##### 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 June 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 000-31249
 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)
  R £
  Large accelerated filer     o
    
    Accelerated filer     o
    
    Non-accelerated filer     þ
 £ R




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##### 



Table of Contents
 Page No.Part I: Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II: Other InformationItem 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 5: Other Information
    
    
    30Item 6. Exhibits
    
    
    3031SignaturesAsset Purchase AgreementDescription of Director, CFO and EVP Compensation ArrangementsCertification of the Chief Executive Officer required by rule 13a-14(a)Certification of the Principal Accounting and Financial Officer by rule 13a-14(a)Chief Executive Officer Certification to Section 906Certification of the Principal Accounting and Financial Officer to Section 906
  2




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PART I: Financial Information
 
 Item 1. Financial Statements
    3




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Arcadia Resources, Inc.
Consolidated Balance Sheets
 June 30,
    
    
    March 31,2006
    
    
    2006Assets (Note 7)
    
    (Unaudited)
    
    
    (Audited)Current AssetsCash
    
    $
    1,933,132
    
    
    $
    530,344Accounts receivable, net of allowance of $2,083,000 and $1,891,000, respectively
    
    
    29,260,136
    
    
    
    27,109,601Inventory, net of allowance of $80,000
    
    
    2,053,876
    
    
    
    1,502,276Prepaid expenses and other current assets
    
    
    3,718,968
    
    
    
    3,140,764Income taxes receivable
    
    
    39,238
    
    
    
    39,238Total Current Assets
    
    
    37,005,350
    
    
    
    32,322,223Fixed Assets (Notes 2 and 8)Equipment
    
    
    6,281,950
    
    
    
    5,883,779Software
    
    
    564,419
    
    
    
    564,419Furniture and fixtures
    
    
    891,008
    
    
    
    810,053Vehicles
    
    
    800,703
    
    
    
    799,793Leasehold improvements
    
    
    394,021
    
    
    
    391,5888,932,101
    
    
    
    8,449,632Accumulated depreciation and amortization
    
    
    (2,692,669
    )
    
    
    (2,224,589
    )Net Fixed Assets
    
    
    6,239,432
    
    
    
    6,225,043Other Assets (Notes 4 and 5)Goodwill
    
    
    31,837,974
    
    
    
    28,263,208Trade name, net of accumulated amortization of $578,000 and $511,000, respectively
    
    
    7,422,223
    
    
    
    7,488,889Customer relationships, net of accumulated amortization of $1,315,000 and $1,128,000,
respectively
    
    
    9,666,678
    
    
    
    9,854,012Non-competition agreements, net of accumulated amortization of $195,000 and $152,000,
respectively
    
    
    665,371
    
    
    
    708,386Technology, net of accumulated amortization of $549,000 and $486,000, respectively
    
    
    211,111
    
    
    
    274,445Deferred financing costs, net of accumulated amortization of $86,000 and $80,000, respectively
    
    
    309,545
    
    
    
    14,940Total Other Assets
    
    
    50,112,902
    
    
    
    46,603,880$
    93,357,684
    
    
    $
    85,151,146Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit, current portion (Note 7)
    
    $
    72,690
    
    
    $
    2,000,000Accounts payable
    
    
    1,903,321
    
    
    
    1,912,860Accrued expenses:Compensation and related taxes
    
    
    2,314,211
    
    
    
    2,417,832Commissions
    
    
    316,946
    
    
    
    279,262Other
    
    
    1,483,551
    
    
    
    1,266,598Accrued Interest
    
    
    155,692
    
    
    
    141,463Payable to affiliated agencies, current portion (Note 6)
    
    
    1,745,319
    
    
    
    2,163,954Long-term debt, current portion (Note 8)
    
    
    4,373,254
    
    
    
    2,405,866Total Current Liabilities
    
    
    12,364,984
    
    
    
    12,587,835Payable to affiliate, less current portion (Note 6)
    
    
    138,942
    
    
    
    152,750Long-term debt, less current portion (Notes 8 and 14)
    
    
    16,288,036
    
    
    
    878,501Line of credit, less current portion (Note 7)
    
    
    6,182,302
    
    
    
    14,487,967Total Liabilities
    
    
    34,974,264
    
    
    
    28,107,053Commitments and Contingencies (Notes 6, 7, 8, 9 and 13)Stockholders Equity (Note 9, 10, 13 and 14)Common stock $.001 par value, 150,000,000 shares authorized, 97,015,623 shares and
96,403,036 shares issued
    
    
    97,016
    
    
    
    96,403Additional paid-in capital
    
    
    71,052,326
    
    
    
    69,555,678Accumulated deficit
    
    
    (12,765,922
    )
    
    
    (12,607,988
    )Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Total Stockholders Equity
    
    
    58,383,420
    
    
    
    57,044,093$
    93,357,684
    
    
    $
    85,151,146
 See accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc.
 Consolidated Statements of Operations
(Unaudited)
 Quarter
    
    
    QuarterEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005Net Sales (Note 15)
    
    $
    37,555,123
    
    
    $
    30,739,040Cost of Sales
    
    
    24,373,126
    
    
    
    20,843,022Gross Profit
    
    
    13,181,997
    
    
    
    9,896,018General and Administrative Expenses
    
    
    12,327,114
    
    
    
    9,773,432Depreciation and Amortization
    
    
    568,889
    
    
    
    414,975Operating Income (Loss)
    
    
    285,994
    
    
    
    (292,389
    )Other Expenses:Interest expense, net
    
    
    405,127
    
    
    
    474,895Amortization of debt discount
    
    
    
    
    
    
    423,781Total Other Expenses
    
    
    405,127
    
    
    
    898,676Net Loss Before Income Tax Expense
    
    
    (119,133
    )
    
    
    (1,191,065
    )Income Tax Expense (Note 11)
    
    
    38,800
    
    
    
    60,000Net Loss
    
    $
    (157,933
    )
    
    $
    (1,251,065
    )Loss Per Share (Note 9):Basic
    
    $
    (0.00
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.00
    )
    
    $
    (0.02
    )Weighted average number of shares (in thousands):Basic
    
    
    86,837
    
    
    
    82,486Diluted
    
    
    86,837
    
    
    
    82,486
 See accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc.
 Consolidated Statements of Cash Flows
(Unaudited)
 Quarter
    
    
    QuarterEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005CASH FLOWS FROM OPERATING ACTIVITIESNet Loss
    
    $
    (157,933
    )
    
    $
    (1,251,065
    )Adjustments to reconcile net loss to net cash provided by operating
activities net of impact of acquisitions:Provision for doubtful accounts
    
    
    318,639
    
    
    
    191,824Depreciation and amortization
    
    
    1,021,889
    
    
    
    498,802Amortization of debt discount and deferred financing costs
    
    
    
    
    
    
    576,884Issuance of stock for services
    
    
    149,925
    
    
    
    2,000Accrual of stock option expense
    
    
    7,000
    
    
    
    87,612Recording of expected release of stock from escrow
    
    
    
    
    
    
    410,000Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,269,173
    )
    
    
    (981,908
    )Inventory
    
    
    (454,071
    )
    
    
    (48,600
    )Prepaid expenses and other current assets
    
    
    (678,205
    )
    
    
    (741,772
    )Income taxes receivable
    
    
    
    
    
    
    (223,802
    )Accounts payable
    
    
    (134,539
    )
    
    
    1,128,339Accrued expenses and other current liabilities
    
    
    (198,948
    )
    
    
    (250,980
    )Due to affiliated agencies
    
    
    (244,570
    )
    
    
    (186,156
    )NET CASH (USED IN) OPERATING ACTIVITIES
    
    
    (2,639,986
    )
    
    
    (788,822
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of businesses
    
    
    90,000
    
    
    
    (2,429,058
    )Purchases of property and equipment
    
    
    (380,592
    )
    
    
    (1,246,004
    )NET CASH (USED IN) INVESTING ACTIVITIES
    
    
    (290,592
    )
    
    
    (3,675,062
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from sale of common stock warrants
    
    
    100,000
    
    
    
    Proceeds from issuance of note payable
    
    
    15,000,000
    
    
    
    5,000,000Proceeds from issuance of common stock
    
    
    
    
    
    
    1,980,065Net payments on line of credit
    
    
    (10,272,975
    )
    
    
    (382,576
    )Payments on acquisition debt
    
    
    (310,612
    )
    
    
    (656,891
    )Payments on notes payable
    
    
    (183,047
    )
    
    
    (157,971
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    4,333,366
    
    
    
    5,782,627NET INCREASE IN CASH AND EQUIVALENTS
    
    
    1,402,788
    
    
    
    1,318,743CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    530,344
    
    
    
    1,412,268CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,933,132
    
    
    $
    2,731,011Supplementary information:Cash paid during the period for:Interest paid
    
    $
    268,035
    
    
    $
    291,145Income taxes
    
    
    38,800
    
    
    
    267,773Non cash investing activities:Issuance of common stock for the purchases of businesses
    
    $
    1,000,000
    
    
    $
    2,586,925Issuance of note payable and purchase price payable on acquisition
    
    
    3,000,000
    
    
    
    Assumption of line of credit in purchase of a business
    
    
    40,000
    
    
    
    Non cash financing activities:Deferred financing costs
    
    $
    300,000
    
    
    $
    618,323Payment of purchase price payable with issuance of common stock
    
    
    187,873
    
    
    
    Exercise of cashless warrants
    
    
    10,000
    
    
    
    43,762Release of shares from escrow
    
    
    100,000
    
    
    
    Payment of note payable with issuance of common stock
    
    
    151,295
    
    
    
    
 See accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc. and Subsidiaries
 Summary of Accounting Policies (Unaudited)
        See accompanying notes to consolidated financial statements.
 7




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Reclassifications
  Recent Accounting Pronouncements
  See accompanying notes to consolidated financial statements.
 8




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Arcadia Resources, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements (Unaudited)
 NOTE 1  BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS AND DESCRIPTION OF
BUSINESS
    DESCRIPTION OF BUSINESS
  NOTE 2  LEASES
  Capital
    
    
    OperatingLeases
    
    
    LeasesYear ending March 31:2007
    
    $
    468,000
    
    
    $
    1,425,0002008
    
    
    416,000
    
    
    
    963,0002009
    
    
    166,000
    
    
    
    215,0002010
    
    
    8,000
    
    
    
    58,0002011
    
    
    
    
    
    
    40,000Total
    
    $
    1,058,000
    
    
    $
    2,701,000Interest
    
    
    96,000Capital Lease Obligation Payable
    
    $
    962,000
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NOTE 3  EMPLOYEE BENEFIT PLANS
  NOTE 4  ACQUISITIONS
   (in thousands)Current Assets
    
    $
    540Property and Equipment
    
    
    80Liabilities
    
    
    (165
    )Goodwill
    
    
    3,545Total Consideration
    
    $
    4,000
  NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS
    10




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June 30, 2006
    
    
    March 31, 2006Services
    
    $
    13,953
    
    
    $
    13,953Products
    
    
    16,735
    
    
    
    13,160Retail
    
    
    1,150
    
    
    
    1,150TOTAL GOODWILL
    
    $
    31,838
    
    
    $
    28,263
   (in thousands)Year ended:2007
    
    $
    1,4242008
    
    
    1,1772009
    
    
    1,1562010
    
    
    1,1562011
    
    
    1,004
 NOTE 6  AFFILIATED AGENCIES PAYABLE
   NOTE 7  LINES OF CREDIT
    11




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NOTE 8  LONG-TERM OBLIGATIONS
  June 30, 2006Note payable to Jana Master Fund, Ltd. dated June 29, 2006, bearing simple interest
at the one year LIBOR rate plus 7.5%, effectively 13.27% at June 30, 2006, with interest
payable quarterly beginning on September 30, 2006 and the principal due in full on
December 26, 2007
    
    $
    15,000,000Purchase price payable to the selling shareholder of Wellscripts, LLC paid on July 3, 2006
    
    
    2,000,000Purchase 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.
    
    
    1,000,000Purchase 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.
    
    
    666,666Purchase price payable to the selling stockholders of Trinity Healthcare of
Winston-Salem, Inc. (Trinity) dated September 23, 2004, bearing simple interest of 8%
per year payable in 2 remaining equal quarterly payments of principal and interest due
July 15, 2006 and October 15, 2006. The note payable is unsecured and interest began
accruing on January 15, 2005.
    
    
    198,218Other purchase price payables (non-interest bearing) to be paid over time to the selling
stockholders or selling entities of various acquired entities, due dates ranging from
July 2006 to March 2007
    
    
    502,606Capital lease obligations due through 2012
    
    
    750,921Other interest-bearing 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 July 2006
to 2011
    
    
    542,879Total long term obligations
    
    
    20,661,290Less: Current portion of long-term obligations
    
    
    (4,373,254
    )LONG-TERM DEBT OBLIGATIONS
    
    $
    16,288,036
  NOTE 9  STOCKHOLDERS EQUITY
      13




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NOTE 10  STOCK-BASED COMPENSATION
  For the QuarterEnded
    
    
    For the Quarter EndedJune 30, 2006
    
    
    June 30, 2005Net income (loss) as reported
    
    $
    (157,933
    )
    
    $
    (1,251,065
    )Add: Stock-based employee compensation expense
included in income, net of related tax effects
    
    
    
    
    
    
    Less: Total stock-based employee compensation
expense determined under the fair value method, net
of related tax effects
    
    
    
    
    
    
    Pro Forma net income (loss)
    
    $
    (157,933
    )
    
    $
    (1,251,065
    )Net income (loss) per share:Basic and diluted income (loss) per share as reported
    
    $
    (0.00
    )
    
    $
    (0.02
    )Pro Forma basic and diluted income (loss) per share
    
    $
    (0.00
    )
    
    $
    (0.02
    )
   14




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OPTIONS
FISCAL 2007 ACTIVITY & ROLLFORWARD
 RANGE OF
    
    
    RANGE OF3/31/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6/30/2006
    
    
    PRICE
    
    
    EXPIRATION
    
    
    VESTINGOUTSTANDING
    
    
    GRANTS
    
    
    FORFEITURES
    
    
    EXERCISES
    
    
    OUTSTANDING
    
    
    PER SHARE
    
    
    DATES
    
    
    DATESIssued to officers
    
    
    8,323,343
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    8,323,343
    
    
    $0.25 to $2.20
    
    
    2012
    
    
    
    2005-2008Issued to other management
    
    
    700,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    700,000
    
    
    $
    1.45
    
    
    
    2011
    
    
    
    2005From prior entity
    
    
    500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    500,000
    
    
    $
    0.25
    
    
    
    2014
    
    
    
    2004Total
    
    
    9,523,343
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,523,343
 As of March 31,
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Cumulative Vested Options
    
    
    500,000
    
    
    
    1,499,040
    
    
    
    1,523,343
    
    
    
    5,523,343
    
    
    
    9,523,343
  2006
    
    
    2005Expected volatility
    
    
    45
    %
    
    
    45
    %Weighted-average volatility
    
    
    45
    %
    
    
    45
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected terms (in years)
    
    
    7
    
    
    
    3 - 7Risk-free rate
    
    
    3.92
    %
    
    
    3.19% - 4.18
    %
 15




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Weighted Average
    
    
    AggregateWeighted Average
    
    
    Remaining
    
    
    IntrinsicOptions
    
    Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at March 31, 2006
    
    
    9,523,343
    
    
    $
    0.37Granted
    
    
    0
    
    
    $
    0.00Exercised
    
    
    (0
    )
    
    $
    0.00Forfeited or expired
    
    
    0
    
    
    $
    0.00Outstanding at June 30, 2006
    
    
    9,523,343
    
    
    $
    0.37
    
    
    
    5.7
    
    
    $
    24,244,232Exercisable at June 30, 2006
    
    
    1,523,343
    
    
    $
    1.03
    
    
    
    5.7
    
    
    $
    2,884,232
   WEIGHTED AVERAGENON-VESTED SHARES
    
    SHARES
    
    
    GRANT-DATE FAIR VALUEOutstanding at March 31, 2006
    
    
    8,000,000
    
    
    $
    0.25Granted
    
    
    0
    
    
    
    0.00Vested
    
    
    (0
    )
    
    
    0.00Forfeited
    
    
    0
    
    
    
    0.00Non-vested at June 30, 2006
    
    
    8,000,000
    
    
    $
    0.25
   NOTE 11  INCOME TAXES
    16




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NOTE 12  COMMITMENTS AND CONTINGENCIES
   NOTE 13  SUBSEQUENT EVENTS
        17




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Quarter Ended
    
    
    Quarter EndedJune 30, 2006
    
    
    June 30, 2005Net Sales:Services
    
    $
    29,918
    
    
    $
    26,750Products Rentals
    
    
    4,061
    
    
    
    2,153Products Sales
    
    
    2,596
    
    
    
    1,376Retail
    
    
    980
    
    
    
    460Total Sales
    
    
    37,555
    
    
    
    30,739Operating Income (Loss):Services
    
    
    1,105
    
    
    
    1,230Products
    
    
    720
    
    
    
    254Retail
    
    
    (387
    )
    
    
    98Unallocated Corporate Overhead
    
    
    (1,152
    )
    
    
    (1,874
    )Total Operating Income (Loss)
    
    
    286
    
    
    
    (292
    )Interest Expense (Income)
    
    
    405
    
    
    
    475Amortization of Debt Discount
    
    
    
    
    
    
    424Net Income (Loss) before Income Tax Expense
    
    
    (119
    )
    
    
    (1,191
    )Income Tax Expense (Benefit)
    
    
    39
    
    
    
    60Net Income (Loss)
    
    $
    (158
    )
    
    $
    (1,251
    )Assets:Services
    
    $
    48,032
    
    
    $
    49,010Products
    
    
    38,387
    
    
    
    13,900Retail
    
    
    2,209
    
    
    
    1,896Unallocated Corporate Assets
    
    
    4,730
    
    
    
    4,276Total Assets
    
    $
    93,358
    
    
    $
    69,082
 18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     Overview
  19




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Results of Operations
 Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005
 Arcadia Resources, Inc.
Consolidated Statements of Income
(In thousands)
 Quarter
    
    
    QuarterEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005Net Sales
    
    $
    37,555
    
    
    $
    30,739Cost of Sales
    
    
    24,373
    
    
    
    20,843Gross Profit
    
    
    13,182
    
    
    
    9,896General and Administrative Expenses
    
    
    12,327
    
    
    
    9,773Depreciation and Amortization
    
    
    569
    
    
    
    415Operating Income (Loss)
    
    
    286
    
    
    
    (292
    )Oher ExpensesInterest Expense, Net
    
    
    405
    
    
    
    475Amortization of Debt Discount
    
    
    
    
    
    
    424Total Other Expenses
    
    
    405
    
    
    
    899Net Income (Loss) Before Income Tax Expense
    
    
    (119
    )
    
    
    (1,191
    )Income Tax Expense
    
    
    39
    
    
    
    60Net Income (Loss)
    
    $
    (158
    )
    
    $
    (1,251
    )Loss per Share  Basic and Diluted
    
    $
    (0.00
    )
    
    $
    (0.02
    )Weighted average number of shares  Basic and Diluted
    
    
    86,837
    
    
    
    82,486
 20




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Results of Operations Liquidity and Capital Resources
 Increase from prior
    
    
    Increase from sameNet sales by quarter:
    
    (in millions)
    
    
    Quarter
    
    
    quarter prior 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
    %
   21




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##### Table of Contents



Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004
 Successor
    
    
    Successor
    
    
    PredecessorPeriod From
    
    
    Period FromQuarter
    
    
    May 10, 2004
    
    
    April 1, 2004Ended
    
    
    To
    
    
    ToConsolidated Statements of Operations (in thousands)
    
    June 30, 2005
    
    
    June 30, 2004
    
    
    May 9, 2004Net Sales
    
    $
    30,739
    
    
    $
    13,621
    
    
    $
    9,487Cost of Sales
    
    
    20,843
    
    
    
    9,699
    
    
    
    6,906Gross Profit
    
    
    9,896
    
    
    
    3,922
    
    
    
    2,581General and Administrative Expenses
    
    
    9,773
    
    
    
    3,819
    
    
    
    2,102Impairment of Goodwill
    
    
    0
    
    
    
    
    
    
    
    16Depreciation and Amortization
    
    
    415
    
    
    
    
    
    
    
    Operating Income (Loss)
    
    
    (292
    )
    
    
    103
    
    
    
    463Other
Expenses Other (Income)Interest Expense (Income), Net
    
    
    475
    
    
    
    244
    
    
    
    Amortization of Debt Discount
    
    
    424
    
    
    
    35
    
    
    
    Total Other Expenses
    
    
    899
    
    
    
    279
    
    
    
    Net Income (Loss) Before Income Tax Expense
    
    
    (1,191
    )
    
    
    (176
    )
    
    
    463Income Tax Expense (Benefit)
    
    
    60
    
    
    
    (60
    )
    
    
    Net Income (Loss)
    
    $
    (1,251
    )
    
    $
    (116
    )
    
    $
    463
 22




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23




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Liquidity and Capital Resources
  Quarter
    
    
    QuarterSUMMARY CONSOLIDATED
    
    Ended
    
    
    EndedSTATEMENTS OF CASH FLOWS (in millions)
    
    June 30, 2006
    
    
    June 30, 2005Net loss
    
    $
    (0.2
    )
    
    $
    (1.3
    )Net cash (used in) operating activities
    
    $
    (2.6
    )
    
    $
    (0.8
    )Net cash (used in) investing activities
    
    $
    (0.3
    )
    
    $
    (3.7
    )Net cash provided by financing activities
    
    $
    4.3
    
    
    $
    5.8Net increase in cash and cash equivalents
    
    $
    1.4
    
    
    $
    1.3Cash and cash equivalents at the end of the period
    
    $
    1.9
    
    
    $
    2.7
      25




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26




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##### Table of Contents



Government-funded
    
    
    27
    %Institutions
    
    
    44
    %Commercial Insurance
    
    
    11
    %Private Pay
    
    
    18
    %
 Financing Transactions
        27




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Contractual Obligations and Commercial Commitments
  Payments due by March 31,Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Operating Leases
    
    $
    2,701
    
    
    $
    1,425
    
    
    $
    963
    
    
    $
    215
    
    
    $
    58
    
    
    $
    40Debt Maturities
    
    
    22,772
    
    
    
    2,406
    
    
    
    19,992
    
    
    
    242
    
    
    
    75
    
    
    
    57Employment Agreements
    
    
    1,257
    
    
    
    867
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    Interest Expense
    
    
    4,219
    
    
    
    2,158
    
    
    
    2,031
    
    
    
    30
    
    
    
    
    
    
    
    Total
    
    $
    30,949
    
    
    $
    6,856
    
    
    $
    23,376
    
    
    $
    487
    
    
    $
    133
    
    
    $
    97
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures.
 Changes in Internal Controls .
 28




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Part II: Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  29




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SIGNATURES
  August 10, 2006
    
    By:
    
    /s/ John E. Elliott, IIJohn E. Elliott, II
Chairman and Chief Executive Officer
(Principal Executive Officer)August 10, 2006
    
    By:
    
    /s/ Rebecca R. IrishRebecca R. Irish
Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
 30




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.
    
    Exhibit Description10.1
    
    Asset Purchase Agreement for Alliance Oxygen & Medical Equipment, Inc. dated July 12, 2006.10.2
    
    Description of Director, Chief Financial Officer and Executive Vice President Compensation Arrangements approved August 4, 2006.31.1
    
    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.