##### 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 1934
 For the quarterly period ended December 31, 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 000-31249
 ARCADIA RESOURCES, INC.
  NEVADA
    
    88-0331369(State of Incorporation)
    
    (I.R.S. Employer I.D. Number)26777 CENTRAL PARK BLVD., SUITE 200SOUTHFIELD, MI
    
    48076(Address of principal executive offices)
    
    (Zip Code)
  þ o
  o o þ
 o þ




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##### 



Table of Contents
 PageNo.Part I: Financial InformationItem 1. Unaudited Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 5.
Other Information
    
    
    43Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36Part II: Other InformationItem 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Signatures
    
    
    43Exhibits
    
    
    44Amended and Restated By-lawsLimited Liability Company Ownership Interest Purchase AgreementLynn Fetterman Inc. Project AgreementCertification of Chief Executive OfficerCertification of the Principal Accounting and Financial OfficerChief Executive Officer CertificationPrincipal Accounting and Financial Officer CertificationPress Release, dated February 14, 2007
  2




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##### Table of Contents



Item 1.  Unaudited Consolidated Financial Statements
    3




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##### Table of Contents



December 31,
    
    
    March 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    11,033,943
    
    
    $
    530,344Accounts receivable, net of allowance of
$3,352,000 and $1,891,000, respectively
    
    
    36,659,142
    
    
    
    27,109,601Inventory, net
    
    
    2,896,885
    
    
    
    1,502,276Prepaid expenses and other current assets
    
    
    5,120,856
    
    
    
    3,180,002Total current assets
    
    
    55,710,826
    
    
    
    32,322,223Property and equipment, net
    
    
    9,104,113
    
    
    
    6,225,043Goodwill
    
    
    38,751,258
    
    
    
    28,263,208Intangible assets, net
    
    
    22,192,857
    
    
    
    18,325,732Other assets
    
    
    401,644
    
    
    
    14,940$
    126,160,698
    
    
    $
    85,151,146LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesLines of credit, current portion
    
    $
    3,017,996
    
    
    $
    2,000,000Accounts payable
    
    
    4,428,941
    
    
    
    1,912,860Accrued expenses:Compensation and related taxes
    
    
    2,478,635
    
    
    
    2,417,832Commissions
    
    
    582,540
    
    
    
    279,262Other
    
    
    1,791,683
    
    
    
    1,266,598Accrued interest
    
    
    229,650
    
    
    
    141,463Payable to affiliated agencies, current portion
    
    
    1,642,377
    
    
    
    2,163,954Long-term obligations, current portion
    
    
    3,033,710
    
    
    
    2,056,311Capital lease obligations, current portion
    
    
    977,993
    
    
    
    349,555Total current liabilities
    
    
    18,183,525
    
    
    
    12,587,835Line of credit, less current portion
    
    
    17,749,866
    
    
    
    14,487,967Payable to affiliated agencies, less current portion
    
    
    82,452
    
    
    
    152,750Long-term obligations, less current portion
    
    
    22,450,615
    
    
    
    266,447Capital lease obligations, less current portion
    
    
    693,436
    
    
    
    612,054Total liabilities
    
    
    59,159,894
    
    
    
    28,107,053Minority interest
    
    
    387,427
    
    
    
    Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock $.001 par value, 200,000,000 shares
authorized, 105,558,992 shares and 96,403,036
shares outstanding
    
    
    105,559
    
    
    
    96,403Preferred stock $.001 par value, 5,000,000 shares
authorized, none outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    83,727,138
    
    
    
    69,555,678Accumulated deficit
    
    
    (17,219,320
    )
    
    
    (12,607,988
    )Total stockholders equity
    
    
    66,613,377
    
    
    
    57,044,093$
    126,160,698
    
    
    $
    85,151,146
 See accompanying notes to these consolidated financial statements.
 4




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##### Table of Contents



Quarter ended
    
    
    Three Quarters endedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues, net
    
    $
    41,026,212
    
    
    $
    33,298,557
    
    
    $
    120,000,022
    
    
    $
    96,702,889Cost of revenues
    
    
    26,543,431
    
    
    
    21,985,099
    
    
    
    77,768,752
    
    
    
    64,792,459Gross profit
    
    
    14,482,781
    
    
    
    11,313,458
    
    
    
    42,231,270
    
    
    
    31,910,430Selling, general and administrative
    
    
    16,258,357
    
    
    
    11,290,948
    
    
    
    42,215,507
    
    
    
    31,423,622Depreciation and amortization
    
    
    788,932
    
    
    
    650,685
    
    
    
    2,072,717
    
    
    
    1,781,815Total operating expenses
    
    
    17,047,289
    
    
    
    11,941,633
    
    
    
    44,288,224
    
    
    
    33,205,437Operating loss
    
    
    (2,564,508
    )
    
    
    (628,175
    )
    
    
    (2,056,954
    )
    
    
    (1,295,007
    )Interest expense, net
    
    
    1,099,986
    
    
    
    168,330
    
    
    
    2,417,642
    
    
    
    1,198,103Amortization of debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    933,185Total other expenses
    
    
    1,099,986
    
    
    
    168,330
    
    
    
    2,417,642
    
    
    
    2,131,288Loss before income taxes
    
    
    (3,664,494
    )
    
    
    (796,505
    )
    
    
    (4,474,596
    )
    
    
    (3,426,295
    )Current income tax expense
    
    
    53,287
    
    
    
    16,778
    
    
    
    136,737
    
    
    
    116,778NET LOSS FOR THE PERIOD
    
    $
    (3,717,781
    )
    
    $
    (813,283
    )
    
    $
    (4,611,333
    )
    
    $
    (3,543,073
    )Weighted average number of common
shares outstanding (in thousands)
    
    
    88,681
    
    
    
    84,240
    
    
    
    87,769
    
    
    
    83,506Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.04
    )
 See accompanying notes to these consolidated financial statements.
 5




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##### Table of Contents



Three Quarters ended December 31,2006
    
    
    2005Cash provided by (used in) operating activities:Net loss for the period
    
    $
    (4,611,333
    )
    
    $
    (3,543,073
    )Adjustments to reconcile net loss to net cash used in operating
activities net of impact of acquisitions:Provision for doubtful accounts
    
    
    1,540,372
    
    
    
    572,576Amortization and depreciation of property and equipment
    
    
    2,633,115
    
    
    
    1,245,473Amortization of intangible assets
    
    
    1,228,135
    
    
    
    811,764Amortization of debt discount
    
    
    
    
    
    
    933,185Amortization of deferred financing costs
    
    
    117,901
    
    
    
    437,065Stock-based compensation expense
    
    
    734,813
    
    
    
    162,577Recording of expected release of stock from escrow
    
    
    
    
    
    
    410,000Net change in operating components of working capital:Accounts receivable
    
    
    (10,340,867
    )
    
    
    (4,437,166
    )Inventory
    
    
    (1,884,832
    )
    
    
    (87,791
    )Other assets
    
    
    (2,121,646
    )
    
    
    (3,488,841
    )Accounts payable
    
    
    2,158,191
    
    
    
    (145,797
    )Accrued expenses
    
    
    210,302
    
    
    
    (746,311
    )Due to affiliated agencies
    
    
    (314,760
    )
    
    
    (363,455
    )Net cash used in operating activities
    
    
    (10,650,609
    )
    
    
    (8,239,794
    )Cash provided by (used in) investing activities:Purchases of businesses, including acquisition costs
    
    
    (9,695,097
    )
    
    
    (5,469,919
    )Purchases of property and equipment
    
    
    (2,878,673
    )
    
    
    (2,422,394
    )Net cash used in investing activities
    
    
    (12,573,770
    )
    
    
    (7,892,313
    )Cash provided by (used in) financing activities:Proceeds from sale of common stock warrants
    
    
    
    
    
    
    31,040,065Proceeds from issuance of note payable
    
    
    21,000,000
    
    
    
    Proceeds from issuance of common stock
    
    
    9,999,998
    
    
    
    Proceeds from exercise of stock options/warrants
    
    
    343,498
    
    
    
    166,782Net advances (payments) on line of credit
    
    
    4,239,895
    
    
    
    (6,741,356
    )Payments on acquisition debt
    
    
    (837,293
    )
    
    
    (1,611,323
    )Payments on notes payable
    
    
    (1,031,880
    )
    
    
    (5,637,782
    )Proceeds from sale of common stock of subsidiary
    
    
    13,760
    
    
    
    Net cash provided by financing activities
    
    
    33,727,978
    
    
    
    17,216,386Net increase in cash and cash equivalents
    
    
    10,503,599
    
    
    
    1,084,279Cash and cash equivalents, beginning of period
    
    
    530,344
    
    
    
    1,412,268Cash and cash equivalents, end of period
    
    $
    11,033,943
    
    
    $
    2,496,547
 See
accompanying notes to these consolidated financial statements.
 6




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Three Quarters ended December 31,2006
    
    
    2005Supplementary information:Cash paid during the period for:Interest
    
    $
    1,029,369
    
    
    $
    1,128,832Income taxes
    
    
    126,653
    
    
    
    43,355Non-cash investing activities:Issuance of common stock for the purchases of businesses
    
    $
    2,704,169
    
    
    $
    3,086,925Issuance of note payable and purchase price payable on acquisition
    
    
    3,400,000
    
    
    
    Assumption of line of credit in purchase of business
    
    
    40,000
    
    
    
    Non-cash financing activities:Issuance of common stock as finders fee
    
    $
    150,000
    
    
    $
    Payments on note payable with issuance of common stock
    
    
    151,295
    
    
    
    119,231Debt issue discount
    
    
    
    
    
    
    1,127,727
 See accompanying notes to these consolidated financial statements.
 7




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##### Table of Contents



Note 1  Description of Company and Significant Account Policies
 Description of Company
   Unaudited Interim Financial Information
  Principles of Consolidation
  8




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##### Table of Contents



Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Inventories
  Property and Equipment
  Goodwill and Acquired Intangible Assets
   Trade name
    
    30 yearsCustomers and referral source relationships (depending on
the type of business purchased)
    
    5 and 15 yearsAcquired technology
    
    3 yearsNon-competition agreements
    
    5 years
 9




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Impairment of Long-Lived Assets
  Payables to Affiliated Agencies
  Income Taxes
  Minority Interest
  Revenue Recognition and Concentration of Credit Risk
  10




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##### Table of Contents



Business Combinations and Valuation of Intangible Assets
 Business
Combinations Goodwill and
Other Intangible Assets
 Earnings (Loss) Per Share
  Recent Accounting Pronouncements
     11




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##### Table of Contents



Note 2  Business Acquisitions
 Wellscripts, LLC
  Alliance Oxygen and Medical Equipment, Inc.
  Lovell Medical Equipment, Inc.
  Pinnacle Easy Care, LLC
  12




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##### Table of Contents



TotalShare consideration
    
    $
    2,704,000Cash consideration
    
    
    9,131,000Note payable
    
    
    3,400,000Acquisition costs
    
    
    564,000Total purchase price
    
    $
    15,799,000Current assets
    
    $
    1,280,000Fixed assets
    
    
    1,430,000Liabilities
    
    
    (1,816,000
    )Minority interest
    
    
    (374,000
    )Intangible assets:Customer relationships
    
    
    4,460,000Non-competition agreements
    
    
    600,000Goodwill
    
    
    10,219,000Total net identifiable assets
    
    $
    15,799,000
  Contingent Consideration
   
    
    On November 3, 2005, the Company acquired 100% of the outstanding stock of O2 Plus for
total consideration of $1.9 million. If certain revenue targets are met at the one and two
year anniversaries of the closing, an additional $1 million could be paid to the sellers in
the Companys common stock valued at the date of acquisition.
    
    On January 27, 2006, the Company acquired certain assets of Remedy Therapeutics, Inc. for
total consideration of $4.8 million. If certain EBITDA targets are met within the first 12
months after the acquisition, an additional $1.5 million could be paid to the sellers. Of
this $1.5 million, $500,000 would be paid in cash and $1 million would be paid in the
Companys common stock valued at the date of acquisition.
 13




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##### Table of Contents



Note 3  Acquired Intangible Assets and Goodwill
  December 31, 2006
    
    
    March 31, 2006Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationTrade name
    
    $
    8,000,000
    
    
    $
    711,111
    
    
    $
    8,000,000
    
    
    $
    511,111Customer relationships
    
    
    15,441,667
    
    
    
    1,748,151
    
    
    
    10,982,000
    
    
    
    1,127,988Non-competition agreements
    
    
    1,460,300
    
    
    
    334,293
    
    
    
    860,000
    
    
    
    151,614Acquired technology
    
    
    760,000
    
    
    
    675,555
    
    
    
    760,000
    
    
    
    485,55525,661,967
    
    
    $
    3,469,110
    
    
    
    20,602,000
    
    
    $
    2,276,268Less accumulated amortization
    
    
    (3,469,110
    )
    
    
    
    
    
    
    (2,276,268
    )Net acquired intangible assets
    
    $
    22,192,857
    
    
    
    
    
    
    $
    18,325,732
  Remainder of Fiscal 2007:
    
    $
    619,000Fiscal 2008:
    
    
    1,177,000Fiscal 2009:
    
    
    1,156,000Fiscal 2010:
    
    
    1,156,000Fiscal 2011:
    
    
    1,004,000Thereafter
    
    
    17,081,000$
    22,193,000
  December 31,
    
    
    March 31,2006
    
    
    2006Services
    
    $
    13,924,000
    
    
    $
    13,953,000Products
    
    
    23,616,000
    
    
    
    13,160,000Retail
    
    
    1,155,000
    
    
    
    1,150,000Clinics
    
    
    56,000
    
    
    
    $
    38,751,000
    
    
    $
    28,263,000
   14




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Note 4  Lines of Credit
        15




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##### Table of Contents



Note 5  Long-Term Obligations
  December 31,
    
    March 31,2006
    
    2006Note payable to Jana Master Fund, Ltd. dated
November 30, 2006, bearing simple interest
at the one year LIBOR rate plus 7.5%,
effectively 12.74% at December 31, 2006,
with interest payable quarterly beginning on
December 31, 2006 and the principal due in
full on January 31, 2008. On the first day
of each of 5 months starting February 1,
2007, the interest rate increases 1.0% up to
a maximum of 5.0% until repayment in full,
making the maximum rate on the promissory
note one year LIBOR rate plus 12.5%. (See
Note 11  Subsequent Events)
    
    $
    21,000,000
    
    
    $
    Purchase price payable to the selling
shareholder of Alliance Oxygen & Medical
Equipment, Inc., dated July 12, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest beginning October 12,
2006 with final payment due on July 12,
2007. (See Note 11  Subsequent Events)
    
    
    1,514,752
    
    
    
    Purchase price payable to the selling
shareholder of Wellscripts, LLC dated June
30, 2006, bearing simple interest of 8% per
year payable in equal quarterly payments of
principal and interest beginning September
30, 2006 with final payment due on June 30,
2007. (See Note 11  Subsequent Events)
    
    
    925,440
    
    
    
    Purchase price payable to Remedy
Therapeutics, Inc. dated January 27, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest beginning April 27,
2006 with final payment due on January 27,
2009.
    
    
    617,455
    
    
    
    800,000Purchase price payable to the selling
shareholders of Trinity Healthcare dated
September 23, 2004, bearing simple interest
of 8% per year due October 15, 2006. The
note payable was paid in full in October
2006.
    
    
    
    
    
    
    294,422Purchase price payable to the selling
shareholders of Lovell Medical Supply, Inc.,
dated August 25, 2006, payable in shares of
the Companys common stock in equal amounts
on February 25, 2007 and August 25, 2007,
subject to offset for potential indemnified
claims.
    
    
    400,000
    
    
    
    Other purchase price payables to be paid
over time to the selling shareholders or
selling entities of various acquired
entities, due dates ranging from January
2007 to March 2007.
    
    
    267,606
    
    
    
    711,126Other long-term obligations with interest
charged at various rates ranging from 4% to
18% to be paid over time based on respective
terms, due dates ranging from January 2007
to November 2011.
    
    
    759,072
    
    
    
    517,210Total long-term obligations
    
    
    25,484,325
    
    
    
    2,322,758Less current portion of long-term obligations
    
    
    (3,033,710
    )
    
    
    (2,056,311
    )Long-term obligations
    
    $
    22,450,615
    
    
    $
    266,447
 16




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##### Table of Contents



Note 6  Stockholders Equity
 General
   Escrow Shares
  Common Stock Transactions
     17




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##### Table of Contents



Warrants
  Description
    
    Exercise Price
    
    Granted
    
    Expiration
    
    OutstandingClass A Warrants
    
    $
    0.50
    
    
    Various
    
    Various
    
    
    6,085,071Class B-1 Warrants
    
    $
    0.001
    
    
    September 2005
    
    September 2009
    
    
    13,777,777Class B-2 Warrants
    
    $
    2.25
    
    
    September 2005
    
    September 2009
    
    
    4,711,110Total Warrants Outstanding
    
    
    
    
    
    
    
    
    
    
    24,573,958
   Note 7  Contingencies
  Note 8  Stock-Based Compensation
  18




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##### Table of Contents



Stock Options
     19




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##### Table of Contents



Quarter
    
    Three Quartersended
    
    endedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Weighted-average expected volatility
    
    
    N/A
    
    
    
    N/A
    
    
    
    20
    %
    
    
    45
    %Expected dividend yields
    
    
    N/A
    
    
    
    N/A
    
    
    
    0
    %
    
    
    0
    %Expected terms (in years)
    
    
    N/A
    
    
    
    N/A
    
    
    
    7
    
    
    
    7Risk-free interest rate
    
    
    N/A
    
    
    
    N/A
    
    
    
    5.11
    %
    
    
    3.92
    %
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at March 31, 2005
    
    
    9,536,540
    
    
    $
    0.37Granted
    
    
    24,303
    
    
    
    2.20Exercised
    
    
    (37,500
    )
    
    
    1.00Forfeited or expired
    
    
    0
    
    
    
    0.00Outstanding at March 31, 2006
    
    
    9,523,343
    
    
    $
    0.37Granted
    
    
    18,026
    
    
    
    2.92Exercised
    
    
    (35,000
    )
    
    
    1.45Forfeited or expired
    
    
    0
    
    
    
    0.00Outstanding at December 31, 2006
    
    
    9,506,369
    
    
    $
    0.38
    
    
    
    5.2
    
    
    $
    16,036,209Exercisable at December 31, 2006
    
    
    1,506,369
    
    
    $
    1.04
    
    
    
    5.2
    
    
    $
    1,556,209
   Weighted-AverageGrant DateShares
    
    
    Fair ValueUnvested at March 31, 2006
    
    
    8,000,000
    
    
    $
    0.25Granted
    
    
    18,026
    
    
    
    2.92Vested
    
    
    (18,026
    )
    
    
    2.92Forfeited
    
    
    0
    
    
    
    0.00Unvested at December 31, 2006
    
    
    8,000,000
    
    
    $
    0.25
 20




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##### Table of Contents



Restricted Stock  Arcadia Resources, Inc.
    Weighted-AverageGrant DateFair ValueShares
    
    
    per ShareUnvested at March 31, 2006
    
    
    367,292
    
    
    $
    2.47Granted
    
    
    2,157,000
    
    
    
    2.92Vested
    
    
    (130,938
    )
    
    
    2.42Forfeited
    
    
    
    
    
    
    Unvested at December 31, 2006
    
    
    2,393,354
    
    
    $
    2.88
     21




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##### Table of Contents



Restricted Stock  Care Clinic, Inc.
  Note 9  Related Party Transactions
  Note 10  Segment Information
       22




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##### Table of Contents



Quarter ended December 31,2006
    
    
    2005Revenue, net:Services
    
    $
    30,049
    
    
    $
    27,867Products
    
    
    9,794
    
    
    
    5,432Retail
    
    
    1,183
    
    
    
    Total revenue
    
    $
    41,026
    
    
    $
    33,299Operating loss:Services
    
    
    1,195
    
    
    
    1,272Products
    
    
    (607
    )
    
    
    (1,202
    )Retail
    
    
    (311
    )
    
    
    Clinics
    
    
    (1,294
    )
    
    
    Unallocated corporate overhead
    
    
    (1,548
    )
    
    
    (698
    )Total operating loss
    
    
    (2,565
    )
    
    
    (628
    )Interest expense
    
    
    1,100
    
    
    
    168Net loss before income tax expense
    
    
    (3,665
    )
    
    
    (796
    )Income tax expense
    
    
    53
    
    
    
    17Net loss
    
    $
    (3,718
    )
    
    $
    (813
    )
 Three Quarters ended December 31,2006
    
    
    2005Revenue, net:Services
    
    $
    90,701
    
    
    $
    82,467Products
    
    
    26,161
    
    
    
    14,236Retail
    
    
    3,138
    
    
    
    Total revenue
    
    $
    120,000
    
    
    $
    96,703Operating loss:Services
    
    $
    3,589
    
    
    $
    3,578Products
    
    
    826
    
    
    
    (1,114
    )Retail
    
    
    (1,003
    )
    
    
    Clinics
    
    
    (1,464
    )
    
    
    Unallocated corporate overhead
    
    
    (4,005
    )
    
    
    (3,759
    )Total operating loss
    
    
    (2,057
    )
    
    
    (1,295
    )Interest expense
    
    
    2,418
    
    
    
    1,198Amortization of debt discount
    
    
    
    
    
    
    933Net loss before income tax expense
    
    
    (4,475
    )
    
    
    (3,426
    )Income tax expense
    
    
    136
    
    
    
    117Net loss
    
    $
    (4,611
    )
    
    $
    (3,543
    )
 23




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December 31,
    
    
    March 31,2006
    
    
    2006Assets:Services
    
    $
    52,410
    
    
    $
    48,337Products
    
    
    56,612
    
    
    
    31,644Retail
    
    
    2,265
    
    
    
    2,160Clinics
    
    
    2,505
    
    
    
    Unallocated corporate assets
    
    
    12,369
    
    
    
    3,010Total assets
    
    $
    126,161
    
    
    $
    85,151
 Note 11  Subsequent Events
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Forward Looking Statements
    Overview
  26




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Results of Operations
 Quarter Ended December 31, 2006 Compared to Quarter Ended December 31, 2005
 Consolidated Statements of Operations
    
    Quarter ended December 31,(in thousands, except per share data)
    
    2006
    
    
    2005Revenues, net
    
    $
    41,026
    
    
    $
    33,299Cost of revenues
    
    
    26,543
    
    
    
    21,985Gross profit
    
    
    14,483
    
    
    
    11,314Selling, general and administrative expenses
    
    
    16,258
    
    
    
    11,291Depreciation and amortization
    
    
    789
    
    
    
    651Total operating expenses
    
    
    17,047
    
    
    
    11,942Operating loss
    
    
    (2,564
    )
    
    
    (628
    )Interest expense, net
    
    
    1,100
    
    
    
    168Net loss before income tax expense
    
    
    (3,664
    )
    
    
    (796
    )Income tax expense
    
    
    53
    
    
    
    17Net loss
    
    $
    (3,717
    )
    
    $
    (813
    )Weighted average number of shares  basic and diluted
    
    
    88,681
    
    
    
    84,240Net loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.01
    )
  27




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Results of Operations Liquidity and Capital Resources
 IncreasefromIncrease
    
    Same(Decrease)
    
    Quarter(in
    
    from Prior
    
    PriorRevenue by Quarter:
    
    millions)
    
    Quarter
    
    YearFirst quarter ended June 30, 2004
    
    $
    23.1
    
    
    
    11.5
    %
    
    
    26.9
    %Second quarter ended September 30, 2004
    
    
    25.5
    
    
    
    10.4
    %
    
    
    30.5
    %Third quarter ended December 31, 2004
    
    
    28.1
    
    
    
    10.2
    %
    
    
    41.4
    %Fourth quarter ended March 31, 2005
    
    
    28.6
    
    
    
    1.8
    %
    
    
    38.1
    %First quarter ended June 30, 2005
    
    
    30.7
    
    
    
    7.4
    %
    
    
    33.0
    %Second quarter ended September 30, 2005
    
    
    32.7
    
    
    
    6.5
    %
    
    
    28.2
    %Third quarter ended December 31, 2005
    
    
    33.3
    
    
    
    1.8
    %
    
    
    18.5
    %Fourth quarter ended March 31, 2006
    
    
    34.2
    
    
    
    2.7
    %
    
    
    19.6
    %First quarter ended June 30, 2006
    
    
    37.6
    
    
    
    9.9
    %
    
    
    22.5
    %Second quarter ended September 30, 2006
    
    
    41.4
    
    
    
    10.3
    %
    
    
    26.8
    %Third quarter ended December 31, 2006
    
    
    41.0
    
    
    
    (0.9
    )%
    
    
    23.2
    %
   28




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30




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Three Quarters Ended December 31, 2006 Compared to Three Quarters Ended December 31, 2005
 Consolidated Statements of Operations
    
    Three Quarters Ended(in thousands, except per share data)
    
    December 31,2006
    
    
    2005Revenues, net
    
    $
    120,000
    
    
    $
    96,703Cost of revenues
    
    
    77,769
    
    
    
    64,792Gross profit
    
    
    42,231
    
    
    
    31,911Selling, general and administrative expenses
    
    
    42,215
    
    
    
    31,424Depreciation and amortization
    
    
    2,073
    
    
    
    1,782Total operating expenses
    
    
    44,288
    
    
    
    33,206Operating loss
    
    
    (2,057
    )
    
    
    (1,295
    )Interest expense, net
    
    
    2,417
    
    
    
    1,198Amortization of debt discount
    
    
    
    
    
    
    933Total other expenses
    
    
    2,417
    
    
    
    2,131Net loss before income tax expense
    
    
    (4,474
    )
    
    
    (3,426
    )Income tax expense
    
    
    137
    
    
    
    117Net loss
    
    $
    (4,611
    )
    
    $
    (3,543
    )Weighted average number of shares  basic and diluted
    
    
    87,769
    
    
    
    83,506Net loss per share  basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.04
    )
     31




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Liquidity and Capital Resources
  Three Quarters endedSUMMARY CONSOLIDATED
    
    December 31,STATEMENTS OF CASH FLOWS (in millions)
    
    2006
    
    2005Net loss
    
    $
    (4.6
    )
    
    $
    (3.5
    )Net cash used in operating activities
    
    $
    (10.7
    )
    
    $
    (8.2
    )Net cash used in investing activities
    
    $
    (12.6
    )
    
    $
    (7.9
    )Net cash provided by financing activities
    
    $
    33.7
    
    
    $
    17.2Net increase in cash and cash equivalents
    
    $
    10.5
    
    
    $
    1.1Cash and cash equivalents at the end of the period
    
    $
    11.0
    
    
    $
    2.5
  33




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Government-funded
    
    
    28
    %Institutions
    
    
    43
    %Commercial Insurance
    
    
    12
    %Private Pay
    
    
    17
    %
 34




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Financing Transactions
        35




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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures.
 Changes in Internal Controls.
 36




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Item 1A. Risk Factors
  To finance the acquisition of Arcadia Services and our subsequent acquisitions, the Company
incurred significant debt which must be repaid. Our debt level could adversely affect our financial
health and affect our ability to run our business, as well as your investment in our Company.
  o
    
    We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes.o
    
    Our ability to adapt to changing market conditions may be hampered. We may be more
vulnerable in a volatile market and at a competitive disadvantage to our competitors that
have less debt.o
    
    Our operating flexibility is more limited due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating liens on our
properties, making acquisitions and paying dividends.o
    
    We are subject to the risks that interest rates and our interest expense will increase.o
    
    Our ability to plan for, or react to, changes in our business is more limited.
  Due to our debt level, we may not be able to increase the amount we can draw on our revolving
credit facility with Comerica Bank, or to obtain credit from other sources, to fund our future
needs for working capital or acquisitions.
  37




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The terms of our Credit Agreements with Comerica Bank subject us to the risk of foreclosure on
certain property.
   The Company has completed several acquisitions over the past two years. The licensure and
credentialing process under the new ownership must be satisfied timely in order to bill and collect
for services rendered to beneficiaries of government-based health care programs and other insurance
carriers. Cash flow related to these transitions can be impaired sufficient to require additional
external financing in the form of debt or equity.
  39




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To be able to implement our business plan as currently projected for the retail clinic operations,
the Company must raise additional funding which could result in dilution to our security holders or
to our holdings in the subsidiaries that hold the clinic operations.
  Because the Company is dependent on key management and advisors, the loss of the services or advice
of any of these persons could have a material adverse effect on our business and prospects.
   We may not be able to successfully integrate acquired businesses, which could result in our failure
to increase revenues or to avoid duplication of costs among acquired businesses, thereby adversely
affecting our financial results and profitability.
  Ownership of our stock is concentrated in a small group of security holders who may exercise
substantial control over our actions to the detriment of our other security holders.
  40




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The price of our Common Stock has been, and will likely continue to be, volatile, which could
diminish your ability to recoup your investment, or to earn a return on your investment, in our
Company.
  The exercise of common stock warrants may depress our stock price and may result in dilution to our
Common Security holders.
  We have granted stock options to certain management employees and directors as compensation which
may depress our stock price and result in dilution to our common security holders.
  41




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Our ability to recruit and retain a majority of independent directors may affect our ability to be
listed on a national securities exchange or quotation system.
   42




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 5. Other Information.
      
 Item 6. Exhibits.
  
 SIGNATURES
  February 14 , 2007
    
    By:
    
    /s/ John E. Elliott, IIJohn E. Elliott, IIChairman and Chief Executive Officer(Principal Executive Officer)February 14, 2007
    
    By:
    
    /s/ Lynn K. FettermanLynn K. FettermanInterim Chief Financial Officer(Principal Financial and Accounting Officer)
 43




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EXHIBIT INDEX
  ExhibitNo.
    
    Exhibit Description3.2
    
    Amended and Restated By-laws10.1
    
    Limited Liability Company Ownership Interest Purchase Agreement10.2
    
    Lynn Fetterman Inc. Project Agreement31.1
    
    Certification of the Chief Executive Officer required by rule 13a
 14(a) or rule 15d  14(a).31.2
    
    Certification of the Principal Accounting and Financial Officer
required by rule 13a  14(a) or rule 15d  14(a).32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350,
as Adopted Pursuant to §206 of the Sarbanes  Oxley Act of 2002.32.2
    
    Principal Accounting and Financial Officer Certification Pursuant
to 18 U.S.C. §1350, as Adopted Pursuant to §206 of the Sarbanes 
Oxley Act of 2002.99.1
    
    Press Release dated
February 14, 2007
 44