UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission file number 001-32935

Arcadia Resources, Inc.

(Exact name of registrant as specified in its charter)

NEVADA		88-0331369
(State or other jurisdiction of		(I.R.S. Employer I.D. Number)
incorporation or organization)
9320 PRIORITY WAY WEST DRIVE
INDIANAPOLIS, INDIANA		46240
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: (317) 569-8234

Securities registered under Section 12(b) of the Exchange Act: Common Stock, $0.001 par value.

Securities registered under Section 12(g) of the Exchange Act: None.

Name of each exchange on which securities are registered: American Stock Exchange

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, 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-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files), Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large Accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of September 30, 2010 based on $0.40 per share (the last reported sale price of our Common Stock quoted on the NYSE Amex Exchange), was approximately $41 million. For purposes of this computation only, all executive officers, directors and 10% beneficial owners of the Registrant are assumed to be affiliates. This determination of affiliate status is not necessarily a determination for other purposes.

As of June 28, 2011, the Registrant had 193,313,000 shares of Common Stock outstanding.

Documents incorporated by reference:

Portions of the definitive Proxy Statement for the Registrant’s fiscal 2011 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year end on March 31, 2011 are incorporated by reference into Part III of this Report.

 

 

TABLE OF CONTENTS

		Page No.
Part I
Item 1. Business			4
Item 1A. Risk Factors			10
Item 1B. Unresolved Staff Comments			19
Item 2. Properties			19
Item 3. Legal Proceedings			19
Item 4. Reserved			19
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			20
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			48
Item 8. Financial Statements and Supplementary Data			48
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			48
Item 9A. Controls and Procedures			48
Item 9B. Other Information			49
Part III
Item 10. Directors, Executive Officers and Corporate Governance			50
Item 11. Executive Compensation			50
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			50
Item 13. Certain Relationships and Related Transactions, and Director Independence			50
Item 14. Principal Accountant Fees and Services			50
Part IV
Item 15. Exhibits and Financial Statement Schedules			51
Signatures			53
EX-10.18
EX-10.27
EX-10.29
EX-10.45
EX-10.46
EX-10.47
EX-21.1
Exhibit 23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

We caution you that certain statements contained in this report (including any of our documents incorporated herein by reference), or which are otherwise made by us or on our behalf, are forward-looking statements. Also, documents which we subsequently file with the SEC and are incorporated herein by reference will contain forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Such forward-looking statements generally are based on our reasonable estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements are also based on economic and market factors and the industry in which we do business, among other things. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Forward-looking statements speak only as of the date hereof and are not guaranties of future performance. Important factors that could cause actual results to differ materially from the Company’s expectations are disclosed in this Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements include statements that are predictive in nature and depend upon or refer to future events or conditions. Forward-looking statements include words such as “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “seek,” “may,” “can,” “will,” “could,” “should,” “project,” “predict,” “aim,” “continue,” “potential,” “opportunity” or similar forward-looking terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements.

Other parts of, or documents incorporated by reference into, this report may also describe forward-looking information. Forward-looking statements are based on current expectations and projections about future events. Forward-looking statements are subject to risks, uncertainties, and assumptions about our Company. Forward-looking statements are also based on economic and market factors and the industry in which we do business, among other things. These statements speak only as of the date hereof and are not guaranties of future performance.

Readers are urged to carefully review and consider the various disclosures made by us in this Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission. These reports and filings attempt to advise interested parties certain risks and factors that may affect our business, financial condition and results of operations and prospects.

Unless otherwise provided, “Arcadia,” “we,” “us,” “our,” and the “Company” refer to Arcadia Resources, Inc. and its wholly-owned subsidiaries, and when we refer to 2011, 2010, and 2009, we mean the twelve-month period ended March 31 of those respective years, unless otherwise provided.

Part I

ITEM 1.		BUSINESS

Overview

Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries, is a national provider of pharmacy, home care, and medical staffing services operating under the service mark Arcadia HealthCare. In October 2010, the Company disposed of its Catalog business. In May and June 2009, the Company disposed of its Home Health Equipment (“HHE”), retail pharmacy software and industrial staffing businesses. Subsequent to these divestitures, the Company operates in two reportable business segments: Pharmacy and Home Care/Medical Staffing Services (“Services”). The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from approximately 65 facilities located in 18 states. The Company has pharmacy operations in Indiana and California and has customer service centers in Michigan and Indiana.

Recent Events

The Company’s Board of Directors has committed to a plan to sell the Services segment business, and management is actively engaged in the sale of this business segment. Once a definitive agreement to sell this business is approved by the Board of Directors, the Company intends to seek approval from the Company’s shareholders for any such sale and anticipates obtaining the necessary approvals and completing the sale of the Services segment by October 2011. Once this sale is completed, the Company’s sole remaining business will be its Pharmacy segment. In March 2011, the Company ceased the operations of its Minnesota pharmacy location. On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health Care Products, LLC, which operated its home-health oriented mail-order catalog and related website, to Home Health Depot, Inc. This entity represented the Company’s Catalog segment.

Business Strategy

The Company has two reportable business segments — Pharmacy and Services.

The key elements of the Company’s on-going business strategy are:

Business line focus. The Company has refocused its business strategy to support its overall vision of “Keeping People at Home and Healthier Longer”. Population demographics, the need for more effective management of medication for targeted groups and the projected demand for home health care are key drivers behind this strategic focus. The Company provides various health care services and products that fulfill these market needs. These services and products include specialty pharmacy services, medication management services and home care services.

The Company will focus on its Pharmacy business going forward. The Pharmacy segment operates under the DailyMed^TM brand and the Company intends to promote this brand in the market as the leading provider of medication management services.

Organic growth and potential acquisitions. In the short term, the Company is focused on organic growth of its pharmacy business. With the launch of its proprietary DailyMed™ medication management program, the Company has experienced the largest organic growth (both in percentage and revenue terms) in the Pharmacy business segment, and this trend is expected to continue. In addition to organic growth, longer term, the Company will consider acquisition opportunities in the pharmacy markets, as capital availability permits.

Pharmacy growth plan. The Company has developed an aggressive growth plan for its DailyMed pharmacy business. The DailyMed program is designed to improve compliance and adherence for members with complex chronic drug regimens, improving the quality of life for members living at home and cost reduction opportunities for at-risk payers. The Company is primarily focused on marketing directly to the at-risk payers and other delivery partners focused on cost-effective provision of health care services with an emphasis on caring for people in their home environments. Marketing efforts have been identified and developed to implement the Company’s sales plans to this target group.

Reduction of SG&A expense. The Company continues to focus on reducing its overall level of selling, general and administrative (“SG&A”) expense. During the past three years, the Company has implemented several actions designed to reduce SG&A expense, including exiting unprofitable business lines, reducing headcount, closing and consolidating executive and support offices, and reducing professional fees. The Company constantly evaluates further cost reduction opportunities. In light of the sale of certain businesses during fiscal 2010 and 2011, the revenue of the Company has been reduced, and the scope of its activities has been narrowed. As a result, management made additional reductions in SG&A expenses during fiscal 2011, principally at the corporate level, to bring these expenses more in line with the size and scope of current business operations. When the sale of the Services segment is completed, it is anticipated that the Company will make further reductions in SG&A expenses to bring its expense structure more in line with the size and scope of a single segment business.

Centralized management with local delivery of products and services. The Company’s Executive Committee includes the Chief Financial Officer, Chief Operating Officer and Executive Vice President of Pharmacy Operations and is chaired by the President/Chief Executive Officer. The Executive Committee oversees all day-to-day aspects of the Company’s business including the establishment of operational policies and procedures. Subject to the review and approval of the Company’s Board of Directors, the Executive Committee sets the strategic direction for each business segment and establishes appropriate financial targets and controls. However, the strategies for delivery of the Company’s services and products are done at a business segment and local market level. Within the Services segment, regional/local managers are given responsibility for tailoring their service and product mix in each office to meet the needs of the regional and local customers they serve.

Our Operating Segments

As indicated above, the Company’s services operate in two segments. These segments and their service and product offerings are discussed in more detail below.

Pharmacy Segment. The Pharmacy segment offers the Company’s DailyMed™ medication management system, which was acquired as part of its purchase of PrairieStone Pharmacy, LLC in February 2007. DailyMed™ transfers a patient’s prescriptions, over-the-counter medications and vitamins and organizes them into pre-sorted 28-day supply packages marked with the date and time each dosage should be taken. Our registered pharmacists review the patient’s panel of medications at the time a patient is enrolled and periodically perform more detailed medication therapy management (“MTM”) reviews to ensure the safety and effectiveness of the patient’s medications. DailyMed™ is aimed at reducing medication errors, improving medication adherence and ultimately lowering the cost of health care for its target customers. The Company is focused on marketing its DailyMed™ products and services through managed care providers and others responsible for managing the health care costs of the targeted population. The Company plans to invest in DailyMed™ as the need for improved systems for medication management creates growth opportunities for this segment.

The Pharmacy segment operates from two locations. The Indianapolis, Indiana pharmacy operation shares a facility with the corporate headquarters. All customer enrollment, customer service, MTM reviews and adjudication and collection of claims are performed from the Indianapolis location. It also houses the administrative overhead employees for the Pharmacy segment, including finance/accounting, compliance, information technology and human resources. The Pharmacy also has contracted operations in California where prescriptions are processed, reviewed and shipped to patients in California.

Numerous companies provide products and services in the pharmacy industry. These companies include community-based retail pharmacies, some of whom operate on a national level, and independents operating from a small number of locations; long-term care pharmacies, which provide pharmacy products and services to long-term care facilities such as assisted living and skilled nursing facilities; and providers of MTM services. The Company believes it has a unique competitive position. The Company has integrated various aspects of pharmacy product distribution and MTM services into a method of providing an enhanced system of medication management.

Services Segment. The Services segment provides home care and medical staffing services across the United States. Operated principally through the Company’s wholly-owned subsidiary, Arcadia Services, Inc. (“ASI”), this segment is a national provider of home care services, including skilled and personal care; and medical staffing services to numerous types of acute care and sub-acute care medical facilities. The Services segment provides nurses, certified nursing assistants, home health aides, homemakers and companions to home care clients. It provides nurses, certified nursing assistants and various allied health professionals to medical facilities. The medical staffing business provides per diem, local contract and travel staffing services to its customers.

The Services segment operates through a network of both company-owned offices, as well as affiliate offices that are locally owned and operated under a contractual arrangement with the Company. The Company and the affiliate offices share the gross margin on business generated by the affiliate office using a revenue-based formula. The affiliate offices market to local customers and service the contracts between the Company and those customers. The affiliates also recruit local field staff, which are employed by the Company, and manage the day-to-day assignment of the field employees to meet customer needs. In the Services segment, sales through affiliate offices represent approximately 66% of net revenue, with 34% of sales being done through company-owned offices. The mix of company-owned sales has increased over the past two years as the Company has converted several affiliate offices into company-owned locations.

The sales activity for home care and medical staffing services is primarily performed at company-owned and affiliate offices in local markets across the United States. In the home care market, these offices work with a wide range of referral sources and also sell directly to consumers. Referral sources for home care services include elder law attorneys, financial counselors, case managers, geriatric care managers, physicians, medical social workers, facility discharge planners and numerous other entities that influence the purchase of home care services. Selling efforts focus on our ability to provide high quality, cost-effective services, in a consistent, reliable fashion, performed by trained caregivers who are employed directly by the Company. The Company serviced more than 9,900 home care clients in fiscal 2011.

The sales activity for medical staffing is also primarily performed at the local office level. Sales are done via direct contacts with a wide variety of acute-care and sub-acute care facilities, including hospitals, rehabilitation facilities, skilled nursing facilities, hospices and others. Selling efforts focus on our ability to provide highly-skilled staff, often on short notice, on a cost-effective basis. Some facilities utilize vendor managed services (“VMS”) providers who contract on their behalf for these services. The Company serviced approximately 540 facilities in fiscal 2011.

The Company also has a central contracting group that pursues contracts for home care and medical staffing services on a national and regional level. These activities are coordinated with the local offices expected to provide the services.

Recruitment of home care and medical staffing personnel is conducted at the local level. Each local office has a different mix of clients and, therefore, has its own requirements for the employees needed to service these clients. All employees hired by the Company go through a rigorous screening process that includes criminal background checks, drug screening and skills assessments and undergo a variety of training to ensure compliance and quality service.

Competition in the Services segment consists of national and regional service providers, as well as smaller locally-owned and operated companies. In the home care segment, competition is highly fragmented with only a few national or regional providers. Because the home care business largely consists of personal care, homemaker/companion services and non-Medicare skilled care, the Company does not compete directly with the larger publicly-traded, Medicare-certified home health agencies. In the medical staffing segment, the Company competes with per diem staffing agencies, as well as agencies focused primarily on travel staffing. Competition in the travel staffing segment is dominated by several large, publicly-traded companies that operate on much larger scale than the Company’s travel staffing business.

Segment Financial Information

Financial information about the segments can be found in Item 7 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 16 to the Consolidated Financial Statements included under Item 8 of this report.

Government Regulation and Compliance

Our health care-related businesses are subject to extensive government regulation. The federal government and all states in which we currently operate (or intend to operate) regulate various aspects of our health care-related businesses. In particular, our operations are subject to numerous laws: (a) requiring licensing and approvals to conduct certain activities; (b) targeting the prevention of fraud and abuse; and (c) regulating reimbursement under various government-funded programs. Our locations are subject to laws governing, among other things, pharmacies, nursing services and certain types of home care.

The marketing, billing, documentation and other practices of health care companies are subject to periodic review by regional insurance carriers and various government agencies. These reviews include on-site audits, records reviews and investigations of complaints. Violations of federal and state regulations can result in criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.

Our operations are subject to: Medicare and Medicaid reimbursement laws; laws permitting Medicare, Medicaid and other payers to audit claims and seek repayment when claims have been improperly paid; laws such as the Health Insurance Portability and Accountability Act (“HIPPA”) regulating the privacy of individually identifiable health information; laws prohibiting kickbacks and the exchange of remuneration as an inducement for the provision of reimbursable services or products; laws regulating physician self-referral relationships; and laws prohibiting the submission of false claims. Health care is an area of rapid regulatory change. Changes in laws and regulations, as well as new interpretations of existing laws and regulations, may affect permissible activities, the relative costs associated with doing business and reimbursement amounts paid by federal, state and other third party payors. We cannot predict the future changes in legislations and regulations, but such changes could have a material adverse impact on the Company.

The Company has a dedicated credentialing and compliance group that manages our licensure, contracting and regulatory compliance. The compliance group oversees the Company’s quality assurance program, which includes periodic audits of the Company’s locations. In addition, compliance with billing and invoicing requirements is performed continually by billing center personnel. The Company believes that it is in material compliance with all laws and regulations applicable to its businesses.

Invoicing, Billing and Accounts Receivable Management

The Company performs most of its accounts receivable management at a national billing center covering the Services segment. The Company also maintains a billing center for its Pharmacy segment at its Indianapolis, Indiana pharmacy facility. Each of these billing centers has unique information systems, experienced billing personnel and established credit and collection procedures to support their business segments. Within each segment, third-party reimbursement is a detailed and complicated process that requires knowledge of and compliance with regulatory, contractual and billing processing requirements. The majority of our business is invoiced shortly after the time of service or at the time the product is shipped. Accurate billing and successful collections are a key to our business plan.

Employees

The Company employs full-time management and administrative employees throughout the United States. In addition, the Company employs a variety of field staff, including health care professionals and caregivers, to service the needs of our customers. The following summarizes the number of full time or part time management and administrative employees by segment as of March 31, 2011:

Pharmacy			61
Services			131
Corporate			37
Total			229

In addition to the above, the Services segment employed approximately 4,000 field employees as of March 31, 2011. We have no unionized employees and do not have any collective bargaining agreements. We believe our relationships with our employees are good.

Supply

We purchase supplies from various vendors. While we utilize one vendor for a majority of our pharmaceutical purchases, we are not dependent upon any single supplier and believe that our product needs can be met by an adequate number of various manufacturers.

Environmental Compliance

We believe we are currently in compliance, in all material respects, with applicable federal, state and local statutes and ordinances regulating the discharge of hazardous materials into the environment. We do not believe the Company will be required to expend any material amount to remain in compliance with these laws and regulations or that such compliance will materially affect our capital expenditures, earnings or competitive position.

Available Information

The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Interested parties may read and copy any documents filed with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s internet site is www.sec.gov.

Our internet site is www.arcadiahealthcare.com. You can access our investor, media and corporate governance information through our internet site, by clicking on the heading “Investors.” We make available free of charge, on or through our Investors webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information on our website does not constitute part of this 10-K report or any other report we file with or furnish to the SEC.

Executive Officers

The following table sets forth information concerning our executive officers, including their ages, positions and tenure:

						Served as Executive
Name		Age		Position(s)		Officer Since
Marvin R. Richardson		53		President and Chief Executive Officer		February 2007
Matthew R. Middendorf		41		Chief Financial Officer, Secretary and Treasurer		February 2008
Steven L. Zeller		54		Chief Operating Officer and General Counsel		September 2007
Charles L. Goodall		49		Executive Vice President, Pharmacy Operations		April 2011

Marvin R. Richardson. Mr. Richardson, who has over 30 years of health care and retail pharmacy experience, joined the Company in conjunction with its acquisition of PrairieStone Pharmacy, LLC in February 2007. In 2003, he co-founded PrairieStone Pharmacy LLC headquartered in Minneapolis, Minnesota and served as President and CEO. While at PrairieStone, DailyMed™ was launched — a comprehensive Medication Therapy Management (MTM) program along with compliance packaging of pharmaceuticals geared to help those in need better manage their conditions while helping payers reduce unnecessary costs associated with medication waste, avoidable hospitalizations and unintended long-term care admissions. The company was named “Chain of the Year” by Drug Topics magazine in 2005. Prior to his involvement with PrairieStone, Mr. Richardson held various management positions with the Walgreen Co. and was Senior Vice President of Pharmacy Operations for Rite Aid Corporation, overseeing Rite Aid’s 3,500 operating pharmacies. Richardson is a 1980 graduate of Purdue University, where he earned his Bachelor of Science degree in Pharmacy. He received the Pharmacy Distinguished Alumni Award in 2008 and was named to the Purdue University Foundation Development Council in 2008. He also serves on the Board of Directors for the Mental Health America of Indiana Association. He has been an advisor to several major government leaders on healthcare policy including Vice President Dan Quayle and current New York City Deputy Mayor and former Indianapolis Mayor Stephen Goldsmith.

Matthew R. Middendorf, Chief Financial Officer, Secretary and Treasurer, joined the Company in February 2008 as Chief Financial Officer. Mr. Middendorf previously served as a consultant to the Company, providing day-to-day financial and accounting support to the Interim CFO and working on special projects for the CEO. He has responsibility for internal and external reporting, planning and analysis, and corporate and business unit accounting. Mr. Middendorf formerly served as the Corporate Controller and Director of Financial Reporting for Workstream, Inc., a publicly-traded human resources software company. He worked in public accounting for more than a decade, most recently with Grant Thornton in its Seattle office; and, has significant experience working with mid-size companies in the technology, healthcare and banking industries. Mr. Middendorf holds a Bachelor of Science Degree in Accountancy from the University of Illinois and passed the CPA Exam in 1992.

Steve L. Zeller, Chief Operating Officer, joined the Company in September 2007 as part of the Executive Committee. Mr. Zeller is responsible for managing the Company’s day-to-day operations that are reported to the Board of Directors and Chief Executive Officer. Mr. Zeller assumed the additional responsibility of General Counsel in 2011. From 2006 to September 2007, Mr. Zeller was President of BestCare Travel Staffing, LLC, an Arcadia affiliate providing travel nursing and allied health services, a position he held until February 2009. Prior to becoming an Arcadia affiliate in 2006, Mr. Zeller served as a division president for SPX Corporation from 2003 to 2005 and was employed for 18 years at Cummins, Inc., where he last served as Vice President and Managing Director for a European-headquartered power generation subsidiary. He received his Juris Doctor degree from Indiana University in 1981 where he graduated Summa Cum Laude, and received a B.A. in Economics from The College of William and Mary in 1978.

Charles L. Goodall, Executive Vice President of Pharmacy Operations, joined Arcadia Resources in June 2009 and is responsible for managing the Company’s day-to-day pharmacy operations. Prior to joining the Company, Mr. Goodall worked for Walgreens for 25 years and held various positions including Divisional Vice-President of Pharmacy Technology Services where he was responsible for all pharmacy technology systems’ maintenance and development. He received a B.S. degree in pharmacy from Purdue University in 1984 with honors where he currently serves on the Deans Advisory Council. He received an M.S. degree in information technology from Northwestern University McCormick School of Engineering in 2002. Mr. Goodall has also attended The Wharton School of Business, University of Pennsylvania and Fuqua School of Business, Duke University. He has lectured at over 20 colleges and universities on the topic of pharmacy and technology. He also holds 11 U.S. patents on pharmacy technology and processes.

ITEM 1A.		RISK FACTORS

This Annual Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We face a number of risks and uncertainties that could cause actual results or events to differ materially from those contained in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, the risks and uncertainties listed below. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment in us. You should carefully consider and evaluate the risks and uncertainties listed below, as well as the other information set forth in this Report.

We have a history of operating losses and negative cash flow that may continue into the foreseeable future.

We have a history of operating losses and negative cash flow. If we fail to execute our strategy to achieve and maintain profitability in the future, investors could lose confidence in the value of our common stock, which could cause our stock price to decline, adversely affect our ability to raise additional capital, and adversely affect our ability to meet the financial covenants contained in our credit agreements. Further, if we continue to incur operating losses and negative cash flow, we may have to implement further significant cost cutting measures, which could include a substantial reduction in work force, location closures, and/or the sale or disposition of certain assets or subsidiaries. We cannot assure that any of the cost cutting measures we implement will be effective or result in profitability or positive cash flow. To achieve profitability, we will need to increase our revenue base, reduce our cost structure and realize economies of scale. If we are unable to achieve and maintain profitability, our stock price could be materially adversely affected.

Our indebtedness could adversely affect our financial condition and operations, prevent us from fulfilling our debt service obligations and adversely affect our ability to operate our business.

We have $39.5 million of outstanding debt as of March 31, 2011, of which $34.9 million matures in April 2012.

Our indebtedness could have important consequences, including, but not limited to:

•

We may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate or other purposes.

•

We may be unable to plan for, or react to, changes in our business and general market conditions.

•

We may be more vulnerable in a volatile market and at a competitive disadvantage to less leveraged competitors.

•

Our operating flexibility is more limited due to financial and other restrictive covenants, including restrictions on incurring additional debt, creating liens on our properties, making acquisitions and paying dividends.

•

We are subject to the risks that interest rates and our interest expense will increase.

•

Our ability to use operating cash flow in other areas of our business may be limited because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness.

•

Our ability to make investments or take other actions or borrow additional funds may be limited based on the financial and other restrictive covenants in our indebtedness.

•

The amount we are permitted to draw on our revolving credit facilities may be limited and we may be unable to fund our early-stage pharmacy product and patient care services and home care staffing business strategies.

•

We may be forced to implement cost reductions, which could impact our product and service offerings.

•

We may be unable to successfully implement our growth strategy and spread our cost structure over a larger revenue base and ultimately become profitable.

The Company may not be successful in selling its Services segment, which is necessary to generate cash to fund the remaining operations.

The Company’s Board of Directors has committed to a plan to sell the Services segment, and management is actively engaged in the sale of this business. The anticipated proceeds from the sale of this business will be used for general corporate purposes, including funding the remaining Pharmacy operations, capital expenditures and repayment of debt, as determined appropriate by the Company’s Board of Directors. The Board of Directors intends to seek approval of any such sale from the Company’s shareholders. If the Company cannot identify a financially capable buyer who is willing to pay an appropriate price for the Services segment in a timely manner, or if shareholders do not approve the sale, the Company would be forced to implement further cost cutting measures. We cannot assure that any of the cost cutting measures we implement would be effective or result in profitability or positive cash flow.

With the sale of our Services segment, the Company results will be entirely dependent on the performance of its Pharmacy segment, which is still in its early stages of a broad market roll-out.

With the sale of our Services segment, the Company will have a single line of business, which is its Pharmacy segment. The Pharmacy segment is still in its early stages of a broad market roll-out. The business has not yet become profitable and currently has negative cash flow. The success of our Pharmacy segment is dependent on the viability and continued demonstration of the effectiveness of the DailyMed™ business model. As an innovative, first to market pharmacy care model, DailyMed™ is challenging the approach of traditional community based retail pharmacies and others to providing pharmacy products and services. It is providing a unique opportunity for at-risk payers to substantially reduce health care costs. Market adoption and customer acceptance are key to continued growth in revenues as is payer adoption of DailyMed™ as part of efforts to reduce overall health care spend. To date, competitive responses to DailyMed™ have yet to evolve. Our ability to grow revenue and receive compensation for the value-added services we provide are keys to the long-term financial viability of the DailyMed™ business model.

As part of a recapitalization or restructuring plan necessary to address the Company’s significant amount of outstanding debt, current and future shareholders could be substantially diluted.

The Company’s operating cash flow has generally been negative in recent quarters, and generating positive cash flow is highly dependent on the growth of Pharmacy segment revenues and improved profitability in that segment. The Company has a significant amount of debt that matures in April 2012, and it will not be able to generate sufficient positive cash flow from operations in that timeframe to repay this indebtedness. As a result, the Company will continue to explore options for dealing with these debt maturities, which could include renegotiation of the terms of these debt instruments with the current debt holders, raising additional capital (in the form of debt or equity) to refinance the outstanding debt, selling assets, including its Services segment, and using the proceeds to repay debt, other restructuring or recapitalization plans, or a combination thereof. Depending on the options pursued by the Company, the result could be substantial dilution of current and future holders of the Company’s common stock. There can be no assurance that any such recapitalization or debt restructuring plans will be successful.

Due to our debt level, our history of operating losses and negative cash flows, and the current conditions in the credit markets, we may not be able to increase the amount we can draw on our revolving credit facility with Comerica Bank, or to obtain credit from other sources, to fund our future needs for working capital, funding early-stage strategies and ongoing business operations, or acquisitions.

Due to our debt level and the current conditions in the credit market, there is the risk that Comerica Bank or other sources of credit may decline to increase the amount we are permitted to draw on the revolving credit facilities or to lend additional funds for day-to-day operations, working capital, making potential acquisitions and for other purposes. This development would have a material adverse affect on our financial condition and liquidity, and there can be no assurance that we would be able to refinance our existing credit facility or obtain alternative financing.

We may not be able to meet the financial covenants contained in our credit facilities, and we may not be able to obtain waivers for any violations of those covenants should they occur.

Under certain of our existing credit facilities, we are required to adhere to certain financial covenants. Specifically, we have a line of credit agreement with Comerica Bank with financial covenants relating to our Services segment. We were not in compliance with two financial covenants under our Comerica Bank line of credit as of September 30, 2010, but we received a waiver of this non-compliance from the bank. We were in compliance with these covenants as of March 31, 2011, but there is no assurance that the Company will be in compliance in future periods. Additionally, our H.D. Smith line of credit agreement includes certain financial covenants specific to our Pharmacy segment, which take effect with the fiscal quarter beginning January 1, 2012. If there are future covenant violations, our lenders could declare a default under the applicable credit facility and, among other actions, refuse to make additional advances, increase our borrowing costs, further restrict our operations, take possession or control of any asset (including our cash) and demand the immediate repayment of all amounts outstanding under the credit facility. Any of these actions could have a material adverse affect on our financial condition and liquidity. Based on our history of operating losses, we cannot guarantee that we would be able to refinance our existing credit facility or obtain alternative financing.

In addition to the financial covenants, our existing credit facility with Comerica Bank includes a subjective acceleration clause and requires the Company to maintain a lockbox. Currently, the Company has the ability to control the funds in the deposit account and determine the amount issued to pay down the line of credit balance. The bank reserves the right under the security agreement to request that the indebtedness be on a remittance basis in the future, whether or not an event of default has occurred. If the bank exercises this right, then the Company would be forced to use its cash to pay down this indebtedness rather than for other needs, including day-to-day operations, expansion initiatives or the pay down of debt which accrues interest at a higher rate.

The terms of our credit agreements with various lenders subject us to the risk of foreclosure on certain property.

Our wholly-owned subsidiary RKDA, Inc. granted Comerica Bank a first-priority security interest in all of the issued and outstanding capital stock of its wholly-owned subsidiary, Arcadia Services, Inc. and Arcadia Services, Inc. and its subsidiaries granted Comerica Bank security interests in all of their assets. Effective April 2010, the Company granted H.D. Smith Wholesale Drug Co. a first priority security interest in all of the issued and outstanding ownership interest of its wholly-owned subsidiary PrairieStone Pharmacy, LLC, and PrairieStone granted H.D. Smith a security interest in all of its assets. Additionally, PrairieStone agreed to provide our lenders, JANA Master Fund, Ltd. (“JANA”), Vicis Capital Master Fund (“Vicis”), and LSP Partners, LP (“LSP”), a subordinated security interest in its assets. If an event of default occurs under the applicable credit agreements, each lender may, at its option, accelerate the maturity of the debt and exercise its respective right to foreclose on the issued and outstanding capital stock and/or on all of the assets of Arcadia Services, Inc. and its subsidiaries, and/or PrairieStone Pharmacy, LLC and its subsidiaries. Any such default and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue operations.

In order to fund operations, repay our debt obligations, or pursue our growth strategies, we may seek additional equity financing, which could result in dilution to our security holders and adversely affect our stock price.

In November 2010, the Company sold certain institutional investors an aggregate of 15,606,250 shares of common stock. The Company raised $4.4 million in net proceeds from this transaction. Additionally, in November 2009, the Company finalized a similar equity financing transaction whereby it raised $10.2 million through the sale of 15,857,141 shares of common stock and 7,135,713 warrants to purchase common stock. We may continue to raise additional financing through the equity markets to repay debt obligations and to fund operations. Because of the capital requirements needed to pursue our early-stage pharmacy growth strategies, we may access the public or private equity markets whenever conditions appear to us to be favorable, even if we do not have an immediate need for additional capital at that time. To the extent we access the equity markets, the price at which we sell shares may be lower than the current market prices for our common stock. If we obtain financing through the sale of additional equity or convertible debt securities, this could result in dilution to our security holders by increasing the number of shares of outstanding stock. We cannot predict the effect this dilution may have on the price of our common stock.

To the extent we are unable to generate sufficient cash from operations or raise adequate funds from the equity or debt markets, we would need to sell assets or modify or abandon our growth strategy.

Our cash on hand and line of credit availability may not be adequate to satisfy our cash needs. To the extent that we are unable to generate sufficient cash from operations, or to raise additional funds from the equity or debt markets, we may be required to sell additional assets or modify or abandon our growth strategy. Asset sales and modification or abandonment of our growth strategy could negatively impact our profitability and financial position, which in turn could negatively impact the price of our common stock.

Given the recurring losses from operations and net capital deficiency, we received a going concern opinion from our independent auditors, which could negatively affect our business and results of operation.

After conducting an audit of the Company’s consolidated financial statements for the fiscal year ended March 31, 2011, our independent auditors issued an unqualified opinion on the financial statements that included a material uncertainty related to our ability to continue as a going concern due to our recurring losses from operations and net capital deficiency. The Company’s ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. Management anticipates the need to for additional cash to fund operating activities during fiscal 2012 and is in the process of divesting its Services segment and is also exploring additional financing alternatives for its Pharmacy segment. If the Company is unable to generate additional funds when they are required or if the funds cannot be obtained on terms favorable to the Company, management may be required to delay, scale back or eliminate its current business strategy.

Due to our low stock price and operating losses during recent fiscal years, our stock could be delisted by the NYSE Amex Equities Exchange.

Our stock currently trades on the NYSE Amex Equities Exchange (“Amex”). The Amex, as a matter of policy, will consider the suspension of trading in, or removal from listing of any stock when, in the opinion of the Amex (i) the financial condition and/or operating results of an issuer of stock listed on the Amex appear to be unsatisfactory, (ii) it appears that the extent of public distribution or the aggregate market value of the stock has become so reduced as to make further dealings on the Amex inadvisable, (iii) the issuer has sold or otherwise disposed of its principal operating assets, or (iv) the issuer has sustained losses which are so substantial in relation to its overall operations or its existing financial condition has become so impaired that it appears questionable, in the opinion of the Amex, whether the issuer will be able to continue operations and/or meet its obligations as they mature.

On April 4, 2011, the Company received written notification from Amex indicating that because the Company’s average closing price of its common stock was less than $0.20 per share over a consecutive 30-day trading period, the Company was not in compliance with Section 1003(f)(v) of the NYSE Amex Company Guide. Amex advised that it deems it appropriate for the Company to effect a reverse stock split to remain in compliance with its continued listing standards and has given the Company until October 4, 2011 to effect such a split. The Company is currently considering its options to comply with Section 1003(f)(v).

In addition, as of March 31, 2011, due to its history of operating losses and negative stockholders’ equity, the Company has fallen below the minimum continued listing standards of Amex.

Delisting of our common stock could adversely affect the price and liquidity of our common stock.

Our Pharmacy segment revenue is highly dependent upon our relationships with key state Medicaid programs, managed care organizations, health plans and other payers.

A significant portion of our current Pharmacy segment revenue is generated from programs that we have in place with several key state Medicaid programs, managed care organizations, health plans and other payers, including Indiana Medicaid and WellPoint. The rate of growth in the Pharmacy segment is highly dependent on maintaining our on-going relationships with these parties. We have contractual arrangements with some of these entities, including WellPoint. Our ability to grow revenue under these arrangements is dependent upon several factors, including the rate of enrollment of their members into the program, the quality of our services and our ability to help at-risk payers achieve health care cost containment and reduction. In addition, our ability to grow revenue under these programs depends upon factors outside of our control, including state appropriations and funding and changes in eligibility requirements. However, our inability to maintain these relationships, and specifically our agreement with WellPoint, would negatively impact current and future Pharmacy segment revenue. There can be no assurance that the loss of these relationships would be offset by relationships with new or additional payers.

Declines in prescription volumes may negatively affect our net revenues and profitability.

We dispense significant volumes of brand-name and generic drugs as part of our Pharmacy business, which we expect to be a significant source of our net revenues and profitability. Demand for prescription drugs can be negatively affected by a number of factors, including increased safety risk problems, manufacturing issues, regulatory action, and negative press or media coverage. Certain prescriptions may also be withdrawn by their manufacturer or transition to over-the-counter products. A reduction in the use of prescription drugs may negatively affect our volumes, net revenues, profitability and cash flows.

The success of our business depends on maintaining a well-secured pharmacy operation and technology infrastructure and failure to do so could adversely impact our business.

We depend on our infrastructure, including our information systems, for many aspects of our business operations, particularly our pharmacy operations. A fundamental requirement for our business is the secure storage and transmission of personal health information and other confidential data and we must maintain our business processes and information systems, and the integrity of our confidential information. Although we have developed systems and processes that are designed to protect information against security breaches, failure to protect such information or mitigate any such breaches may adversely affect our operations. Malfunctions in our business processes, breaches of our information systems or the failure to maintain effective and up-to-date information systems could disrupt our business operations, result in customer and member disputes, damage our reputation, expose us to risk of loss or litigation, result in regulatory violations, increase administrative expenses or lead to other adverse consequences.

We are exposed to certain risks related to the frequency and rate of the introduction of generic drugs and brand-name prescription products.

The profitability of retail and mail order pharmacy businesses are dependent upon the utilization of prescription drug products. Utilization trends are affected by the introduction of new and successful prescription pharmaceuticals as well as lower-priced generic alternatives to existing brand-name products. Accordingly, a slowdown in the introduction of new and successful prescription pharmaceuticals and/or generic alternatives (the sale of which normally yield higher gross profit margins than brand-name equivalents) could adversely affect our business, financial position and results of operations.

Changes in federal and state laws that govern our financial relationships with physicians and other health care providers may impact potential or current referral sources.

We offer certain healthcare-related products and services that are subject to federal and state laws restricting our relationship with physicians and other healthcare providers. Generally referred to as “anti-kickback laws,” these laws prohibit certain direct and indirect payments or other financial arrangements that are designed to encourage the referral of patients to a particular medical services provider. In addition, certain financial relationships, including ownership interests and compensation arrangements, between physicians and providers of designated health services, such as our Company, to whom those physicians refer patients, are prohibited by the federal physician self-referral prohibition, known as the “Stark Law,” and similar state laws. Violations of these laws could lead to fines or sanctions that could have a material adverse effect on our business. In addition, changes in healthcare law or new interpretations of existing laws may have a material impact on our business and results of operations.

We are required to comply with laws governing the transmission of privacy of health information.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply with standards for the exchange of health information within our Company and with third parties, such as payers, business associates and consumers. These include standards for common health care transactions, such as claims information, plan eligibility, payment information, the use of electronic signatures, unique identifiers for providers, employers, health plans and individuals and security, privacy and enforcement. New standards and regulations may be adopted governing the use, disclosure and transmission of health information with which we may be required to comply. We could be subject to criminal penalties and civil sanctions if we fail to comply with these standards. In addition, compliance with new standards and regulations could increase our costs and adversely affect our results of operations.

The Health Information Technology for Economic and Clinical Health Act, or HITECH, established certain health information security breach notification requirements. A covered entity must notify any individual whose protected health information is breached. While we believe that we protect individuals’ health information, if our information systems are breached, we may experience reputational harm that could adversely affect our business. In addition, failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.

Because we depend on key management, the loss of the services or advice of any of these persons could have a material adverse effect on our business and prospects.

Our success is dependent on our ability to attract and retain qualified and experienced management and personnel. We do not presently maintain key person life insurance for any of our personnel. There can be no assurance that we will be able to attract and retain key personnel in the future, and our inability to do so could have a material adverse effect on us. Our management team will need to work together effectively to successfully develop and implement our business strategies and financial operations. In addition, management will need to devote significant attention and resources to preserve and strengthen relationships with employees, customers and the investor community. If our management team is unable to achieve these goals, our ability to grow our business and successfully meet operational challenges could be impaired.

We do not have long-term agreements or exclusive guaranteed order contracts with our home care, hospital and healthcare facility clients.

The success of our Services business depends upon our ability to continually secure new orders from home care clients, hospitals and other healthcare facilities and to fill those orders with our temporary healthcare professionals. We do not have long-term agreements or exclusive guaranteed order contracts with our home care, hospital and health care facility clients. We rely on our agencies to establish and maintain positive relationships with these clients. If we, or our agents, fail to maintain positive relationships with our home care, hospital and healthcare facility clients, we may be unable to generate new temporary healthcare professional orders and our business may be adversely affected. In addition, many of these clients may have devised strategies to reduce the expenditures on temporary healthcare workers and to limit overall agency utilization. If current pressures to control agency usage continue and escalate, we will have fewer business opportunities, which could harm our business.

Our operations subject us to risk of litigation.

Operating in the homecare industry exposes us to an inherent risk of wrongful death, personal injury, professional malpractice and other potential claims or litigation brought by our consumers and employees. These claims may include, for example, allegations that we did not properly treat or care for a consumer or that we failed to follow internal or external procedures that resulted in death or harm to a consumer.

In addition, regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our services and seek to impose monetary penalties on us. We could be required to pay substantial amounts to respond to regulatory investigations or, if we do not prevail, damages or penalties arising from these legal proceedings. We also are subject to potential lawsuits under the False Claims Act or other federal and state whistleblower statutes designed to combat fraud and abuse in our industry. These lawsuits can involve significant monetary awards or penalties which may not be covered by our insurance. If our third-party insurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations and financial condition. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract management from running our business or irreparably damage our reputation.

Absent a divestiture of our Services segment, a significant decline in sales in our Services business would adversely impact our revenue, operating income and cash flow and our ability to repay indebtedness and invest in new products and services.

Our Services segment has traditionally accounted for the majority of our revenue, operating profit and cash flow. There can be no assurance that this business will continue to generate cash flows at the levels generated in recent periods. Failure to achieve our sales targets in this market segment would adversely impact our revenue. While operating expense reductions and other actions would be taken in response to a decline in projected sales, such a reduction could adversely affect our projected operating income and cash flow. If this were to occur, we would have less cash available to fund our Pharmacy segment and repay indebtedness.

Sales of certain of our services and products are largely dependent upon payments from governmental programs and private insurance, and cost containment initiatives by these payers may reduce our revenues, thereby harming our performance.

In the U.S., healthcare providers and consumers who purchase home care services, prescription drug products and related products and services generally rely on third party payers, such as Medicare and Medicaid, to reimburse all or part of the cost of the healthcare product or service. Our sales and profitability are affected by the efforts of healthcare payers to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements. Any changes which lower reimbursement levels under Medicare, Medicaid or private pay programs, including managed care contracts, could reduce our future revenue. Furthermore, other changes in these reimbursement programs or in related regulations could reduce our future revenue. These changes may include modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicare, Medicaid or third party expenditures. In addition, our profitability may be adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the net prices on the products we obtain from them.

The markets in which we operate are highly competitive and we may be unable to compete successfully against competitors with greater resources.

We compete in markets that are constantly changing, intensely competitive (given low barriers to entry), highly fragmented and subject to dynamic economic conditions. Increased competition is likely to result in price reductions, reduced gross margins, loss of customers, and loss of market share, any of which could adversely affect our net revenue and results of operations. Many of our competitors and potential competitors have more capital and marketing and technical resources than we do. These competitors and potential competitors include large drugstore chains, pharmacy benefits managers, on-line marketers, national wholesalers, and national and regional distributors. Further, the Company may face a significant competitive challenge from alliances entered into between and among its competitors, major HMO’s or chain drugstores, as well as from larger competitors created through industry consolidation. These potential competitors may be able to respond more quickly than we can to emerging market changes or changes in customer needs. To the extent competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenues or clients. In addition, relatively few barriers to entry exist in local healthcare markets. As a result, we could encounter increased competition in the future that may increase pricing pressure and limit our ability to maintain or increase our market share for our mail order pharmacy and related businesses.

We cannot predict the impact that registration of shares may have on the price of our common stock.

We cannot predict the impact, if any, that sales of, or the availability for sale of, shares of our common stock by selling security holders pursuant to a prospectus or otherwise will have on the market price of our securities prevailing from time to time. The possibility that substantial amounts of our common stock might enter the public market could adversely affect the prevailing market price of our common stock and could impair our ability to fund acquisitions or to raise capital in the future through the sales of securities. Sales of substantial amounts of our securities, including shares issued upon the exercise of options or warrants, or the perception that such sales could occur, could adversely affect prevailing market prices for our securities.

The price of our common stock has been, and will likely continue to be, volatile, which could diminish the ability to recoup an investment, or to earn a return on an investment, in our common stock.

The market price of our common stock has fluctuated over a wide range, and it is likely that it will continue to do so in the future. During fiscal 2011, the Company’s stock price decreased from a high of $0.75 during the first quarter to a low of $0.10 in the fourth quarter. Limited demand for our common stock has resulted in limited liquidity, and it may be difficult to dispose of our securities. Due to the volatility of the price of our common stock, an investor may be unable to resell shares of our common stock at or above the price paid for them, thereby exposing an investor to the risk that he may not recoup an investment in our common stock or earn a return on such an investment. In the past, securities class action litigation has been brought against companies following periods of volatility in the market price of their securities. If we are the target of similar litigation in the future, we would be exposed to incurring significant litigation costs. This would also divert management’s attention and resources, all of which could substantially harm our business and results of operations.

Resale of our securities by any holder may be limited and affected by state blue-sky laws, which could adversely affect the price of our securities and the holder’s investment in our Company.

Under the securities laws of some states, shares of common stock and warrants can be sold in such states only through registered or licensed brokers or dealers. In addition, in some states, warrants and shares of common stock may not be sold unless these shares have been registered or qualified for sale in the state or an exemption from registration or qualification is available and is complied with. The requirement of a seller to comply with the requirements of state blue sky laws may lead to delay or inability of a holder of our securities to dispose of such securities, thereby causing an adverse effect on the resale price of our securities.

The issuance of our preferred stock could materially impact the market price of our common stock and the rights of holders of our common stock.

We are authorized to issue 5,000,000 shares of serial preferred stock, par value $0.001. Shares of preferred stock may be issued from time to time in one or more series as may be determined by our Board of Directors. Except as otherwise provided in our Restated Articles of Incorporation, the Board of Directors has the authority to fix by resolution adopted before the issuance of any shares of each particular series of preferred stock, the designation, powers, preferences, and relative participating, optional redemption and other rights, and the qualifications, limitations, and restrictions of that series. The issuance of our preferred stock could materially impact the price of our common stock and the rights of holders of our common stock, including voting rights. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring or preventing a change in control of our company, despite such change of control being in the best interest of the holders of our common stock. The existence of authorized but unissued preferred stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.

The exercise of common stock warrants and stock options may depress our stock price and may result in dilution to our common security holders.

Warrants to purchase approximately 12.1 million shares of our common stock were issued and outstanding as of March 31, 2011, and these warrants had exercise prices ranging from $0.13 to $0.95. Options to purchase approximately 8.9 million shares of our common stock were issued and outstanding as of March 31, 2011, and these options had exercise prices ranging from $0.18 to $2.92. As of March 31, 2011, none of the outstanding warrants or options were “in the money”. The Arcadia Resources, Inc. 2006 Equity Incentive Plan (the “Plan”), as amended on October 14, 2009, allows for the granting of additional incentive stock options, non-qualified stock options, stock appreciation rights and restricted shares up to 15 million shares (5.0% of our authorized shares of common stock as of the date the Plan was approved), of which the Company had available approximately 5.1 million shares as of March 31, 2011 for future grants.

If the market price of our common stock is above the exercise price of some of the outstanding warrants or options; the holders of those warrants or options may exercise their warrants or options and sell the common stock they acquire upon exercise in the public market. Sales of a substantial number of shares of our common stock in the public market may depress the prevailing market price for our common stock and could impair our ability to raise capital through the future sale of our equity securities. Additionally, if the holders of outstanding warrants exercise those warrants, our common security holders will suffer dilution in their voting power. The exercise price and the number of shares subject to the warrant or option is subject to adjustment upon stock dividends, splits and combinations, as well as certain anti-dilution adjustments as set forth in the respective common stock warrants.

We depend on our affiliated agencies and our internal sales force to sell our services and products, the loss of which could adversely affect our business.

We rely upon our affiliated agencies and our internal sales force to sell our home care and medical staffing services and our internal sales force to sell our pharmacy products and services. Arcadia Services’ affiliated agencies are owner-operated businesses. The primary responsibilities of Arcadia Services’ affiliated agencies include the recruitment and training of field staff employed by Arcadia Services and generating and maintaining sales to Arcadia Services’ customers. The arrangements with affiliated agencies are formalized through a standard contractual agreement, which states performance requirements of the affiliated agencies. Our employees provide the services to our customers, and the affiliated agents and internal sales force are restricted by non-competition agreements. In the event of loss of our affiliated agents or internal sales force personnel, we would recruit new sales and marketing personnel and/or affiliated agents, which could cause our operating costs to increase and our sales to fall in the interim.

Any additional impairment of intangible assets could negatively impact our results of operations.

During fiscal 2011, 2010 and 2009, we wrote off an aggregate of $2.5 million, $14.6 million and $23.5 million, respectively, of goodwill and other intangible assets. As of March 31, 2011, we have $7.1 million of Service segment intangible assets remaining on our balance sheet. These intangibles are subject to an impairment test whenever events and circumstances indicate possible impairment. Intangible assets are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business which will require us to record goodwill based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen issues with such business which adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded intangible assets for such business. Future determinations of significant write-offs of intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition.

Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreements and renew existing agreements.

Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as a quality service provider among governmental authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes, rehabilitation centers, advocacy groups, consumers and their families, other referral sources and the public. Negative publicity, changes in public perceptions of our services or government investigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain new agreements. Increased government scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services. Any of these events could have a negative effect on our business, financial condition and operating results.

Delays in reimbursement due to state budget deficits or otherwise have decreased, and may in the future further decrease, our liquidity.

There is generally a delay between the time that we provide services and the time that we receive reimbursement or payment for these services. A majority of states are facing budget deficits and other states may in the future delay reimbursement, which would adversely affect our liquidity. From time to time, procedural issues require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Additionally, unanticipated delays in receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely impact our liquidity and working capital. Because we fund our operations primarily through the collection of accounts receivable, any delays in reimbursement would result in the need to increase borrowings under our credit facility.

We are subject to extensive government regulation. Changes to the laws and regulations governing our business could negatively impact our profitability and any failure to comply with these regulations could adversely affect our business.

The federal government and the states in which we operate regulate our industry extensively. The laws and regulations governing our operations, along with the terms of participation in various government programs, impose certain requirements on the way in which we do business, the services we offer, and our interactions with consumers and the public. These requirements relate to:

	•		Licensure and certification;
	•		Adequacy and quality of health care services;
	•		Qualifications and training of health care and support personnel;
	•		Confidentiality, maintenance and security issues associated with medical records and claims processing;
	•		Relationships with physicians and other referral sources;
	•		Operating policies and procedures;
	•		Addition of facilities and services; and
	•		Billing for services.

These laws and regulations, and their interpretations, are subject to frequent change. These changes could reduce our profitability by increasing our liability, increasing our administrative and other costs, increasing or decreasing mandated services, forcing us to restructure our relationships with referral sources and providers or requiring us to implement additional or different programs and systems. Failure to comply could lead to the termination of rights to participate in federal and state-sponsored programs, the suspension or revocation of licenses and other civil and criminal penalties and a delay in our ability to bill and collect for services provided.

On March 23, 2010, the President signed into law the Health Reform Law. The Health Reform Law is broad, sweeping reform, and is subject to change, including through the adoption of related regulations, the way in which its provisions are interpreted and the manner in which it is enforced. We cannot assure you that such provisions of the Health Reform Law will not adversely impact our business, results of operations or financial results. We may be unable to mitigate any adverse effects resulting from the Health Reform Act.

We are subject to reviews, compliance audits and investigations that could result in adverse findings that negatively affect our net service revenues and profitability.

As a result of our participation in Medicaid and other governmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, audits and investigations by governmental authorities and other third parties to verify our compliance with these programs and agreements as well as applicable laws, regulations and conditions of participation. If we fail to meet any of the conditions of participation or coverage, we may receive a notice of deficiency from the applicable surveyor or authority. Failure to institute a plan of action to correct the deficiency within the period provided by the surveyor or authority could result in civil or criminal penalties, the imposition of fines or other sanctions, damage to our reputation, cancellation of our agreements, suspension or revocation of our licenses or disqualification from federal and state reimbursement programs. These actions may adversely affect our ability to provide certain services, to receive payments from other payers and to continue to operate. Additionally, actions taken against one of our locations may subject our other locations to adverse consequences. Any termination of one or more of our locations from a government program for failure to satisfy such program’s conditions of participation could adversely affect our net service revenues and profitability.

Payments we receive in respect of Medicaid can be retroactively adjusted after a new examination during the claims settlement process or as a result of pre- or post-payment audits. Federal, state and local government payers may disallow our requests for reimbursement based on determinations that certain costs are not reimbursable because proper documentation was not provided or because certain services were not covered or deemed necessary. In addition, other third-party payers may reserve rights to conduct audits and make reimbursement adjustments in connection with or exclusive of audit activities. Significant adjustments as a result of these audits could adversely affect our revenues and profitability.

Several anti-takeover measures under Nevada law could delay or prevent a change of control, despite such change of control being in the best interest of the holders of our common stock.

Several anti-takeover measures under Nevada law could delay or prevent a change of control, despite such change of control being in the best interest of the holders of our common stock. This could make it more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. This could negatively impact the value of an investment in our common stock, by discouraging a potential suitor who may otherwise be willing to offer a premium for shares of our common stock.

ITEM 1B.		UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.		PROPERTIES

Our corporate headquarters and Pharmacy segment share a facility in Indianapolis, Indiana. Our Services segment administrative support office is located in Southfield, Michigan. Additionally, our Services segment operates local offices in 18 states and approximately 65 locations. All facilities are leased and have lease expiration dates ranging from 2011 to 2017.

We do not own any real estate.

ITEM 3.		LEGAL PROCEEDINGS

We are a defendant from time to time in lawsuits incidental to our business in the ordinary course of business. We are not currently subject to, and none of our subsidiaries are subject to, any material legal proceedings.

ITEM 4.		RESERVED

Part II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shares of our common stock are currently quoted on the NYSE Amex Exchange (“NYSE Amex”) under the symbol “KAD.” The following table sets forth the quarterly high and low sale prices for our common stock for the periods indicated.

		Fiscal Year Ended March 31, 2011
		4th Quarter				3rd Quarter				2nd Quarter				1st Quarter
High		$	0.34			$	0.42			$	0.58			$	0.75
Low		$	0.10			$	0.27			$	0.37			$	0.39

		Fiscal Year Ended March 31, 2010
		4th Quarter				3rd Quarter				2nd Quarter				1st Quarter
High		$	0.74			$	1.09			$	1.24			$	0.74
Low		$	0.35			$	0.38			$	0.57			$	0.38

There is no established market for our warrants to purchase common stock. The Company’s warrants are not quoted by NYSE Amex, nor are they listed on any exchange. We do not expect our warrants to be quoted by the NYSE Amex or listed on any exchange. As a result, an investor may find it difficult to trade, dispose of, or to obtain accurate quotations of the price of our warrants.

There are 260 record holders of our common stock as of May 31, 2011. The number of record holders of our common stock excludes an estimate of the number of beneficial owners of common stock held in street name, totaling approximately 174.1 million shares held by approximately 2,000 shareholders. The transfer agent and registrar for our common stock is Computershare, 7530 Lucerne Drive, Ste. 305, Cleveland, Ohio, 44130 (440-239-7361).

We have never paid cash dividends on our common shares, and we do not anticipate that we will pay dividends with respect to those securities in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion and development of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements, debt agreement restrictions and other factors as our Board may deem relevant at that time.

Stock Performance Graph

The following graph compares the percentage change in the cumulative total shareholder return on the Company’ Common Stock during the period beginning April 1, 2006 and ending March 31, 2011 with the NYSE Amex index, a peer group index comprised of the following companies: Almost Family, Inc., Amedisys, Inc., Genitiva Health Services, Inc., LHC Group, Inc., Omnicare, Inc., and Pharmerica Corp. The stock prices shown are historical and do not determine future performance.

ITEM 6.		SELECTED FINANCIAL DATA

The selected consolidated summary financial data is set forth in the table below. You should read the following summary consolidated financial data in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

(In thousands, except per share data)

		Year Ended				Year Ended				Year Ended				Year Ended				Year Ended
		March 31,				March 31,				March 31,				March 31,				March 31,
		2011				2010				2009				2008				2007
Revenues, net		$	100,041			$	98,084			$	100,999			$	99,216			$	102,899
Cost of revenues			72,636				70,274				70,749				70,690				73,186
Gross profit			27,405				27,810				30,250				28,526				29,713
Selling, general and administrative expenses			36,403				38,500				38,565				35,501				34,005
Depreciation and amortization			1,380				1,300				1,513				1,769				1,923
Goodwill and intangible asset impairment			2,500				14,599				22,619				—				—
Operating loss			(12,878	)			(26,589	)			(32,447	)			(8,744	)			(6,215	)
Total other expenses			2,376				2,422				8,634				3,765				3,041
Loss from continuing operations before income taxes			(15,254	)			(29,011	)			(41,081	)			(12,509	)			(9,256	)
Current income tax expense			33				29				122				207				88
Loss from continuing operations			(15,287	)			(29,040	)			(41,203	)			(12,716	)			(9,344	)
Discontinued operations:
Loss from discontinued operations			(464	)			(2,603	)			(4,009	)			(10,725	)			(34,361	)
Net gain (loss) on disposal			1,400				557				(1,258	)			43				—
			936				(2,046	)			(5,267	)			(10,682	)			(34,361	)
NET LOSS		$	(14,351	)		$	(31,086	)		$	(46,470	)		$	(23,398	)		$	(43,705	)
Basic and diluted loss per share:
Loss from continuing operations		$	(0.08	)		$	(0.17	)		$	(0.31	)		$	(0.10	)		$	(0.10	)
Loss from discontinued operations			(0.00	)			(0.02	)			(0.04	)			(0.09	)			(0.38	)
		$	(0.08	)		$	(0.19	)		$	(0.35	)		$	(0.19	)		$	(0.48	)
Weighted average number of basic and diluted common shares outstanding			185,796				166,840				134,583				122,828				91,433

		As of March 31,
		2011				2010				2009				2008				2007
Balance Sheet Data (excluding assets/liabilities of discontinued operations):
Total current assets		$	16,435			$	19,575			$	8,604			$	24,770			$	24,927
Working capital			9,559				8,004				10,283				17,835				(1,104	)
Total assets			26,131				32,133				45,990				53,619				54,778
Total long-term debt, including current maturities			39,525				33,964				38,936				38,735				44,044
Total liabilities			46,187				44,562				49,558				49,775				34,588
Total stockholders’ (deficit) equity			(20,056	)			(11,775	)			9,833				49,797				54,084

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements

The MD&A should be read in conjunction with the other sections of this report, including the consolidated financial statements and notes thereto beginning on page F-1 of this report and the subsection captioned “Disclosure Regarding Forward-Looking Statements” above. Historical results set forth in Selected Consolidated Financial Information and the Financial Statements beginning on page F-3 and this section should not be taken as indicative of our future operations.

Critical Accounting Policies

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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Identified below are some of the more significant accounting policies followed by the Company in preparing the accompanying consolidated financial statements. For further discussion of our accounting policies see “Note 1 — Description of Company and Significant Accounting Policies” in the notes to the consolidated financial statements.

Revenue Recognition

In general, the Company recognizes revenue when all revenue recognition criteria are met, which typically is when:

	•		Evidence of an arrangement exists;
	•		Services have been provided or goods have been delivered;
	•		The price is fixed or determinable; and
	•		Collection is reasonably assured.

Revenues for services are recorded in the period the services are rendered. Revenues for products are recorded in the period delivered based on sales prices established with the client or its insurer prior to delivery.

Allowance for Doubtful Accounts

The Company reviews its accounts receivable balances on a periodic basis. Accounts receivable have been reduced by the estimated allowance for doubtful accounts.

The provision for doubtful accounts is primarily based on historical analysis of the Company’s records. The analysis is based on patient and institutional client payment histories, the aging of the accounts receivable, and specific review of patient and institutional client records. As actual collection experience changes, revisions to the allowance may be required. Any unanticipated change in customers’ creditworthiness or other matters affecting the collectability of amounts due from customers could have a material effect on the results of operations in the period in which such changes or events occur. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance.

Goodwill

The Company has acquired several entities resulting in the recording of intangible assets, including goodwill, which represents the excess of the purchase price over the fair value of the net assets of businesses acquired.

The Company has two reporting units included in continuing operations: Services and Pharmacy. These reporting units are also the Company’s two reportable business segments. The following table represents goodwill by reporting unit as of March 31:

		2011				2010				2009
Services		$	—			$	—			$	14,553
Pharmacy			—				2,500				2,500
Total Goodwill		$	—			$	2,500			$	17,053

The Company conducts its annual goodwill impairment assessment during its fiscal fourth quarter. We test for impairment between annual goodwill impairment assessments if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following: (i) a significant adverse change in business climate; (ii) an adverse action or assessment by a regulator; (iii) unanticipated competition; or (iv) a decline in the market capitalization below net book value.

Goodwill is tested using a two-step process. The first step of the goodwill impairment assessment, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill (“net book value”). If the fair value of a reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If net book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test will be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment assessment, used to measure the amount of impairment loss, if any, compares the implied fair value of reporting unit goodwill, which is determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

In the first step of the goodwill impairment assessment, the Company uses an income approach to derive a present value of the reporting unit’s projected future annual cash flows and the present residual value of the reporting unit. The fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The Company uses a variety of underlying assumptions to estimate these future cash flows, which vary for each of the reporting units and include (i) future revenue growth rates, (ii) future operating profitability, (iii) the weighted-average cost of capital and (iv) a terminal growth rate. In addition, the Company makes certain judgments about the allocation of corporate overhead costs in order to calculate the fair values of each of the Company’s reporting units. Estimates of future revenue and expenses associated with each reporting unit are the most sensitive of estimates related to the fair value calculations. Other factors considered in the fair value calculations include assumptions as to the business climate, industry and economic conditions. The assumptions are subjective and different estimates could have a significant impact on the results of the impairment analyses. In determining the appropriate assumptions, management considers historic trends as well as current activities and initiatives.

In addition to estimating fair value of the Company’s reporting units using the income approach, the Company also estimates fair value using a market-based approach which relies on values based on market multiples derived from comparable public companies. The Company uses the estimated fair value of the reporting units under the market-based approach to validate the estimated fair value of the reporting units under the income approach.

Intangible Assets

Acquired finite-lived intangible assets are amortized using the economic benefit method when reliable information regarding future cash flows is available and the straight-line method when this information is unavailable. The estimated useful lives are as follows:

Trade name		30 years
Customer relationships (depending on the type of business purchased)			5 to 15 years

Income Taxes

Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as for tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. We record a valuation allowance to reduce our deferred tax assets and review the amount of such allowance periodically. When we determine certain deferred tax assets are more likely than not to be utilized, we will reduce our valuation allowance accordingly. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain.

Internal Revenue Code Section 382 rules limit the utilization of net operating losses following a change in control of a company. It has been determined that a change in control of the Company took place at the time of the reverse merger in 2004. Therefore, the Company’s ability to utilize certain net operating losses generated by Critical Home Care will be subject to severe limitations in future periods, which could have an effect of eliminating substantially all the future income tax benefits of the respective net operating losses. Tax benefits from the utilization of net operating loss carry-forwards will be recorded at such time as they are considered more likely than not to be realized.

Fiscal Year Ended March 31, 2011 Compared to the Fiscal Year Ended March 31, 2010

The Company’s Board of Directors has committed to a plan to sell the Services segment, and management is actively engaged in the sale of this business. The Company intends to seek approval from the Company’s shareholders for any such sale, and since such approval had not been obtained by March 31, 2011, the accompanying consolidated financial statements reflect the Services segment as a continuing operation. Upon approval of a definitive agreement by the Company’s Board of Directors and subsequent shareholder approval, should it be obtained, the Services segment will begin to be reflected as a discontinued operations in the Company’s current and historical consolidated financial statements. Management anticipates obtaining the necessary approvals and completing the sale of the Services segment by October 2011.

Results of Continuing Operations (in thousands, except per share amounts)

		Years Ended
		March 31,
		2011				2010
Services			83,328				86,635
Pharmacy			16,713				11,449
Revenues, net			100,041				98,084
Cost of revenues			72,636				70,274
Gross profit			27,405				27,810
Selling, general and administrative expenses			36,403				38,500
Depreciation and amortization			1,380				1,300
Goodwill and intangible impairment			2,500				14,599
Total operating expenses			40,283				54,399
Operating loss			(12,878	)			(26,589	)
Other expenses (income):
Interest expense, net			3,799				3,371
Change in fair value of warrant liability			(1,423	)			(979	)
Other			—				30
Total other expenses (income)			2,376				2,422
Net loss before income tax expense			(15,254	)			(29,011	)
Income tax expense			33				29
Net loss from continuing operations		$	(15,287	)		$	(29,040	)
Weighted average number of shares — basic and diluted			185,796				166,840
Net loss from continuing operations per share — basic and diluted		$	(0.08	)		$	(0.17	)

Revenues, Cost of Revenues and Gross Profits

The following table summarizes revenues, cost of revenues and gross profit for the fiscal years ended March 31, (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2011				Revenue				2010				Revenue				(Decrease)				(Decrease)
Revenues, net:
Services		$	83,328				83.3	%		$	86,635				88.3	%		$	(3,307	)			-3.8	%
Pharmacy			16,713				16.7	%			11,449				11.7	%			5,264				46.0	%
			100,041				100.0	%			98,084				100.0	%			1,957				2.0	%
Cost of revenues:
Services			58,342								60,247								(1,905	)			-3.2	%
Pharmacy			14,294								10,027								4,267				42.6	%
			72,636								70,274								2,362				3.4	%
		Gross								Gross
		Margin %								Margin %
Gross margins:
Services			24,986				30.0	%			26,388				30.5	%			(1,402	)			-5.3	%
Pharmacy			2,419				14.5	%			1,422				12.4	%			997				70.1	%
		$	27,405				27.4	%		$	27,810				28.4	%		$	(405	)			-1.5	%

Services Segment

The following table summarizes the Services segment revenues by type for the fiscal years ended March 31, (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2011				Revenue				2010				Revenue				(Decrease)				(Decrease)
Home care		$	67,116				80.5	%		$	68,511				79.2	%		$	(1,395	)			-2.0	%
Per diem medical staffing			11,014				13.2	%			12,296				14.2	%			(1,282	)			-10.4	%
Travel staffing			5,198				6.3	%			5,828				6.6	%			(630	)			-10.8	%
Total Services		$	83,328				100.0	%		$	86,635				100.0	%		$	(3,307	)			-3.8	%

The Services segment remains the largest source of revenue for the Company. Services revenue comes from two business lines, Home Care and Medical Staffing. Medical Staffing consists of both per diem staffing as well as travel nursing and allied health staffing.

For fiscal 2011, Home Care revenue as a percentage of total Services segment revenue increased to 80.5% as compared with 79.2% for the prior year. Home Care revenues fell by $1,395,000, or 2.0%, to $67,116,000 from $68,511,000 compared to the prior year. Home Care revenue from government programs declined compared to the prior year as various state waiver and community-based programs reduced reimbursement rates, limited hours per program participant, put moratoriums on new program enrollments or a combination of the three. This impacted the Company’s business in several key markets, including Arizona, Washington, North Carolina and California. In addition, private duty Home Care revenue was impacted compared to the prior year by high unemployment rates and the resulting availability of family caregivers in lieu of our services, and the impact of lower retirement savings and investment accounts on the demand for private pay services.

Total Medical Staffing revenue declined 10.5% compared to the prior year to $16,212,000 from $18,124,000. Per diem medical staffing declined 10.4% over the prior year, while travel nursing and allied health medical staffing decreased 10.8% compared to the prior year. Overall demand for temporary medical staffing remains depressed driven by low patient censuses, the return of retired or part-time staff to full time status and the increases in overtime accepted by permanent staff at many facilities. In February 2011, the Company was notified that it was not awarded a new contract to provide travel nurses to the North Carolina Department of Corrections, which accounted for approximately $4,100,000 in revenue during fiscal 2011, because of lower price proposals received from other vendors. The Company’s appeal of this decision was denied on June 3, 2011.

The Services segment operates independently and through a network of affiliated agencies (“Affiliates”) throughout the United States. These affiliated agencies are independently-owned, owner-managed businesses, which have been contracted by the Company to sell services under the Arcadia name. The affiliated agency’s commission is based on a percentage of gross profit (see additional discussion in the “Selling, General and Administrative” section). Revenue generated from the Affiliate locations was $55,135,000 for fiscal 2011 compared to $58,822,000 for the prior year. This $3,687,000, or 6.3%, decrease in revenue was driven by lower levels of Medical Staffing as well as some reduction in Home Care revenues in some Affiliate locations. The Company-Owned locations revenue increased by $382,000, or 1.4%, to $28,194,000 during fiscal 2011 compared to the prior year. The Affiliate locations accounted for 66.2% of total Services segment revenue during fiscal 2011, and this percentage is down slightly from 67.9% for the prior year.

Gross margin in the Services segment was 30.0% for fiscal 2011, which represents a slight decrease from 30.5% for the prior fiscal. While the overall mix of higher margin Home Care business increased as a percentage of total revenues, this gross margin benefit was offset by several factors. These factors included a reduction in margins on several state-sponsored home care programs, such as Arizona, North Carolina, Washington and California; a reduction in the percentage of business generated in some of the Company’s higher margin offices and markets, including the state of Michigan; and an overall decline in the margins in the medical staffing business due to changes in staffing business mix.

Pharmacy Segment

Revenue increased by $5,264,000, or 46.0%, to $16,713,000 during fiscal 2011 compared to the prior year. This growth was driven by the Company’s DailyMed program. During the second half of fiscal 2009, revenue generated from the DailyMed medication management program began to increase at a rapid pace. The revenue growth in fiscal 2011 was primarily driven by the Company’s relationship with WellPoint. In June 2009, the Company announced the signing of an agreement with WellPoint. Under this agreement, the Company initiated the DailyMed medication management program to certain WellPoint Medicaid members in specific states where WellPoint companies provide Medicaid managed care benefits. The Company is currently serving WellPoint’s members in California, Kansas, South Carolina, and Virginia. The WellPoint agreement currently runs through July 2015.

The costs of revenue include the cost of medications and packaging for the DailyMed proprietary dispensing system. Gross margins for fiscal 2011 were 14.5% compared to 12.4% for the prior year. The margin improvement was primarily attributable to improved drug pricing under its new prime vendor agreement with H.D. Smith, which was executed in April 2010. Additionally, subsequent to the amendment to the WellPoint agreement in August 2010, the Pharmacy began recognizing revenue from the additional fees being generating for the services provided through the DailyMed program. This incremental revenue has no additional cost of goods sold associated with it, which resulted in margin improvement.

Selling, General and Administrative

The following table summarizes selling, general and administrative expenses for the fiscal years ended March 31 (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2011				SG&A				2010				SG&A				(Decrease)				(Decrease)
Services			20,043				55.1	%			22,003				57.1	%			(1,960	)			-8.9	%
Pharmacy			8,080				22.2	%			7,069				18.4	%			1,011				14.3	%
Corporate			8,280				22.7	%			9,428				24.5	%			(1,148	)			-12.2	%
		$	36,403				100.0	%		$	38,500				100.0	%		$	(2,097	)			-(5.4	%)
SG&A as a % of net revenue			43.7	%							44.4	%

Services Segment

The Services segment selling, general and administrative expense decreased to $20,043,000 for fiscal 2011 compared to $22,003,000 for the prior year. This $1,960,000, or 8.9%, decrease was primarily due to decreases in commissions paid to Affiliates and bad debt expense. Affiliate commissions are based on the gross margins of the individual Affiliates, and the $958,000, or 8.7%, decrease is approximately consistent with the 6.3% decrease in Affiliate revenue. Additionally, bad debt expense decreased by $679,000 over the prior fiscal year. The Services business has focused on improving its cash collections on both current and past due accounts and has both reduced the absolute dollar level of past due accounts, particularly over 150 days, as well as decreased its days’ sales outstanding. The improved management of accounts receivable has resulted in the need for a lower allowance for doubtful accounts provision than in the prior year. The selling, general and administrative expense for the Services segment does not include costs that are incurred at the corporate level but which include personnel and expenses used to support the Services business.

Pharmacy Segment

The Pharmacy segment selling, general and administrative expense increased by $1,011,000, or 14.3%, to $8,080,000 during fiscal 2011 compared to fiscal 2010. In general, the increase in Pharmacy expenses was due to the significant growth in revenue year over year. Specifically, total labor costs increased by $209,000 during fiscal 2011 as the Company hired additional pharmacists, pharmacy technicians, and customer service representatives in order to process the increased volume and to support the patient care component of the DailyMed program. With patient enrollment efforts associated with the WellPoint agreement, the Company also incurred $472,000 in costs associated with an external call center during fiscal 2010. Shipping costs and bad debt expense also increased during the year by $393,000 and $147,000, respectively, which was consistent with the revenue growth. The remaining increase during the fiscal 2011 was due to various other administrative expenses, including travel, marketing materials, and various service fees, that increased with the growth in revenue and headcount that has occurred over the prior year. The selling, general and administrative expense for the Pharmacy segment does not include costs that are incurred at the corporate level but which include personnel and expenses used to support the Pharmacy business.

Corporate

Corporate overhead decreased by $1,148,000, or 12.2%, to $8,280,000 for fiscal 2011 compared to $9,428,000 for the prior year. The decrease was due to a $769,000 reduction in professional and legal expenses and a $289,000 reduction in insurance costs. The reduction in legal fees was the primary driver in the lower professional fees as the Company was involved in fewer disputes and claims in the current year compared to the prior year. Insurance costs were lower due to reductions in premiums effective with the policy year that began in September 2010.

Depreciation and Amortization

The following table summarizes depreciation and amortization expense for the fiscal years ended March 31 (in thousands):

										$ Increase/				% Increase/
		2011				2010				(Decrease)				(Decrease)
Depreciation and amortization of property and equipment		$	808			$	665				143				21.5	%
Amortization of acquired intangible assets			572				635				(63	)			-9.9	%
Depreciation and amortization		$	1,380			$	1,300			$	80				6.2	%

Depreciation and amortization of property and equipment increased by $143,000 or 21.5%, during fiscal 2011 compared to the prior year. The increase reflects the increase in the depreciation expense relating to recently acquired pharmacy equipment and software.

Amortization of acquired intangible assets decreased by $64,000, or 10.1%, during fiscal 2011 compared to the prior year. The decrease reflects a slight decrease in the amortization expense associated with customer relationships. The amortization expense is adjusted annually and attempts to match the expense to the economic benefit generated by the specific intangible asset.

Goodwill and Intangible Asset Impairment

The following table summarizes goodwill and intangible asset impairment charges for the fiscal years ended March 31, (in thousands):

		2011				2010
Services:
Goodwill		$	—			$	14,599
			—				14,599
Pharmacy:
Goodwill			2,500				—
			2,500				—
Total		$	2,500			$	14,599

In accordance with our policy, the Company performs its annual impairment review during the fiscal fourth quarter.

Fiscal 2011

As part of the fourth quarter fiscal 2011 Pharmacy goodwill impairment analysis, the Company recognized that based on recent growth trends and other factors surrounding the timing and amount of future revenue and cash flow streams, the Company determined that it was appropriate to write off the remaining goodwill balance and recorded a $2,500,000 impairment charge.

Fiscal 2010

During fiscal 2009 and 2010, the Services segment as a whole had seen declining revenue, and the decline was primarily driven by a decline in the medical staffing and travel staffing businesses. Many of the Service’s segments locations provided both home care and medical staffing services. During fiscal 2010, home care accounted for 79% of total segment revenue and medical staffing and travel staffing, in the aggregate, accounted for the remaining 21% of revenue. The medical staffing and travel staffing business experienced a 46% decline in revenue from fiscal 2008 to fiscal 2010. During the same period, home care revenue increased by 9%, but fiscal 2010 revenue was approximately 1% lower than fiscal 2009. Management’s ability to predict the timing and extent of the segments recovery was subject to some uncertainty. Therefore, management focused on more recent trends in its annual impairment analysis, which resulted in lower future cash flow projections than in prior years’ analysis. The impairment analysis resulted in a $14,599,000 goodwill impairment charge for fiscal 2010, and subsequent to this charge, there was no remaining goodwill associated with the Services segment.

In conjunction with the fiscal 2009 goodwill impairment analysis (as described below), the Company recognized a $13,217,000 goodwill impairment charge in the Pharmacy reporting unit. As evidenced by the annual revenue growth in fiscal 2010, the Pharmacy segment continued to advance its DailyMed business during the year, but it continued to be in the early stages of development. In performing the goodwill impairment analysis for the Pharmacy reporting unit during the fiscal fourth quarter 2010, management relied on recent trends and future expectations based on these trends and on industry experience to project future operating results. The fiscal 2011 revenue estimates were based on payer relationships that existed as of the time of the analysis. The revenue estimates in the future years assumed new payer relationships similar to the WellPoint relationship. Additionally, management assumed margin improvement over the next five years due to increased volume, operational improvements and additional revenue from medication adherence services, which would generate higher margins than drug revenue. Management also estimated that SG&A as a percentage of revenue would improve due to software and technological enhancements as well as efficiencies gained through volume and experience. As of March 31, 2010, the Pharmacy reporting unit analysis indicated that its fair value was in excess of it carrying value by approximately 40% so the second step of the analysis was not considered necessary.

Interest Expense and Income

The following table summarizes interest expense and income for the fiscal years ended March 31 (in thousands):

										$ Increase/				% Increase/
		2011				2010				(Decrease)				(Decrease)
Interest expense		$	3,810			$	3,395			$	415				12.2	%
Interest income			(11	)			(24	)			13				-54.2	%
		$	3,799			$	3,371			$	428				12.7	%

Interest expense for fiscal 2011 increased by $415,000, or 12.2%, to $3,810,000 as compared to the prior year. Total interest expense includes the amortization of debt discounts and deferred financing costs of $391,000 and $332,000 for fiscal 2011 and 2010, respectively. Additionally, interest expense includes non-cash interest that was added to the principal balance of the outstanding debt of $2,892,000 and $2,397,000 for fiscal 2011 and 2010, respectively. Cash paid for interest totaled $527,000 and $623,000 during fiscal 2011 and 2010, respectively, and this amount primarily includes the interest due on the Comerica Bank line of credit.

The average interest bearing liabilities balance (sum of the balances at the end of each quarter divided by the number of quarters) for fiscal 2011 was $38.1 million compared to $35.0 million for fiscal 2010, which represents an increase of 8.8%. The increase in the total debt balance was the primary driver for the increase in interest expense during the current year. The increase in total debt was primarily due to the increase in the amounts due to H.D. Smith under the line of credit agreement executed in April 2010 and the additional non-cash interest that was added to the principal balance for certain notes.

Change in Fair Value of Warrant Liability

As of March 31, 2011 and 2010, the 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction and are recorded as a liability at fair value with subsequent changes in fair value recorded in earnings. Additionally, the 500,000 warrants issued to H.D. Smith that vested effective March 31, 2011 were originally recorded as a warrant liability from their issuance date in April 2010 until the vesting date, at which time these warrants were reclassified to permanent equity. The fair value of the warrants is determined using the Black-Scholes pricing model and is affected by changes in inputs to that model, including: our stock price, expected stock price volatility, and contractual terms. To the extent that the fair value of the warrant liability increases or decreases, the Company records a loss or gain in the consolidated statement of operations. The total gain of $1,423,000 and $979,000 on the change in fair value of the warrant liability during fiscal 2011 and 2010, respectively, was primarily due to the changes in our stock price.

Income Taxes

Income tax expense was $33,000 for the year ended March 31, 2011 compared to $29,000 for the year ended March 31, 2010, an increase of $4,000.

Due to the Company’s losses in recent years, it has paid nominal federal income taxes. For federal income tax purposes, the Company had significant permanent and timing differences between book income and taxable income resulting in combined net deferred tax asset balance to be utilized by the Company for which an offsetting valuation allowance has been established for the entire amount. The Company has a net operating loss carry-forward for tax purposes totaling $78.4 million that expires at various dates through 2031. Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating loss carry-forwards upon a change of control of the Company. It has been determined that a change in control took place at the time of the reverse merger in 2004, and as such, the utilization of $700,000 of the net operating loss carry-forwards will be subject to severe limitations in future periods.

Earnings (Loss) from Discontinued Operations

The components of the earnings/(loss) from discontinued operations by segment are presented below (in thousands):

		Year Ended March 31, 2011
										Home Health
		Services				Pharmacy				Equipment				Catalog				Total
Revenues, net:		$	—			$	3,194			$	—			$	660			$	3,854
Cost of revenue			—				2,541				—				397				2,938
Gross profit			—				653				—				263				916
Selling, general and administrative			—				923				—				372				1,295
Depreciation and amortization			—				85				—				—				85
Total operating expenses			—				1,008				—				372				1,380
Gain (loss) from operations			—				(355	)			—				(109	)			(464	)
Net gain (loss) on disposal			686				127				655				(68	)			1,400
Earnings (loss) from discontinued operations		$	686			$	(228	)		$	655			$	(177	)		$	936

		Year Ended March 31, 2010
										Home Health
		Services				Pharmacy				Equipment				Catalog				Total
Revenues, net		$	1,223			$	4,054			$	1,423			$	1,813			$	8,513
Cost of revenue			979				3,078				511				1,095				5,663
Gross profit			244				976				912				718				2,850
Selling, general and administrative			290				1,426				2,251				795				4,762
Depreciation and amortization			3				600				88				—				691
Total operating expenses			293				2,026				2,339				795				5,453
Gain (loss) from operations			(49	)			(1,050	)			(1,427	)			(77	)			(2,603	)
Net gain (loss) on disposal			201				(30	)			386				—				557
Earnings (loss) from discontinued operations		$	152			$	(1,080	)		$	(1,041	)		$	(77	)		$	(2,046	)

Services Segment

On May 29, 2009, the Company finalized the sale of substantially all of the assets of its industrial and non-medical staffing business, which had then been a part of the Services segment, for cash proceeds of $250,000, which were paid in five equal installments through September 2009. Additionally, the Company is to receive 50% of the future earnings of the business until the total payments equal $1,600,000. During fiscal 2011 and 2010, the Company received $683,000 and $72,000, respectively, in earn out payments and recorded these amount as additional gain on the transaction. The Company retained all accounts receivable for services provided prior to May 29, 2009.

Based on the original sales price, the Company recorded an impairment charge of $2,403,000 in the fourth quarter of fiscal 2009.

Pharmacy Segment

In March 2011, the Company ceased operations at its Minnesota pharmacy and began reflecting the ceased operations as discontinued operations in the consolidated financial statements. A portion of the business and the majority of the Minnesota assets were transferred to the Indianapolis, Indiana pharmacy location. The cost to close the Minnesota facility was immaterial.

On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy management company to sell substantially all of the assets of JASCORP, LLC (“JASCORP”) for proceeds of $2,200,000, less fees of $185,000. $220,000 of the purchase price was held back by the buyer in order to cover the Company’s contingent obligations. In January 2011, the Company received $190,000 of the original amount held back. JASCORP operated the retail pharmacy software business that the Company acquired in July 2007. As part of the divestiture, the Company entered into a License and Services Agreement with the buyer which provides the Company the right to continue to use the software for internal purposes.

HHE Segment

On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its Midwest region of the Company’s HHE business. Total proceeds were $4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. The Company retained all accounts receivable for services provided prior to May 2009. Subsequent to the transaction date, the buyer made certain claims, and in fiscal 2011, the buyer and the Company settled these claims and the final payment relating to this transaction of $500,000 was released to the Company.

On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply, Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc. to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of closing, $475,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. During fiscal 2010, the buyer released $267,000 of this amount, which was recognized as an additional gain on the sale. During fiscal 2011, the Company received the final payment of $155,000. A total of $53,000 was retained by the buyer to cover certain obligations of the Company. The entities sold represented the Southeast region of the Company’s HHE business.

Based on the combined sales price of the HHE businesses sold in May 2009, the Company recorded an impairment charge of $540,000 in the fourth quarter of fiscal 2009.

On January 5, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its HHE business in San Fernando, California. Total proceeds were originally estimated to be $503,000, less fees of $24,000. The Company retained all accounts receivables for services provided prior to January 2009. Total proceeds included $126,000 that was held back by the buyer to cover certain contingent obligations of the Company. During fiscal 2010, the Company and the buyer resolved certain claims, and the entire holdback amount was forfeited by the Company.

In October 2008, the Company recognized $696,000 in additional loss on the sale of its ownership interest in Beacon Respiratory Services, Inc. (“Beacon”), which was divested of in September 2007. See Note 9 — “Stockholders’ Equity” for a more detailed discussion of this transaction.

As of May 2009, the Company had sold all of its HHE operations.

Catalog Segment

On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health Care Products, LLC to Home Health Depot, Inc. The Company is to receive 50% of future earnings of the business until total payments equal $375,000. 40% of these proceeds are to be paid to a third party. No earn-out payments will be payable after the quarter ending September 30, 2013. The Company recorded a loss of $6,000 during fiscal 2011 in conjunction with this disposal. This entity represented the Company’s Catalog segment.

Fiscal Year Ended March 31, 2010 Compared to the Fiscal Year Ended March 31, 2009

Results of Continuing Operations (in thousands, except per share amounts)

		Years Ended
		March 31,
		2010				2009
Services			86,635				97,537
Pharmacy			11,449				3,462
Revenues, net			98,084				100,999
Cost of revenues			70,274				70,749
Gross profit			27,810				30,250
Selling, general and administrative expenses			38,500				38,565
Depreciation and amortization			1,300				1,513
Goodwill and intangible asset impairment			14,599				22,619
Total operating expenses			54,399				62,697
Operating loss			(26,589	)			(32,447	)
Other expenses (income):
Interest expense, net			3,371				4,072
Loss on extinguishment of debt			—				4,487
Change in fair value of warrant liability			(979	)			—
Other			30				75
Total other expenses			2,422				8,634
Net loss before income tax expense			(29,011	)			(41,081	)
Income tax expense			29				122
Net loss from continuing operations		$	(29,040	)		$	(41,203	)
Weighted average number of shares — basic and diluted			166,840				134,583
Net loss from continuing operations per share — basic and diluted		$	(0.17	)		$	(0.31	)

Revenues, Cost of Revenues and Gross Profits

The following table summarizes revenues, cost of revenues and gross profit for the fiscal years ended March 31, (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2010				Revenue				2009				Revenue				(Decrease)				(Decrease)
Revenues, net:
Services		$	86,635				88.3	%		$	97,537				96.6	%		$	(10,902	)			-11.2	%
Pharmacy			11,449				11.7	%			3,462				3.4	%			7,987				230.7	%
			98,084				100.0	%			100,999				100.0	%			(2,915	)			-2.9	%
Cost of revenues:
Services			60,247								67,779								(7,532	)			-11.1	%
Pharmacy			10,027								2,970								7,057				237.6	%
			70,274								70,749								(475	)			-0.7	%

		Gross								Gross
		Margin %								Margin %
Gross margins:
Services			26,388				30.5	%			29,758				30.5	%			(3,370	)			-11.3	%
Pharmacy			1,422				12.4	%			492				14.2	%			930				189.0	%
		$	27,810				28.4	%		$	30,250				30.0	%		$	(2,440	)			-8.1	%

Services Segment

The following table summarizes the Services segment revenues by type for the fiscal years ended March 31, (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2010				Revenue				2009				Revenue				(Decrease)				(Decrease)
Home care		$	68,511				79.1	%		$	69,204				71.1	%		$	(693	)			-1.0	%
Per diem medical staffing			12,296				14.2	%			18,779				19.3	%			(6,483	)			-34.5	%
Travel staffing			5,828				6.7	%			9,554				9.7	%			(3,726	)			-39.0	%
Total Services		$	86,635				100.0	%		$	97,537				100.0	%		$	(10,902	)			-11.2	%

The Services segment remains the largest source of revenue for the Company. Home Care revenue as a percentage of the total segment revenue continues to increase, reaching 79.1% of such revenue during fiscal 2010. Home care revenues fell by $693,000, or 1.0%, from $69,204,000 to $68,511,000 over the prior year. Home care revenues were adversely affected by several factors, including reductions in hours/reimbursement rates by state-sponsored programs in some of the Company’s key markets such as Arizona, North Carolina, Washington and California; high unemployment rates, particularly in the State of Michigan where the Company has substantial operations, resulting in increased availability of family caregivers to provide care in lieu of our services; and the significant reduction in the value of individual retirement savings and investment accounts during 2008 and 2009, resulting in some reduction in the hours of services purchased.

The negative trends in the medical staffing and travel staffing markets continued during fiscal 2010. Medical staffing and travel staffing declined by 34.5% and 39.0%, respectively, as compared with the prior year. Several factors have contributed to the lower level of overall sales. Market conditions for temporary medical staffing during this period were not favorable, driven by lower patient censuses in facilities; constraints on facility staffing budgets; the return of part-time staff to full-time status and increases in overtime accepted by permanent staff of our potential customers, largely in response to overall economic conditions; and delays in the construction and opening of new facilities that often drives short-term staffing requirements. In addition to these market conditions, travel staffing revenues have been adversely affected by state budget constraints with a major correctional institution customer.

The Services segment operates independently and through a network of affiliated agencies (“Affiliates”) throughout the United States. These affiliated agencies are independently-owned, owner-managed businesses, which have been contracted by the Company to sell services under the Arcadia name. The affiliated agency’s commission is based on a percentage of gross profit (see additional discussion in the “Selling, General and Administrative” section). Revenue generated from the Affiliate locations was $58,822,000 for fiscal 2010 compared to $66,450,000 for the prior year. This $7,628,000, or 11.5%, decrease in revenue was driven by lower levels of Medical Staffing as well as some reduction in Home Care revenues in some Affiliate locations. The Company-Owned locations revenue decreased by $3,266,000, or 10.5%, to $27,812,000 during fiscal 2010 compared to the prior year. The Affiliate locations accounted for 67.9% of total Services segment revenue during fiscal 2010, and this percentage is down slightly from 68.1% for the prior year.

Gross margin in the Services segment was 30.5% for both fiscal 2010 and 2009. While the overall mix of higher margin home care business increased as a percentage of total revenues, this gross margin benefit was offset by several factors. These factors included a reduction in margins on several state-sponsored home care programs, such as Arizona, North Carolina, Washington and California; a reduction in the percentage of business generated in some of the Company’s higher margin offices and markets, including the state of Michigan; and an overall decline in the margins in the medical staffing business due to changes in staffing business mix. In addition, in the fiscal fourth quarter 2010, the Company experienced an increase in state unemployment taxes in many of the states in which it operates.

Pharmacy Segment

Pharmacy segment revenue increased by $7,987,000, or 230.7%, to $11,449,000 during fiscal 2010 compared to the prior year. This growth was driven by the Company’s DailyMed program. During the second half of fiscal 2009, revenue generated from the DailyMed medication management program began to increase at a rapid pace. The revenue growth in fiscal 2010 was primarily driven by the Company’s relationship with WellPoint. In June 2009, the Company announced the signing of its agreement with WellPoint. Under this agreement, the Company provides the DailyMed medication management program to WellPoint’s high-risk Medicaid members in specific states where WellPoint companies provide Medicaid managed care benefits. The program was launched to WellPoint’s high risk members in Virginia in August 2009, and the Company began recognizing revenue from these patients in September 2009. The program was rolled out to WellPoint’s California patients during fiscal fourth quarter 2010.

The costs of revenue include the cost of medications and packaging for the DailyMed proprietary dispensing system. Gross margins for fiscal 2010 were 12.4% compared to 14.2% for the prior year. In general, the margins were negatively impacted by shifts in the payer and patient mix as the revenue grew. The revenue growth during fiscal 2010 was primarily driven by the Indiana Medicaid program and the WellPoint patients in Virginia. The margins associated with these patients are lower due to a combination of lower reimbursement rates and the brand/generic drug mix where generic drugs have lower margins than brand drugs.

Selling, General and Administrative

The following table summarizes selling, general and administrative expenses by segment for the fiscal years ended March 31 (in thousands):

						% of Total								% of Total				$ Increase/				% Increase/
		2010				SG&A				2009				SG&A				(Decrease)				(Decrease)
Services		$	22,003				57.2	%		$	25,316				65.6	%		$	(3,313	)			-13.1	%
Pharmacy			7,069				18.4	%			3,612				9.4	%			3,457				95.7	%
Corporate			9,428				24.5	%			9,637				25.0	%			(209	)			-2.2	%
		$	38,500				100.0	%		$	38,565				100.0	%		$	(65	)			-(0.2	%)
SG&A as a % of net revenue			44.4	%							39.5	%

Services Segment

The Services segment selling, general and administrative expense decreased to $22,003,000 for fiscal 2010 compared to $25,316,000 for fiscal 2009. This $3,313,000, or 13.1%, decrease was primarily due to a $1,346,000 decrease in commissions paid to the affiliates, a $838,000 decrease in bad debt expense and a $674,000 decrease in labor costs. Affiliate commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins generated from the affiliate owned locations. The decrease in bad debt expense is due to a combination of higher than normal bad debt expense in the prior year and an increased focus on collection efforts during fiscal 2010. The decrease in labor costs was a direct result of the Company’s efforts to reduce headcount in certain areas. The selling, general and administrative expense for the Services segment does not include costs that are incurred at the corporate level but which include personnel and expenses used to support the Services business.

Pharmacy Segment

The Pharmacy segment’s selling, general and administrative expense increased by $3,457,000, or 95.7%, to $7,069,000 during fiscal 2010 compared to fiscal 2009. In general, the increase in Pharmacy expenses was due to the significant growth in revenue year over year. Specifically, total labor costs increased by $1,635,000 during fiscal 2010 as the Company hired additional pharmacists, pharmacy technicians, and customer service representatives in order to process the increased volume and to support the patient care component of the DailyMed program. With patient enrollment efforts associated with the WellPoint agreement, the Company also incurred $472,000 in costs associated with an external call center during fiscal 2010. Shipping costs and bad debt expense also increased during the year by $393,000 and $147,000, respectively, which was consistent with the revenue growth. The remaining increase during the fiscal 2010 was due to various other administrative expenses, including travel, marketing materials, and various service fees, that increased with the growth in revenue and headcount that has occurred over the prior year. The selling, general and administrative expense for the Pharmacy segment does not include costs that are incurred at the corporate level but which include personnel and expenses used to support the Pharmacy business.

Corporate

Corporate general and administrative expense decreased by $209,000, or 2.2%, to $9,428,000 for fiscal 2010 compared to $9,637,000 for the prior year. The slight decrease reflects a general reduction in the Corporate overhead necessary to operate the business subsequent to the various business divestitures during the fiscal first quarter 2010. These reductions were offset by increases in:

	•		legal fees as the number of claims and disputes arising during the normal course of business was higher in fiscal 2010 than fiscal 2009; and,
	•		equity compensation, which was higher in fiscal 2010 due to a stock option grant to senior management in March 2010 which vested immediately resulting in a $464,000 charge during fiscal fourth quarter 2010.

Depreciation and Amortization

The following table summarizes depreciation and amortization expense for the fiscal years ended March 31 (in thousands):

										$ Increase/				% Increase/
		2010				2009				(Decrease)				(Decrease)
Depreciation and amortization of property and equipment		$	666			$	601				65				10.8	%
Amortization of acquired intangible assets			634				704				(70	)			-9.9	%
Depreciation and amortization — operating expense		$	1,300			$	1,305			$	(5	)			-0.4	%

Depreciation and amortization of property and equipment increased by $65,000 or 10.8%, during fiscal 2010 compared to the prior year. The increase reflects the increase in depreciation associated with Pharmacy equipment acquired during the last year and various software.

Amortization of acquired intangible assets decreased by $70,000, or 9.9%, during fiscal 2010 compared to the prior year. The decrease reflects the fact that as of March 31, 2009, the Company recognized certain impairment charges relating to amortizable intangible assets associated with the Pharmacy segment, which ultimately reduced 2010 amortization expense.

Goodwill and Intangible Asset Impairment

The following table summarizes goodwill and intangible asset impairment charges for the fiscal years ended March 31, (in thousands):

		2010				2009
Services:
Goodwill		$	14,599			$	—
			14,599				—
Pharmacy:
Goodwill			—				13,217
Intangible assets			—				9,402
			—				22,619
Total		$	14,599			$	22,619