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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
   FORM 10-KSB/A (Mark One) þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004.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.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    06-1688360
(I.R.S. Employer
Identification No.)13650 NW 8thStreet, Suite 109, Sunrise, FL
(Address of principal executive offices)
    
    33325
(Zip Code)
 Issuers telephone number, including area code: (954) 903-5000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. o The issuers total net revenues for the year ended December 31, 2004 were $74,222,000. The aggregate market value of the common stock held by non-affiliates of the registrant as of March
10, 2005 based upon the closing price of the Common Stock on the NASDAQ Small Cap Market for such
date was $19,288,000.
As of the close of business on March 10, 2005, the issuer had 26,174,800 shares of common stock,
$0.0001 par value issued and outstanding. Documents Incorporated By Reference Certain portions of the Companys definitive Proxy Statement to be used in connection with the
annual meeting of stockholders for the year 2005 will be incorporated by reference into Part III of
this Form 10-KSB. Transitional Small Business Disclosure Format (Check one): Yes o; No þ   1




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EXPLANATORY NOTE This Annual Report on Form 10-KSB/A of NationsHealth, Inc., or the (Company), for the fiscal
year ended December 31, 2004, amends in its entirety the Form 10-KSB for the year ended December
31, 2004, we filed on March 25, 2005. We are filing this Form 10-KSB/A for the purpose of
reclassifying the Companys outstanding balance on its line of credit as of December 31, 2004. The Companys revolving line of credit agreement with CapitalSource LLC expires in April 2007.
However, the credit agreement requires the Company to maintain a lock-box arrangement whereby
amounts received into the lock-box are applied to reduce the revolving credit facility outstanding
and contains certain subjective acceleration clauses in the event of a material adverse event. In
light of these conditions, the Company has reclassified its borrowings under the revolving credit
agreement as a current liability in accordance with the provisions set forth in Emerging Issues
Task Force (EITF) Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement. Accordingly, the accompanying balance sheet as of December 31, 2004, Notes 3 and
6 thereto and the Contractual Obligations table, in Item 6, have been restated and the amount owed
under the line of credit previously reported as long-term debt has been reclassified to current
liabilities. 2




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NATIONSHEALTH, INC.
 FORM 10-KSB/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 INDEX PagePART IItem 1
    
    Description of Business
    
    
    1Item 2
    
    Description of Property
    
    
    7Item 3
    
    Legal Proceedings
    
    
    7Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    7PART IIItem 5
    
    Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
    
    
    8Item 6
    
    Managements Discussion and Analysis or Plan of Operations
    
    
    9Item 7
    
    Financial Statements
    
    
    23Item 8
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    48Item 8A
    
    Controls and Procedures
    
    
    48PART IIIItem 9
    
    Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
    
    
    49Item 10
    
    Executive Compensation
    
    
    49Item 11
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    49Item 12
    
    Certain Relationships and Related Transactions
    
    
    50Item 13
    
    Exhibits
    
    
    50Item 14
    
    Principal Accountant Fees and Services
    
    
    52SIGNATURES
    
    
    
    
    53Consent of Rachlin Cohen & Holtz LLPSection 302 Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 CEO & CFO CertificationImportant Factors
    3




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##### Table of Contents



PART I 
 Item 1. Description of Business Business We are a growing provider of diabetes, respiratory and ostomy supplies reimbursable by
Medicare Part B, as well as a provider of prescription discount services. We focus on providing
services and supplies to the approximately 40 million Medicare beneficiaries in the United States.
Our proprietary and scalable information technology platform supports the large scale enrollment
and servicing of individual cardholders and patients, discount prescription card fulfillment,
prescription discount administration, and patient management. Medical Product Sales. We operate a licensed pharmacy in the State of Florida, with the ability to dispense
physician-prescribed medications and distribute medical equipment and supplies nationally. Revenues
from medical product sales in the areas of diabetes, respiratory ailments and ostomy currently
comprise approximately 96% of our revenues. The federal Medicare program provides reimbursement to its beneficiaries for a number of
products under Medicares Part B coverage. Products covered under Part B include, among other
items, respiratory medications, supplies used to treat diabetes, respiratory ailments and ostomy,
as well as certain specialty pharmaceuticals. Medicare pays us for 80% of the Medicare allowable
cost for these Part B products after the beneficiary has satisfied his or her annual deductible
amount, and we bill the remaining balance to either third party payors such as a patients
supplemental insurance carrier or directly to the patient. Because we are a Medicare participating
supplier, we may accept assignments of Medicare benefits, ship supplies and medications to
patients, bill and receive payments from Medicare and certain private insurers on behalf of
patients (in addition to any patient co-payment and/or deductible). Our proprietary and scalable technology permits us to service our patients on a
large-scale, but cost-effective basis. Our core competencies and expertise developed by servicing
Medicare eligible diabetic, respiratory and ostomy patients include:  
    Direct-to-consumer marketing
    Enrollment and service of individual patients
    Fulfillment, reorder and electronic medical records management
    Inventory management and distribution systems
    Contracting with manufacturers
    Regulatory and Medicare compliance, audit and claims settlement
    Medicare and private insurer billing and accounts receivable management 1




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We continue to develop our scalable infrastructure and experience in an effort to offer
patients additional products in an efficient manner, thereby diversifying our sources of revenue
and enhancing our profitability. We believe our high level of patient service and our proprietary
scalable information technology platform provides us with a competitive advantage. Prescription Discount Drug Card Services. In addition to providing home delivery of diabetes, respiratory and ostomy supplies, we
provide discount prescription drug card services under two programs. Our original program is open
to all individuals and our Medicare-approved program is open only to Medicare patients. We receive
a fee, net of administrative and processing costs, each time a cardholder saves money using either
of these cards. As of December 31, 2004, our discount prescription drug cards were accepted at
over 50,000 pharmacies nationwide. NationsHealth Discount Prescription Drug Card. Mass marketing of the free NationsHealth Discount Prescription Card Program was launched in
June of 2002. We have relied primarily upon television advertising to generate enrollees and have
enrolled over 2 million individual cardholders through December 31, 2004. With our card,
cardholders can save, on average, approximately 25% on prescriptions at their local pharmacies. We
provide individual enrollment of new cardholders, discount prescription card fulfillment,
prescription discount administration, and patient management services to users of the NationsHealth
Discount Prescription Card. We outsource the prescription discount administration and certain
patient management functions to a third party. Medicare-approved Prescription Drug Card. In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
or the MMA, became law. The MMA provided for the establishment of a Medicare prescription drug
benefit beginning in January 2006. As an interim step before the implementation of the Medicare
prescription drug benefit in 2006, the MMA established a program for the approval of private
discount prescription card plans in which Medicare beneficiaries may enroll to obtain outpatient
prescription drugs at discounted prices. This benefit is voluntary and available to certain
Medicare beneficiaries who do not have an existing outpatient prescription drug benefit. This
program is scheduled to last through May 2006. The Medicare enrollment period for all
Medicare-approved prescription drug discount cards began in May 2004, and benefits to patients
began in June 2004. Cardholders use the Medicare-approved cards at their local retail pharmacies or
by mail order to obtain discounts on their prescription medical needs. During 2004, as provided for under the MMA, we began offering Medicare-eligible patients the
opportunity to participate in a Medicare-approved prescription drug card program, called
PrecisionDiscounts, through our relationship with WellPoint Pharmacy Management or WellPoint, a
wholly owned subsidiary of WellPoint Health Networks, Inc. In connection with WellPoints receipt
of approval from Medicare of its discount prescription card, we entered into a service agreement
with WellPoint pursuant to which we act as WellPoints exclusive subcontractor for a number of the
functions under the Medicare-approved card program. Our responsibilities include, among other
things:  
    Determining Medicare eligibility of members
    Handling enrollment and disenrollment of members
    Handling fulfillment of enrollment cards
    Operating a call center to handle all member service functions
    Handling all direct-to-consumer television advertising for the program 2




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WellPoints responsibilities include, among other things:  
    Establishing a network of pharmacy providers for the program
    Adjudicating claims of members with the pharmacy providers
    Developing and managing the programs formulary
    Negotiating rebates, discounts and other price concessions from drug manufacturers Under the contract, both parties earn service fees and the right to payments of other amounts,
which fees and payments vary depending upon the services and products provided. Absent an earlier
termination of the contract for breach or elimination of the Medicare-approved prescription drug
discount card program, our contract with WellPoint ends in May 2006. There are currently over 200,000 individuals enrolled in the PrecisionDiscounts program.
Though the revenue from the PrecisionDiscounts program has increased somewhat since June 2004, it
still represented less than 1% of our total revenues for the fourth quarter ended December 31,
2004. Retail Initiative. Medicare beneficiaries often purchase certain of the products we offer at retail stores, some
of which do not accept assignment of benefit forms from their patients. If a retailer does not
accept assignment of benefit forms, the patient must pay up-front for the supplies and then seek
reimbursement on their own from Medicare, as well as from other third party payors, if applicable,
for the cost of covered products. Recognizing an opportunity to expand our patient base and improve
accessibility of diabetes supplies, we launched our retail initiative. Under our retail initiative,
Medicare beneficiaries have the convenience of purchasing our diabetes supplies at a retail
pharmacy location, just as they would their medications. They do not, however, incur any up-front
expense for their diabetes supplies, and we seek reimbursement from Medicare and other third party
payors, subject to any patient co-payment and/or deductible. We have combined our expertise in
Medicare billing and regulatory compliance with the accessibility of nationwide pharmacies to
create an additional convenient, consumer-friendly mechanism for Medicare beneficiaries to receive
their diabetes supplies at retail locations. We entered the first distribution agreement under our
retail initiative with Kmart in April 2004, with a nationwide rollout at over 1,000 Kmart
pharmacies in May 2004. As a result of this retail initiative we have added approximately 6,000
patients through December 31, 2004. Patient Management. Our proprietary technology and information systems have been designed to facilitate the
enrollment of large numbers of patients on an individual basis. This enables us to maximize the
benefits and services we deliver to our extensive patient base. Patient care representatives are
available through toll-free phone numbers to assist patients with questions they may have and are
trained regarding the use of all the products we sell. Our representatives are specifically trained
to direct patients to sources where they can find more information concerning their medical
conditions and to direct patients to their physicians when appropriate. We also offer a proactive compliance program to assist patients with their treatment regimens.
We contact our durable medical equipment, or DME, patients prior to the estimated date that their
present diabetes, respiratory or ostomy supplies will be exhausted, typically monthly or quarterly.
We take this opportunity to extend the services we provide by making inquiries designed to monitor
the patients testing, medication or medical supply use patterns against the physician prescribed
regimen. Depending upon the results of the comparison, the patient may be advised of the benefits
of adjusting his or her testing, medication or medical supply use to be in accordance with the
physicians orders. If the present use pattern exceeds the physicians orders, so that the patient
is in danger of running out of supplies or medication, we may recommend that the patient notify
their physician of the increased use to determine 3




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whether an increased quantity of supplies or medications can be made available to the patient.
Alternatively, with appropriate authorization, we may contact the patients physician on their
behalf. Government Regulation Medicare is a federally funded program that provides health insurance coverage for qualified
persons age 65 or older and for some disabled persons. The majority of the products that we provide
are reimbursed by Medicare. As a Medicare supplier of DME, we must comply with applicable supplier
standards and stringent billing guidelines in order to maintain the right to receive Medicare
reimbursement. Accordingly, we are subject to extensive regulation. Current Medicare reimbursement
guidelines stipulate, among other things, that refills of Part B medical products must be requested
by existing patients before shipment and that all doctors orders for supplies must be re-collected
at least every twelve months. Numerous federal, state and local laws relating to controlled drug substances, safe working
conditions, environmental protection, disposal of hazardous or potentially hazardous substances and
various other matters apply to portions of our operations. Labeling and promotional activities
relating to medical devices and drugs are, in certain instances, subject to regulation by the
Federal Trade Commission, or the FTC. Drug products and drug recalls also are subject to extensive
regulation by the Food and Drug Administration, or the FDA. Although the cost of compliance with
these regulations has not been material to our existing operations to date, to the extent we engage
in new activities or expand current activities, the cost of compliance with applicable regulations
and licensing requirements could become significant. Our compliance with Medicare and other regulations may be reviewed periodically by federal or
state agencies, including the United States Department of Health and Human Services, or DHHS, the
Department of Justice, the FDA and the FTC. If any investigation or administrative or other legal proceeding is initiated against us
alleging any failure to comply with the law, including regulations governing Medicare participation
or reimbursement or financial reporting or other healthcare fraud or securities law violation, we
could be subject to delays in, or loss of reimbursement, substantial fines or penalties, and other
sanctions that could have a material adverse effect on our financial position, results of
operations and cash flows. We frequently receive screening audits by Medicare in the ordinary
course of business and we believe that we do not have any instances of material noncompliance with
applicable laws and regulations. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, is comprised of
several components which apply to us as a covered entity under that law. Material regulations
that have been issued to implement HIPAA include the following:  
    Standards for Privacy of Individually Identifiable Health Information, or the
Privacy Rule  compliance date: April 14, 2003
    Transactions and Code Sets Standards  compliance date: October 16, 2003
    Electronic Security of Individually Identifiable Health Information, or the
Security Standards  compliance date: April 20, 2005 The Privacy Rule provides patients with greater information and control regarding requests
for, receipt, use and disclosure of patients protected health information. The Privacy Rule
requires the development and implementation of detailed policies, procedures, contracts and forms
for this purpose. The Privacy Rule also requires entities subject to the HIPAA regulations to
contractually obligate certain of their contractors, who may receive protected health information
during the course of rendering services on behalf of that entity, to abide by certain privacy
requirements. Our privacy policies and practices must also comply with any state law privacy
protections that are more stringent than the privacy afforded by 4




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the Privacy Rule. We have developed and implemented the required policies, procedures and
forms necessary to comply in all material respects with the Privacy Rule and related applicable
laws. The Transactions and Code Sets Standards standardize how health claims and eligibility
information is collected, recorded and processed. The Transaction and Code Sets Standards also
mandate that standardized codes be used for electronic billing purposes by all payors in the United
States, including both government and private health plans. The Security Standards require covered entities to implement reasonable technical, physical
and administrative security measures to safeguard protected health information maintained, used and
disclosed in electronic form. To date, we have performed a preliminary gap analysis and we believe
that we have systems in place to comply with some of the applicable HIPAA Security Standards. We
have developed an implementation plan regarding our compliance with the Security Standards and are
presently developing additional policies and procedures and monitoring mechanisms necessary to
achieve full compliance by the April 2005 implementation date. At this time, we expect to maintain our compliance with the regulations already in effect and
anticipate that we will be able to comply with the Security Standards in all material respects by
their mandatory compliance date. We could face potential criminal or civil sanctions, if we do not comply with existing or new
laws and regulations related to patient health information. New health information standards,
whether implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner
in which we handle health care related data and communicate with payors, and the cost of complying
with such standards could be significant. Background We were formed through the merger of NationsHealth Holdings, LLC, a privately-held company
based in Sunrise, Florida and Millstream Acquisition Corporation. Millstream was formed on April
11, 2003 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or
other similar business combination. On August 28, 2003, Millstreams initial public offering was
consummated. Of the approximately $21,418,000 in net proceeds from the offering, $20,685,000 was
placed in trust to be used for a potential business combination and the remaining proceeds were
available for business, legal and accounting due diligence on prospective acquisitions and
continuing general and administrative expenses. On March 9, 2004, Millstream entered into a definitive merger agreement with NationsHealth
Holdings. On August 30, 2004, the shareholders of Millstream voted to approve the merger agreement.
Upon consummation of the merger on August 31, 2004, NationsHealth Holdings merged with and into
Millstream and Millstream changed its name to NationsHealth, Inc. The membership interests in
NationsHealth Holdings were converted into a total of 21,375,000 shares of Millstreams common
stock, or approximately 81.7%, of the subsequently outstanding common stock of the combined
company. Immediately prior to the merger, the amount held in trust by Millstream for purposes of
completing a business combination was $20,882,000. After payments totaling $3,186,000 for
professional fees and other costs related to the merger and $3,000,000 to NationsHealth Holdings
members, the net proceeds amounted to $14,696,000. From these net proceeds, we used $2,873,000 to
repay debt and placed $2,000,000 into an escrow account to satisfy any damages under an
indemnification agreement to existing stockholders of Millstream prior to the consummation of the
merger, approximately $9,823,000 remained available to the combined company for working capital
purposes. 5




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Merger Accounting Treatment The merger was accounted for under the purchase method of accounting as a reverse acquisition.
Under this method of accounting, NationsHealth Holdings was treated as the acquiring company for
financial reporting purposes. In accordance with guidance applicable to these circumstances, this
merger was considered to be a capital transaction in substance. Accordingly, for accounting
purposes, the merger was treated as the equivalent of NationsHealth Holdings issuing stock for the
net monetary assets of Millstream, accompanied by a recapitalization. The net monetary assets of
Millstream were stated at their fair value, essentially equivalent to historical costs, with no
goodwill or other intangible assets recorded. The financial position, operations and cash flows
reflected in this document as of the dates and for the periods prior to the merger are those of
NationsHealth Holdings. The accumulated deficit of NationsHealth Holdings was carried forward to
the combined company. Customers The following table contains the approximate number of patients for whom we provide diabetes,
respiratory and ostomy supplies, as well as the approximate number of cardholders in our
prescription discount programs: As of December 31,2004
    
    
    2003
    
    
    2002Patients of Supplies Services:(1)Diabetes Supplies Patients
    
    
    86,000
    
    
    
    26,000
    
    
    
    2,000Respiratory Supplies Patients
    
    
    26,000
    
    
    
    10,000
    
    
    
    1,000Ostomy Supplies Patients
    
    
    1,000
    
    
    
    
    
    
    
    Total Supplies Patients
    
    
    113,000
    
    
    
    36,000
    
    
    
    3,000Prescription Discount Cardholders:NationsHealth Program
    
    
    2,000,000
    
    
    
    900,000
    
    
    
    100,000PrecisionDiscounts Program
    
    
    200,000
    
    
    
    
    
    
    
    Total Number of Cardholders
    
    
    2,200,000
    
    
    
    900,000
    
    
    
    100,000
   (1)
    
    Includes all patients who have requested and been shipped products and have not canceled
service. Employees As of December 31, 2004, we had approximately 367 total employees, including temporary
personnel, of which 360 were full-time employees. We expect to continue adding personnel as we
expand our operations. Our workforce is non-unionized and our relationship with our employees is
generally good. Website Our website can be accessed atwww.nationshealth.com. Our Code of Business Conduct and Ethics
and a link to our filings with the Securities and Exchange Commission are located in the Investor
Relations section of our website. 6




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Item 2. Description of Property Our corporate offices are located in Sunrise, Florida, where we lease approximately 38,000
square feet of office space. This lease is scheduled to expire in August, 2010. Our distribution
center, which is approximately 24,000 square feet, in nearby Weston, Florida, is the subject of a
lease which expires in May of 2006. 
 Item 3. Legal Proceedings We are not a party to any material legal proceedings. 
 Item 4. Submission of Matters to a Vote of Security Holders During the quarter ended December 31, 2004, no matters were submitted to a vote of security
holders through the solicitation of proxies or otherwise. 7




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PART II 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Market Information Since September 1, 2004, our common stock, warrants and units have been trading on the NASDAQ
SmallCap Market under the symbols NHRX, NHRXW and NHRXU, respectively. From our initial
public offering in August 2003 to August 31, 2004, our common stock, warrants and units were traded
on the Over-the-Counter Bulletin Board under the symbols MSTM, MSTMW and MSTMU, respectively.
The table below sets forth, for the calendar quarters indicated, the high and low sales prices of
our common stock, warrants and units as reported by NASDAQ from September 1, 2004 through December
31, 2004, and the high and low bid prices by the Over-the-Counter Bulletin Board from August 2003
to August 31, 2004. The over-the-counter market quotations reported below reflect inter-dealer
prices, without markup, markdown or commissions and may not represent actual transactions. Common Stock
    
    
    Warrants
    
    
    UnitsHigh
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low2003Third quarter
    
    $
    5.00
    
    
    $
    4.75
    
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    6.25
    
    
    $
    6.00Fourth quarter
    
    $
    5.00
    
    
    $
    4.84
    
    
    $
    0.71
    
    
    $
    0.60
    
    
    $
    6.60
    
    
    $
    6.012004First quarter
    
    $
    5.90
    
    
    $
    4.89
    
    
    $
    1.55
    
    
    $
    0.70
    
    
    $
    8.95
    
    
    $
    6.17Second quarter
    
    $
    8.20
    
    
    $
    5.50
    
    
    $
    3.19
    
    
    $
    1.34
    
    
    $
    14.80
    
    
    $
    8.00Third quarter
    
    $
    7.55
    
    
    $
    6.00
    
    
    $
    2.68
    
    
    $
    1.57
    
    
    $
    12.65
    
    
    $
    9.80Fourth quarter
    
    $
    7.36
    
    
    $
    5.89
    
    
    $
    2.39
    
    
    $
    1.45
    
    
    $
    11.80
    
    
    $
    9.17
 Holders of Record On March 10, 2005, the last reported sale prices of our common stock, warrants and units on
the NASDAQ SmallCap Market was $5.44, $1.57 and $8.40 per share, respectively. Also as of March
10, 2005, we had approximately 10 shareholders of record. Dividends We have never paid or declared any cash dividends on our common stock or other securities and
do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain
all future earnings, if any, for use in the operation of our business. Additionally, under the
terms of our line of credit agreement, which expires on April 30, 2007, we are not permitted to pay
dividends. 8




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Merger and Use of Funds Upon consummation of the merger of NationsHealth Holdings and Millstream on August 31, 2004,
the membership interests in NationsHealth Holdings were converted into a total of 21,375,000 shares
of Millstreams common stock. Immediately prior to the merger, the amount held in trust by
Millstream for purposes of completing a business combination was $20,882,000. After payments
totaling $3,186,000 for professional fees and other costs related to the merger and $3,000,000 to
NationsHealth Holdings members, the net proceeds amounted to $14,696,000. From these net proceeds,
we used $2,873,000 to repay debt and placed $2,000,000 into an escrow account to satisfy any
damages under an indemnification agreement to existing stockholders of Millstream prior to the
consummation of the merger, approximately $9,823,000 remained available to the combined company for
working capital purposes. Stock Option Plan On August 30, 2004, the shareholders of the Company voted to adopt the NationsHealth, Inc.
2004 Stock Option Plan, or the Plan. The purpose of the Plan is to enable the Company to offer
directors, officers and other key employees stock options in the Company, thereby attracting,
retaining, and rewarding these participants and strengthening the mutuality of interests between
these participants and the Companys stockholders. A total of 1,900,000 shares of the Companys
common stock have been reserved for issuance under the Plan. On October 22, 2004, stock options
were granted to employees and directors to purchase 1,208,125 shares at an exercise price of $6.87
per share, the closing price for that day. Bonus Plan and Trust In December 2004, certain of our principal shareholders transferred significant portions of
their shares to fund a stock bonus plan for the benefit of certain of our key employees and
consultants. These shareholders transferred 2,006,893 shares of stock, representing approximately
7.7% of our outstanding shares and 9.8% of their personal holdings, to a trust to be distributed to
these employees and consultants over the next four years. The transfer of shares, which had no effect on the total number of shares outstanding,
resulted in a non-cash expense of approximately $13,707,000 in the fourth quarter of 2004. This
expense, equal to the fair value of the shares at the date of transfer, was accompanied by an equal
amount recorded to additional paid-in capital, resulting in no change to total stockholders equity
on our balance sheet from the transaction. 
 Item 6. Managements Discussion and Analysis or Plan of Operation Overview We are a growing provider of diabetes, respiratory and ostomy supplies reimbursable by
Medicare Part B, as well as a provider of prescription discount services. We focus on providing
services and supplies to the approximately 40 million Medicare beneficiaries in the United States.
Our proprietary and scalable information technology platform supports the large scale enrollment
and servicing of individual cardholders and patients, discount prescription card fulfillment,
prescription discount administration, and patient management. 9




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Our operational and information systems have been designed to facilitate the enrollment of
patients on an individual basis. This enables us to maximize the benefits and services we deliver
to our extensive patient base. Patient care representatives are available through toll-free phone
numbers to assist patients with questions they may have and are trained regarding the use of all
the products we sell. Our representatives are specifically trained to direct patients to sources
where they can find more information concerning their medical conditions and to direct patients to
their physicians when appropriate. We believe our high level of patient service and our proprietary
scalable information technology platform, which supports the individual enrollment of new
cardholders and patients, provides us with a competitive advantage. Sales of diabetes, respiratory and ostomy products represented approximately 96% of our
revenues through December 31, 2004. We have grown this business, in both the amount of revenues and
the number of patients, each quarter since June 2002, primarily driven by our television
advertising program. The following table contains the approximate number of patients for whom we
provide diabetes, respiratory and ostomy supplies, as well as the approximate number of cardholders
in our prescription discount programs: As of December 31,2004
    
    
    2003
    
    
    2002Patients of Supplies Services:(1)Diabetes Supplies Patients
    
    
    86,000
    
    
    
    26,000
    
    
    
    2,000Respiratory Supplies Patients
    
    
    26,000
    
    
    
    10,000
    
    
    
    1,000Ostomy Supplies Patients
    
    
    1,000
    
    
    
    
    
    
    
    Total Supplies Patients
    
    
    113,000
    
    
    
    36,000
    
    
    
    3,000Prescription Discount Cardholders:NationsHealth Program
    
    
    2,000,000
    
    
    
    900,000
    
    
    
    100,000PrecisionDiscounts Program
    
    
    200,000
    
    
    
    
    
    
    
    Total Number of Cardholders
    
    
    2,200,000
    
    
    
    900,000
    
    
    
    100,000
   (1)
    
    Includes all patients who have requested and been shipped products and have not canceled
service. Continued future growth in the number of patients over the next six to twelve months will
depend, to a large extent, on the amount we spend on television advertising. However, even though
we may continue to increase the number of patients, we anticipate our revenues will be lower
beginning in the first quarter of 2005, compared to the fourth quarter of 2004, due to the
significantly reduced Medicare reimbursement rates for respiratory supplies, which we expect to
reduce our revenue per respiratory supplies shipment by approximately 40% to 50%. Aside from
television advertising, other opportunities to expand our patient base include our relationship
with WellPoint Pharmacy Management and our retail initiative, both of which began in 2004 and are
described below. Additionally, we plan to expand the products we offer our patients to include
specialty pharmaceuticals. 10




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##### Table of Contents



Medical Product Supplies Diabetes Supplies.It is estimated that over 18% of Americans, or more than 6 million
people, age 65 or older have diabetes. We offer all major brands of blood glucose testing strips,
lancing devices, control solutions, impotency devices and blood glucose meters. If qualified, our
patients can receive diabetes supplies delivered to their homes nationwide. We have approximately
86,000 patients, including approximately 6,000 retail patients, who use our diabetes supply
service. These patients typically order shipments of supplies quarterly. During 2004, we increased
by approximately 60,000, the number of patients receiving our diabetes supplies. For the year ended
December 31, 2004, approximately 45% of our revenues were attributable to the sale of diabetes
supplies. Respiratory Supplies.It is estimated that over 6% of Americans age 65 or older suffer from
chronic obstructive pulmonary disease. We offer a broad assortment of respiratory medications and
supplies that are reimbursed by Medicare, including nebulizers and required drugs such as
albuterol, ipratropium and budesonide. We have approximately 26,000 patients that subscribe to our
respiratory supply service. These patients typically order shipments of supplies monthly. During
2004, we increased by approximately 16,000, the number of patients receiving our respiratory
supplies. For the year ended December 31, 2004, approximately 49% of our revenues were attributable
to the sale of respiratory supplies for which Medicare reimbursement rates will be substantially
reduced effective January 1, 2005. Ostomy Supplies.Though the ostomy market is small relative to the diabetes and respiratory
markets, the operational and compliance systems required to service this population are similar to
those used to service diabetes and respiratory patients. Ostomy is an operation to create an
artificial passage for bodily elimination. These patients typically order shipments of supplies
quarterly. We began offering ostomy supplies in November 2003. We now have approximately 1,000
ostomy patients. For the year ended December 31, 2004, approximately 1% of our revenues were
attributable to the sale of ostomy supplies. Prescription Discounts WellPoint Relationship.In addition to television advertising, we intend to add to our
patient base through our relationship with WellPoint, outside of the Medicare-approved prescription
drug discount card program. WellPoint has agreed to make commercially reasonable efforts to present
NationsHealth to its clients and ultimately, their enrollees. Our arrangement with WellPoint also
permits us to market and sell pharmaceutical and other medical products and services, as well as a
non-approved prescription drug discount card, to WellPoints clients enrollees who are not
eligible for Medicare. Our initial efforts included a direct-mail marketing campaign to offer
diabetes supplies as a preferred provider to one of WellPoints clients. Retail Initiative.Our retail initiative is another avenue for us to expand the number of
patients we service by combining our expertise in Medicare billing and regulatory compliance with
the accessibility of nationwide pharmacies to create an additional convenient, consumer-friendly
mechanism for Medicare beneficiaries to receive their diabetes supplies at retail locations. We
entered into our first distribution agreement under this retail initiative with Kmart. Pursuant to
the agreement, we supply diabetes products at specified store locations nationwide. Subject to our
satisfying certain volume requirements, the term of the agreement is for three years. We began
recognizing revenue from this initiative during the fourth quarter of 2004. As of December 31,
2004, we had approximately 6,000 retail patients and we are examining opportunities to find new
outlets and expand the types of products offered under our retail initiative. Specialty Pharmaceuticals.Seeking opportunities to provide additional products and
services to our existing patient base, we intend to pursue opportunities to provide management and
distribution for specialty therapies used to treat certain medical conditions. Following
established disease treatment 11




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##### Table of Contents



guidelines and protocols, we would provide oral medications, self-administered injectables,
physician administered injectables, and infusion products used to treat certain chronic conditions.
We may choose to service one or more of the following medical conditions and treatments (some of
which may not be covered under Medicare Part B): 
    
    Oncology
    
    
    
     Rheumatoid Arthritis
    
    Anti-emetics
    
    
    
     Transplant
    
    HIV/AIDS
    
    
    
     Crohns/Irritable Bowel Disease
    
    Multiple Sclerosis
    
    
    
     Immune Deficiency
    
    Hemophilia
    
    
    
     Infertility
    
    Hepatitis
 Medications could be delivered directly to the patient, or to the office of the administering
physician, as required. The provision of specialty pharmaceuticals would give us the opportunity to
help patients receive critical medications, to help Medicare and private insurers control the cost
of some of the most expensive therapies available today and to participate in a rapidly growing
market. Results of Operations The following table contains certain revenue and expense amounts expressed in thousands of dollars
and as a percentage of total net revenues for the years ended December 31: 2004
    
    
    2003
    
    
    2002*$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Net sales
    
    $
    70,982
    
    
    
    95.6
    %
    
    $
    25,072
    
    
    
    97.5
    %
    
    $
    2,531
    
    
    
    99.6
    %Prescription card fees, net
    
    
    3,240
    
    
    
    4.4
    
    
    
    654
    
    
    
    2.5
    
    
    
    10
    
    
    
    0.4Total net revenue
    
    
    74,222
    
    
    
    100.0
    
    
    
    25,726
    
    
    
    100.0
    
    
    
    2,541
    
    
    
    100.0Cost of Sales
    
    
    22,718
    
    
    
    30.6
    
    
    
    9,899
    
    
    
    38.5
    
    
    
    1,644
    
    
    
    64.7Gross Profit
    
    
    51,504
    
    
    
    69.4
    
    
    
    15,827
    
    
    
    61.5
    
    
    
    897
    
    
    
    35.3Operating Expenses:Patient acquisition and
related costs
    
    
    23,151
    
    
    
    31.2
    
    
    
    6,779
    
    
    
    26.4
    
    
    
    1,131
    
    
    
    44.5Patient service and fulfillment
    
    
    13,672
    
    
    
    18.4
    
    
    
    4,325
    
    
    
    16.8
    
    
    
    246
    
    
    
    9.7General and administrative
    
    
    13,116
    
    
    
    17.7
    
    
    
    4,435
    
    
    
    17.2
    
    
    
    1,135
    
    
    
    44.7Employee stock bonus plan
    
    
    14,315
    
    
    
    19.3
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Provision for doubtful accounts
    
    
    12,228
    
    
    
    16.5
    
    
    
    3,794
    
    
    
    14.7
    
    
    
    181
    
    
    
    7.1Depreciation and amortization
    
    
    506
    
    
    
    0.7
    
    
    
    121
    
    
    
    0.5
    
    
    
    14
    
    
    
    0.676,988
    
    
    
    103.7
    
    
    
    19,454
    
    
    
    75.6
    
    
    
    2,707
    
    
    
    106.5Loss from Operations
    
    
    (25,484
    )
    
    
    (34.3
    )
    
    
    (3,627
    )
    
    
    (14.1
    )
    
    
    (1,810
    )
    
    
    (71.2
    )Other expense, net of other
income
    
    
    (940
    )
    
    
    (1.3
    )
    
    
    (199
    )
    
    
    (0.8
    )
    
    
    (45
    )
    
    
    (1.8
    )Net loss
    
    $
    (26,424
    )
    
    
    (35.6
    %)
    
    $
    (3,826
    )
    
    
    (14.9
    %)
    
    $
    (1,855
    )
    
    
    (73.0
    %)
   *
    
    Since NationsHealth did not commence significant operations until June of 2002, the
information set forth in the table above and in the discussion below reflects approximately seven
months of operations in 2002. 12




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##### Table of Contents



Revenues.Total net revenues increased in each of the last two years. Total net revenues
increased approximately $48.5 million, or 189%, to $74.2 million in the year 2004, compared to
approximately $25.7 million in 2003. For 2003, total net revenues increased approximately $23.2
million, or 912%, compared to approximately $2.5 million in 2002. The increases in both years were
primarily the consequence of increased patient acquisition efforts, which resulted in higher sales
of diabetic and respiratory supplies and, to a lesser extent, higher prescription card fees. The
growth in revenues corresponds to the increase in our medical supplies patient base, which grew
from just a few thousand patients as of December 31, 2002, to over 36,000 by the end of 2003 and to
over 113,000 by December 31, 2004. We expect our revenues to be negatively impacted in future
periods due to the significant decreases in Medicare reimbursement rates for respiratory supplies
effective January 1, 2005. Cost of Sales.Cost of sales increased approximately $12.8 million, or 129%, to $22.7 million
in 2004, compared to approximately $9.9 million in 2003. For 2003 cost of sales increased
approximately $8.3 million, or 502%, compared to approximately $1.6 million in 2002. Cost of sales
increased in each of the last two years primarily in conjunction with the growth in sales of
medical supplies to our growing customer base. As a percentage of total net revenues, overall gross margins were 69.4% in 2004, compared to
61.5% in 2003 and 35.3% in 2002. This increase in gross margins in each of the last two years was
primarily the result of obtaining volume-based discounts on purchases of medical products from
suppliers and, to a lesser extent, growing prescription card fees, which have no cost of sales.
Prescription card fees represented 4.4%, 2.5% and 0.4% of total net revenues for 2004, 2003 and
2002, respectively. We expect our gross margins to be lower in future periods due to the
significant decreases in Medicare reimbursement rates for respiratory supplies effective January 1,
2005. Patient Acquisition and Related Costs.Patient acquisition and related costs increased
approximately $16.4 million, or 242%, to $23.2 million in 2004, compared to approximately $6.8
million in 2003. For 2003, patient acquisition and related costs increased approximately $5.7
million, or 499%, compared to approximately $1.1 million in 2002. To a significant degree, patient
acquisition and related costs, which include advertising, marketing and creative costs, call center
services and prescription card fulfillment services, are under the control of our management. The
increase in patient acquisition and related costs over the past two years is reflective of our
deliberate efforts to expand our patient and cardholder bases. Advertising, marketing and creative
costs were approximately $9.2 million, $2.7 million and $0.3 million for 2004, 2003 and 2002,
respectively. Call center services were approximately $5.7 million, $1.8 million and $0.3 million
for 2004, 2003 and 2002, respectively. Prescription card fulfillment services were approximately
$3.6 million, $1.1 million and $0.2 million for 2004, 2003 and 2002, respectively. As a percentage
of total net revenues, patient acquisition and related costs were 31.2% in 2004, as compared with
26.4% and 44.5% in 2003 and 2002, respectively. The decrease in patient acquisition and related
costs as a percentage of total net revenues in 2004 and 2003, as compared to 2002, was primarily
attributable to higher re-orders from existing patients. Patient Service and Fulfillment Expenses.Patient service and fulfillment expenses increased
approximately $9.4 million, or 216%, to $13.7 million in 2004, compared to approximately $4.3
million in 2003. For 2003, patient service and fulfillment expenses increased approximately $4.1
million, or 1,658%, compared to approximately $0.2 million in 2002. Patient service and fulfillment
expenses, which consist primarily of costs to service existing patients, rose during 2004 and 2003
to meet the demands of our expanding patient base. As a percentage of total net revenues, patient
service and fulfillment expenses were 18.4% in 2004, as compared with 16.8% and 9.7% in 2003 and
2002, respectively. 13




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##### Table of Contents



General and Administrative Expenses.General and administrative expenses increased
approximately $8.7 million, or 196%, to $13.1 million in 2004, compared to approximately $4.4
million in 2003. For 2003, general and administrative expenses increased approximately $3.3
million, or 291%, compared to approximately $1.1 million in 2002. The growth in general and
administrative expenses in 2004 and 2003 was primarily related to the overall expansion of
operations. Additionally, we had higher payroll and related costs and professional fees in 2004
related to the pursuit of strategic opportunities. As a percentage of total net revenues, general
and administrative expenses were 17.7% in 2004 and 17.2% in 2003, as compared with 44.7% in 2002.
The lower general and administrative expenses, as a percentage of total net revenues, in 2004 and
2003, compared to 2002, was primarily attributable to higher reorders and economies of scale
achieved as the business grew. Employee Stock Bonus Plan.The employee stock bonus plan expense related to a transaction at
the end of 2004 whereby certain principal shareholders of NationsHealth transferred significant
portions of their shares, valued at approximately $13.7 million at the date of the transfer, to
fund a stock bonus plan for select key employees and consultants. These shareholders transferred
2,006,893 shares of stock representing 9.8% of their personal holdings and approximately 7.7% of
the outstanding shares of NationsHealth, to be held by a trust and distributed to the employees and
consultants over the next four years. The award of these fully vested shares related to prior
services and the ultimate distribution is pre-determined and not contingent upon continuation of
service to the Company or any other future event. The amount of expense recorded related to this
transaction was $14.3 million, consisting of a non-cash charge of $13.7 million for the value of
the shares contributed and $0.6 million of related payroll costs. The transfer of the shares, which
had no effect on the total number of shares outstanding, was treated as a contribution to the
capital of the Company for accounting purposes and resulted in $13.7 million being recorded to
additional paid-in capital on the Companys balance sheet as of December 31, 2004. Doubtful Accounts.The provision for doubtful accounts increased approximately $8.4 million,
or 222%, to $12.2 million in 2004, compared to approximately $3.8 million in 2003. For 2003, the
provision for doubtful accounts increased approximately $3.6 million, or 1,996%, compared to
approximately $0.2 million in 2002. As a percentage of total net revenues, the provision for
doubtful accounts was 16.5% in 2004, compared to 14.7% and 7.1% in 2003 and 2002, respectively. The
increases in each of 2004 and 2003 in the provision for doubtful accounts were primarily
attributable to a higher proportion of non-Medicare reimbursed revenue in 2002 and, to a lesser
degree, in 2003. Depreciation and Amortization.Depreciation and amortization increased approximately
$385,000, or 318%, to $506,000 in 2004, compared to approximately $121,000 in 2003. For 2003,
depreciation and amortization increased approximately $107,000, or 764%, compared to approximately
$14,000 in 2002. The increases in depreciation and amortization in 2004 and 2003 were due to our
investments in equipment and software to support out continued growth. As a percentage of total net
revenues, depreciation and amortization were 0.7% in 2004, compared to 0.5% and 0.6% in 2003 and
2002, respectively. Other Expense.Other expense, which was almost entirely comprised of interest expense,
increased approximately $741,000, or 372%, to $940,000 in 2004, compared to approximately $199,000
in 2003. For 2003, other expense increased approximately $154,000, or 342%, compared to
approximately $45,000 in 2002. The increase in interest expense in each of 2004 and 2003 was due to
higher average debt balances. 14




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##### Table of Contents



Net Loss.Since we had a net loss for income tax purposes in the period, there was no tax
provision recorded for 2004. Although the Company was a partnership prior to 2004, if we had been
taxed as a corporation for each of the years ended December 31, 2003 and 2002, our tax provision
would have been zero as we incurred a loss for each of these years as well. We experienced net losses of approximately $26.4 million, $3.8 million and $1.9 million in the
years ended December 31, 2004, 2003 and 2002, respectively. The losses in 2004 included $14.3
million of expense for the employee stock bonus plan, consisting of a non-cash charge of $13.7
million for the value of the shares contributed by certain principal shareholders of NationsHealth
and $0.6 million of related payroll costs. Other than the employee stock bonus plan in 2004, these
net losses were primarily attributable to the investments required to establish and grow our
operations. Principal among these investments were the substantial costs required to obtain
patients, hire and train personnel and build other infrastructure in advance of the receipt of
revenues resulting from such investments. Recent Developments Medicare Modernization Act On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, known as the MMA, became law. The MMA contained provisions affecting the coverage and
reimbursement for products we provide. The MMA revised Medicare reimbursement rates for certain
items of durable medical equipment, including diabetes testing supplies and respiratory drugs. As a
result of the MMA, Medicare reimbursement amounts for 2004 for diabetic supplies consisting of
testing strips and lancets were frozen at the rates in effect for the 2003 calendar year.
Commencing January 1, 2005, reimbursement rates for diabetes test strips and lancets were reduced
by the percentage difference between the median amounts paid by the Federal Employees Health
Benefit Program in the 2002 calendar year and the amount reimbursed by the Medicare program in the
2002 calendar year. Under this provision, reimbursement was reduced by approximately 4.1% for
diabetic test strips and 5.4% for lancets. Also due to the MMA, effective January 1, 2004,
reimbursement for respiratory drugs was reduced from 95% of the average wholesale price (AWP) to
80% of the AWP. Beginning January 1, 2005, the reimbursement amounts were reduced for inhalation
drugs to 106% of the average sales price by manufacturers (ASP), a new benchmark that was
determined by sales data submitted by drug manufacturers. Under this rule, reimbursements for
albuterol and ipratropium, two of the most common inhalation drugs, decreased by approximately 82%
and 90%, respectively. The effect of the decreased reimbursement rates on revenue was partially
offset by an increase in the dispensing fee Medicare pays to suppliers for dispensing inhalation
drugs. The dispensing fee was increased from approximately $7.00, on average, to $57.00, effective
January 1, 2005. In combination, we expect the above changes, particularly the reduction in
reimbursement rates for respiratory drugs, which we expect to reduce our revenue per respiratory
supplies shipment by approximately 40% to 50%, to have a significant negative impact on our
revenues, gross margins, net income and operating cash flows beginning January 1, 2005. Also, beginning January 1, 2005, Medicare coverage will be provided for an initial physical
examination for new Medicare beneficiaries and for regular diabetes screening tests for at-risk
individuals, which should increase the incidence of diagnosis of diabetes and potentially expand
the Medicare market for testing supplies and other diabetes products. The new benefits are subject
to certain coverage limitations, and will not be available to all Medicare beneficiaries. This may
result in a positive effect on our revenues, although given coverage limitations, the magnitude of
the effect is difficult to predict. 15




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##### Table of Contents



The MMA also established a voluntary prescription drug benefit under the Medicare program.
Beginning in calendar year 2006, coverage for certain prescription drugs will be available through
both prescription drug plans and Medicare Advantage, previously called Medicare +Choice,
prescription plans. This new benefit will include coverage for insulin pumps, as well as certain
prescription drugs. Beginning in 2007, the Centers for Medicare & Medicaid Services is required by the MMA to
begin reimbursing for durable medical equipment, including diabetes testing supplies, furnished in
certain geographic areas pursuant to a competitive acquisition program, whereby reimbursement rates
will be based on bids submitted by suppliers, and only certain suppliers will be reimbursed for
items furnished to program beneficiaries. Liquidity and Capital Resources Our discussion and analysis of our liquidity and capital resources may be affected by factors
discussed in the section entitled Recent Developments and other trends which could adversely
affect our sources of cash. In the years ended December 31, 2004, 2003 and 2002, we used approximately $9.7 million, $2.9
million and $0.9 million of net cash in operating activities, respectively. The increasing net use
of cash in operating activities during 2004 and 2003 was primarily due to higher spending on
patient acquisition and related costs and other efforts to grow our business. In the years ended December 31, 2004, 2003 and 2002, we used approximately $3.7 million, $0.7
million and $0.1 million of net cash in investing activities, respectively. The increase in net
cash used for investing activities in 2004 was primarily due to the investment of funds held in
trust. Cash was also used in 2004 and 2003 for the acquisition of property and equipment to
support the growth of our business. In the years ended December 31, 2004, 2003 and 2002, we obtained approximately $14.9 million,
$5.0 million and $1.1 million of net cash from financing activities, respectively. The increase in
net cash provided by financing activities in 2004 was primarily due to the completion of the
merger, after the payment of merger related costs and proceeds from the line of credit, partially
offset by repayment of the notes to members of NationsHealth Holdings, the company with which we
merged. The increase in net cash provided by financing activities in 2003 was primarily due to the
sale of membership interests in NationsHealth Holdings which totaled $4.0 million. Since our inception we have experienced temporary cash flow shortages due to our aggressive
patient acquisition strategy and related marketing costs. Additionally, we have incurred net losses
of approximately $26.4 million, $3.8 million and $1.9 million for the years ended December 31,
2004, 2003 and 2002, respectively. As reflected in the consolidated and combined balance sheet
contained herein, we have cash and cash equivalents of approximately $2.9 million as of December
31, 2004. 16




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##### Table of Contents



Contractual Obligations We have various contractual obligations that affect our liquidity. The following table
presents our line of credit, contractual obligations for future annual purchase commitments,
primarily for inventory, minimum payments due under a service agreement and minimum operating lease
payments, which primarily pertain to leased facilities, (in thousands) as of December 31, 2004. Purchase
    
    
    Service
    
    
    Operating
    
    
    YearlyObligations
    
    Line of Credit
    
    
    Commitments(1)
    
    
    Agreement
    
    
    Leases
    
    
    Total2005
    
    $
    2,619
    
    
    $
    33,064
    
    
    $
    48
    
    
    $
    1,003
    
    
    $
    36,7342006
    
    
    
    
    
    
    44,431
    
    
    
    48
    
    
    
    868
    
    
    
    45,3472007
    
    
    
    
    
    
    17,050
    
    
    
    48
    
    
    
    793
    
    
    
    17,8912008
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    764
    
    
    
    7762009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    741
    
    
    
    741Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    609Total minimum
payments
    
    $
    2,619
    
    
    $
    94,545
    
    
    $
    156
    
    
    $
    4,778
    
    
    $
    102,098
   (1)
    
    Includes $4,813,000 of commitments for advertising in 2005. In certain instances, primarily in the first calendar quarter of each year, we may delay
seeking reimbursement from Medicare until a patients deductible has been reached in connection
with the purchase of Medicare supplies or services. In such a case, we would recognize revenue
prior to billing Medicare in accordance with our policies, although the receipt of cash upon
reimbursement would be delayed. This practice could further impact our cash flow position. We have a revolving credit facility with CapitalSource Finance LLC in the principal amount of
up to $10.0 million pursuant to an agreement dated April 30, 2004, which was subsequently amended
in June 2004 to add additional over-advance borrowing capability, and amended again in August and
November 2004 and February 2005 to adjust the financial covenants to account for our actual and
projected financial results. The revolving borrowing availability of up to $10.0 million under the
credit facility is subject to a borrowing base formula based upon our eligible receivables and
inventory. Additional borrowings of up to $5.0 million became available under the overadvance
facility commencing March 1, 2005, subject to a borrowing base formula relating to our EBITDA (as
defined in the agreement). The credit facility is subject to ongoing collateral management and
unused borrowing fees. Interest on outstanding borrowings under the revolving credit facility is
payable monthly at the greater of 4% or Citibank N.A.s base prime rate plus 2.5%, and interest on
outstanding borrowings under the overadvance facility is payable monthly at the greater of 4% or
Citibank N.A.s base prime rate plus 4.5%. The credit facility has a three year term and is secured
by substantially all of our assets. As of December 31, 2004 the outstanding balance on the
revolving credit facility was approximately $2.6 million of the approximately $4.8 million total
available. On February 28, 2005, we obtained an additional $15.0 million of cash through a private
placement of 7.75% convertible secured notes. These notes, which mature on February 28, 2012, are
convertible at any time until maturity into common stock at $6.56 per share, subject to
anti-dilution adjustments. Interest on these notes will be accrued and paid monthly. As part of
this financing arrangement, certain principal shareholders of NationsHealth indirectly transferred
1,785,714 shares of common stock to the note purchasers. The $15 million received will be
allocated between the shares of common stock and the convertible debt. Since no additional shares
were issued, the portion allocated to the common stock will be credited to additional paid-in
capital. Any discount calculated in the transition will be amortized as additional interest expense
over the term of the debt. 17




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##### Table of Contents



We have $2 million in an escrow account, shown as investment held in trust in the accompanying
consolidated and combined balance sheets, to satisfy any damages under an indemnification agreement
to existing stockholders of Millstream prior to the consummation of the merger. If there are no
such claims, the funds will be released to the Company from escrow on August 31, 2005. To date,
there have been no such claims. We believe that our cash and cash equivalents balance, and other available financing sources,
will be sufficient to meet working capital and capital expenditure needs for business operations
for the next twelve months. Factors which could negatively affect our liquidity include a reduction
in the demand for our products, a reduction in Medicare reimbursement for our products, and those
factors set forth in Exhibit 99.1 entitled Important Factors that May Affect Future Operating
Results. Off-Balance-Sheet Arrangements As of December 31, 2004, we did not have any significant off-balance-sheet arrangements, as
defined in Item 303(c)(2) of SEC Regulation S-B. Critical Accounting Policies Our discussion and analysis of our financial condition, results of operations and cash flows
are based upon our consolidated and combined financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. To
prepare these financial statements we are required to make significant estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. These items are regularly monitored and analyzed by
management for changes in facts and circumstances, and material changes in these estimates could
occur in the future. These estimates include assessing the allowance for doubtful accounts,
determination of appropriate Medicare reimbursement rates, the valuation of inventory, and the
costs related to billings in process and related allowance. Changes in estimates are recorded in
the period in which they become known. We base our estimates on historical experience and various
other assumptions that we believe to be reasonable under the circumstances. Actual results may
differ materially from the estimates if past experience or other assumptions do not turn out to be
substantially accurate. While all accounting policies impact the financial statements, certain policies may be viewed
as critical. Critical accounting policies are those that are both most important to the portrayal
of financial condition and results of operations and that require managements most subjective or
complex judgments and estimates. We believe the policies that fall within this category are the
policies on revenue recognition, accounts receivable and the allowance for doubtful accounts, costs
related to billings in process, inventory, internal software development costs and patient
acquisition and related costs. Revenue Recognition We recognize revenue related to product sales to patients who have placed orders and received
shipments, provided that risk of loss has passed to the patients and the required written forms, to
bill Medicare, other third party payors, and patients have been received and verified. Revenue is
recorded at amounts expected to be collected from Medicare, other third party payors, and directly
from patients. Revenue is not recognized for product shipments until that period in which the
required documentation has been collected and verified. The costs related to these billings in
process are deferred and charged to expense at the time the related revenue is recognized. Medicare reimbursement payments are sometimes lower than the reimbursement payments of other
third party payors, such as traditional indemnity insurance companies. Revenue for Medicare
reimbursement is calculated based on government-determined prices for Medicare-covered items and is 18




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##### Table of Contents



recognized at such reimbursement amounts. Revenue amounts billed in excess of the
government-determined reimbursement prices are excluded from revenue and, therefore, contractual
allowances are not significant. Medicare reimbursements are subject to review by appropriate
government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices
for reimbursable products. The remaining balance is billed to either other third party payors or
directly to patients. Amounts due from patients represent a disproportionately higher amount of our
provision for doubtful accounts. Revenue from Medicare represented approximately 75% of net revenue
in our 2004 financial statements. Pursuant to our NationsHealth Discount Prescription Card Program, we receive a
transaction-based fee, net of an administrative and processing fee from the retailer, each time a
cardholder saves money with the card. The per-transaction fee we receive ranges from $0.70 to
$1.30 per transaction. Revenue is recognized in the month the transaction occurs and is presented
net of related costs in our financial statements. Beginning in the third quarter of 2004, we also
began recognizing a minimal amount of revenue from manufacturer rebates for cardholder purchases of
certain drugs using the card. These rebates are included in prescription card fees in the
accompanying consolidated and combined financial statements. Accounts Receivable and Allowance for Doubtful Accounts The valuation of accounts receivable is based upon the credit-worthiness of patients and third
party payors as well as our historical collection experience. A significant portion of accounts
receivable are owed by Medicare. We base our estimates of accounts receivable collectibility on our
historical collection and write-off experience, current trends, our credit policy, and our analysis
of accounts receivable by aging category. Changes in judgment regarding these factors will cause
the allowance for doubtful accounts to be adjusted. Our accounts receivable are generally due from Medicare, other third party payors and our
patients. The collection process is time consuming and complex and typically involves the
submission of claims to multiple payors whose payment of claims may be dependent upon the payment
of another payor. As a result, our collection efforts may be active for up to 18 months from the
initial billing date. In accordance with applicable regulatory requirements, we make reasonable and
appropriate efforts to collect our accounts receivable, including deductible and co-payment
amounts, in a consistent manner for all payor classes. Costs Related to Billings in Process Patients sometimes request supplies before we have received the required written forms, if
applicable, to bill Medicare and other third party payors. As a result, we classify the costs
related to such billings as billings in process. This includes the cost of inventory shipped to
patients for whom we have received a verbal order, but have not yet received required written
documents to bill Medicare and other payors. These costs are presented net of a valuation allowance
based upon our historical experience with the collection of documents required to bill Medicare and
other payors. Changes in judgment regarding the recoverability of costs related to billings in
process could result in the recording of a higher or lower amount of patient acquisition and
related costs. The costs related to billings in process are charged to cost of sales at the time
the related revenue is recognized. Inventory Our inventory is comprised of diabetes supplies and respiratory drugs and medical supplies and
is stated at the lower of cost, determined on the average cost method, or market. Changes in
judgment regarding the recoverability of inventory could result in the recording of a higher or
lower amount of cost of sales. 19




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##### Table of Contents



Internal Software Development Costs We capitalize certain internal software development costs, and amortize these costs on a
straight-line basis over the estimated useful lives of the software, which is generally three (3)
years. These capitalized software development costs are included in property and equipment in our
consolidated and combined balance sheets. Patient Acquisition and Related Costs We expense our patient acquisition and related costs as incurred. This accounting results in
those expenses being a charge to earnings in the period when incurred, as opposed to capitalizing
the amount of such costs which would allow the amount to be classified as an asset and amortized
over time. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46(R), Consolidation of Variable Interest Entities. Interpretation No. 46(R) clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Interpretation No. 46(R) was
applicable for all reporting periods ending after December 15, 2004. Interpretation No. 46(R) did
not have a material impact on our results of operations or financial position. In April 2003, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments Hedging Activities. This statement amends
and clarifies accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 became
effective during the fourth quarter of fiscal 2003 and did not have a material impact on our
results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 affects the issuers accounting for
three types of freestanding financial instruments. One type is mandatorily redeemable shares, which
the issuing company is obligated to buy back in exchange for cash or other assets. A second type,
which includes put options and forward purchase contracts, involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash or other assets. The third
type of instrument consists of obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a market index, or varies
inversely with the value of the issuers shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety. SFAS No. 150 also requires
disclosures about alternative ways of settling the instruments and the capital structure of
entities, whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31, 2003, and otherwise
is effective from the start of the first interim period beginning after June 15, 2003. The adoption
of this standard did not have a material impact on our results of operations or financial position. 20




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In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment to Accounting
Research Bulletin No. 43, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. This Statement requires that
those items be recognized as current-period charges regardless of whether they meet the criterion
of so abnormal. Additionally, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
The provisions of SFAS No. 151 will become effective for fiscal years beginning after June 15,
2005. We have not yet determined the impact of adopting this standard. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment
to Accounting Principles Board Opinion No. 29. Accounting for Nonmonetary Transactions, is based
on the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that
principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges in which the
future cash flows of the entity are not expected to change significantly as a result of the
exchange. The provisions of SFAS No. 153 will become effective for nonmonetary asset exchanges in
fiscal periods beginning after June 15, 2005. We have not yet determined the impact of adopting
this standard. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS
No. 123(R)). SFAS No. 123(R) requires companies to recognize the compensation cost relating to
share-based payment transactions in the financial statements. This Statement eliminates the
ability to account for share-based compensation transactions using Accounting Principles Board
Opinion No. 25, and requires instead that such transactions be accounted for using a
fair-value-based method. SFAS No. 123(R) will be effective for our third quarter of fiscal 2005.
We have not yet determined the impact of adopting this standard. Important Factors That May Affect Future Operations and Results This Annual Report on Form 10-KSB/A contains forward-looking statements. These forward-looking
statements appear principally in the sections entitled Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations. Forward-looking statements may appear
in other sections of this report as well. Generally, the forward-looking statements in this report
use words like expect, believe, continue, anticipate, estimate, may, will, could,
opportunity, future, project, and similar expressions. The forward-looking statements include statements about our:  
    Expected future revenues, operations and expenditures
    Projected cash needs
    Credit facilities
    Relationships Statements that are not historical facts are based on our current expectations, beliefs,
assumptions, estimates, forecasts and projections for our business and the industry and markets in
which we compete. The forward-looking statements contained in this report are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what is expressed in
such forward-looking statements. We caution investors not to place undue reliance on the
forward-looking statements contained in this 21




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report. These statements speak only as of the date of this report, and we do not undertake any
obligation to update or revise them, except as required by law. The following factors, among others, create risks and uncertainties that could affect our
future or other performance:  
    Declining reimbursement levels for, or increases in the costs of, products
dispensed
    Our history of operating losses and our expectation that we will incur
significant additional operating losses
    Any inability to raise the capital that we will 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
    Any inability to establish and maintain successful collaborative
relationships could adversely affect our ability to generate revenues
    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
    Any inability to obtain and maintain intellectual property protection for our technologies
    Adverse resolution of future lawsuits or investigations
    Significant fluctuations in our revenues 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 could adversely affect our ability to accurately report financial results or
prevent fraud
    Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses
    Our common stock may continue to have a volatile public trading price and
low trading volume
    Anti-takeover provisions in our governing documents and under Delaware law
may make an acquisition of us more difficult As a result of the foregoing and other factors, we may experience material fluctuations in our
future operating results, which could materially affect our business, financial position, and stock
price. These risks and uncertainties are discussed in more detail in Exhibit 99.1 Important
Factors That May Affect Future Operations and Results to this Form 10-KSB/A, which is incorporated
into this item by this reference. 22




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Item 7. Financial Statements INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    24Consolidated and Combined Balance Sheets as of December 31, 2004 and 2003
    
    25Consolidated and Combined Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    26Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    27Consolidated and Combined Statements of Stockholders / MembersDeficiency for the years ended December 31, 2004, 2003 and 2002
    
    28Notes to Financial Statements
    
    29
 23




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
NationsHealth, Inc.: We have audited the accompanying consolidated and combined balance sheets of NationsHealth,
Inc. as of December 31, 2004 and 2003, and the related consolidated and combined statements of
operations, stockholders / members deficiency and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated and combined financial statements referred to above present
fairly, in all material respects, the financial position of NationsHealth, Inc. as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. The accompanying consolidated and combined financial statements have been restated as
discussed in Note 2. /s/ RACHLIN COHEN & HOLTZ LLP Fort Lauderdale, Florida
February 18, 2005 except for Note 12, as to which the date is February 28, 2005 24




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NATIONSHEALTH, INC. 
 CONSOLIDATED AND COMBINED BALANCE SHEETS
 (In thousands, except share and per share data)
 December 31,2004
    
    

    2003(Restated)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,904
    
    
    $
    1,412Certificate of deposit
    
    
    100
    
    
    
    Accounts receivable, net of allowance of $10,985 and $3,526
    
    
    8,708
    
    
    

    2,761Inventory
    
    
    1,719
    
    
    
    834Costs related to billings in process, net
    
    
    1,437
    
    
    
    854Investment held in trust
    
    
    2,000
    
    
    
    Prepaid expenses and other
    
    
    392
    
    
    
    32Total current assets
    
    
    17,260
    
    
    
    5,893Property and equipment, net
    
    
    1,770
    
    
    
    684Other assets
    
    
    346
    
    
    
    52Total assets
    
    $
    19,376
    
    
    $
    6,629LIABILITIES AND STOCKHOLDERS /
MEMBERS DEFICIENCYCurrent Liabilities:Accounts payable
    
    $
    4,595
    
    
    $
    4,124Accounts payable, related party
    
    
    5,004
    
    
    
    954Accrued expenses
    
    
    7,195
    
    
    
    1,163Line of credit
    
    
    2,619
    
    
    
    Total current liabilities
    
    
    19,413
    
    
    
    6,241Long-Term Debt:Lines of credit
    
    
    
    
    
    
    800Notes payable to members
    
    
    
    
    
    
    1,343Total long-term debt
    
    
    
    
    
    
    2,143Commitments and contingenciesStockholders / Members Deficiency:Preferred stock, $0.0001 par value; 50,000,000 shares
authorized; none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 250,000,000 shares
authorized; 26,174,800 issued and outstanding
    
    
    3
    
    
    
    Additional paid-in capital
    
    
    32,315
    
    
    
    Preferred members interests ¥ voting
    
    
    
    
    
    
    400Preferred members interests ¥ nonvoting
    
    
    
    
    
    
    3,741Class B interests
    
    
    
    
    
    
    35Accumulated deficit
    
    
    (32,355
    )
    
    
    (5,931
    )Total stockholders / members deficiency
    
    
    (37
    )
    
    
    (1,755
    )Total liabilities and stockholders /
members deficiency
    
    $
    19,376
    
    
    $
    6,629
 The accompanying notes are an integral part of these consolidated and combined financial
statements. 25




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NATIONSHEALTH, INC. 
 CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Revenue:Net sales
    
    $
    70,982
    
    
    $
    25,072
    
    
    $
    2,531Prescription card fees, net
    
    
    3,240
    
    
    
    654
    
    
    
    1074,222
    
    
    
    25,726
    
    
    
    2,541Cost of Sales
    
    
    22,718
    
    
    
    9,899
    
    
    
    1,644Gross Profit
    
    
    51,504
    
    
    
    15,827
    
    
    
    897Operating Expenses:Patient acquisition and related
costs
    
    
    23,151
    
    
    
    6,779
    
    
    
    1,131Patient service and fulfillment
    
    
    13,672
    
    
    
    4,325
    
    
    
    246General and
administrative
    
    
    13,116
    
    
    
    4,435
    
    
    
    1,135Cost of employee stock bonus
plan
    
    
    14,315
    
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    12,228
    
    
    
    3,794
    
    
    
    181Depreciation and
amortization
    
    
    506
    
    
    
    121
    
    
    
    1476,988
    
    
    
    19,454
    
    
    
    2,707Loss from Operations
    
    
    (25,484
    )
    
    
    (3,627
    )
    
    
    (1,810
    )Other Income (Expenses):Interest income
    
    
    3
    
    
    
    2
    
    
    
    Interest expense
    
    
    (943
    )
    
    
    (201
    )
    
    
    (45
    )(940
    )
    
    
    (199
    )
    
    
    (45
    )Net Loss
    
    $
    (26,424
    )
    
    $
    (3,826
    )
    
    $
    (1,855
    )Net loss per share:Basic and diluted
    
    $
    (1.01
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )Weighted average shares outstanding:Basic and diluted
    
    
    26,154
    
    
    
    26,150
    
    
    
    26,150
 The accompanying notes are an integral part of these consolidated and combined financial
statements. 26




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NATIONSHEALTH, INC. 
 CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net loss
    
    $
    (26,424
    )
    
    $
    (3,826
    )
    
    $
    (1,855
    )Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:Depreciation and amortization
    
    
    506
    
    
    
    121
    
    
    
    14Provision for doubtful accounts
    
    
    12,228
    
    
    
    3,794
    
    
    
    181Stock bonus plan
    
    
    13,707
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:(Increase) in:Accounts receivable
    
    
    (18,175
    )
    
    
    (6,211
    )
    
    
    (526
    )Inventory
    
    
    (885
    )
    
    
    (517
    )
    
    
    (317
    )Costs related to billings in process
    
    
    (583
    )
    
    
    (765
    )
    
    
    (89
    )Prepaid expenses and other assets
    
    
    (654
    )
    
    
    (35
    )
    
    
    (42
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    6,497
    
    
    
    3,541
    
    
    
    1,732Accounts payable, related party
    
    
    4,050
    
    
    
    954
    
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (9,733
    )
    
    
    (2,944
    )
    
    
    (902
    )Cash Flows from Investing Activities:Investment of funds held in trust
    
    
    (2,000
    )
    
    
    
    
    
    
    Purchase of certificate of deposit
    
    
    (100
    )
    
    
    
    
    
    
    Acquisition of property and equipment
    
    
    (1,592
    )
    
    
    (719
    )
    
    
    (98
    )Net cash and cash equivalents used in investing activities
    
    
    (3,692
    )
    
    
    (719
    )
    
    
    (98
    )Cash Flows from Financing Activities:Proceeds from reverse merger
    
    
    20,270
    
    
    
    
    
    
    
    Payments for conversion of membership
interests
    
    
    (3,000
    )
    
    
    
    
    
    
    Payments for merger costs, net
    
    
    (2,954
    )
    
    
    
    
    
    
    Proceeds from sale of membership interest
    
    
    
    
    
    
    4,000
    
    
    
    Payment of offering costs
    
    
    
    
    
    
    (259
    )
    
    
    Proceeds from member notes payable
    
    
    
    
    
    
    1,648
    
    
    
    1,125Principal payments on member notes payable
    
    
    (1,343
    )
    
    
    (833
    )
    
    
    (408
    )Net draws on overadvance facility and lines of credit
    
    
    1,819
    
    
    
    428
    
    
    
    372Proceeds from exercise of warrants
    
    
    125
    
    
    
    
    
    
    
    Net cash and cash equivalents provided by financing
activities
    
    
    14,917
    
    
    
    4,984
    
    
    
    1,089Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    1,492
    
    
    
    1,321
    
    
    
    89Cash and Cash Equivalents, Beginning
    
    
    1,412
    
    
    
    91
    
    
    
    2Cash and Cash Equivalents, Ending
    
    $
    2,904
    
    
    $
    1,412
    
    
    $
    91Supplemental Disclosure of Cash Flow Information:Interest Paid
    
    $
    770
    
    
    $
    240
    
    
    $
    45Non-cash Investing and Financing Activities:Conversion of member notes payable to members capital
    
    $
    
    
    
    $
    435
    
    
    $
    
 The accompanying notes are an integral part of these consolidated and combined financial statements. 27




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NATIONSHEALTH, INC. 
 CONSOLIDATED AND COMBINED STATEMENTS OF
STOCKHOLDERS / MEMBERS DEFICIENCY
 (In thousands)
 Preferred
    
    
    PreferredAdditional
    
    
    Members'
    
    
    Members'Common Stock
    
    
    Paid-in
    
    
    Interests-
    
    
    Interests-
    
    
    Class B
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Voting
    
    
    Nonvoting
    
    
    Interest
    
    
    Deficit
    
    
    TotalBalance, December 31, 2001
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (249
    )
    
    $
    (249
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,855
    )
    
    
    (1,855
    )Balance, December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,105
    )
    
    
    (2,105
    )Conversion of notes
payable to members
capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    435Sale of membership
interest, net of offering
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,741
    
    
    
    
    
    
    
    
    
    
    
    3,741Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,826
    )
    
    
    (3,826
    )Balance, December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    3,741
    
    
    
    35
    
    
    
    (5,931
    )
    
    
    (1,755
    )Reverse merger
    
    
    26,150
    
    
    
    3
    
    
    
    18,483
    
    
    
    (400
    )
    
    
    (3,741
    )
    
    
    (35
    )
    
    
    
    
    
    
    14,310Employee stock bonus plan
    
    
    
    
    
    
    
    
    
    
    13,707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,707Warrant exercises
    
    
    25
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,424
    )
    
    
    (26,424
    )Balance, December 31, 2004
    
    
    26,175
    
    
    $
    3
    
    
    $
    32,315
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (32,355
    )
    
    $
    (37
    )
 The accompanying notes are an integral part of these consolidated and combined financial statements. 28




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NATIONSHEALTH, INC. 
 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
 1. ORGANIZATION AND CAPITALIZATION Millstream. Millstream Acquisition Corporation (Millstream) was formed on April 11, 2003 to serve as a
vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business
combination. On August 28, 2003, Millstreams initial public offering (the Offering) was
consummated. Of the approximately $21,418,000 in net proceeds from the Offering, $20,685,000 was
placed in trust to be used for a potential business combination and the remaining proceeds were
available for business, legal and accounting due diligence on prospective acquisitions and
continuing general and administrative expenses. NationsHealth Holdings. NationsHealth Holdings LLC (NationsHealth Holdings), its wholly-owned subsidiary, United
States Pharmaceutical Group LLC (USPG) and NationsHealth Supply LLC (Supply), an affiliate
under common ownership, were formed as follows: NationsHealth Holdings, a privately held company based in Sunrise, Florida, was organized as a
Florida limited liability company on September 18, 2002, under the name NationsHealth LLC. On
November 17, 2002, NationsHealth LLC changed its name to NationsHealth Holdings, LLC. USPG was incorporated on July 3, 2001 as United States Pharmaceutical Group, Inc. under the
laws of Delaware and had the authority to issue 1,000,000 shares of common stock with a par value
of $.001 per share. As of December 31, 2002, United States Pharmaceutical Group, Inc. had 3,000
shares issued and outstanding. On January 28, 2003, USPG converted from a corporation to a Delaware
limited liability company and changed its name to United States Pharmaceutical Group LLC. On
February 19, 2003, the membership interest in USPG was assigned to NationsHealth Holdings, making
USPG a wholly-owned subsidiary of NationsHealth Holdings. The equity ownership interests of NationsHealth Holdings and USPG were owned or controlled by
a common group of members. Accordingly, these entities are considered to be under common control,
and the accompanying financial statements include the accounts and results of operations of all the
affiliated entities from inception. Members of NationsHealth Holdings also converted certain notes payable to members capital in
the amount of $435,308 to capitalize NationsHealth Holdings. Supply was formed as a Florida limited liability company in October 2002. On October 30, 2003, NationsHealth Holdings sold a 4% interest in NationsHealth Holdings for
$4,000,000 to a Fortune 500 healthcare company (see Note 10) under a preferred member interest
purchase agreement. 29




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND CAPITALIZATION (Continued) Merger and Accounting Treatment. On March 9, 2004, Millstream entered into a definitive merger agreement with NationsHealth
Holdings, L.L.C. (NationsHealth Holdings), a privately held company based in Sunrise, Florida. On
August 30, 2004, the shareholders of Millstream voted to approve the merger agreement. Upon
consummation of the merger on August 31, 2004, Millstream changed its name to NationsHealth, Inc.
(NationsHealth or the Company), and the membership interests in NationsHealth Holdings were
converted into a total of 21,375,000 shares of the Companys common stock, or approximately 81.7%
of the subsequently outstanding common stock of the combined company. Immediately prior to the
merger, the amount held in trust for purposes of completing a business combination was $20,882,000.
After payments totaling $3,186,000 for professional fees and other costs related to the merger,
$3,000,000 to NationsHealth Holdings members, the net proceeds amounted to $14,696,000. From these
net proceeds, The Company used $2,873,000 to repay debt and placed $2,000,000 into an escrow
account to satisfy any damages under an indemnification agreement to existing stockholders of
Millstream prior to the consummation of the merger, approximately $9,823,000 remained available to
the combined company for working capital purposes. The merger was accounted for under the purchase method of accounting as a reverse acquisition.
Under this method of accounting, NationsHealth Holdings was treated as the acquiring company for
financial reporting purposes. In accordance with guidance applicable to these circumstances, this
merger was considered to be a capital transaction in substance. Accordingly, for accounting
purposes, the merger was treated as the equivalent of NationsHealth Holdings issuing stock for the
net monetary assets of Millstream, accompanied by a recapitalization. The net monetary assets of
the Company were stated at their fair value, essentially equivalent to historical costs, with no
goodwill or other intangible assets recorded. The financial position, operations and cash flows
reflected in the accompanying consolidated and combined financial statements as of the dates and
for the periods prior to the merger are those of NationsHealth Holdings. The accumulated deficit of
NationsHealth Holdings was carried forward to the combined company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business. NationsHealth is a growing provider, primarily via direct home delivery, of diabetes,
respiratory and ostomy supplies reimbursable by Medicare under Part B of the Medicare Program, as
well as prescription discount services. The Company focuses on providing services and supplies to
the approximately 40,000,000 Medicare beneficiaries in the United States. The Companys proprietary
and scalable information technology platform supports the individual enrollment of new cardholders
and patients, discount prescription card fulfillment, prescription discount administration, and
patient management. Revenues from medical product sales in the areas of diabetes, respiratory ailments and ostomy
currently comprise approximately 96% of total revenues. NationsHealth is a Medicare-enrolled
supplier, allowing it to accept Medicare assignment of benefit forms, ship supplies and medications
to patients, bill Medicare and any private insurer, and receive payment from Medicare and any
private insurers on behalf 30




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) of patients (in addition to any patient co-pay and/or deductible). Medicare pays for 80% of the
Medicare allowable fees for these Part B products after the beneficiary has satisfied his or her
annual deductible amount. The Company then bills the remaining balance to either third party payors
such as a patients supplemental insurance carrier or directly to patients. In addition to providing diabetes, respiratory and ostomy supplies, the Company has a
discount prescription card business in which it has enrolled over 2,000,000 individual cardholders,
who save, on average, approximately 25% on prescriptions at their local pharmacies. The Company
receives a fee, which is net of an administrative and processing fee, each time a patient saves
money with the card. In May 2004, the Company began offering Medicare-eligible patients the opportunity to
participate in the Medicare-approved prescription drug card program, called PrecisionDiscounts,
through its arrangement with WellPoint Pharmacy Management (WellPoint). There are currently over
200,000 individuals enrolled in the PrecisionDiscounts program. The Company is responsible for many
aspects of the PrecisionDiscounts program including: verifying Medicare eligibility of members;
handling enrollment and disenrollment of members; handling fulfillment of enrollment cards;
operating a call center to handle all patient service functions; and handling all
direct-to-consumer television advertising and marketing for the program. Principles of Consolidation and Combination. The consolidated and combined financial statements include the accounts of NationsHealth, Inc.
and its wholly-owned subsidiaries, NationsHealth Holdings, L.L.C. and United States Pharmaceutical
Group LLC, as well as NationsHealth Supply LLC, a company under common control. Intercompany
balances and transactions have been eliminated. Revenue Recognition. The Company recognizes revenue related to product sales to patients who have placed orders and
received shipments, provided that risk of loss has passed to the patient and the required written
forms to bill Medicare, other third party payors, and patients have been received and verified, if
applicable. Revenue is recorded at amounts expected to be collected from Medicare, other third
party payors, and directly from patients. Revenue is not recognized for product shipments until
that period in which the required documentation has been collected and verified. The costs related
to these billings in process are deferred and charged to expense at the time the related revenue is
recognized. Medicare reimbursement payments are sometimes lower than the reimbursement payments of other
third party payors, such as traditional indemnity insurance companies. Revenue for Medicare
reimbursement is calculated based on government-determined prices for Medicare-covered items and is
recognized at such reimbursement amounts. Revenue amounts billed in excess of the
government-determined reimbursement prices are excluded from revenue and, therefore, contractual
allowances are not significant. Medicare reimbursements are subject to review by appropriate
government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices
for reimbursable products. The remaining balance is billed to either other third party payors or
directly to patients. Amounts due from patients represent a disproportionately higher amount of the
Companys provision for doubtful accounts. Revenue from Medicare represents approximately 75% of
total net revenue in 2004. 31




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Pursuant to the NationsHealth discount prescription drug card program, the Company receives a
transaction-based fee, net of an administrative and processing fee from the retailer, each time a
cardholder saves money with the card. The net per-transaction fee received ranged from $0.70 to
$1.30. Revenue is recognized in the month the transaction occurs and is presented net of related
costs in the accompanying consolidated and combined financial statements. These costs were
approximately $1,285,000, $302,000 and $50,000 for the years ended December 31, 2004, 2003 and
2002, respectively. Beginning in the third quarter of 2004, the Company also began recognizing
revenue from manufacturer rebates for cardholder purchases of certain drugs using the card. These
rebates, which amounted to $308,000 for the year ended December 31, 2004, are included in
prescription card fees in the accompanying consolidated and combined financial statements. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. These estimates include assessing the allowance for doubtful accounts,
determination of appropriate Medicare reimbursement rates, and the valuation of inventory. Actual
results could differ from those estimates. Reclassification. Certain prior period amounts have been reclassified to conform to the current period
presentation. Concentrations of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. With respect to cash and cash equivalents, the Company maintains deposit balances at financial
institutions that, from time to time, may exceed federally insured limits. The Company maintains
its cash with high quality financial institutions, which the Company believes limits these risks. The Companys single largest account receivable balance is from Medicare, which the Company
does not consider to be a significant credit risk. Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents. 32




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounts Receivable. The Company does business and extends credit based on an evaluation of the financial condition
of the third party payors and patients generally without requiring collateral. Exposure to losses
on receivables is expected to vary by patient due to the financial condition of each patient. A
significant portion of accounts receivable is due from Medicare, but also includes amounts due from
other third party payors and patients. The collection process is time consuming and complex and
typically involves the submission of claims to multiple payors whose payment of claims may be
dependent upon the payment of another payor. As a result, collection efforts may be active for up
to 18 months from the initial billing date. In accordance with applicable regulatory requirements,
the Company makes reasonable and appropriate efforts to collect its accounts receivable, including
deductible and co-payment amounts, in a consistent manner for all payor classes. Inventory. Inventory is comprised of diabetes supplies and respiratory drugs and medical supplies and is
stated at the lower of cost, determined on the average cost method, or market. Costs Related to Billings in Process. Due to the medical nature of the products the Company provides, patients sometimes request
supplies before the Company has received the required written forms, such as an assignment of
benefits, to bill Medicare and other third party payors. As part of the Companys continuing
efforts to service more patients the Company generally ships product to these patients but defers
the revenue and costs related to such billings in process, until all required forms have been
obtained and verified. The costs, which include the cost of the inventory shipped, are presented
net of a valuation allowance based upon the Companys historical experience with the collection of
documents required to bill Medicare and other patients and are charged to cost of sales at the time
the related revenue is recognized. The valuation allowance as of December 31, 2004, 2003 and 2002
amounted to $1,606,000, $183,000 and $17,000, respectively. Investment Held in Trust. Investment held in trust is comprised of cash placed in an escrow account with a bank to
satisfy any damages under an indemnification agreement to existing stockholders of Millstream prior
to the consummation of the merger. If there are no such claims, the funds will be released to the
Company from escrow on August 31, 2005. 33




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Internal Software Development Costs. The Company capitalizes certain internal software development costs, which are being amortized
on a straight-line basis over the estimated useful lives of the software, generally 3 years. These
capitalized software development costs, which are included in property and equipment in the
accompanying consolidated and combined balance sheet totaled $876,000, net of accumulated
amortization of $314,000 as of December 31, 2004 and $297,000, net of accumulated amortization of
$53,000 as of December 31, 2003. Amortization of software development costs amounted to $261,000,
$50,000 and $3,000 for 2004, 2003 and 2002, respectively. Patient Acquisition and Related Costs. Patient acquisition and related costs represent the costs incurred by the Company in the
development of its patient base. These costs are primarily comprised of advertising, promotion,
call center and data collection expenses and the provision for costs of inventory shipped but never
billed because all documents required to bill Medicare have not been collected. Such costs are
charged to expense as incurred because they are only indirectly associated with the sale of product
and services, and therefore not of a direct-response nature, and are internally developed costs
associated with the Companys intangible assets, primarily the patient base. Advertising costs, which are included in patient acquisition and related costs, are expensed
as incurred. These costs, which primarily related to television airtime, were approximately
$8,232,000, $2,574,000 and $295,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Shipping Costs. Shipping costs, which are included in operations and fulfillment costs in the accompanying
consolidated and combined financial statements, were $4,257,000, $1,347,000 and $160,000 for the
years ended December 31, 2004, 2003 and 2002, respectively. Stock-Based Compensation. NationsHealth adopted a stock option plan during 2004 and accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion,
(APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under this
method, compensation costs for stock options are measured as the excess, if any, of the estimated
market price of NationsHealths stock at the date of the grant over the amount an employee must pay
to acquire the stock. Accordingly, NationsHealth provides the additional disclosures required under
SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure. 34




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) NationsHealth has adopted the disclosure only provision of SFAS 123. Had compensation costs
for NationsHealths stock option grants described above been determined based on the fair value at
the grant date for awards, consistent with the provisions of SFAS 123, NationsHealths net loss and
loss per share would have been increased to the pro forma amounts indicated below for the year
ended December 31, 2004 (in thousands, except per share data), as follows: Net loss:
    
    $
    (26,424
    )As reportedAdd: Stock-based employee compensation
expense included in net loss, net of related
tax effects
    
    
    13,707Deduct: Total stock-based compensation
expense determined under fair value based

method for all awards, net of related tax
effects
    
    
    (13,962
    )Pro forma
    
    $
    (26,679
    )Basic and Diluted loss per share:As reported
    
    $
    (1.01
    )Pro forma
    
    $
    (1.02
    )
 The fair value of the options granted of $3.52 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions used: dividend
yield of 0%, risk-free interest rate 3.27%; expected life of 6.0 years, based on the plan and
volatility of 50%. For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period of four years, except for 15,000 of
options that vested immediately, using the straight-line method. Basic and Diluted Loss Per Share. As discussed in Note 1, Merger and Accounting Treatment, the historical results prior to
September 1, 2004 reflected in these consolidated and combined financial statements are those of
NationsHealth Holdings, for which there was no common stock outstanding. To provide comparability
of all periods presented for earnings per share amounts, the total shares outstanding immediately
after consummation of the merger were deemed to be outstanding from the beginning of all periods
presented. Since the exercise of the warrants, stock options and underwriters option would have
had an antidilutive effect, diluted earnings per share did not include common stock equivalents. Fair Value of Financial Instruments. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair value. These instruments include cash and cash equivalents, accounts receivable and
accounts payable. Fair values were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying amounts approximate fair values
or they are receivable or payable on demand. 35




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The fair values of lines of credit and notes payable to members are estimated based on current
rates offered to the Company for debt of comparable maturities and similar collateral requirements.
The carrying values of lines of credit and notes payable to members approximate their fair value. Segment Information. The Company has adopted Statement of Financial Accounting Standard (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the way that public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders. The Company operates in one
segment for management reporting purposes. Recent Accounting Pronouncements. In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46(R), Consolidation of Variable Interest
Entities. Interpretation No. 46(R) clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Interpretation No. 46(R) was for all
reporting periods ending after December 15, 2004. Interpretation No. 46(R) did not have a material
impact on the Companys results of operations or financial position. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments Hedging Activities. This statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 became effective during the fourth quarter of fiscal
2003 and did not have a material impact on the Companys results of operations or financial
position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 affects the issuers accounting for
three types of freestanding financial instruments. One type is mandatorily redeemable shares, which
the issuing company is obligated to buy back in exchange for cash or other assets. A second type,
which includes put options and forward purchase contracts, involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash or other assets. The third
type of instrument consists of obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a market index, or varies
inversely with the value of the issuers shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety. SFAS No. 150 also requires
disclosures about alternative ways of settling the instruments and the capital structure of
entities, whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31, 2003, and otherwise
is effective from the start of the first interim period beginning after June 15, 2003. The adoption
of this standard did not have a material impact on the Companys results of operations or financial
position. 36




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment to Accounting
Research Bulletin No. 43, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. This Statement requires that
those items be recognized as current-period charges regardless of whether they meet the criterion
of so abnormal. Additionally, this statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
The provisions of SFAS No. 151 will become effective for fiscal years beginning after June 15,
2005. The company has not yet determined the impact of adopting this standard. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment
to Accounting Principals Board Opinion No. 29. Accounting for Nonmonetary Transactions, is based
on the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that
principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges in which the
future cash flows of the entity are not expected to change significantly as a result of the
exchange. The provisions of SFAS No. 153 will become effective for nonmonetary asset exchanges in
fiscal periods beginning after June 15, 2005. The company has not yet determined the impact of
adopting this standard. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS
No. 123(R)). SFAS No. 123(R) requires companies to recognize the compensation cost relating to
share-based payment transactions in the financial statements. This Statement eliminates the
ability to account for share-based compensation transactions using Accounting Principles Board
Opinion No. 25, and requires instead that such transactions be accounted for using a
fair-value-based method. SFAS No. 123(R) will be effective for the Companys third quarter of
fiscal 2005. The company has not yet determined the impact of adopting this standard. Restatement The Companys 2004 balance sheet has been restated to reclassify the balance outstanding on
the line of credit as of December 31, 2004 as a current liability. The Companys revolving line of credit agreement with CapitalSource LLC expires in April 2007.
However, the credit agreement requires the Company to maintain a lock-box arrangement whereby
amounts received into the lock-box are applied to reduce the revolving credit facility outstanding
and contains certain subjective acceleration clauses in the event of a material adverse event. In
light of these conditions, the Company has reclassified its borrowings under the revolving credit
agreement as a current liability in accordance with the provisions set forth in Emerging Issues
Task Force (EITF) Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement. Accordingly, the accompanying balance sheet as of December 31, 2004, and Notes 3 and
6 thereto and have been restated and the amount owed under the line of credit previously reported
as long-term debt has been reclassified to current liabilities. 37




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 3. LIQUIDITY AND PROFITABILITY CONSIDERATIONS From inception and continuing through 2004, the Company has experienced temporary cash flow
shortages due to its aggressive patient acquisition strategy and related marketing costs. As
reflected in the consolidated and combined balance sheet as of December 31, 2004, the Company had
negative working capital of approximately $2,153,000 and a stockholders deficiency of
approximately $37,000. Additionally, the Company has suffered net losses of approximately
$26,424,000, $3,826,000 and $1,855,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Managements plans with regard to these matters encompass the following actions: Subsequent Financing. In February 2005, as more fully described in Note 12 herein, the Company obtained $15,000,000
through the issuance of 7.75% convertible notes. These funds will generally be used for the
Companys working capital requirements. Liquidity Revolving Line of Credit. The Company has a revolving line of credit agreement together with an overadvance facility.
See Note 5 for the terms of the overadvance facility and Note 6 for the terms of the revolving
credit agreement. As of December 31, 2004, the total amount available under the revolving line of
credit was approximately $4,834,000. Trade Credit Expansion. Management believes that it will be successful in continuing to expand existing credit
facilities and obtaining additional lines of credit with new vendors. Profitability Cost Reductions. Under alternative plans of operations, management would, if considered necessary, be able to
substantially reduce operating costs associated with patient acquisition activities and other
operating costs to mitigate the effects of any temporary cash flow shortages. Potential Sale of Intangible Assets. Management has explored the strategic alternatives associated with the sale of a portion of
the Companys developed patient base in exchange for cash, and believes that substantial profits,
as well as cash, could be available from such transactions. Summary. Management believes that the actions presently being taken by the Company provide the
opportunity for the Company to improve liquidity and profitability. However, there can be no
assurances that managements plans will be achieved. 38




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 4. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation on property and equipment is calculated
on the straight-line method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the lease terms or the estimated useful lives of the
assets. EstimatedUseful
    
    
    December 31,Life (Years)
    
    
    2004
    
    
    2003(in thousands)Office and computer equipment
    
    
    3-5
    
    
    $
    682
    
    
    $
    260Leasehold improvements
    
    
    5
    
    
    
    412
    
    
    
    197Software
    
    
    3
    
    
    
    1,317
    
    
    
    3622,411
    
    
    
    819Less accumulated depreciation
    
    
    
    
    
    
    641
    
    
    
    135$
    1,770
    
    
    $
    684
 5. OVERADVANCE FACILITY On March 1, 2005, borrowings of up to $5,000,000 became available under an overadvance
facility, limited by a borrowing base formula relating to the Companys earnings before interest,
taxes, depreciation and amortization (EBITDA), as defined. The overadvance facility, which matures
on April 30, 2007, bears interest at prime plus 4.5%, plus certain additional fees and charges,
including an equity participation fee, as defined. As of December 31, 2004, there was no amount
owed on the overadvance facility. 6. LINES OF CREDIT December 31,2004
    
    
    2003(in thousands)$10,000,000 maximum, limited by a borrowing
base. Interest is the higher of prime plus 2.5% or
4.0%, plus certain additional fees and charges. See
additional terms below.
    
    $
    2,619
    
    
    $
    $500,000 secured line of credit with a bank.
Interest was at prime plus 1%, payable monthly. The
line was repaid with the proceeds from the new
revolving credit facility and terminated on April
30, 2004.
    
    
    
    
    
    
    400$400,000 secured line of credit with a bank.
Interest was stated at 2.5%, payable monthly. The
line was repaid with the proceeds from the new
revolving credit facility and terminated on April
30, 2004.
    
    
    
    
    
    
    400Line of credit included in current liabilities
    
    $
    2,619Lines of credit included in long-term debt
    
    
    
    
    
    $
    800
 39




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 6. LINES OF CREDIT (Continued) The Company entered into a revolving credit agreement on April 30, 2004, which was
subsequently amended. Under the agreement, as amended, the available funding is limited by a
borrowing base, which is comprised of a percentage of eligible accounts receivable and inventory,
as defined, up to a maximum of $10,000,000, maturing on April 30, 2007. The revolving line bears
interest monthly at the higher of prime plus 2.5% or 4.0%. As of December 31, 2004, the rate in
effect was 7.75%. The line is secured by substantially all assets of the Company and requires the
maintenance of minimum EBITDA as defined, and fixed charge coverage ratios, as well as minimum
monthly cash collections of accounts receivable and minimum available cash balances, as defined.
Under the terms of our line of credit agreement, the Company is not permitted to pay dividends. The lines of credit outstanding as of December 31, 2003 were repaid in full with the proceeds
from the revolving credit agreement entered into on April 30, 2004. 7. COMMITMENTS AND CONTINGENCIES Purchase Commitments. The Company has entered into distribution agreements with several vendors, one of which is a
stockholder of the Company (See Note 10). The agreements require the vendors to provide medical
supplies to the Company for sale to Medicare eligible patients. The agreements expire at various
times through October 31, 2007 and provide for pricing allowances based on purchase volumes and
require the Company to make minimum annual purchase commitments. In order to secure pricing
discounts, the Company has also contracted to purchase a minimum of $4,813,000 in advertising
during 2005. Purchase commitments outstanding as of December 31, 2004 were as follows (in
thousands): Related
    
    
    OtherYear ending December 31:
    
    Party
    
    
    Vendors
    
    
    Advertising
    
    
    Total2005
    
    $
    14,301
    
    
    $
    13,950
    
    
    $
    4,813
    
    
    $
    33,0642006
    
    
    28,931
    
    
    
    15,500
    
    
    
    
    
    
    
    44,4312007
    
    
    
    
    
    
    17,050
    
    
    
    
    
    
    
    17,050$
    43,232
    
    
    $
    46,500
    
    
    $
    4,813
    
    
    $
    94,545
 WellPoint Agreement. On March 30, 2004, the Company entered into an exclusive service agreement (Agreement) with
WellPoint Pharmacy Management (WellPoint). WellPoint is an approved sponsor under the Medicare
Prescription Drug Discount Card and Transitional Assistance Program established pursuant to the
Medicare Prescription Drug Improvement and Modernization Act of 2003. As such, WellPoint has
identified USPG as its exclusive subcontractor for the provision of enrollment and patient services
to persons who enroll in the prescription drug card program operated by WellPoint. Under the
Agreement, the parties provide these and certain other exclusive services for each other as set
forth in the Agreement and pay each other fees for providing these services, as defined. Through
December 31, 2004, revenues under this agreement have not been significant. 40




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (Continued) Service Agreement. The Company entered into a service agreement with a supplier whereby the supplier establishes
and maintains a network of pharmacies and negotiates pharmaceutical pricing at pharmacies accepting
the discount drug cards distributed by the Company. Under the agreement, which expires on March 31,
2008, the Company receives a fee each time a cardholder uses the card. The supplier receives an
administrative fee that varies based on volume with a minimum of $4,000 per month. The revenue
under this agreement is presented net of related costs. Distribution Agreement. The Company entered into a distribution agreement, which expires on February 27, 2007, with a
large retail pharmacy for the provision of diabetic supplies to the Companys patients. Under the
agreement, the Companys patients can obtain diabetic supplies directly from the retail pharmacy.
The Company must purchase diabetic supplies from the retail pharmacy at the net price paid by the
retail pharmacy to its wholesaler. As consideration for entering into the agreement, the Company
must pay minimum dispensing fees, as defined, to the retail pharmacy. In April 2004, the Company
began the pilot phase of its retail pharmacy diabetic supplies program. The Company began
recognizing revenue from this initiative during the fourth quarter of 2004, and, there were
approximately 6,000 retail patients enrolled in this program as of December 31, 2004. Operating Leases. The Company leases its operating facilities and certain equipment under noncancelable
operating leases expiring at various dates through September 1, 2010. Future minimum payments are
estimated as follows (in thousands): Year ending December 31:2005
    
    $
    1,0032006
    
    
    8682007
    
    
    7932008
    
    
    7642009
    
    
    741Thereafter
    
    
    609$
    4,778
 Rent expense for each of the years ended December 31, 2004, 2003 and 2002 was approximately
$671,000, $215,000 and $68,000, respectively. 41




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES (Continued) Equity Participation Fee. As discussed in Note 5, the Companys overadvance facility, which matures on April 30, 2007,
includes an equity participation fee that is contingent upon the Companys financial results. The
fee will become due on a date determined by the lender, which shall not be later than maturity, but
may be earlier if the facility is terminated prior to April 30, 2007. The fee can range from
$125,000 to $625,000, depending on the date chosen by the lender. As of December 31, 2004, the
Company had accrued $75,000 related to the equity participation fee. Employment Agreements. The Company has employment agreements with its chief executive officer, Dr. Glenn M. Parker,
M.D., President and Chief Information Officer, Lewis P. Stone, and chief operating officer, Robert
Gregg. In addition to salary, bonuses and benefits, these agreements also provide for termination
benefits if the agreement is terminated by the Company for reasons other than cause or by the
executive for good reason or disability, each as defined in the agreement. In these cases, then the
executive is entitled to:  
    An amount equal to base salary for twenty-four months
    In the event of the executives disability, medical insurance during the period the
executives spouse or the executive is eligible to receive benefits under COBRA
    Immediately vest all stock options or restricted stock previously granted to the
executive
    Require the Company to purchase from the executive up to $3,000,000 worth of shares of
the Companys common stock. In lieu of a cash payment, the Company may arrange the sale of
the shares to a third party or register the resale of the shares, in which case the
executive shall receive at least $3,000,000. If the Company decides to purchase the shares
from the executive and one or both of the other executives exercises their rights to sell
at the same time, then the Company may pay the funds to the executives over two or three
years, as appropriate, in equal amounts pro-rata among the executives 8. STOCK BENEFIT PLANS 2004 Incentive Stock Plan. On August 30, 2004, the shareholders of the Company voted to adopt the NationsHealth, Inc.
2004 Incentive Stock Plan (the Plan) to enable the Company to offer directors, officers and other
key employees stock options in the Company, thereby attracting, retaining, and rewarding these
participants and strengthening the mutuality of interests between these participants and the
Companys stockholders. A total of 1,900,000 shares of the Companys common stock have been
reserved for issuance under the Plan. On October 22, 2004, options were granted to employees and
directors to purchase 1,208,125 shares at an exercise price of $6.87 per share which was the
closing price for that day. These options, which were the only options granted by the Company
through December 31, 2004, will expire on October 21, 2010.As of December 31, 2004, none of these
options had been exercised or forfeited and all 1,208,125 options, of which 15,000 were
exercisable, remained outstanding. 42




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 8. STOCK BENEFIT PLANS (Continued) The fair value of the options granted was estimated as of the date of the grant using the
Black-Scholes option pricing model with the following assumptions.  
    Expected dividend yield of 0%
    Risk-free interest rate of 3.27%
    Expected life of 6.0 years
    Expected volatility of 50% For purposes of pro forma disclosures, the estimated fair value of the options of $3.52 is
amortized to expense over the options vesting period of four years, except for 15,000 options that
were vested immediately, using the straight-line method. The Company accounts for its stock options plan under the intrinsic value and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Under this method, compensation cost for stock options
granted to directors or employees is measured as the excess, if any, of the estimated market price
of the Companys stock at the date of the grant of the amount an employee must pay to acquire the
stock. The Company provides additional disclosures required under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation as amended by Statement of Financial
Accounting Standards No. 148 Accounting for Stock-Based Compensation  Transition and Disclosure. Employee Savings Plan. During 2004, NationsHealth established a savings plan pursuant to Section 401(k) of the
Internal Revenue Code (the Code), whereby employees may contribute a percentage of their
compensation, not to exceed the maximum amount allowable under the Code. At the discretion of the
Board of Directors, NationsHealth may elect to make contributions into the savings plan. Through
December 31, 2004 the Board has not authorized any contributions and has no current plans for
future contributions. Bonus Plan and Trust. In December 2004, certain of the Companys principal shareholders transferred significant
portions of their shares to fund a stock bonus plan for certain of the Companys key employees and
consultants. These shareholders transferred 2,006,893 shares of stock, representing approximately
7.7% of the Companys outstanding shares and 9.8% of their personal holdings, to a trust. The
shares will be distributed to these employees and consultants over the next four years. The award
of these fully vested shares related to prior services and the ultimate distribution is
pre-determined and not contingent upon continuation of service to the Company or any other future
event. The amount of expense recorded related to this transaction was $14,315,000, consisting of a
non-cash charge of $13,707,000 for the value of the shares contributed and $608,000 of related
payroll costs. The transfer of the shares, which had no effect on the total number of shares
outstanding, was treated as a contribution to the capital of the Company for accounting purposes
and resulted in $13,707,000 being recorded to additional paid-in capital on the Companys balance
sheet as of December 31, 2004. 43




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 9. STOCKHOLDERS EQUITY The Offering. On August 28, 2003, Millstream sold 4,025,000 units (Units) in the Offering, which included the
525,000 Units subject to the underwriters over-allotment option. Each Unit consists of one share
of the Companys common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants
(Warrants). Each Warrant entitles the holder to purchase from the Company one share of common
stock at an exercise price of $5.00. The Warrants, which expire August 25, 2007, are redeemable at
a price of $.01 per Warrant upon 30 days notice, only in the event that the last sale price of the
common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period
ending on the third day prior to the date on which notice of redemption is given. In connection
with the Offering, Millstream issued an option for $100 to the representative of the underwriters
to purchase 350,000 Units at an exercise price of $9.90 per Unit. The warrants underlying such
Units are exercisable at $6.00 per share, but otherwise have the same terms and conditions as the
Warrants. Separate trading of the Common Stock and Warrants underlying the Companys Units
commenced on September 9, 2003. Warrants. On March 9, 2004, Millstream granted warrants, which expire on August 31, 2011, to purchase an
aggregate of 45,000 shares of common stock at an exercise price of $8.50 per share to three
consultants who assisted in the due diligence investigation of NationsHealth Holdings and other
aspects of the merger. The consultants were all employed by companies affiliated with directors of
Millstream. Preferred Stock. The Company is authorized to issue 1,000,000 shares of preferred stock, par value $.0001 per
share, with such designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. As of December 31, 2004, no shares of preferred stock have
been issued. Common Stock Reserved. The Company has 11,020,200 shares of common stock reserved for issuance upon exercise of the
warrants, stock options and the underwriters option, which totaled 8,070,200, 1,900,000 and
1,050,000, respectively. 10. RELATED PARTY TRANSACTIONS Medical Benefit Distribution Agreement. Effective October 1, 2003, NationsHealth Holdings entered into a distribution agreement with a
vendor who subsequently acquired a membership interest in NationsHealth Holdings on October 30,
2003, which was subsequently converted into common stock of the combined Company. The agreement
requires the Company to make minimum annual purchases of diabetes supplies over the term of the
agreement, which expires on December 31, 2006 (see Note 7). 44




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 10. RELATED PARTY TRANSACTIONS (Continued) For the years ended December 31, 2004 and 2003, the Company had total purchases from this
vendor of approximately $9,642,000 and $879,000, respectively, of which the total amount relating
to the minimum purchase commitment was $8,686,000. The Company also had inventory on hand from this
vendor of approximately $552,000 and $311,000 as of December 31, 2004 and 2003, respectively.
Additionally, the Company had accounts payable to this vendor of approximately $5,004,000 and
$954,000 as of December 31, 2004 and 2003, respectively. Notes Payable to Members. As of December 31, 2003 NationsHealth Holdings had notes payable to members of $1,343,000. These
notes, with interest of 12% per annum, were unsecured and due on October 30, 2006. The Company
incurred interest expense on these notes of approximately $230,000, $171,000 and $37,000 for the
years ended December 31, 2004, 2003 and 2002, respectively. Upon consummation of the merger, these
notes were repaid in full. 11. INCOME TAXES For the years ended December 31, 2002 and 2003 and through the date of the merger on August
31, 2004, the Company was treated as a partnership for federal income tax purposes and therefore
was not subject to income taxes. However, in contemplation of a potential offering or other capital
transaction that would require the Company to convert to a corporation, the Company has presented a
tax provision as if it were subject to income taxes. Subsequent to the merger date, the Company was
subject to income taxes and accounted for such taxes as prescribed in SFAS No. 109, Accounting for
Income Taxes. Deferred income taxes are recognized for the tax consequences of temporary differences by
applying the enacted statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and tax bases of the existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income for the period that
includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset
may not be realized. The tax effects of temporary differences that would give rise to significant portions of the
net deferred tax asset at December 31, 2004 and 2003 are presented below: 2004
    
    
    2003Net operating loss carry forward
    
    $
    1,076
    
    
    $
    765Restricted stock plan
    
    
    5,158
    
    
    
    Allowance for doubtful accounts
    
    
    4,388
    
    
    
    1,360Inventory reserve
    
    
    605
    
    
    
    39Accrued salaries
    
    
    234
    
    
    
    Property and equipment basis differences,
depreciation and amortization
    
    
    (468
    )
    
    
    (12
    )Other
    
    
    
    
    
    
    40Total gross deferred tax asset
    
    
    10,993
    
    
    
    2,192Less valuation allowance
    
    
    (10,993
    )
    
    
    (2,192
    )$
    
    
    
    $
    
 45




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 11. INCOME TAXES (Continued) Because of the Companys lack of earnings history, the net deferred tax assets have been
offset by a 100% valuation allowance. The valuation allowance for net deferred tax assets was
$10,993,000 and $2,192,000 as of December 31, 2004 and 2003, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this assessment. At December 31, 2004, the Company had net operating loss carryforwards available of
approximately $2,861,000. These carryforwards expire through 2024. The Company had no income tax
expense in 2004. Pursuant to the Internal Revenue Code and regulations thereunder, prior to the Merger,
NationsHealth Holdings was treated as a partnership for Federal income tax purposes. Accordingly,
the members reported their distributive share of income, deductions, gain, loss, credits and
specifically allocated items on their respective income tax returns. Therefore, NationsHealth
Holdings did not incur federal income tax through the date of the Merger and the accompanying
financial statements do not include a provision for federal income taxes for 2003 or 2002. If the
Company had been taxed as a corporation for each of the years ended December 31, 2003 and 2002, the
provision would have been $0. 12. SUBSEQUENT EVENT On February 28, 2005, the Company obtained $15,000,000 through a private placement of 7.75%
convertible secured notes. These notes, which mature on February 28, 2012, are convertible at any
time until maturity into common stock at $6.56 per share, subject to anti-dilution adjustments.
Interest on these notes will be accrued and paid monthly. As part of this financing arrangement,
certain principal shareholders of NationsHealth indirectly transferred 1,785,714 shares of common
stock to the note purchasers. The $15,000,000 received will be allocated between the shares of
common stock and the convertible debt. Since no additional shares were issued, the portion
allocated to the common stock will be credited to additional paid-in capital. Any discount
calculated in the transition will be amortized as additional interest expense over the term of the
debt. 46




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 13. MAJOR SUPPLIERS The Company purchases medical supplies for sale to Medicare eligible patients from several
suppliers that constitute a significant portion of the Companys purchases and accounts payable for
the years ended December 31, 2004, 2003 and 2002, respectively. The major suppliers were as follows
(in thousands): Percentage
    
    
    Amount
    
    
    Percentage
    
    
    Amount ofof
    
    
    of
    
    
    of Accounts
    
    
    AccountsPurchases
    
    
    Purchases
    
    
    Payable
    
    
    PayableYear Ended December 31, 2004Supplier A
    
    
    39
    %
    
    $
    9,642
    
    
    
    52
    %
    
    $
    5,004Supplier D
    
    
    15
    %
    
    
    3,794
    
    
    
    3
    %
    
    
    30254
    %
    
    $
    13,436
    
    
    
    55
    %
    
    $
    5,306Year Ended December 31, 2003Supplier B
    
    
    18
    %
    
    $
    1,895
    
    
    
    2
    %
    
    $
    99Supplier C
    
    
    15
    %
    
    
    1,622
    
    
    
    0
    %
    
    
    Supplier D
    
    
    24
    %
    
    
    2,531
    
    
    
    14
    %
    
    
    73157
    %
    
    $
    6,048
    
    
    
    16
    %
    
    $
    830Year Ended December 31, 2002Supplier B
    
    
    27
    %
    
    $
    539
    
    
    
    18
    %
    
    $
    282Supplier C
    
    
    29
    %
    
    
    593
    
    
    
    7
    %
    
    
    115Supplier D
    
    
    28
    %
    
    
    572
    
    
    
    28
    %
    
    
    45784
    %
    
    $
    1,704
    
    
    
    53
    %
    
    $
    854
 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) March 31
    
    
    June 30
    
    
    September 30
    
    
    December 312004Revenue
    
    $
    13,305
    
    
    $
    18,580
    
    
    $
    20,087
    
    
    $
    22,251Gross profit
    
    
    9,250
    
    
    
    12,627
    
    
    
    13,804
    
    
    
    15,824Net loss
    
    
    (3,071
    )
    
    
    (4,235
    )
    
    
    (888
    )
    
    
    (18,230
    )Loss per share
basic and diluted*
    
    $
    (0.12
    )
    
    $
    (0.16
    )
    
    $
    (0.03
    )
    
    $
    (0.70
    )2003Revenue
    
    $
    4,702
    
    
    $
    5,187
    
    
    $
    5,570
    
    
    $
    10,267Gross profit
    
    
    1,740
    
    
    
    2,693
    
    
    
    3,923
    
    
    
    7,472Net loss
    
    
    (461
    )
    
    
    (642
    )
    
    
    (827
    )
    
    
    (1,897
    )Loss per share
basic and diluted *
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.07
    )
   *
    
    See Note 2. 47




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##### Table of Contents



Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On September 21, 2004, BDO Seidman, LLP, the principal accountants of NationsHealth, Inc.,
delivered to us a resignation letter in connection with our routine decision to engage another
auditor. On September 21, 2004, we engaged Rachlin Cohen & Holtz LLP, based in Fort Lauderdale,
Florida as our principal accountants to audit our financial statements. Prior to the merger of
Millstream and NationsHealth Holdings, on August 31, 2004, Rachlin served as the principal
accountants to NationsHealth Holdings, L.L.C. The resignation of BDO and the appointment of
Rachlin were approved by the audit committee of the board of directors of the Corporation. BDOs report on our financial statements for either of the past two years did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles. During our two most recent fiscal years and any subsequent interim
period preceding the resignation of BDO, there were no disagreements with BDO on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope. 
 Item 8A. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the our disclosure controls and procedures. Based on their
evaluation, as of the end of the period covered by this Annual Report on Form 10-KSB/A, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) are effective. There have been no significant changes in internal control
over financial reporting for the period covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting. 48




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##### Table of Contents



PART III Certain information required by Part III of Form 10-KSB/A is contained in the definitive Proxy
Statement to be used in connection with the annual meeting of stockholders for the year 2005, and
is incorporated herein by reference to this Form 10-KSB/A Annual Report: 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act Portions of the response to this item are incorporated herein by reference from the discussion
responsive thereto under the captions Election of Directors  Nominees for Director, Section
16(a) Beneficial Ownership Reporting Compliance, Executive Officers and Key Employees and
Election of Directors-Board and Committee Matters in the Companys Definitive Proxy Statement
relating to the 2005 Annual Meeting of Stockholders (the 2005 Proxy Statement). Code of Ethics Our Code of Business Conduct and Ethics is available in the Investor Relations section of our
website, at www.nationshealth.com. 
 Item 10. Executive Compensation The response to this item is incorporated herein by reference from the discussion responsive
thereto under the following captions in the 2005 Proxy Statement: Election of Directors  Director
Compensation, and Executive Compensation and Election of Directors  Compensation Committee
Interlocks and Insider Participation. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters The response to this item is incorporated herein by reference in part from the discussion
responsive thereto under the caption Share Ownership in the 2005 Proxy Statement. 49




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The following table provides information about the Common Stock that may be issued under our
existing equity compensation plans as of December 31, 2004. Weighted-average
    
    
    Number of securities remainingNumber of securities to
    
    
    exercise price of
    
    
    available for future issuance underbe issued upon exercise
    
    
    outstanding
    
    
    equity compensation plansof outstanding options,
    
    
    options, warrants
    
    
    (excluding securities reflected inwarrants and rights
    
    
    and rights
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,208,125
    
    
    $
    6.87
    
    
    
    691,875Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,208,125
    
    
    
    
    
    
    
    691,875
 
 Item 12. Certain Relationships and Related Transactions The response to this item is incorporated herein by reference from the discussion responsive
thereto under the caption Election of Directors  Certain Relationships and Related Transactions
in the 2005 Proxy Statement. 
 Item 13. Exhibits, List and Reports on Form 8-KFinancial Statements The Financial Statements are included under Part II, Item 7 of this Report. (a) Exhibits Exhibit No.
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger dated as
of August 10, 2004 among Millstream Acquisition
Corporation, N Merger L.L.C. and NationsHealth Holdings,
L.L.C. Filed as Annex A to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.3.1
    
    Second Restated Certificate of Incorporation of Millstream
Acquisition Corporation. Filed as Exhibit 3.3 to the
Companys Form 8-A12G/A (File No. 000-50348) filed
September 8, 2004 and incorporated herein by reference.3.2
    
    By-Laws of NationsHealth, Inc., as amended and restated on
August 31, 2004. Filed as Exhibit 3.4 to the Companys
Form 8-A12G/A (File No. 00050348) filed September 8, 2004
and incorporated herein by reference.4.1
    
    Stockholders Agreement, dated as of March 9, 2004, as
amendment on June 2, 2004 among Millstream Acquisition
Corporation, RGGPLS Holding, Inc. and GRS Holdings, L.L.C.
Filed as Annex E to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.
 50




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##### Table of Contents



Exhibit No.
    
    Description4.2
    
    Registration Rights Agreement, dated as of March 9, 2004,
as amended on June 2, 2004, by and among Millstream
Acquisition Corporation, RGGPLS Holding, Inc., GRH
Holdings, L.L.C., and Becton, Dickinson and Company.
Filed as Annex F to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.4.3
    
    NationsHealth, Inc. 2004 Incentive Stock Plan, dated
August 30, 2004. Filed as Annex I to the Companys
Definitive Proxy Statement (File No. 000-50348) filed on
August 13, 2004.4.4
    
    Amended and Restated Governance Agreement, dated as of
August 10, 2004, among Millstream Acquisition Corporation,
RGGPLS Holding, Inc., and Arthur Spector. Filed as
Exhibit 5.02(a) to the Companys Form 8-K (File No.
000-50348) filed September 7, 2004 and incorporated herein
by reference.4.5
    
    Form of Stock Option Agreement under the NationsHealth,
Inc. 2004 Stock Option Plan. Filed as Exhibit 10.12 to
the Companys Form 10-QSB (File No. 000-50348) filed
November 10, 2004 and incorporated herein by reference.10.1
    
    Employment Agreement made as of March 9, 2004, by and
between Millstream Acquisition Corporation and Glenn M.
Parker, M.D. Filed as Exhibit 5.02(d) to the Companys
Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.2
    
    Employment Agreement made as of March 9, 2004, by and
between Millstream Acquisition Corporation and Robert
Gregg. Filed as Exhibit 5.02(e) to the Companys Form 8-K
(File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.3
    
    Employment Agreement made as of March 9, 2004, by and
between Millstream Acquisition Corporation and Lewis
Stone. Filed as Exhibit 5.02(f) to the Companys Form 8-K
(File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.4
    
    Indemnification and Escrow Agreement, dated as of August
30, 2004 among Millstream Acquisition Corporation,
Continental Stock Transfer & Trust Company, as Escrow,
RGGPLS Holding, Inc., and Arthur Spector. Filed as
Exhibit 5.02(g) to the Companys Form 8-K (File No.
000-50348) filed September 7, 2004 and incorporated herein
by reference.10.5
    
    Lease Agreement with Liberty Property Limited Partnership
dated March 1, 2003, for the property located at 13650
N.W. 8th Street, Sunrise, Florida. Filed as
exhibit 10.5 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and incorporated herein by
reference.10.6
    
    Assignment of Lease Agreement with Liberty Property
Limited Partnership for the property located at 13650 N.W.
8th Street, Sunrise, Florida, dated February
19, 2004. Filed as exhibit 10.6 to the Companys Form
10-KSB (File No. 000-50348) filed March 25, 2005 and
incorporated herein by reference.10.7
    
    Lease Agreement with Liberty Property Limited Partnership
dated May 1, 2004, for the property located at 13630 N.W.
8th Street, Sunrise, Florida. Filed as exhibit
10.7 to the Companys Form 10-KSB (File No. 000-50348)
filed March 25, 2005 and incorporated herein by reference.10.8
    
    Assignment of Lease Agreement with Liberty Property
Limited Partnership for the property located at 13630 N.W.
8th Street, Sunrise, Florida, dated February
19, 2004. Filed as exhibit 10.8 to the Companys Form
10-KSB (File No. 000-50348) filed March 25, 2005 and
incorporated herein by reference.10.9
    
    Sublease Agreement with D & K Healthcare Resources Inc.
dated May 19, 2004, for the premises located at 2955 West
Corporate Lakes Boulevard, Weston, Florida. Filed as
exhibit 10.9 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and
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Exhibit No.
    
    Descriptionincorporated herein by
reference.
 52




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##### Table of Contents



Exhibit No.
    
    Description23.1
    
    Consent of Rachlin Cohen & Holtz LLP. Filed herewith.31.1
    
    Certification of Chief Executive Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed
herewith.31.2
    
    Certification of Chief Financial Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed
herewith.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350. Filed herewith.99.1
    
    Important Factors that May Affect Future Operating Results. Filed herewith.
 (b) Reports on Form 8-K On November 12, 2004, we filed a Current Report on Form 8-K to announce our third quarter
results in a press release, dated November 10, 2004 which contained the following financial
statements:  
    Unaudited Summary Consolidated Statements of Operations Data for the quarter ended
September 30, 2004
    Unaudited Summary Consolidated Statements of Operations Data for the nine months ended
September 30, 2004
    Unaudited Summary Consolidated Balance Sheet dated September 30, 2004 On November 17, 2004, we filed a Current Report on Form 8-K to furnish presentation materials,
which were prepared for presentations to institutional investors beginning on November 17, 2004. 
 Item 14. Principal Accountant Fees and Services The response to this item is incorporated herein by reference from the discussion responsive
thereto under the captions Election of Directors  Board and committee Matters and Information
Concerning Our Auditors in the 2005 Proxy Statement. 53




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf of the undersigned, thereunto
duly authorized, this 13th day of May, 2005. NATIONSHEALTH, INC.By:
    
    /s/ Glenn M. Parker
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company in the capacities and on the dates
indicated. Name
    
    Title
    
    Date/s/ Glenn M. Parker

Glenn M. Parker
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    May 13, 2005/s/ Timothy Fairbanks

Timothy Fairbanks
    
    Chief Financial Officer and
Director (Principal Financial
Officer)
    
    May 13, 2005/s/ Arthur A. Spector

Arthur A. Spector
    
    Chairman of the Board of Directors
    
    May 13, 2005/s/ Lewis P. Stone

Lewis P. Stone
    
    Director, President and Chief
Information Officer
    
    May 13, 2005/s/ Don K. Rice

Don K. Rice
    
    Director
    
    May 13, 2005/s/ Richard R. Howard

Richard R. Howard
    
    Director
    
    May 13, 2005/s/ George F. Raymond

George F. Raymond
    
    Director
    
    May 13, 2005
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NATIONSHEALTH, INC. 
 EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger dated as
of August 10, 2004 among Millstream Acquisition
Corporation, N Merger L.L.C. and NationsHealth Holdings,
L.L.C. Filed as Annex A to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.3.1
    
    Second Restated Certificate of Incorporation of Millstream
Acquisition Corporation. Filed as Exhibit 3.3 to the
Companys Form 8-A12G/A (File No. 000-50348) filed
September 8, 2004 and incorporated herein by reference.3.2
    
    By-Laws of NationsHealth, Inc., as amended and restated on
August 31, 2004. Filed as Exhibit 3.4 to the Companys
Form 8-A12G/A (File No. 00050348) filed September 8, 2004
and incorporated herein by reference.4.1
    
    Stockholders Agreement, dated as of March 9, 2004, as
amendment on June 2, 2004 among Millstream Acquisition
Corporation, RGGPLS Holding, Inc. and GRS Holdings, L.L.C.
Filed as Annex E to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.4.2
    
    Registration Rights Agreement, dated as of March 9, 2004,
as amended on June 2, 2004, by and among Millstream
Acquisition Corporation, RGGPLS Holding, Inc., GRH
Holdings, L.L.C., and Becton, Dickinson and Company.
Filed as Annex F to the Companys Definitive Proxy
Statement (File No. 000-50348) filed on August 13, 2004
and incorporated herein by reference.4.3
    
    NationsHealth, Inc. 2004 Incentive Stock Plan, dated
August 30, 2004. Filed as Annex I to the Companys
Definitive Proxy Statement (File No. 000-50348) filed on
August 13, 2004.4.4
    
    Amended and Restated Governance Agreement, dated as of
August 10, 2004, among Millstream Acquisition Corporation,
RGGPLS Holding, Inc., and Arthur Spector. Filed as
Exhibit 5.02(a) to the Companys Form 8-K (File No.
000-50348) filed September 7, 2004 and incorporated herein
by reference.4.5
    
    Form of Stock Option Agreement under the NationsHealth,
Inc. 2004 Stock Option Plan. Filed as Exhibit 10.12 to
the Companys Form 10-QSB (File No. 000-50348) filed
November 10, 2004 and incorporated herein by reference.10.1
    
    Employment Agreement made as of March 9, 2004, by and
between Millstream Acquisition Corporation and Glenn M.
Parker, M.D. Filed as Exhibit 5.02(d) to the Companys
Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.2
    
    Employment Agreement made as of March 9, 2004, by and
between Millstream Acquisition Corporation and Robert
Gregg. Filed as Exhibit 5.02(e) to the Companys Form 8-K
(File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.
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##### Table of Contents



Exhibit No.
    
    Description10.3
    
    Employment Agreement made as of March 9, 2004, by and between Millstream
Acquisition Corporation and Lewis Stone. Filed as Exhibit 5.02(f) to the
Companys Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.4
    
    Indemnification and Escrow Agreement, dated as of August 30, 2004 among
Millstream Acquisition Corporation, Continental Stock Transfer & Trust
Company, as Escrow, RGGPLS Holding, Inc., and Arthur Spector. Filed as
Exhibit 5.02(g) to the Companys Form 8-K (File No. 000-50348) filed
September 7, 2004 and incorporated herein by reference.10.5
    
    Lease Agreement with Liberty Property Limited Partnership dated March 1,
2003, for the property located at 13650 N.W. 8th Street,
Sunrise, Florida. Filed as exhibit 10.5 to the Companys Form 10-KSB (File
No. 000-50348) filed March 25, 2005 and incorporated herein by reference.10.6
    
    Assignment of Lease Agreement with Liberty Property Limited Partnership for
the property located at 13650 N.W. 8th Street, Sunrise, Florida,
dated February 19, 2004. Filed as exhibit 10.6 to the Companys Form 10-KSB
(File No. 000-50348) filed March 25, 2005 and incorporated herein by
reference.10.7
    
    Lease Agreement with Liberty Property Limited Partnership dated May 1,
2004, for the property located at 13630 N.W. 8th Street,
Sunrise, Florida. Filed as exhibit 10.7 to the Companys Form 10-KSB (File
No. 000-50348) filed March 25, 2005 and incorporated herein by reference.10.8
    
    Assignment of Lease Agreement with Liberty Property Limited Partnership for
the property located at 13630 N.W. 8th Street, Sunrise, Florida,
dated February 19, 2004. Filed as exhibit 10.8 to the Companys Form 10-KSB
(File No. 000-50348) filed March 25, 2005 and incorporated herein by
reference.10.9
    
    Sublease Agreement with D & K Healthcare Resources Inc. dated May 19, 2004,
for the premises located at 2955 West Corporate Lakes Boulevard, Weston,
Florida. Filed as exhibit 10.9 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and incorporated herein by reference.23.1
    
    Consent of Rachlin Cohen & Holtz LLP. Filed herewith.31.1
    
    Certification of Chief Executive Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed
herewith.31.2
    
    Certification of Chief Financial Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended. Filed
herewith.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350. Filed herewith.99.1
    
    Important Factors that May Affect Future Operating Results. Filed herewith.
 56