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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 o
    
    TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-32887
 FAMILY HOME HEALTH SERVICES INC.
  NEVADA
    
    02-0718322(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
    
    (I.R.S. EMPLOYER
IDENTIFICATION NO. )
 801 WEST ANN ARBOR TRAIL
SUITE 200
PLYMOUTH, MICHIGAN
48170
 (734) 414-9990
 o þ
 o þ
  Class
    
    Outstanding at June 30, 2006Common stock, $0.01 par value
    
    26,667,254




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    1Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
    
    
    3Notes to Interim Condensed Consolidated Financial Statements
    
    
    4-10Item 2.
Managements Discussion and Analysis or Plan of Operation
    
    
    11-12Item 3. Controls and Procedures
    
    
    13PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 3. Defaults upon Senior Securities
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 5. Other Information
    
    
    14Item 6. Exhibits
    
    
    17Amended and Restated Articles of IncorporationCertificate of Designations of Preference, Rights and Limitations of Series A Preferred StockWarrant to Purchase Common StockCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS (unaudited)
 FAMILY HOME HEALTH SERVICES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (Unaudited)March 31,
    
    

December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    50,308
    
    
    $
    55,109Accounts receivable, net
    
    
    3,156,729
    
    
    
    2,295,718Current portion of advances to affiliates
    
    
    133,599
    
    
    
    115,599Prepaid expenses and other current assets
    
    
    174,816
    
    
    
    135,844Deferred income taxes
    
    
    150,000
    
    
    
    120,000Total current assets
    
    
    3,665,452
    
    
    
    2,722,270Net property and equipment
    
    
    841,711
    
    
    
    782,256Other assets
    
    
    283,782
    
    
    
    298,335Goodwill
    
    
    1,250,000
    
    
    
    1,250,000Total assets
    
    $
    6,040,945
    
    
    $
    5,052,861LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    548,119
    
    
    $
    494,141Line-of-credit borrowings
    
    
    802,399
    
    
    
    485,208Current portion of long-term debt
    
    
    180,326
    
    
    
    275,728Current portion of capital lease obligations
    
    
    91,122
    
    
    
    45,907Accrued compensation
    
    
    684,145
    
    
    
    474,750Accrued expenses
    
    
    317,327
    
    
    
    436,827Deferred revenue and payor advances
    
    
    1,609,558
    
    
    
    1,160,000Total current liabilities
    
    
    4,232,996
    
    
    
    3,372,561Long-term debt, net of current portion
    
    
    118,272
    
    
    
    118,812Capital lease obligations, net of current portion
    
    
    366,596
    
    
    
    168,489Total liabilities
    
    
    4,717,864
    
    
    
    3,659,862Commitment (Note 6)Stockholders equityCommon stock, $.001 par value; authorized 50,000,000 shares,
issued and outstanding 26,617,254 shares
    
    
    26,617
    
    
    
    26,617Additional paid-in capital
    
    
    729,834
    
    
    
    729,834Retained earnings
    
    
    566,630
    
    
    
    636,548Total stockholders equity
    
    
    1,323,081
    
    
    
    1,392,999Total liabilities and stockholders equity
    
    $
    6,040,945
    
    
    $
    5,052,861




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FAMILY HOME HEALTH SERVICES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)Three Months Ended March 31,2006
    
    
    2005RevenueNet Medicare patient service revenue
    
    $
    4,673,104
    
    
    $
    3,839,632Management fee income and other revenues
    
    
    95,587
    
    
    
    129,655Total revenue
    
    
    4,768,691
    
    
    
    3,969,287Costs of revenue
    
    
    1,922,020
    
    
    
    1,315,540Gross profit
    
    
    2,846,671
    
    
    
    2,653,747Selling, general and administrative expenses
    
    
    2,917,213
    
    
    
    1,827,723Operating (loss) income
    
    
    (70,542
    )
    
    
    826,024Interest expense
    
    
    (29,376
    )
    
    
    (12,712
    )(Loss) income before income taxes (benefit)
    
    
    (99,918
    )
    
    
    813,312Income taxes (benefit)
    
    
    (30,000
    )
    
    
    280,000Net (loss) income
    
    $
    (69,918
    )
    
    $
    533,312Basic earnings per share:Weighted average shares outstanding
    
    
    26,617,254
    
    
    
    26,250,000Net (loss) income per share
    
    $
    (0.00
    )
    
    $
    0.02




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FAMILY HOME HEALTH SERVICES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activitiesNet (loss) income
    
    $
    (69,918
    )
    
    $
    533,312Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activitiesDepreciation and amortization
    
    
    41,106
    
    
    
    4,431Deferred income tax benefit
    
    
    (30,000
    )
    
    
    Changes in assets and liabilities that provided (used) cash,Accounts receivable, net
    
    
    (861,011
    )
    
    
    (2,947
    )Prepaid expenses and other current assets
    
    
    91,028
    
    
    
    (9,372
    )Other assets
    
    
    14,553
    
    
    
    (2,055
    )Accounts payable
    
    
    187,323
    
    
    
    (118,149
    )Deferred revenue and payor expenses
    
    
    499,558
    
    
    
    103,539Accrued expenses and other current liabilities
    
    
    39,895
    
    
    
    490,322Net cash (used in) provided by operating activities
    
    
    (87,466
    )
    
    
    999,081Cash flows from investing activitiesPurchases of property and equipment
    
    
    (88,640
    )
    
    
    (73,034
    )Advances to affiliates
    
    
    (18,000
    )
    
    
    (124,739
    )Net cash used in investing activities
    
    
    (106,640
    )
    
    
    (197,773
    )Cash flows from financing activitiesNet line-of-credit borrowings
    
    
    317,191
    
    
    
    Repayments of long-term debt
    
    
    (107,863
    )
    
    
    (11,334
    )Repayments of capital leases
    
    
    (20,023
    )
    
    
    Repayments of net advances from related-party
    
    
    
    
    
    
    (135,000
    )Net cash provided by (used in) financing activities
    
    
    189,305
    
    
    
    (146,334
    )(Decrease) increase in cash and cash equivalents
    
    
    (4,801
    )
    
    
    654,974Cash and cash equivalents, beginning of period
    
    
    55,109
    
    
    
    209,088Cash and cash equivalents, end of period
    
    $
    50,308
    
    
    $
    864,062




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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Note 1  Basis of Presentation
   Note 2  Recapitalization
  4




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Note 3  Use of Estimates
   Note 4  Segment Information
  Note 5  Reclassification
  Note 6  Commitment
  Note 7  Legal Matters
  Note 8  Computations of Earnings per Share
  5




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Note 9  Net Revenues
    Note 10  Recently Issued Accounting Standards
 Share-Based Payment
 Note 11  Subsequent Events
 Business Acquisition
  6




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Amended Loan Agreement
      8




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Equity Funding Agreement
      9




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
    
    Twenty days after filing a Schedule 14C with the Commission, to amend our articles of
incorporation to increase our authorized capitalization to 100,000, 000 shares of common
stock, par value $0.001 per share and 10,000,000 shares of preferred stock, par value $.001
per share.
    
    To file a certificate of designations of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock.
    
    Immediately upon the filing of the amended articles of incorporation and certificate of
designations and in any event within 35 days following the closing date, to issue the share
certificates for the Series A Preferred Stock.
    
    Within 45 days after closing, to file a registration statement covering the resale of
such registrable securities as determined by Barron.
    
    Within 60 days after the closing date, to apply for listing on higher exchange or
trading market.
    
    Within 90 days of closing date, to cause the appointment of the majority of the board of
directors to be qualified independent directors.
    
    Within 90 days of closing date, to cause the appointment of a majority of outside
directors to the audit and compensation committees of the board of directors.
    Capital Stock
    10




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Safe
Harbor and Forward-Looking Statements
   Business Overview
   
    
    Skilled nursing
    
    Physical therapy
    
    Occupational therapy
    
    Speech therapy
    
    Medical social work
    
    Home health aids
  11




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Results of Operations
 Comparison of the three months ended March 31, 2006 to the three months ended March 31, 2005.
 Revenue
 Gross Profit
 Selling, General and Administrative Expenses
 Operating Income
 Other Income (Expense)
 Income Taxes
 Net
Income(Loss)
 Inflation
  Liquidity and Capital Resources
  12




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Recent
Accounting Pronouncements
  Critical Accounting Policies
   Seasonality
  Off-Balance Sheet Arrangements
  
 ITEM 3. CONTROLS AND PROCEDURES
    13




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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  The Amended Articles
   14




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
    
    No dividends
    
    No voting rights, provided that the consent of the holders of the Series A Preferred
Stock is required to (a) alter or change adversely the powers, preferences or rights given
to the Series A Preferred Stock or alter or amend this Certificate of Designations, (b)
authorize or create any class of stock ranking as to dividends or distribution of assets
upon a Liquidation (as defined in Section 5) senior to or otherwise pari passu with the
Series A Preferred Stock, or any preferred stock possessing greater voting rights or the
right to convert at a more favorable price than the Series A Preferred Stock, (c) amend its
certificate or articles of incorporation or other charter documents in breach of any of the
provisions hereof, (d) increase the authorized number of shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to the foregoing.
    
    Upon any voluntary or involuntary liquidation, dissolution or winding-up, the holders of
the Series B Preferred Stock are entitled to a preference of $0.40 per share before any
distributions or payments may be made with respect to the Common Stock or any other class
or series of capital stock which is junior to the Series B Preferred Stock.
    
    Convertible into common stock on a 1-to-1 ratio at any time at the option of the holders
and automatically converted upon 1) a public offering of the Companys securities resulting
in at least $10,000,000 of gross proceeds before deducting underwriting discounts and
commissions and offering expenses, and reflecting a Company valuation of at least
$100,000,000 or 2) A change in control of the Company. Provided further, that the holders
of the Series A Preferred Stock may not convert the Series A Preferred Stock to the extent
that such conversion would result in the holders owning more than 4.9% of the
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outstanding common stock. This limitation may not be amended without the consent of the holders of a
majority of the outstanding common stock.
    
    If, within two years after the closing, the Company issues common stock or options,
warrants or other convertible securities at a price or with a conversion or exercise price
less than the conversion price (initially $.40), with certain specified exceptions, the
number of shares issuable upon conversion of one share of Series B Preferred Stock is
adjusted, using a weighted average formula, to reflect such issuance.
    
    While the Series B Preferred Stock is outstanding, the Company may not pay dividends on
or redeem shares of common stock.
    
    The Company is prohibited from effecting or entering into an agreement to effect any
subsequent financing involving a Variable Rate Transaction or an MFN
Transaction. Variable Rate Transaction means a transaction in which the Company issues or sells
(i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the trading prices of or
quotations for the shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is subject to being
reset at some future date after the initial issuance of such debt or equity security (other than
pursuant to customary antidilution provisions) or upon the occurrence of specified or contingent
events directly or indirectly related to the business of the Company or the market for the Common
Stock. MFN Transaction means a transaction in which the Company issues or sells any securities in
a capital raising transaction or series of related transactions which grants to an investor the
right to receive additional shares based upon future transactions of the Company on terms more
favorable than those granted to such investor in such offering.
 
    
    In the event the Company has income of between $0.098 and $0.059 (40% decline) per share
(defined as operating income on a fully diluted basis as reported for the audited fiscal
year ended December 31st, 2006 from continuing operations before any non-recurring items)
then the
then current conversion value at the time the audited numbers are reported to the SEC shall
be decreased proportionately by 0% if the income is $0.098 per share or greater and by 40%
if the income is $0.059 per share (40% decrease). In the event the Company has income of any
amount below $0.059 per share, then the then current conversion vValue shall be decreased by
40% and not more, and if the Company has no income or negative income, then the then
current conversion value shall be decreased by 70% and not more.
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3.1
    
    Amendment and Restatement of Articles of Incorporation (filed herewith).4.1.
    
    Certificate of Designations of Preference, Rights and Limitations of Series A Convertible
Preferred Stock (filed herewith).10.1
    
    Master Equipment Lease Agreement dated January 16, 2006.*10.2
    
    Warrant to Purchase Common Stock (filed herewith).31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 *
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
with the Commission on February 1, 2006 (File No. 000-32887). 17




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FAMILY HOME HEALTH SERVICES INC.Date: July 10, 2006
    
    /s/ Kevin R. RuarkBy: Kevin R. RuarkIts: Chief Executive Officer and President/s/ James M. MitchellBy: James M. MitchellIts: Chief Financial Officer and Treasurer
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3.1
    
    Amendment and Restatement of Articles of Incorporation (filed herewith).4.1.
    
    Certificate of Designations of Preference, Rights and Limitations of Series A Convertible
Preferred Stock (filed herewith).10.1
    
    Master Equipment Lease Agreement dated January 16, 2006.*10.2
    
    Warrant to Purchase Common Stock (filed herewith).31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith).31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (furnished herewith).32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 *
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
with the Commission on February 1, 2006 (File No. 000-32887). 19