##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended June 30, 2006.
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For 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 JUNE 30, 2006
 INDEX
 PagePART I.Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II.Item 1A.
    
    Risk Factors
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30Signatures
    
    
    
    
    31Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,306
    
    
    $
    13,971Short-term investments
    
    
    
    
    
    
    923Accounts receivable, net of allowances of $17,165 and $17,525,
respectively
    
    
    5,278
    
    
    
    7,908Inventory
    
    
    1,161
    
    
    
    1,285Costs related to billings in process, net
    
    
    1,247
    
    
    
    874Other receivables
    
    
    909
    
    
    
    1,877Prepaid expenses and other current assets
    
    
    524
    
    
    
    750Total current assets
    
    
    13,425
    
    
    
    27,588Property and equipment, net
    
    
    3,604
    
    
    
    3,747Investment in joint venture
    
    
    797
    
    
    
    1,488Deferred CIGNA equity compensation, net
    
    
    13,571
    
    
    
    15,510Other assets, net
    
    
    1,743
    
    
    
    1,526Total assets
    
    $
    33,140
    
    
    $
    49,859LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current Liabilities:Accounts payable
    
    $
    10,697
    
    
    $
    13,387Accrued expenses
    
    
    9,940
    
    
    
    12,030Deferred revenue, current portion
    
    
    3,314
    
    
    
    235Line of credit
    
    
    3,181
    
    
    
    2,500Total current liabilities
    
    
    27,132
    
    
    
    28,152Long-Term Liabilities:Deferred revenue
    
    
    
    
    
    
    1,100Convertible notes, related party, net
    
    
    5,717
    
    
    
    5,176Other long-term liabilities
    
    
    1,016
    
    
    
    1,414Total long-term liabilities
    
    
    6,733
    
    
    
    7,690Commitments and contingenciesStockholders Equity (Deficiency):Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    69,973
    
    
    
    68,949Unearned compensation
    
    
    
    
    
    
    (2,761
    )Accumulated deficit
    
    
    (70,701
    )
    
    
    (52,174
    )Total stockholders equity (deficiency)
    
    
    (725
    )
    
    
    14,017Total liabilities and stockholders equity (deficiency)
    
    $
    33,140
    
    
    $
    49,859
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  1




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Net product sales
    
    $
    10,890
    
    
    $
    19,995
    
    
    $
    21,744
    
    
    $
    37,132Prescription card revenue
    
    
    1,339
    
    
    
    2,156
    
    
    
    3,312
    
    
    
    4,011Service revenue
    
    
    7,387
    
    
    
    
    
    
    
    19,575
    
    
    
    19,616
    
    
    
    22,151
    
    
    
    44,631
    
    
    
    41,143Cost of product sales
    
    
    4,907
    
    
    
    8,485
    
    
    
    10,191
    
    
    
    15,411Cost of services
    
    
    4,173
    
    
    
    
    
    
    
    23,255
    
    
    
    Gross Profit
    
    
    10,536
    
    
    
    13,666
    
    
    
    11,185
    
    
    
    25,732Operating Expenses:Patient acquisition and related costs
    
    
    1,563
    
    
    
    5,566
    
    
    
    2,644
    
    
    
    14,720Patient service and fulfillment
    
    
    2,099
    
    
    
    3,933
    
    
    
    4,543
    
    
    
    7,825General and administrative
    
    
    8,129
    
    
    
    5,313
    
    
    
    15,971
    
    
    
    9,617Provision for doubtful accounts
    
    
    990
    
    
    
    2,924
    
    
    
    1,846
    
    
    
    5,245Depreciation and amortization
    
    
    322
    
    
    
    213
    
    
    
    666
    
    
    
    429Amortization of equity issued to CIGNA
    
    
    970
    
    
    
    
    
    
    
    1,939
    
    
    
    Impairment of investment in joint venture
    
    
    733
    
    
    
    
    
    
    
    733
    
    
    
    14,806
    
    
    
    17,949
    
    
    
    28,342
    
    
    
    37,836Loss from Operations
    
    
    (4,270
    )
    
    
    (4,283
    )
    
    
    (17,157
    )
    
    
    (12,104
    )Other Income (Expense):Interest income
    
    
    60
    
    
    
    20
    
    
    
    153
    
    
    
    20Interest expense, related party
    
    
    (604
    )
    
    
    (747
    )
    
    
    (1,195
    )
    
    
    (995
    )Interest expense
    
    
    (183
    )
    
    
    (390
    )
    
    
    (328
    )
    
    
    (595
    )(727
    )
    
    
    (1,117
    )
    
    
    (1,370
    )
    
    
    (1,570
    )Net Loss
    
    $
    (4,997
    )
    
    $
    (5,400
    )
    
    $
    (18,527
    )
    
    $
    (13,674
    )Loss per share  basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.21
    )
    
    $
    (0.67
    )
    
    $
    (0.52
    )Weighted average shares outstanding  basic
and diluted
    
    
    27,888
    
    
    
    26,175
    
    
    
    27,848
    
    
    
    26,175
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 For the Six Months EndedJune 30,2006
    
    
    2005Cash Flows from Operating Activities:Net Loss
    
    $
    (18,527
    )
    
    $
    (13,674
    )Adjustments to reconcile net loss to net cash and
cash equivalents used in operating activities:Provision for doubtful accounts
    
    
    1,846
    
    
    
    5,245Provision for sales allowances and returns
    
    
    1,139
    
    
    
    836Reserve for (recovery of) costs related to billings in process
    
    
    (229
    )
    
    
    1,558Depreciation and amortization
    
    
    914
    
    
    
    429Amortization of note discount
    
    
    541
    
    
    
    559Amortization of deferred loan costs and other non-cash interest charges,
net
    
    
    131
    
    
    
    269Amortization of equity issued to CIGNA
    
    
    1,939
    
    
    
    Stock-based compensation
    
    
    1,373
    
    
    
    Impairment of investment in joint venture
    
    
    733
    
    
    
    Other non-cash charges
    
    
    440
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    124
    
    
    
    (7,043
    )Inventory
    
    
    124
    
    
    
    (231
    )Costs related to billings in process
    
    
    (143
    )
    
    
    (1,900
    )Prepaid expenses and other assets
    
    
    842
    
    
    
    (229
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (5,678
    )
    
    
    (615
    )Deferred revenue
    
    
    1,980
    
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (12,451
    )
    
    
    (14,796
    )Cash Flows from Investing Activities:Maturity (purchase) of available for sale investments, net
    
    
    923
    
    
    
    (200
    )Acquisition of property and equipment
    
    
    (771
    )
    
    
    (622
    )Net cash and cash equivalents provided by (used in) investing activities
    
    
    152
    
    
    
    (822
    )Cash Flows from Financing Activities:Proceeds from issuance of convertible notes, related party
    
    
    
    
    
    
    15,000Net draws on line of credit
    
    
    681
    
    
    
    1,839Proceeds from exercise of warrants
    
    
    2,000
    
    
    
    Payment of note issuance costs
    
    
    
    
    
    
    (907
    )Exercise of stock options
    
    
    17
    
    
    
    Principal payments under capital lease obligations
    
    
    (64
    )
    
    
    (53
    )Net cash and cash equivalents provided by financing activities
    
    
    2,634
    
    
    
    15,879Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (9,665
    )
    
    
    261Cash and Cash Equivalents, Beginning of Period
    
    
    13,971
    
    
    
    2,904Cash and Cash Equivalents, End of Period
    
    $
    4,306
    
    
    $
    3,165Non-cash Investing and Financing Activities:Equipment acquired under capital leases
    
    $
    
    
    
    $
    262
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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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
   4




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Revolving Line of Credit .
  Cost Reductions
  Potential Sale of Assets
  Summary
  3. CIGNA AGREEMENT
    5




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4. US BIO JOINT VENTURE
    6




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5. REVENUE RECOGNITION
     6. STOCK-BASED COMPENSATION
    7




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Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure,
 Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (5,400
    )
    
    $
    (13,674
    )Add: Stock-based employee
compensation expense included in
net loss
    
    
    
    
    
    
    Deduct: Total stock-based
compensation expense determined
under fair value based method for
all awards
    
    
    (246
    )
    
    
    (498
    )Pro forma net loss
    
    $
    (5,646
    )
    
    $
    (14,172
    )Basic and diluted loss per share:As reported
    
    $
    (0.21
    )
    
    $
    (0.52
    )Pro forma
    
    $
    (0.22
    )
    
    $
    (0.54
    )
 Share-Based Payment
  8




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Six Months Ended June 30,2006 Grants
    
    
    2005 GrantsExpected volatility .
    
    
    55
    %
    
    
    47
    %Approximate risk free interest rate
    
    
    4.87
    %
    
    
    3.96
    %Expected term
    
    5.0 years
    
    5.0 yearsExpected forfeiture rate
    
    
    25
    %
    
    
    0
    %
  WeightedAverageExerciseShares
    
    
    PriceBeginning 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
    
    
    (520,751
    )
    
    
    6.56Expired
    
    
    (177,000
    )
    
    
    6.60Outstanding at end of period
    
    
    1,621,922
    
    
    
    6.34Options exercisable at end of period
    
    
    438,760
    
    
    
    6.85Weighted-average grant date fair value
    
    $
    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
    
    
    345,187
    
    
    
    5.67
    
    
    $
    3.74
    
    
    
    20,936
    
    
    
    4.84
    
    
    $
    6.15$6.26 to $6.80
    
    
    243,500
    
    
    
    5.20
    
    
    
    6.79
    
    
    
    22,500
    
    
    
    5.16
    
    
    
    6.74$6.87 to $6.87
    
    
    822,687
    
    
    
    4.31
    
    
    
    6.87
    
    
    
    387,824
    
    
    
    4.31
    
    
    
    6.87$6.97 to $8.06
    
    
    135,548
    
    
    
    5.36
    
    
    
    7.90
    
    
    
    7,500
    
    
    
    5.31
    
    
    
    7.93$8.20 to $8.20
    
    
    75,000
    
    
    
    5.27
    
    
    
    8.20
    
    
    
    0
    
    
    
    n/a
    
    
    
    n/a1,621,922
    
    
    
    4.86
    
    
    
    6.34
    
    
    
    438,760
    
    
    
    4.40
    
    
    
    6.85
  9




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7. 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.
  10




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8. CONVERTIBLE NOTES
      11




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12




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9. STOCKHOLDERS EQUITY
 Warrants
    Common Stock Reserved
  10. EARNINGS (LOSS) PER SHARE
   13




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11. COMMITMENTS AND CONTINGENCIES
 Purchase Commitment
  Employment Arrangements
    14




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Equity Participation Fee
  12. SEGMENT INFORMATION
    15




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Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Revenue:Pharmacy Products (1)
    
    $
    12,229
    
    
    $
    25,056Insurance Services (2)
    
    
    7,387
    
    
    
    19,575Consolidated revenue
    
    $
    19,616
    
    
    $
    44,631Segment profit (loss):Pharmacy Products
    
    $
    1,609
    
    
    $
    3,864Insurance Services (3)
    
    
    2,424
    
    
    
    (5,545
    )Unallocated amounts:Amortization of equity issued to CIGNA
    
    
    (970
    )
    
    
    (1,939
    )Impairment of investment in joint
venture
    
    
    (733
    )
    
    
    (733
    )Other corporate expenses
    
    
    (6,600
    )
    
    
    (12,804
    )Consolidated loss from operations
    
    $
    (4,270
    )
    
    $
    (17,157
    )
 
 (1)
    
    Revenue for the Pharmacy Products segment includes net product sales and prescription
card revenue.(2)
    
    Represents revenue from services provided to CIGNA.(3)
    
    The segment profit for Insurance Services for the three months ended June 30, 2006
includes a gain of $1.7 million related to the settlement of a vendor obligation for
expenses primarily incurred during the first quarter of 2006.  Pharmacy Products
    
    $
    8,914Insurance Services
    
    
    1,463Unallocated assets
    
    
    22,763Consolidated assets
    
    $
    33,140
  16




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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 an Insurance Services segment;
 
    
    Declining reimbursement levels for, or increases in the costs of, products
dispensed;
 
    
    Our history of operating losses and our expectation that we will incur additional
operating losses;
 
    
    An inability to raise the capital that we may need to sustain our operations;
 
    
    Our ability to attract new customers and retain existing customers;
 
    
    Identification of, and competition for, growth and expansion opportunities;
 
    
    Compliance with, or changes in, government regulation and legislation, or
interpretations thereof, including, but not limited to, pharmacy licensing
requirements and healthcare reform legislation, including HIPAA;
 
    
    An inability to establish and maintain successful collaborative relationships;
  17




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
    
    Adverse developments in any investigation related to the pharmaceutical industry;
 
    
    Competition and technological change that may make our products and technologies
less attractive or obsolete;
 
    
    An inability to obtain and maintain intellectual property protection for our
technologies;
 
    
    Adverse resolution of future lawsuits or investigations;
 
    
    Significant fluctuations in our revenue and operating results, which have occurred
in the past and which we expect to continue to fluctuate in the future;
 
    
    Any loss or inability 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
that results in additional expenses;
 
    
    Our common stock may continue to have a volatile public trading price and low
trading volume; and
 
    
    Anti-takeover provisions in our governing documents and under Delaware law that may
make an acquisition of us more difficult.
  Business
    18




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Insurance Services
    Pharmacy Products
 Home Delivery of Medical Products
    19




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Retail Program
  Sale of Respiratory Division
  Specialty Pharmacy
  Prescription Discount Drug Card Services
   20




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Critical Accounting Policies
  Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    10,890
    
    
    
    55.5
    %
    
    $
    19,995
    
    
    
    90.3
    %
    
    $
    21,744
    
    
    
    48.7
    %
    
    $
    37,132
    
    
    
    90.3
    %Prescription card revenue
    
    
    1,339
    
    
    
    6.8
    
    
    
    2,156
    
    
    
    9.7
    
    
    
    3,312
    
    
    
    7.4
    
    
    
    4,011
    
    
    
    9.7Service revenue
    
    
    7,387
    
    
    
    37.7
    
    
    
    
    
    
    
    
    
    
    
    19,575
    
    
    
    43.9
    
    
    
    
    
    
    
    19,616
    
    
    
    100.0
    
    
    
    22,151
    
    
    
    100.0
    
    
    
    44,631
    
    
    
    100.0
    
    
    
    41,143
    
    
    
    100.0Cost of product sales
    
    
    4,907
    
    
    
    25.0
    
    
    
    8,485
    
    
    
    38.3
    
    
    
    10,191
    
    
    
    22.8
    
    
    
    15,411
    
    
    
    37.5Cost of services
    
    
    4,173
    
    
    
    21.3
    
    
    
    
    
    
    
    
    
    
    
    23,255
    
    
    
    52.1
    
    
    
    
    
    
    
    Gross Profit
    
    
    10,536
    
    
    
    53.7
    
    
    
    13,666
    
    
    
    61.7
    
    
    
    11,185
    
    
    
    25.1
    
    
    
    25,732
    
    
    
    62.5Operating Expenses:Patient acquisition and related costs
    
    
    1,563
    
    
    
    8.0
    
    
    
    5,566
    
    
    
    25.1
    
    
    
    2,644
    
    
    
    5.9
    
    
    
    14,720
    
    
    
    35.8Patient service and fulfillment
    
    
    2,099
    
    
    
    10.7
    
    
    
    3,933
    
    
    
    17.8
    
    
    
    4,543
    
    
    
    10.2
    
    
    
    7,825
    
    
    
    19.0General and administrative
    
    
    8,129
    
    
    
    41.4
    
    
    
    5,313
    
    
    
    24.0
    
    
    
    15,971
    
    
    
    35.8
    
    
    
    9,617
    
    
    
    23.4Provision for doubtful accounts
    
    
    990
    
    
    
    5.0
    
    
    
    2,924
    
    
    
    13.2
    
    
    
    1,846
    
    
    
    4.1
    
    
    
    5,245
    
    
    
    12.7Depreciation and amortization
    
    
    322
    
    
    
    1.6
    
    
    
    213
    
    
    
    1.0
    
    
    
    666
    
    
    
    1.5
    
    
    
    429
    
    
    
    1.0Amortization of equity issued to
CIGNA
    
    
    970
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    1,939
    
    
    
    4.3
    
    
    
    
    
    
    
    Impairment of investment in joint
venture
    
    
    733
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    1.6
    
    
    
    
    
    
    
    14,806
    
    
    
    75.5
    
    
    
    17,949
    
    
    
    81.0
    
    
    
    28,342
    
    
    
    63.5
    
    
    
    37,836
    
    
    
    92.0Loss from Operations
    
    
    (4,270
    )
    
    
    (21.8
    )
    
    
    (4,283
    )
    
    
    (19.3
    )
    
    
    (17,157
    )
    
    
    (38.4
    )
    
    
    (12,104
    )
    
    
    (29.4
    )Other expense, net
    
    
    (727
    )
    
    
    (3.7
    )
    
    
    (1,117
    )
    
    
    (5.0
    )
    
    
    (1,370
    )
    
    
    (3.1
    )
    
    
    (1,570
    )
    
    
    (3.8
    )Net loss
    
    $
    (4,997
    )
    
    
    (25.5
    %)
    
    $
    (5,400
    )
    
    
    (24.4
    %)
    
    $
    (18,527
    )
    
    
    (41.5
    %)
    
    $
    (13,674
    )
    
    
    (33.2
    %)
  21




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##### Table of Contents



Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenue.
 Cost of Product Sales .
 Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
  22




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##### Table of Contents



Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Amortization of Equity Issued to CIGNA .
  23




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##### Table of Contents



Impairment of Investment in Joint Venture.
 Other Expense.
 Net Loss.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Revenue.
 Cost of Product Sales .
 Cost of Services.
  24




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##### Table of Contents



Gross Profit Margin.
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
 Provision for Doubtful Accounts.
  25




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##### Table of Contents



Depreciation and Amortization .
 Amortization of Equity Issued to CIGNA .
 Impairment of Investment in Joint Venture.
 Other Expense.
 Net Loss.
 LIQUIDITY AND CAPITAL RESOURCES
     26




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27




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##### Table of Contents



Off-Balance-Sheet Arrangements
  Recently Adopted Accounting Standards
 Accounting for Stock Issued to Employees
 Share-Based Payment
  28




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##### Table of Contents



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 4. Submission of Matters to a Vote of Security Holders
  For
    
    Against
    
    WithheldLewis P. Stone
    
    
    17,894,091
    
    
    
    
    
    
    
    30,300Don K. Rice
    
    
    17,894,091
    
    
    
    
    
    
    
    30,300Richard K. Howard
    
    
    17,894,091
    
    
    
    
    
    
    
    30,300George F. Raymond
    
    
    17,894,091
    
    
    
    
    
    
    
    30,300
 
 Item 5. Other Information
  
 Item 6. Exhibits
    30




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##### Table of Contents



SIGNATURES
  NATIONSHEALTH, INC.Date: August 14, 2006
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer(Principal Executive Officer) Date: August 14, 2006
    By:
    /s/ Timothy FairbanksName:
    Timothy FairbanksTitle:
    Chief Financial Officer(Principal Financial Officer) Date: August 14, 2006
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Accounting Officer(Principal Accounting Officer)




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##### Table of Contents



NATIONSHEALTH, INC.
 EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    
    Separation Agreement and Waiver and General Release of
Claims, dated June 30, 2006, between NationsHealth, Inc.
and Tracy M. Schmidt.10.2
    *
    
    Amended and Restated Preferred Vendor Agreement by and
among Connecticut General Life Insurance Company, United
States Pharmaceutical Group, L.L.C. and NationsHealth,
Inc., dated as of May 26, 2006.10.3
    
    
    First Amendment of Sublease Agreement with D & K
Healthcare Resources Inc., dated May 1, 2006.31.1
    
    
    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.
 
 *
    
    Portions of this Exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.