, partially offset by higher
amounts of re-orders from its customers. Personnel costs increased 240% to $10,162,000 in the nine months ended
September 30, 2004, as compared to $2,991,000 in the nine months ended
September 30, 2003. This increase was primarily the result of a substantial
increase in the number of employees. As a percentage of total net revenues,
personnel expenses were 19.6% in the nine months ended September 30, 2004, as
compared with 19.3% in the nine months ended September 30, 2003. The provision for doubtful accounts increased 362% to $9,128,000 in the
nine months ended September 30, 2004, as compared to $1,976,000 in the nine
months ended September 30, 2003. As a percentage of total net revenues, the
provision for doubtful accounts was 17.6% in the nine months ended September
30, 2004, as compared with 12.8% in the nine months ended September 30, 2003.
The increase in the provision was 24




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directly related to the increase in revenues particularly with respect to
accounts receivable from third party payors and patient customers, because the
exposure to credit risk is higher in these components than the Medicare
reimbursement component of the accounts receivable. Selling, general and administrative expenses increased 320% to $6,759,000
in the nine months ended September 30, 2004, as compared to $1,611,000 in the
nine months ended September 30, 2003. As a percentage of total net revenues,
selling, general and administrative expenses were 13.0% in the nine months
ended September 30, 2004, as compared with 10.4% in the nine months ended
September 30, 2003. The increase in selling, general and administrative
expenses was primarily due to higher shipping costs from increased sales volume
as well as higher occupancy costs and professional fees primarily attributable
to expanding infrastructure needed for the launch of new products and services
in 2004 and 2005. Depreciation and amortization increased 370% to $334,000 in the nine
months ended September 30, 2004, as compared to $71,000 in the nine months
ended September 30, 2003. The increase in depreciation and amortization was
primarily due to investments in computer software and hardware. As a percentage
of total net revenues, depreciation and amortization were 0.6% in the nine
months ended September 30, 2004, as compared with 0.5% in the nine months ended
September 30, 2003. Interest expense increased 461% to $712,000 in the nine months ended
September 30, 2004, as compared to $127,000 in the nine months ended September
30, 2003. The increase in interest expense was due to higher average debt
balances during the period. We experienced a net loss of $8,194,000 and $1,929,000 in the nine-month
periods ended September 30, 2004 and 2003, respectively. These net losses are
primarily attributable to the expenditures required to establish and grow our
operations, including costs associated with the acquisition of new customers
and the development and offering of new products and services such as the
PrecisionDiscounts Program, our retail initiative, and ostomy supplies. In addition to a variety of health regulatory matters, a number of
anticipated trends may affect our revenues and profitability. To date, our
growth in revenues has been attributable in part to the acquisition of new
customers that have been generated primarily by television advertising, which
in turn is dependent on the availability of capital to fund such advertising.
At this stage in our development, we believe our revenues can be increased
significantly through additional advertising. Alternatively, our expenses could
be reduced substantially through the elimination or reduction in spending on
advertising as appropriate to affect financial results. We can adjust spending
on advertising with an increase in advertising expense expected to lower
earnings on a short-term basis but increase revenues over the longer term. In
addition, if our business continues to expand and mature, certain trends should
positively impact our profitability. As our revenues increase, we expect to
benefit from improved pricing from our suppliers as additional volume-based
discounts are achieved. As our customer base grows, our income from reorders of
medical products should increase and result in recurring revenue without the
accompanying customer acquisition costs related to new customers. Our revenues
and profitability, however, will 25




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continue to be dependent upon the availability and level of reimbursement from
Medicare, and those amounts are periodically reviewed and adjusted by the
federal regulatory authorities. For instance, as of January 2004, the
reimbursement amounts for the major components of respiratory supplies were
reduced approximately sixteen percent, resulting in significantly reduced
revenues from the sale of respiratory products. Medicare reimbursement rates
for respiratory drugs will be further substantially reduced effective January
1, 2005, and we expect this to have a significant negative impact on our
revenues, gross margins, net income and cash flows. LIQUIDITY AND CAPITAL RESOURCES In the nine months ended September 30, 2004 and years ended December 31,
2003 and 2002, we used approximately $7,607,000, $2,944,000 and $902,000 of net
cash in operating activities, respectively. The increasing net use of cash in
operating activities was primarily due to higher costs to acquire new customers
and other efforts to grow our business. In the nine months ended September 30, 2004 and years ended December 31,
2003 and 2002, we used approximately $3,252,000, $719,000 and $97,000 of net
cash in investing activities, respectively. The increase in net cash used for
investing activities in 2004 was primarily due to the investment of funds held
in trust and the acquisition of property and equipment to support the growth of
our business. In the nine months ended September 30, 2004 and years ended December 31,
2003 and 2002, we generated approximately $14,880,000, $4,983,000 and
$1,089,000 of net cash from financing activities, respectively. The increase in
net cash provided by financings activities was primarily due to the completion
of the merger, after the payment of merger related costs, and proceeds from the
line of credit, partially offset by repayment of notes to members of
NationsHealth Holdings. We have a revolving credit facility with CapitalSource Finance LLC
(CapitalSource) in the principal amount of $10,000,000 pursuant to an
agreement dated April 30, 2004 and subsequently amended in June 2004 to add
additional overadvance borrowing capability and in August and November 2004 to
adjust the financial covenants to account for our actual and projected
financial results. The revolving borrowing availability of up to $10,000,000
under the credit facility is subject to a borrowing base formula based upon our
eligible receivables and inventory. Additional borrowings of up to $5,000,000
will be available under the overadvance facility commencing March 1, 2005,
subject to a borrowing base formula relating to our EBITDA (as defined in the
agreement). The credit facility is subject to ongoing collateral management and
unused borrowing fees. Interest on outstanding borrowings under the revolving
credit facility is payable monthly at the greater of 4% or Citibank N.A.s base
prime rate plus 2.5%, and interest on outstanding borrowings under the
overadvance facility is payable monthly at the greater of 4% or Citibank N.A.s
base prime rate plus 4.5%. The credit facility has a three year term and is
secured by substantially all of our assets. As of September 30, 2004 the
outstanding balance on the revolving credit facility was $2,706,000. 26




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We have various contractual obligations that affect our liquidity. The
following table represents our long-term debt obligations, contractual
obligations for future annual purchase commitments, minimum payments due under
a service agreement and minimum operating lease payments as of September 30,
2004. The purchase commitments for 2004, which relate to medical supplies we
sell to our customers, were met as of September 30, 2004. Obligations (In US
    
    Long-Term Debt
    
    Purchase
    
    Service
    
    Operatingcurrency)(1)
    
    Obligations
    
    Commitments
    
    Agreement
    
    Leases2004
    
    $
    
    
    
    $
    
    
    
    $
    12,000
    
    
    $
    246,0002005
    
    
    
    
    
    
    15,226,000
    
    
    
    48,000
    
    
    
    993,0002006
    
    
    
    
    
    
    28,931,000
    
    
    
    48,000
    
    
    
    806,0002007
    
    
    2,706,000
    
    
    
    
    
    
    
    48,000
    
    
    
    731,0002008
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    707,000Thereafter
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    1,201,000Total minimum payments
    
    $
    2,706,000
    
    
    $
    44,157,000
    
    
    $
    168,000
    
    
    $
    4,684,000
  (1)
    
    Amounts shown in table are not necessarily representative of, and may
vary substantially from, amounts that will actually be paid in future
years as we may incur additional or different obligations. In certain instances, primarily in the first calendar quarter of each
year, we may delay seeking reimbursement from Medicare until a customers
deductible has been reached in connection with the purchase of Medicare
supplies or services. In such a case, we would recognize revenue prior to
billing Medicare in accordance with our policies, although the receipt of cash
upon reimbursement would be delayed. This practice could further impact our
cash flow position. From inception through the consummation of the merger, we have experienced
temporary cash flow shortages due to our aggressive customer acquisition
strategy and related marketing costs. Additionally, we have suffered net losses
of approximately $8,194,000, $3,826,000 and $1,855,000 for the nine months
ended September 30, 2004 and for the years ended December 31, 2003 and 2002,
respectively. The merger resulted in approximately $9,823,000 becoming
available to the combined company for working capital purposes. As reflected in
the consolidated and combined balance sheet contained herein, we have cash and
cash equivalents of approximately $5,433,000 as of September 30, 2004. We believe that our cash and cash equivalents balance, and other available
financing sources, will be sufficient to meet working capital and capital
expenditure needs for business operations for the next twelve months. Factors
which could negatively affect our liquidity include a reduction in the demand
for our products, a reduction in Medicare reimbursement for our products, and
those factors set forth in the following section entitled Risk Factors. 27




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RISK FACTORS There are a number of important factors that could affect our business and
future operating results, including without limitation, the factors set forth
below. The information contained in this report should be read in light of such
factors. Any of the following factors could harm our business and future
operating results. We could experience significantly reduced revenues and net income if Medicare
changes, delays, reduces or denies reimbursement. We depend on the continued availability of reimbursement by government and
private insurance plans for products sold to our customers. The federal
regulatory authorities periodically review and adjust reimbursement amounts.
Any reduction in Medicare reimbursement currently available for our products
would reduce our revenues. The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, or MMA, reduced Medicare reimbursement rates for
diabetic testing supplies, effective in 2005. The MMA also reduced
reimbursement rates for commonly-prescribed respiratory drugs. The reduced
reimbursement rates for these drugs were effective January 1, 2004, with
substantial further reductions effective January 1, 2005. The reduction in
reimbursement rates will negatively impact our revenues and net income.
Similarly, any increase in the cost of such products would reduce our net
income unless there was a corresponding increase in Medicare reimbursement. Our
revenues and net income could also be adversely affected by the imposition of
more stringent regulatory requirements for Medicare reimbursement or
adjustments to previously reimbursed amounts or by changes in co-pay amounts. If we do not have sufficient capital to fund additional advertising, our
ability to grow our business will be substantially diminished. Our growth in revenues to date has been attributable in large part to the
acquisition of new customers that have been generated primarily by television
advertising, which in turn is dependent on the availability of capital to fund
such advertising. At this stage in our development, we believe our revenues
can continue to be increased through additional advertising. If we do not have
access to sufficient capital to fund such advertising, our ability to grow our
business will be substantially diminished. We can provide no assurance that we
will have access to sufficient capital to fund such advertising, or that if we
sought to raise additional capital from third parties through debt or equity
financings, that such capital would be available on acceptable terms or at all. If we do not manage our growth successfully, our growth and chances for
achieving profitability may slow or stop. We have expanded our operations rapidly and plan to continue to expand.
This expansion has created significant demands on our administrative,
operational and financial personnel and other resources, particularly our need
for working capital. Additional expansion in existing or new markets could
strain these resources and increase our need for capital, which may result in
cash flow shortages. Our personnel, systems, procedures, controls and existing
space may not be adequate to support further expansion. 28




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If we do not comply with applicable government regulations, we may be
prohibited from selling our products and could experience significantly reduced
revenues and net income. The majority of the products that we sell are regulated by the FDA and
other regulatory agencies. If any of these agencies mandate a suspension of
sales of products or a recall, we may lose sales and incur expenses until we
are in compliance with the regulations or change to another acceptable
supplier. We, as a Medicare supplier, are subject to extensive regulation including,
but not limited to, the Medicare durable medical equipment (DME) supplier
standards and the federal health care program anti-fraud and abuse laws. While
we believe that our current and contemplated future operations materially
comply with applicable regulatory requirements, there are a number of common
practices in the industry where the law is unsettled and there have not been
decided cases or definitive statements by the regulatory authorities concerning
such practices. Specifically, we, like many providers of diabetes supplies,
obtain glucose monitors from manufacturers without charge and, in turn, provide
them to Medicare beneficiaries without charge. These practices potentially
implicate the federal health care program anti-kickback law and the law
prohibiting payment of inducements to Medicare beneficiaries. Another practice,
our telephone calls to beneficiaries based on such beneficiaries initial
telephone calls to an outsourced third-party call center, could implicate the
Medicare anti-telemarketing law. Additionally, our retail initiative is a new
initiative that could potentially raise questions about our role and the role
of the retail pharmacy under the Medicare DME supplier standards. In each case,
we have evaluated the practices at issue and believe that it is in compliance
with applicable requirements. However, there can be no assurance that such
practices could not be challenged. Any such challenge, regardless of whether
successful, could have a material adverse effect on our business. In addition, any negligence or mistake we make in processing Medicare
reimbursement claims could lead to recoupment of past payments and/or our
suspension from the Medicare program. We are also subject to state laws and regulations, including those
governing pharmacy licensing and DME supplier licensing, which are costly and
burdensome. Although we believe we are in material compliance with such state
laws and regulations, our failure to comply or failure to continue to comply
with these state laws and regulations could materially and adversely affect our
business. Finally, under the MMA, the legal framework governing the MMAs
Prescription Drug Discount Card and Prescription Drug Plan is complex, and in
many cases ambiguous. Under the MMA, we are not presently permitted to market
our current Medicare Part B products to enrollees of the PrescriptionDiscounts
program. Violation of the above-described federal and state laws may result in
penalties that include loss or prohibition of payment for services, loss of
licenses, fines, and other civil or criminal penalties, including exclusion
from governmental programs. The loss of Medicares endorsement of the PrecisionDiscounts Program could
result in loss of revenue due to decreased customer enrollment. We entered into a service agreement with Wellpoint pursuant to which we
will act as Wellpoints exclusive subcontractor for a number of the functions
under a Medicare-endorsed prescription drug card program, which they refer to
as the PrecisionDiscounts Program. We have not received any significant revenue
to date from the PrecisionDiscounts Program. The loss of 29




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Medicares endorsement of the PrecisionDiscounts Program would adversely effect
future revenue growth and would significantly inhibit anticipated growth
prospects. Termination of our arrangement with Wellpoint could significantly reduce our
revenues. We are the exclusive provider of enrollment, disenrollment, prescription
card fulfillment and customer service to Wellpoint in connection with its
PrecisionDiscounts Program. We have not received any significant revenue to
date from the PrecisionDiscounts Program and any significant revenue would be
received in the future. If our arrangement with Wellpoint terminates, this will
adversely effect future revenue growth and it is likely to significantly
inhibit anticipated growth prospects. We have a limited operating history and are subject to the risks of a new
enterprise. Our limited operating history makes it difficult to predict how our
business will develop. Accordingly, we face all of the risks and uncertainties
encountered by early-stage companies, such as:  
    
    no history of profitability;  
    
    uncertain growth in the market for, and uncertain market acceptance of, our services;  
    
    the evolving nature of the healthcare marketplace and the Medicare
regulatory environment; and  
    
    the risks of competition, technological change or evolving customer
preferences could harm sales of our products or services. The profitability of our supply business will decrease if we do not receive
recurring orders from customers. Due primarily to the marketing and regulatory compliance costs associated
with the initial customer qualification, we generally incur losses and negative
cash flow with respect to the first order for supplies from a customer.
Accordingly, the profitability of our medical products supply business depends
on recurring and sustained reorders. Reorder rates are inherently uncertain due
to several factors, many of which are outside our control. These include
changing customer preferences, competitive price pressures, customer transition
to extended care facilities, customer mortality and general economic
conditions. We could experience significantly reduced revenues and net income from sales of
diabetes products if improved technologies eliminate the need for consumable
testing supplies are developed for glucose monitoring. Approximately 44% of our revenue for the first nine months of 2004 and 51%
of our 2003 revenues was from consumable diabetic testing supplies. Customers
use these supplies to draw and test small quantities of blood for the purpose
of measuring and monitoring glucose levels. Numerous research efforts are
underway to develop more convenient and less intrusive glucose measurement
techniques. The commercialization and widespread acceptance of new technologies
that eliminate or reduce the need for consumable testing supplies could
negatively affect sales in this market segment. We could be liable for harm caused by products that we sell. The sale of medical supply products entails the risk that users will make
product liability claims against us. A product liability claim could be
expensive to resolve, even if the claim is 30




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resolved in our favor. While we believe that our insurance provides adequate
coverage, no assurance can be made that adequate coverage will exist for these
claims. Due to our size and limited operating history, we depend substantially on
certain key personnel. Due to our size and limited operating history, our success depends to a
large extent upon the continued service of executive officers and key
employees, including:  
    
    Glenn M. Parker, M.D., Chief Executive Officer;  
    
    Robert Gregg, Chief Operating Officer; and  
    
    Lewis Stone, President and Chief Information Officer. The loss of the services of one or more of these key employees could have
an adverse effect on us, as each of these individuals played a significant role
in developing our business plan, customer relationships and proprietary
technology systems. For example, Messrs. Parker and Gregg have played a
significant role in developing and implementing our business plan and in
establishing relationships with our customers. In addition, Mr. Stone has
played a significant role in developing our technology systems and overseeing
our operations. While none of these key personnel is irreplaceable, the loss of
the services of any of these individuals may be disruptive to our business. We
believe that our future success will also depend in large part upon our ability
to attract and retain highly-skilled managerial and marketing personnel.
Competition within the medical supply products industry for such personnel is
intense. There can be no assurance that we will be successful in attracting and
retaining such personnel on terms acceptable to us. We have agreed to purchase a large amount of medical supplies and products from
various vendors and we may not have the cash to satisfy these purchase
obligations. We have agreed to purchase a minimum of approximately $44.2 million, as of
September 30, 2004, of medical supplies and products from certain vendors prior
to December 31, 2006. It was necessary for us to commit to these minimum
purchase requirements in order to ensure that we received a significant
discount on the medical supplies and products purchased from these vendors.
There can be no assurance that we will generate enough revenues to satisfy
these minimum purchase obligations. Although our purchases of medical supplies
through September 30, 2004 have exceeded these commitments for the year ending
December 31, 2004, the minimum commitments for future years are significantly
higher. Approximately 98% of our purchase commitments were made under a
distribution agreement that we executed with a vendor who subsequently acquired
a membership interest in NationsHealth Holdings, which was later converted into
common stock of NationsHealth, Inc. We may be liable to refund rebates and discounts that we received under
agreements with certain of our suppliers, which liability may reduce the amount
of cash available to us. We have entered into agreements with several suppliers of medical products
which provide for pricing discounts based on purchase volumes and require us to
make minimum annual purchase commitments. The agreements also restrict us from
selling medical supplies to other distributors and wholesalers. Due to our
sales of products to one of our affiliated companies in 2002 and in the first
half of 2003, which in turn resold the products to third parties, one of the
suppliers under one of these agreements has alleged that we sold products to
non-Medicare beneficiaries in contravention of the agreement. There can be no
assurance that the suppliers will not take legal action against us, including
requiring us to refund rebates and discounts that we received pursuant 31




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to these agreements. The maximum amount of rebates and discounts which could be
subject to such claims is approximately $1.6 million. If legal action were
commenced, we could incur significant legal expenses in defending ourself, and
could also be subject to substantial liability depending on how the action is
ultimately resolved, whether by settlement or judgment. A substantial number of shares of our common stock will become eligible for
future resale in the public market which could result in dilution and an
adverse effect on the market price of our common stock. A total of 21,375,000 shares of our common stock were issued in the merger
and will become available for resale in the public market at prescribed times
in the future under the lock up agreement. In addition, warrants to purchase
8,795,000 shares of common stock issued in connection with our initial public
offering became exercisable upon completion of the merger on August 30, 2004.
Moreover, 750,000 shares of Millstream common stock purchased by its
stockholders prior to the initial public offering will be held in escrow until
August 25, 2006, at which time they will be released from escrow and be
eligible for resale in the public market subject to compliance with applicable
law. Consequently, at various times in the future, a substantial number of
additional shares of our common stock will be eligible for resale in the public
market. Sales of substantial numbers of such shares in the public market could
adversely affect the market price of such shares and of the warrants. If we are unable to receive a listing of our securities on a national
securities exchange or the NASDAQ National Market, then it may be more
difficult for our stockholders to sell their securities. The potential for listing of our common stock and warrants on the NASDAQ
National Market or a national securities exchange is uncertain. If we are
unable to receive a listing or approval of trading of our securities on a
national securities exchange or NASDAQ National Market, then it may be more
difficult for our stockholders to sell their securities. Shares of our common
stock and warrants are currently traded in the Small Cap Market of the NASDAQ
Stock Market. Key personnel have certain rights under employment agreements, which may
require us to make substantial payments to key personnel. We have employment agreements with each of Glenn M. Parker, M.D., Robert
Gregg and Lewis Stone. The employment agreements provide that if we or the key
person terminate employment in several specified events, that key person has
the right to cause us to repurchase a number of shares of our common stock
owned by the key person with a value of up to $3,000,000 based on then current
market prices. Alternatively, we may elect to sell these shares of common stock
to third parties or to register the resale of these shares. In the event a sale
or registration results in proceeds less than the key person is to receive
related to their right to sell, then we shall pay to the key person the
difference between the requested dollar amount and the proceeds of the sale.
The occurrence of either of these events could materially and adversely affect
us as it may require us to make large cash payments to these individuals, thus
reducing the amount of cash available to us. If any of our information technology platforms malfunction, our business and
profitability may be seriously harmed. Our business relies on proprietary information technology platforms that
support the individual enrollment of new members, discount card fulfillment,
prescription discount administration, document generation and collection, and
customer management. In addition, we 32




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use information technology platforms that provide us with electronic
connectivity to a large number of pharmacies, shipping vendors and billing
services. Due to the relatively high volume, the successful operation of our
proprietary information technology platforms is necessary for us to transact
business profitably. In addition, due to the highly regulated nature of the
Medicare billing and payment process, the successful operation of our
proprietary information technology platforms is necessary for us to be able to
operate our business. A malfunction of the information technology systems will
be disruptive to our business operations and, based on the duration of such
malfunction, could result in reduced sales or profitability and the possible
loss of customers. We may have difficulties in finding replacement supplies if we lose any
agreement with our suppliers of medical products, which may cause us to
experience reduced sales and profitability. We receive volume-based discounts under our agreements with suppliers of
medical products. These discounts favorably impact our gross margins. Any
failure to achieve or sustain volume-based discounts under these supply
agreements would negatively affect our profitability. In addition, many of the
supply agreements that we have with our suppliers are terminable without cause
upon the giving of a specified number of days advance written notice. In the
event that one or more of these suppliers elects to terminate their supply
agreements, we may have difficulties in finding replacement suppliers, which
may prevent us from purchasing a sufficient amount of supplies to satisfy the
demand of our customers. Our accounts receivable are subject to significant collection risk due to
third-party payors. Seeking reimbursement from third-party payors is subject to rigorous
requirements and involves complicated paperwork. This may result in us
suffering extremely long collection times, or not collecting at all, on a
significant portion of our accounts receivable. If we are unable to obtain
reimbursement from third-party payors, we will be required to seek payment of
the entire account receivable from our customer, who may not be financially
capable of making the payment. Voting control by our executive officers, directors and other affiliates may
limit your ability to influence the outcome of director elections and other
matters requiring stockholder approval. Our executive officers, directors and affiliates own a majority of our
voting stock. These stockholders can control substantially all matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or discouraging a potential acquiror from attempting to
obtain control of us, which in turn could have a material adverse effect on the
market price of our common stock or prevent our stockholders from realizing a
premium over the market price for their shares of common stock. 33




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Item 3. Controls and Procedures Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the our disclosure
controls and procedures. Based on their evaluation, as of the end of the period
covered by this Quarterly Report on Form 10-QSB, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that the our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) are effective. There have been no
significant changes in internal control over financial reporting for the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. 34




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 4. Submission of Matters to a Vote of Security Holders At the special meeting of the stockholders of NationsHealth, Inc. held on
August 30, 2004, stockholders voted to adopt three proposals, as follows: For
    
    Against
    
    AbstainTo adopt the Amended and Restated
Agreement and Plan of Merger, dated
August 10, 2004, including the
amendment and restatement of the
Companys certificate of incorporation
    
    
    2,738,342
    
    
    
    1001
    
    
    
    To adopt the NationsHealth, Inc. 2004
Stock Option Plan
    
    
    2,658,242
    
    
    
    81,101
    
    
    
    To consider adjournment of the special
meeting to a later date, if necessary,
to permit further solicitation of
proxies in the event there were not
sufficient votes to approve the
Agreement and Plan of Merger
    
    
    2,704,742
    
    
    
    29,601
    
    
    
    5,000
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits NUMBER
    
    DESCRIPTION10.12
    
    
    Standard form of Stock Option Agreement under the
NationsHealth, Inc. 2004 Stock Option Plan31.1
    
    
    Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 35




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized. NATIONSHEALTH, INCDate: November 10, 2004
    
    By:
    
    /s/ Glenn M. ParkerName:
    
    Glenn M. ParkerTitle:
    
    Chief Executive Officer (Principal
executive officer)Date: November 10, 2004
    
    By:
    
    /s/ Timothy FairbanksName:
    
    Timothy FairbanksTitle:
    
    Chief Financial Officer (Principal
financial and accounting officer)
 36




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NATIONSHEALTH, INC.
EXHIBIT INDEX NUMBER
    
    DESCRIPTION10.12
    
    
    Standard form of Stock Option Agreement under the
NationsHealth, Inc. 2004 Stock Option Plan31.1
    
    
    Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 37