##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006.
 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 registrant as specified in its charter)
 Delaware
    
    06-1688360(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 13630 N.W. 8th Street, Suite 210, Sunrise, Florida
    
    33325(Address of principal executive offices)
    
    (Zip Code)
 (954) 903-5000
(Registrants telephone number, including area code)
 N/A
(Former name, former address, and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



NATIONSHEALTH, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 2006
 INDEX
 PagePART I.Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets-- as of September 30, 2006 (Unaudited) and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations (Unaudited)-- for the Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)-- for the Nine Months Ended September 30, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II.Item 1A.
    
    Risk Factors
    
    
    30Item 6.
    
    Exhibits
    
    
    30Signatures
    
    
    
    
    31Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 10.7Exhibit 10.8Exhibit 10.9Exhibit 10.10Exhibit 31.1Exhibit 31.2Exhibit 32.1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,763
    
    
    $
    13,971Short-term investments
    
    
    
    
    
    
    923Accounts receivable, net of allowances of $17,903 and $17,525, respectively
    
    
    5,834
    
    
    
    7,908Inventory
    
    
    1,233
    
    
    
    1,285Costs related to billings in process, net
    
    
    879
    
    
    
    874Other receivables
    
    
    1,640
    
    
    
    1,877Prepaid expenses and other current assets
    
    
    442
    
    
    
    750Total current assets
    
    
    12,791
    
    
    
    27,588Property and equipment, net
    
    
    3,556
    
    
    
    3,747Investment in joint venture
    
    
    
    
    
    
    1,488Deferred CIGNA equity compensation, net
    
    
    12,602
    
    
    
    15,510Other assets, net
    
    
    1,657
    
    
    
    1,526Total assets
    
    $
    30,606
    
    
    $
    49,859LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,359
    
    
    $
    13,387Accrued expenses
    
    
    9,004
    
    
    
    12,030Deferred revenue, current portion
    
    
    1,774
    
    
    
    235Line of credit
    
    
    2,500
    
    
    
    2,500Total current liabilities
    
    
    15,637
    
    
    
    28,152Long-Term Liabilities:Deferred revenue
    
    
    
    
    
    
    1,100Convertible notes, related party, net
    
    
    6,009
    
    
    
    5,176Promissory Note payable, net
    
    
    1,292
    
    
    
    Other long-term liabilities
    
    
    1,788
    
    
    
    1,414Total long-term liabilities
    
    
    9,089
    
    
    
    7,690Commitments and contingenciesStockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    70,558
    
    
    
    68,949Unearned compensation
    
    
    
    
    
    
    (2,761
    )Accumulated deficit
    
    
    (64,681
    )
    
    
    (52,174
    )Total stockholders equity
    
    
    5,880
    
    
    
    14,017Total liabilities and stockholders equity
    
    $
    30,606
    
    
    $
    49,859
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Net product sales
    
    $
    11,811
    
    
    $
    18,167
    
    
    $
    33,555
    
    
    $
    55,299Prescription drug card revenue
    
    
    671
    
    
    
    2,316
    
    
    
    3,983
    
    
    
    6,327Service revenue
    
    
    7,314
    
    
    
    780
    
    
    
    26,889
    
    
    
    78019,796
    
    
    
    21,263
    
    
    
    64,427
    
    
    
    62,406Cost of product sales
    
    
    4,233
    
    
    
    8,037
    
    
    
    14,424
    
    
    
    23,448Cost of services
    
    
    2,430
    
    
    
    1,311
    
    
    
    25,685
    
    
    
    1,311Gross Profit
    
    
    13,133
    
    
    
    11,915
    
    
    
    24,318
    
    
    
    37,647Operating Expenses:Patient acquisition and related costs
    
    
    149
    
    
    
    3,256
    
    
    
    2,793
    
    
    
    17,976Patient service and fulfillment
    
    
    1,839
    
    
    
    3,593
    
    
    
    6,382
    
    
    
    11,418General and administrative
    
    
    6,457
    
    
    
    5,576
    
    
    
    22,428
    
    
    
    15,193Provision for doubtful accounts
    
    
    998
    
    
    
    2,330
    
    
    
    2,844
    
    
    
    7,575Depreciation and amortization
    
    
    364
    
    
    
    224
    
    
    
    1,030
    
    
    
    653Amortization of equity issued to CIGNA
    
    
    969
    
    
    
    
    
    
    
    2,908
    
    
    
    Gain on sale of business line
    
    
    (5,000
    )
    
    
    (15,508
    )
    
    
    (5,000
    )
    
    
    (15,508
    )Impairment of investment in joint venture
    
    
    559
    
    
    
    
    
    
    
    1,292
    
    
    
    6,335
    
    
    
    (529
    )
    
    
    34,677
    
    
    
    37,307Income (Loss) from Operations
    
    
    6,798
    
    
    
    12,444
    
    
    
    (10,359
    )
    
    
    340Other Income (Expense):Interest income
    
    
    48
    
    
    
    35
    
    
    
    201
    
    
    
    55Interest expense, related party
    
    
    (619
    )
    
    
    (306
    )
    
    
    (1,814
    )
    
    
    (1,300
    )Interest expense
    
    
    (207
    )
    
    
    (381
    )
    
    
    (535
    )
    
    
    (977
    )(778
    )
    
    
    (652
    )
    
    
    (2,148
    )
    
    
    (2,222
    )Net Income (Loss)
    
    $
    6,020
    
    
    $
    11,792
    
    
    $
    (12,507
    )
    
    $
    (1,882
    )Earnings (Loss) Per Share:Basic
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    (0.45
    )
    
    $
    (0.07
    )Diluted
    
    $
    0.22
    
    
    $
    0.40
    
    
    $
    (0.45
    )
    
    $
    (0.07
    )Weighted average shares outstanding:Basic
    
    
    27,919
    
    
    
    26,283
    
    
    
    27,871
    
    
    
    26,211Diluted
    
    
    27,921
    
    
    
    30,105
    
    
    
    27,871
    
    
    
    26,211
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 For the Nine Months EndedSeptember 30,2006
    
    
    2005Cash Flows from Operating Activities:Net Loss
    
    $
    (12,507
    )
    
    $
    (1,882
    )Adjustments to reconcile net loss to net cash and cash equivalents used in
operating activities:Gain on sale of business line
    
    
    (5,000
    )
    
    
    (15,508
    )Provision for doubtful accounts
    
    
    2,844
    
    
    
    7,575Provision for sales allowances and returns
    
    
    1,635
    
    
    
    1,248Reserve for (recovery of) costs related to billings in process
    
    
    (396
    )
    
    
    2,093Depreciation and amortization
    
    
    1,403
    
    
    
    653Amortization of note discount
    
    
    833
    
    
    
    537Amortization of deferred loan costs and other non-cash interest charges, net
    
    
    195
    
    
    
    471Amortization of equity issued to CIGNA
    
    
    2,908
    
    
    
    Stock-based compensation
    
    
    1,958
    
    
    
    71Impairment of investment in joint venture
    
    
    1,292
    
    
    
    Other non-cash charges
    
    
    450
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (1,671
    )
    
    
    (6,007
    )Inventory
    
    
    52
    
    
    
    (742
    )Costs related to billings in process
    
    
    391
    
    
    
    (1,885
    )Prepaid expenses and other assets
    
    
    145
    
    
    
    (1,372
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (15,410
    )
    
    
    (4,641
    )Deferred revenue
    
    
    439
    
    
    
    1,440Net cash and cash equivalents used in operating activities
    
    
    (20,439
    )
    
    
    (17,949
    )Cash Flows from Investing Activities:Proceeds from sale of business line
    
    
    7,600
    
    
    
    14,400Investment in joint venture
    
    
    
    
    
    
    (1,530
    )Investment released from trust
    
    
    
    
    
    
    2,000Maturity of available for sale investments, net
    
    
    923
    
    
    
    100Acquisition of property and equipment
    
    
    (1,212
    )
    
    
    (1,517
    )Net cash and cash equivalents provided by investing activities
    
    
    7,311
    
    
    
    13,453Cash Flows from Financing Activities:Proceeds from issuance of convertible notes, related party
    
    
    
    
    
    
    15,000Proceeds from exercise of warrants
    
    
    2,000
    
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    1,500Net draws on line of credit
    
    
    
    
    
    
    1,324Payment of note issuance costs
    
    
    
    
    
    
    (907
    )Exercise of stock options
    
    
    17
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (136
    )Principal payments under capital lease obligations
    
    
    (97
    )
    
    
    (82
    )Net cash and cash equivalents provided by financing activities
    
    
    1,920
    
    
    
    16,699Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (11,208
    )
    
    
    12,203Cash and Cash Equivalents, Beginning of Period
    
    
    13,971
    
    
    
    2,904Cash and Cash Equivalents, End of Period
    
    $
    2,763
    
    
    $
    15,107
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  4




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NATIONSHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. BASIS OF PRESENTATION
   2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS
   Amended and Restated CIGNA Agreement
   5




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Revolving Line of Credit
  Cost Reductions
  Sales of Lines of Business
  Dissolution of Joint Venture
  Summary
  3. CIGNA AGREEMENT
    6




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4. US BIO JOINT VENTURE
      7




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5. SALE OF LINES OF BUSINESS
   6. REVENUE RECOGNITION
    8




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7. STOCK-BASED COMPENSATION
    Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation, Accounting for Stock-Based Compensation  Transition and Disclosure,
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss), as reported
    
    $
    11,792
    
    
    $
    (1,882
    )Add: Stock-based employee
compensation expense included in
net income (loss)
    
    
    
    
    
    
    Deduct: Total stock-based
compensation expense determined
under the fair value based method
for all awards
    
    
    (309
    )
    
    
    (809
    )Pro forma net income (loss)
    
    $
    11,483
    
    
    $
    (2,691
    )Basic earnings (loss) per share:As reported
    
    $
    0.45
    
    
    $
    (0.07
    )Pro forma
    
    $
    0.44
    
    
    $
    (0.10
    )Diluted earnings (loss) per share:As reported
    
    $
    0.40
    
    
    $
    (0.07
    )Pro forma
    
    $
    0.39
    
    
    $
    (0.10
    )
  9




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Share-Based Payment
  Nine Months Ended September 30,2006 Grants
    
    
    2005 GrantsExpected volatility
    
    
    55
    %
    
    
    49
    %Approximate risk free interest rate
    
    
    4.87
    %
    
    
    3.95
    %Expected life
    
    5.0 years
    
    5.0 yearsExpected annual forfeiture rate
    
    
    25
    %
    
    
    0
    %
  WeightedAverageExerciseShares
    
    
    PriceOutstanding at beginning of period
    
    
    1,834,673
    
    
    $
    6.87Granted at Exercise Price = Market Price
    
    
    287,500
    
    
    
    3.32Granted at Exercise Price > Market Price
    
    
    200,000
    
    
    
    6.65Exercised
    
    
    (2,500
    )
    
    
    6.87Forfeited
    
    
    (558,751
    )
    
    
    6.50Expired
    
    
    (268,999
    )
    
    
    6.68Outstanding at end of period
    
    
    1,491,923
    
    
    
    6.33Options exercisable at end of period
    
    
    422,511
    
    
    
    6.90Weighted average grant date fair value per share
    
    $
    1.66
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Average
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    Remaining
    
    
    AverageRange of
    
    Options
    
    
    Contractual
    
    
    Exercise
    
    
    Options
    
    
    Contractual
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Life In Years
    
    
    Price
    
    
    Exercisable
    
    
    Life In Years
    
    
    Price$2.25 to $6.15
    
    
    321,250
    
    
    
    5.42
    
    
    $
    3.69
    
    
    
    19,374
    
    
    
    4.67
    
    
    $
    6.01$6.80
    
    
    239,500
    
    
    
    4.95
    
    
    
    6.80
    
    
    
    74,875
    
    
    
    4.95
    
    
    
    6.80$6.87
    
    
    730,625
    
    
    
    4.06
    
    
    
    6.87
    
    
    
    302,012
    
    
    
    4.06
    
    
    
    6.87$6.97 to $8.06
    
    
    125,548
    
    
    
    5.10
    
    
    
    7.91
    
    
    
    7,500
    
    
    
    5.06
    
    
    
    7.93$8.20
    
    
    75,000
    
    
    
    5.02
    
    
    
    8.20
    
    
    
    18,750
    
    
    
    5.02
    
    
    
    8.201,491,923
    
    
    
    4.63
    
    
    
    6.33
    
    
    
    422,511
    
    
    
    4.22
    
    
    
    6.90
  10




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8. LINE OF CREDIT
   Balance Sheet Classifications of Borrowings
Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement.
  11




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9. CONVERTIBLE NOTES
       12




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10. STOCKHOLDERS EQUITY
 Warrants
   13




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Common Stock Reserved
  11. EARNINGS (LOSS) PER SHARE
   Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except for per share information)Numerator:Numerator for basic earnings
(loss) per share  Net income (loss)
    
    $
    6,020
    
    
    $
    11,792
    
    
    $
    (12,507
    )
    
    $
    (1,882
    )Add: Interest expense on
convertible notes
    
    
    
    
    
    
    305
    
    
    
    
    
    
    
    Numerator for diluted earnings
(loss) per share
    
    $
    6,020
    
    
    $
    12,097
    
    
    $
    (12,507
    )
    
    $
    (1,882
    )Denominator:Denominator for basic earnings
(loss) per share  weighted
average shares outstanding
    
    
    27,919
    
    
    
    26,283
    
    
    
    27,871
    
    
    
    26,211Effect of dilutive securities:Convertible notes
    
    
    
    
    
    
    2,286
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    1,523
    
    
    
    
    
    
    
    Employee stock options
    
    
    2
    
    
    
    13
    
    
    
    
    
    
    
    Denominator for diluted earnings
(loss) per share
    
    
    27,921
    
    
    
    30,105
    
    
    
    27,871
    
    
    
    26,211Basic earnings (loss) per share
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    (0.45
    )
    
    $
    (0.07
    )Diluted earnings (loss) per share
    
    $
    0.22
    
    
    $
    0.40
    
    
    $
    (0.45
    )
    
    $
    (0.07
    )
  14




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12. COMMITMENTS AND CONTINGENCIES
 Purchase Commitment
  Employment Arrangements
    Equity Participation Fee
   15




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13. SEGMENT INFORMATION
    16




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Revenue:Pharmacy Products (1)
    
    $
    12,482
    
    
    $
    37,538Insurance Services (2)
    
    
    7,314
    
    
    
    26,889Consolidated revenue
    
    $
    19,796
    
    
    $
    64,427Segment profit (loss):Pharmacy Products (3)
    
    $
    3,431
    
    
    $
    7,295Insurance Services
    
    
    3,730
    
    
    
    (1,815
    )Unallocated amounts:Amortization of equity issued to CIGNA
    
    
    (969
    )
    
    
    (2,908
    )Impairment of investment in joint venture
    
    
    (559
    )
    
    
    (1,292
    )Gain on sale of business line
    
    
    5,000
    
    
    
    5,000Other corporate expenses
    
    
    (3,835
    )
    
    
    (16,639
    )Consolidated income (loss) from operations
    
    $
    6,798
    
    
    $
    (10,359
    )
 
 (1)
    
    Revenue for the Pharmacy Products segment includes net product sales and prescription drug
card revenue.(2)
    
    Represents revenue from services provided to CIGNA.(3)
    
    Segment profit for Pharmacy Products for the three and nine months ended September 30, 2006
includes a gain of approximately $977,000 related to the settlement of the vendor obligation
discussed in Note 12.   Pharmacy Products
    
    $
    9,092Insurance Services
    
    
    1,409Unallocated assets
    
    
    20,105Consolidated assets
    
    $
    30,606
  17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Important Factors That May Affect Future Operations and Results
   
    
    Expected future operations, revenue, gross margins and expenses;
    
    Credit facilities and projected cash needs;
    
    Sales opportunities, strategic relationships and marketing plans; and
    
    Estimates of potential markets for our products and services, including the
anticipated drivers for future growth.
   
    
    Our ability to successfully maintain and grow our Insurance Services and Pharmacy
Products segments;
    
    Declining Medicare reimbursement levels for, or increases in the costs of, products dispensed;
    
    Our history of operating losses and the possibility that we may incur additional operating losses;
    
    An inability to raise the capital that we may need to sustain our operations;
    
    Identification of, and competition for, growth and expansion opportunities;
    
    Changes in, or our ability to comply with, government regulation and legislation, or
interpretations thereof, including, but not limited to, pharmacy licensing requirements
and healthcare reform legislation, including HIPAA;
    
    Our ability to establish and maintain successful collaborative relationships;
    
    Adverse developments in any investigation related to the pharmaceutical industry;
    
    Competition and technological change that may make our products and services less
attractive or obsolete;
    
    Our ability to obtain and maintain intellectual property protection for our technologies;
  18




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
    
    An adverse resolution of future lawsuits or investigations;
    
    Significant fluctuations in our revenue and operating results, which have occurred
in the past and may continue in the future;
    
    Our ability to hire and retain qualified personnel;
    
    Our exposure to product liability in excess of our insurance coverage;
    
    Any failure to maintain an effective system of internal controls in the future that
could adversely affect our ability to accurately report financial results or prevent
fraud;
    
    Compliance with changing regulation of corporate governance and public disclosure
resulting in additional expenses;
    
    Volatility in the public trading price and low trading volume for our common stock;
    
    Failure to meet the standards for continued listing on The Nasdaq Global Market
could result in the delisting of our securities, negatively affecting their liquidity
and our ability to obtain future equity financing; and
    
    Anti-takeover provisions in our governing documents and under Delaware law that may
make an acquisition of our Company more difficult.
  Business
   Pharmacy Products
 Home Delivery of Medical Products
   19




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Retail Program
  Specialty Pharmacy
   Discount Prescription Drug Card Services
   20




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##### Table of Contents



Insurance Services
   Critical Accounting Policies
   21




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    11,811
    
    
    
    59.7
    %
    
    $
    18,167
    
    
    
    85.4
    %
    
    $
    33,555
    
    
    
    52.1
    %
    
    $
    55,299
    
    
    
    88.6
    %Prescription drug card revenue
    
    
    671
    
    
    
    3.4
    
    
    
    2,316
    
    
    
    10.9
    
    
    
    3,983
    
    
    
    6.2
    
    
    
    6,327
    
    
    
    10.1Service revenue
    
    
    7,314
    
    
    
    36.9
    
    
    
    780
    
    
    
    3.7
    
    
    
    26,889
    
    
    
    41.7
    
    
    
    780
    
    
    
    1.219,796
    
    
    
    100.0
    
    
    
    21,263
    
    
    
    100.0
    
    
    
    64,427
    
    
    
    100.0
    
    
    
    62,406
    
    
    
    100.0Cost of product sales
    
    
    4,233
    
    
    
    21.4
    
    
    
    8,037
    
    
    
    37.8
    
    
    
    14,424
    
    
    
    22.4
    
    
    
    23,448
    
    
    
    37.6Cost of services
    
    
    2,430
    
    
    
    12.3
    
    
    
    1,311
    
    
    
    6.2
    
    
    
    25,685
    
    
    
    39.9
    
    
    
    1,311
    
    
    
    2.1Gross Profit
    
    
    13,133
    
    
    
    66.3
    
    
    
    11,915
    
    
    
    56.0
    
    
    
    24,318
    
    
    
    37.7
    
    
    
    37,647
    
    
    
    60.3Operating Expenses:Patient acquisition and related costs
    
    
    149
    
    
    
    0.8
    
    
    
    3,256
    
    
    
    15.3
    
    
    
    2,793
    
    
    
    4.3
    
    
    
    17,976
    
    
    
    28.8Patient service and fulfillment
    
    
    1,839
    
    
    
    9.3
    
    
    
    3,593
    
    
    
    16.9
    
    
    
    6,382
    
    
    
    9.9
    
    
    
    11,418
    
    
    
    18.3General and administrative
    
    
    6,457
    
    
    
    32.6
    
    
    
    5,576
    
    
    
    26.2
    
    
    
    22,428
    
    
    
    34.8
    
    
    
    15,193
    
    
    
    24.3Provision for doubtful accounts
    
    
    998
    
    
    
    5.0
    
    
    
    2,330
    
    
    
    11.0
    
    
    
    2,844
    
    
    
    4.4
    
    
    
    7,575
    
    
    
    12.1Depreciation and amortization
    
    
    364
    
    
    
    1.8
    
    
    
    224
    
    
    
    1.1
    
    
    
    1,030
    
    
    
    1.6
    
    
    
    653
    
    
    
    1.0Gain on sale of business line
    
    
    (5,000
    )
    
    
    (25.3
    )
    
    
    (15,508
    )
    
    
    (72.9
    )
    
    
    (5,000
    )
    
    
    (7.8
    )
    
    
    (15,508
    )
    
    
    (24.9
    )Amortization of equity issued to
CIGNA
    
    
    969
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    2,908
    
    
    
    4.5
    
    
    
    
    
    
    
    Impairment of investment in joint
venture
    
    
    559
    
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    1,292
    
    
    
    2.0
    
    
    
    
    
    
    
    6,335
    
    
    
    32.0
    
    
    
    (529
    )
    
    
    (2.5
    )
    
    
    34,677
    
    
    
    53.8
    
    
    
    37,307
    
    
    
    59.8Income (Loss) from Operations
    
    
    6,798
    
    
    
    34.3
    
    
    
    12,444
    
    
    
    58.5
    
    
    
    (10,359
    )
    
    
    (16.1
    )
    
    
    340
    
    
    
    0.5Other expense, net
    
    
    (778
    )
    
    
    (3.9
    )
    
    
    (652
    )
    
    
    (3.1
    )
    
    
    (2,148
    )
    
    
    (3.3
    )
    
    
    (2,222
    )
    
    
    (3.5
    )Net Income (Loss)
    
    $
    6,020
    
    
    
    30.4
    %
    
    $
    11,792
    
    
    
    55.5
    %
    
    $
    (12,507
    )
    
    
    (19.4
    %)
    
    $
    (1,882
    )
    
    
    (3.0
    %)
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Revenue.
  22




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##### Table of Contents



Cost of Product Sales .
 Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
  23




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##### Table of Contents



Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Gain on Sale of Line of Business.
 Amortization of Equity Issued to CIGNA .
 Impairment of Investment in Joint Venture.
 Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Revenue.
  24




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Cost of Product Sales .
 Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
  25




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##### Table of Contents



General and Administrative Expenses .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Gain on Sale of Line of Business.
 Amortization of Equity Issued to CIGNA .
 Impairment of Investment in Joint Venture.
 LIQUIDITY AND CAPITAL RESOURCES
   26




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27




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Off-Balance-Sheet Arrangements
   28




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Recently Adopted Accounting Standards
 Accounting for Stock Issued to Employees
 Share-Based Payment
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
     29




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 6. Exhibits
    30




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SIGNATURES
  NATIONSHEALTH, INC.
 Date: November 10, 2006
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer)Date: November 10, 2006
    By:
    /s/ Timothy FairbanksName:
    Timothy FairbanksTitle:
    Chief Financial Officer
(Principal Financial Officer)Date: November 10, 2006
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Accounting Officer
(Principal Accounting Officer)  31




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NATIONSHEALTH, INC.
 EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    Asset Purchase Agreement, dated as of September 5, 2006, by and among
NationsHealth, Inc., United States Pharmaceutical Group, L.L.C. and
HealthTran LLC,. Filed as Exhibit 99.1 to the Companys Form 8-K (File
No. 000-50348) filed September 6, 2006 and incorporated herein by
reference.10.2
    
    Agreement of Termination, dated as of September 13, 2006, by and among
NationsHealth, Inc., United States Pharmaceutical Group, L.L.C. and
Becton, Dickinson and Company. Filed as Exhibit 99.1 to the Companys
Form 8-K (File No. 000-50348) filed September 13, 2006 and incorporated
herein by reference.10.3
    
    Agreement to Dissolve Limited Liability Company and Promissory Note, dated
as of September 27, 2006, between NationsHealth, Inc., and US Bioservices
Corporation. Filed as Exhibit 10.1 to the Companys Form 8-K (File No.
000-50348) filed October 3, 2006 and incorporated herein by reference.10.4
    
    Industrial Lease Agreement Between Industrial Property Fund III, L.P. as
Landlord and NationsHealth, Inc. and United States Pharmaceutical Group,
L.L.C. Collectively, as Tenant commencing on September 4, 2006.10.5
    
    Amendment to the Employment Agreement Between NationsHealth, Inc. and
Robert E. Tremain dated as of October 5, 2006.10.6
    
    Description of NationsHealth, Inc. Non-Employee Director Compensation.10.7
    
    First Amendment to Second Amended and Restated Revolving Credit and
Security Agreement dated August 11, 2006, by and between CapitalSource
Finance LLC, United States Pharmaceutical Group, L.L.C., NationsHealth
Holdings, L.L.C. and the Company.10.8
    
    Waiver, Consent and Second Amendment to Second Amended and Restated
Revolving Credit and Security Agreement dated September 27, 2006, by and
between CapitalSource Finance LLC, United States Pharmaceutical Group,
L.L.C., NationsHealth Holdings, L.L.C. and the Company.10.9
    
    Third Amendment to Second Amended and Restated Revolving Credit and
Security Agreement dated October 2, 2006, by and between CapitalSource
Finance LLC, United States Pharmaceutical Group, L.L.C., NationsHealth
Holdings, L.L.C. and the Company.
  32




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ExhibitNo.
    
    Description10.10
    
    Property Lease between Orange Blossom Investments, LLC, and the
Company, dated October 13, 2006.10.11
    
    Separation Agreement and General Release dated October 5, 2006,
between NationsHealth, Inc. and Gregory Couto. Filed as Exhibit
10.1 to the Companys Form 8-K (File No. 000-50348) filed October
16, 2006 and incorporated herein by reference.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  33