**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

**ý****  Quarterly reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

 

**For the quarterly period ended March 31,2006**

 

**OR**

 

**o****  Transition reportpursuant to Section 13 or 15 (d) of the Securities Exchange Act of1934**

 

**Commission FileNumber:  000-50371**

 

**Curative Health Services, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **MINNESOTA**                                                    |   | **51-0467366**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**61 Spit Brook Road**

**Nashua, New Hampshire 03060**

(Address of principal executive offices)

 

**(603) 888-1500**

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days:  Yes ý      No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act (Check one):
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|--------------------------------|--------|--------------------------|--------|-----------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o      No ý

 

As of May 10, 2006, there were 13,043,967shares of the Registrant’s Common Stock, $.01 par value, outstanding.

 

 

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# **INDEX**

 
| ** **       | ** **                                                                                        | **Page** |
|------------------|---------------------------------------------------------------------------------------------------|----------|
| **Part I**  | **Financial Information**                                                                         |     |
|             |                                                                                              |     |
| Item 1           | Financial  Statements (Debtors-in-Possession as of March 27, 2006):                          |     |
|             |                                                                                              |     |
|             | Condensed  Consolidated Statements of Operations  Three months ended March 31, 2006 and 2005 | 3        |
|             |                                                                                              |     |
|             | Condensed  Consolidated Balance Sheets  March 31, 2006 and December 31, 2005            | 4        |
|             |                                                                                              |     |
|             | Condensed  Consolidated Statements of Cash Flows  Three months ended March 31, 2006 and 2005 | 5        |
|             |                                                                                              |     |
|             | Notes  to Condensed Consolidated Financial Statements                                             | 6        |
|             |                                                                                              |     |
| Item 2           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations       | 19       |
|             |                                                                                              |     |
| Item 3           | Quantitative and Qualitative  Disclosures About Market Risk                                       | 27       |
|             |                                                                                              |     |
| Item 4           | Controls and Procedures                                                                           | 28       |
|             |                                                                                              |     |
| **Part II** | **Other  Information**                                                                            |     |
|             |                                                                                              |     |
| Item 1           | Legal Proceedings                                                                                 | 29       |
|             |                                                                                              |     |
| Item 1A          | Risk Factors                                                                                      | 30       |
|             |                                                                                              |     |
| Item 4           | Submission  of Matters to a Vote of Security Holders                                              | 31       |
|             |                                                                                              |     |
| Item 6           | Exhibits                                                                                          | 32       |
|             |                                                                                              |     |
|             | Signatures                                                                                        | 34       |

 

2

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# **Part I**                                         FinancialInformation

 

**Item 1.****                                   Financial Statements**

 

# **Curative HealthServices, Inc. and Subsidiaries**(Debtors-in-Possession as of March 27, 2006)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)(Unaudited)

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **March 31**      | ** ** |
| ** **                                                                               | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Revenues:                                                                                |       |                   |       |   |   |
| Products                                                                                 |       | $                      | 59,566     |   | $ | 52,562 |   |
| Services                                                                                 |       | 7,477                  |       | 6,768 |   |
| Total revenues                                                                           |       | 67,043                 |       | 59,330 |   |
|                                                                                     |       |                   |       |   |   |
| Costs and operating expenses:                                                            |       |                   |       |   |   |
| Cost of product sales                                                                    |       | 50,228                 |       | 43,550 |   |
| Cost of services                                                                         |       | 3,318                  |       | 3,048 |   |
| Selling, general and administrative                                                      |       | 13,834                 |       | 11,422 |   |
| Total costs and operating expenses                                                       |       | 67,380                 |       | 58,020 |   |
|                                                                                     |       |                   |       |   |   |
| (Loss) income from continuing operations                                                 |       | (337                   | )          | 1,310 |   |
|                                                                                     |       |                   |       |   |   |
| Interest income                                                                          |       | 36                     |       | 32 |   |
| Interest expense                                                                         |       | (6,194                 | )          | (5,826 | ) |
| Other                                                                                    |       | —                 |       | (2,006 | ) |
|                                                                                     |       |                   |       |   |   |
| (Loss) from continuing operations before  reorganization expenses and income tax benefit |       | (6,495                 | )          | (6,490 | ) |
|                                                                                     |       |                   |       |   |   |
| Reorganization expenses                                                                  |       | 12,490                 |       | — |   |
|                                                                                     |       |                   |       |   |   |
| Loss from continuing operations before income taxes                                      |       | (18,985                | )          | (6,490 | ) |
| Income tax provision (benefit)                                                           |       | 75                     |       | (2,142 | ) |
|                                                                                     |       |                   |       |   |   |
| Net loss from continuing operations                                                      |       | (19,060                | )          | (4,348 | ) |
|                                                                                     |       |                   |       |   |   |
| Discontinued operations:                                                                 |       |                   |       |   |   |
| (Loss) income from discontinued operations                                               |       | (324                   | )          | 1,466 |   |
| Income taxes                                                                             |       | —                 |       | 482 |   |
| (Loss) income from discontinued operations                                               |       | (324                   | )          | 984 |   |
|                                                                                     |       |                   |       |   |   |
| Net (loss)                                                                               |       | $                      | (19,384    | ) | $ | (3,364 | ) |
|                                                                                     |       |                   |       |   |   |
| Net (loss) income per share: (1):                                                        |       |                   |       |   |   |
| (Loss) from continuing operations                                                        |       | $                      | (1.46      | ) | $ | (0.34 | ) |
| (Loss) income from discontinued operations                                               |       | (0.03                  | )          | 0.08 |   |
| Net (loss) per common share, basic and diluted                                           |       | $                      | (1.49      | ) | $ | (0.26 | ) |
|                                                                                     |       |                   |       |   |   |
| Weighted average common shares, basic and diluted                                        |       | 13,043                 |       | 12,968 |   |

 

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(1)               See Note 6 fornet loss per share calculation.

 

See accompanying notes

 

3

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# **CurativeHealth Services, Inc. and Subsidiaries(Debtors-in-Possession as of**March 27, 2006)CONDENSED CONSOLIDATED BALANCESHEETS(Inthousands)(Unaudited)

 
| ** **                                         | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                         | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current assets:**                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                          |       | $                        | 698        |                        | $          | 1,099 |   |
| Accounts receivable, net                           |       | 63,157                   |       | 66,487                      |       |
| Inventories                                        |       | 11,618                   |       | 10,495                      |       |
| Prepaids and other current assets                  |       | 3,205                    |       | 3,529                       |       |
| Deferred financing fees                            |       | 1,454                    |       | 9,913                       |       |
| Federal income tax refund receivable               |       | —                   |       | 756                         |       |
| Deferred income tax assets                         |       | 4,097                    |       | 5,860                       |       |
| Current assets of discontinued operations          |       | 734                      |       | 2,278                       |       |
| Total current assets                               |       | 84,963                   |       | 100,417                     |       |
|                                               |       |                     |       |                        |       |
| Property and equipment, net                        |       | 9,587                    |       | 11,934                      |       |
| Intangibles subject to amortization, net           |       | 18,182                   |       | 18,548                      |       |
| Intangibles not subject to amortization            |       | 1,440                    |       | 1,440                       |       |
| Goodwill                                           |       | 36,387                   |       | 36,387                      |       |
| Other assets                                       |       | 362                      |       | 367                         |       |
| Non-current assets of discontinued operations      |       | 159                      |       | 195                         |       |
| Total assets                                       |       | $                        | 151,080    |                        | $          | 169,288 |   |
|                                               |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Liabilities Not Subject to Compromise**          | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current liabilities:**                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Accounts payable                                   |       | $                        | 9,112      |                        | $          | 13,133 |   |
| Accrued expenses and other current liabilities     |       | 17,293                   |       | 29,879                      |       |
| Debt in default and other obligation               |       | 26,681                   |       | 213,245                     |       |
| Current liabilities of discontinued operations     |       | 356                      |       | 1,035                       |       |
| Total current liabilities                          |       | 53,442                   |       | 257,292                     |       |
|                                               |       |                     |       |                        |       |
| Deferred income taxes                              |       | 4,097                    |       | 5,860                       |       |
| Other long-term liabilities                        |       | 77                       |       | 74                          |       |
| Non-current liabilities of discontinued operations |       | —                   |       | 395                         |       |
| Total long-term liabilities                        |       | 4,174                    |       | 6,329                       |       |
|                                               |       |                     |       |                        |       |
| **Liabilities subject to compromise**              | ** ** | **206,436**              | ** ** | **—**                  | ** ** |
|                                               |       |                     |       |                        |       |
| **Stockholders’ deficit:**                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Common stock                                       |       | 129                      |       | 129                         |       |
| Additional paid in capital                         |       | 120,770                  |       | 120,293                     |       |
| Accumulated deficit                                |       | (232,263                 | )          | (212,879                    | )          |
| Deferred compensation                              |       | (1,608                   | )          | (1,876                      | )          |
| Total stockholders’ deficit                   |       | (112,972                 | )          | (94,333                     | )          |
|                                               |       |                     |       |                        |       |
| Total liabilities and stockholders’ deficit   |       | $                        | 151,080    |                        | $          | 169,288 |   |

 

See accompanying notes

 

4

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# **CurativeHealth Services, Inc. and Subsidiaries(Debtors-in-Possession as of**March 27, 2006)CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Inthousands)(Unaudited)

 
| ** **                                                                                         | ** ** | **Three Months Ended  March 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **OPERATING ACTIVITIES:**                                                                          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss from continuing operations                                                                |       | $                                     | (19,060    | ) | $ | (4,348 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:         |       |                                  |       |   |   |
| Depreciation and amortization                                                                      |       | 1,284                                 |       | 1,513 |   |
| Provision for doubtful accounts                                                                    |       | 1,799                                 |       | 756 |   |
| Stock based compensation                                                                           |       | 745                                   |       | 331 |   |
| Change in fair value of interest rate swap                                                         |       | —                                |       | 2,006 |   |
| Deferred income taxes                                                                              |       | —                                |       | (665 | ) |
| Amortization of deferred financing fees                                                            |       | 495                                   |       | 486 |   |
| Changes in operating assets and liabilities, net of  effects from Specialty Infusion acquisitions: |       |                                  |       |   |   |
| Accounts receivable                                                                                |       | 1,531                                 |       | (2,966 | ) |
| Inventories                                                                                        |       | (1,123                                | )          | 3,624 |   |
| Swap interest receivable                                                                           |       | —                                |       | (158 | ) |
| Prepaids and other                                                                                 |       | 1,074                                 |       | 2,691 |   |
| Accounts payable and accrued expenses                                                              |       | 2,750                                 |       | 585 |   |
| **Net cash (used in) provided by continuing  operating activities**                                |       | (10,505                               | )          | 3,855 |   |
| **Non-cash reorganization costs**                                                                  |       | 8,413                                 |       | — |   |
| **Net cash provided by (used in) discontinued  operations**                                        |       | 746                                   |       | (1,039 | ) |
| **NET CASH (USED IN) PROVIDED BY OPERATING  ACTIVITES**                                            |       | (1,346                                | )          | 2,816 |   |
|                                                                                               |       |                                  |       |   |   |
| **INVESTING ACTIVITIES:**                                                                          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                                |       | (375                                  | )          | (1,624 | ) |
| Disposal of property and equipment and other                                                       |       | 1,810                                 |       | 460 |   |
| **NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES**                                           |       | 1,435                                 |       | (1,164 | ) |
|                                                                                               |       |                                  |       |   |   |
| **FINANCING ACTIVITIES:**                                                                          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Payment financing fees                                                                             |       | (450                                  | )          | — |   |
| Borrowing from credit facilities, net                                                              |       | 335                                   |       | (3,003 | ) |
| Proceeds from repayment of note receivable -  stockholders                                         |       | —                                |       | 1,474 |   |
| Repayment of notes payable                                                                         |       | (375                                  | )          | (218 | ) |
| **NET CASH (USED IN) FINANCING ACTIVITIES**                                                        |       | (490                                  | )          | (1,747 | ) |
|                                                                                               |       |                                  |       |   |   |
| NET (DECREASE) IN CASH AND CASH EQUIVALENTS                                                        |       | (401                                  | )          | (95 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                   |       | 1,099                                 |       | 1,176 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                         |       | $                                     | 698        |   | $ | 1,081 |   |

 

See accompanying notes

 

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Curative Health Services, Inc. andSubsidiaries

(Debtors-in-Possessionas of March 27, 2006)

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.****                        Basisof Presentation**

 

Thecondensed consolidated financial statements are unaudited and reflect alladjustments (consisting only of normal recurring adjustments except asdescribed below related to Statement of Position 90-7, “Financial Reporting byEntities in Reorganization Under the Bankruptcy Code,” and in Notes 2 and 3)which are, in the opinion of management, necessary for a fair presentation ofthe financial position and operating results for the interim period. Thecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements for the year ended December 31, 2005and notes thereto contained in the Company’s Annual Report on Form 10-Kfiled with the Securities and Exchange Commission. The results of operationsfor the three months ended March 31, 2006 are not necessarily indicativeof the results to be expected for the entire fiscal year ending December 31,2006.

 

On March 27,2006, Curative and each of its direct and indirect subsidiaries (collectivelythe “Debtors”) filed voluntary petitions under chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the Southern District of New York (the “Bankruptcy Court”) as furtherdescribed below. As a result of the Debtors entering into Chapter 11proceedings, the Company’s unaudited condensed consolidated financialstatements for the quarter ended March 31, 2006 have been prepared inaccordance with AICPA Statement of Position (“SOP”) 90-7, “Financial Reportingby Entities in Reorganization Under the Bankruptcy Code,” and will continue toapply generally accepted accounting principles as a going concern which assumesthe realization of assets and the payment of liabilities in the ordinary courseof business.

 

SOP90-7 requires that pre-petition liabilities that are subject to compromise besegregated in the Company’s unaudited Condensed Consolidated Balance Sheet asLiabilities Subject to Compromise (which are more specifically detailed in Note3 and that revenues, expenses, interest income, realized gains and losses, andprovisions for losses directly resulting from the reorganization of the Debtors’be reported separately as reorganization cost, except those revenues andexpenses required to be reported as discontinued operations, in the unauditedCondensed Consolidated Statements of Operations.

 

Asdebtors-in-possession, the Debtors, subject to any required court approval, may electto assume or reject real estate leases, employment contracts, personal propertyleases, service contracts, and other unexpired executory pre-petitioncontracts. Management cannot presently determine with certainty the ultimateaggregate liability that will result from the filing and settlement of claimsrelated to any rejected contracts, and as a result, no allowance has beenrecorded for these items. However, lease termination costs related to theCompany’s 2003 consolidation of pharmacy operations, 2004 Corporate headquarterconsolidation and 2005 discontinued operations totaling $0.8 million have beenreclassified as Liabilities Subject to Compromise in the Condensed ConsolidatedBalance Sheet as of March 31, 2006. The above leases have been rejected inthe Chapter 11 cases.

 

Forthe quarter ended March 31, 2006, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-BasedPayment” (SFAS No. 123R) (See Note 4).

 

**PlannedReorganization and Chapter 11 Bankruptcy Proceedings**

 

TheCompany has incurred significant losses over the past two years. The Companyhired a financial advisor to assist it in evaluating the financial alternativesavailable given its significant debt and continuing losses. In October 2005,the Company commenced discussions with an ad hoc committee representing holdersof approximately 80% of the $185.0 million aggregate principal amount of theCompany’s 10.75% Senior Subordinated Notes (“Notes” or “Senior Notes”) due 2011regarding a possible restructuring of the Notes. In connection with thesediscussions, the Company elected not to pay the interest payment due on theNotes on November 1, 2005 and, instead, elected to use the 30-day graceperiod under the Note agreement. In the absence of significantly improvedoperating

 

6

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cash flow, arestructuring of the Notes or some other event that improves liquidity, theCompany did not expect to be able to service its debt obligations coming due infiscal 2006.

 

Asnoted above, on March 27, 2006, Curative and each of its direct andindirect subsidiaries filed voluntary petitions under chapter 11 of theBankruptcy Code in the Bankruptcy Court. The Company filed its Chapter 11 Casesto implement and effect a Plan of Reorganization (the “Plan”) further describedbelow. Prior to commencement of the Chapter 11 Cases, Curative solicited votesto accept or reject the Plan from the holders of the Notes issued by the Companyand the holders of known general unsecured claims against the Company as of February 6,2006. Prior to the commencement of the Chapter 11 Cases, the Company receivedthe requisite votes for the Plan to be confirmable under Section 1129 ofthe Bankruptcy Code.

 

ThePlan was filed with the Bankruptcy Court on March 27, 2006. The Plan,which is described in more detail under Item 1 of the Company’s Annual Reportfiled on Form 10-K for the year ended December 31, 2005 under thecaption, “Planned Reorganization and Chapter 11 Bankruptcy Proceedings,” will,if confirmed and consummated, result in the cancellation and discharge of allclaims relating to the Senior Notes. Each Senior Noteholder will receive a cashpayment of approximately 54.9% of its respective claim related to the SeniorNotes, unless a Senior Noteholder was qualified to elect and did elect toreceive its pro rata share of certain cash consideration provided in the Planand the New Curative Common Stock. Holders of existing shares of Old CurativeCommon Stock and options will not receive any distributions under the Plan andall shares of Old Curative Common Stock and options will be extinguished.

 

Inconnection with the reorganization to be effected by the Plan, the Companyintends to deregister its existing securities under the Securities Exchange Actof 1934, and become a “private company” upon its emergence from Chapter 11.

 

Underthe Plan, each holder of an undisputed general unsecured claim against theCompany (other than those against the Company’s subsidiaries, Apex TherapeuticCare, Inc. and eBioCare.com Inc.) will receive a promissory note in a faceamount equal to approximately 56% of its respective claim. Each holder of anundisputed general unsecured claim against each of Apex and eBioCare willreceive a promissory note in a face amount equal to approximately 5.2% of itsrespective claim. Prior to the commencement of the Chapter 11 Cases, eachholder of a general unsecured claim against each of the Curative Debtors, Apexand eBioCare had the option in lieu of receiving a promissory note to elect toreceive a cash payment in an amount equal to 50% of the face amount of itsrespective promissory note. Substantially all of the holders of unsecuredclaims against each of the Curative Debtors, Apex and eBiocare elected toreceive a promissory note. In accordance with certain orders entered by theBankruptcy Court and the Plan, certain general unsecured claims will beunimpaired and paid in full. Secured claims against the Company (other than theclaims relating to the Company’s credit facility with GE Capital Corporation ineffect prior to commencement of the Chapter 11 Cases (the “Pre-Petition CreditFacility”) will be unimpaired.

 

**Events Leading to Chapter 11 Cases**

 

***Factors Affecting the Company’s Liquidity***

 

Since June 2004,Curative has faced various issues that have negatively affected its liquidityand its ability to service its debt obligations. Specifically, and as describedin further detail below, Curative has experienced reduced revenue generation asa result of:

 

•                            California’smodification of its blood-product reimbursement methodology,

 

•                            amodification of the federal government’s blood-product reimbursementmethodology,

 

•                            slowmaturation of certain new branch locations,

 

•                            theresignation of certain customer sales and service representatives, and

 

•                            additionalfuture liquidity risks, including potential indemnification claims.

 

7

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*Significant Decrease in Blood-Product Reimbursement*

 

On April 23,2004, the Company acquired Critical Care Systems (“CCS”), a leading nationalprovider of specialty infusion pharmaceuticals and related services for apurchase price of $154.2 million, including working capital adjustments ofapproximately $4.1 million. The acquisition of CCS was financed with a portionof the proceeds obtained from the issuance of the Senior Notes and additionalborrowings. See Note 11 of Notes to Consolidated Financial Statements includedin the Company’s Annual Report on Form 10-K.

 

At thetime of the CCS acquisition, a significant portion of the Company’s businessinvolved the sale of blood-clotting products by the Company to hemophiliapatients who are beneficiaries of Medi-Cal program or other state fundedprograms for hemophilia patients. These blood products were dispensed directlyto patients or through the Company’s relationships with third party pharmacies.

 

In May 2004,California announced that, effective June 1, 2004, California modified itsreimbursement methodology for blood-clotting products to Average Selling Price(ASP) (as provided by the manufacturer) plus 20%. This change in California’sreimbursement methodology amounted to an approximate 30-40% reduction from theacquisition cost plus 1% methodology previously in effect. The implementationof this reduction in reimbursement from Medi-Cal, and changes in regulationsgoverning such reimbursement, significantly impacted the Company’s revenues andrelated profitability from the sale of blood-clotting products.

 

Inaddition to the 30%-40% decrease in revenue for blood-clotting productsgenerated from Medi-Cal reimbursement, in November 2004, the federalgovernment announced that, effective January 1, 2005, it would modify itsreimbursement methodology for blood-clotting products in a manner which wouldnegatively affect the Company’s revenues. Prior to January 1, 2005,Curative was able to seek reimbursement from Medicare for blood-clottingproducts at a rate of 95% of the Average Wholesale Price (AWP). Effective January 1,2005, Medicare reimbursed for blood-clotting products at a rate of ASP plus 6%plus a $0.14 per unit dispensing fee.

 

*Underperforming Branch Expansion*

 

TheCompany’s overall growth strategy, and its approach to offsetting the decreasedrevenue resulting from the change in Medi-Cal reimbursement methodologydescribed above, included the opening of 13 new branches throughout the UnitedStates since June 2004. The Company projected that these new brancheswould quickly enter into the necessary service contracts and other business andpatient relationships in the short-term and begin generating positive revenueconsistent with historical results. However, for various reasons, includingslower than anticipated managed care contract signings, certain of thesebranches have not matured as quickly as planned and have not generatedanticipated revenues.

 

*Resignation of Hemophilia Service Representatives*

 

Thesuccess of the Company’s Specialty Infusion business unit depends in part uponits ability to retain key employees, referred to as hemophilia servicerepresentatives, who service hemophilia patients. The hemophilia servicerepresentatives are the chief contacts and maintain the primary relationshipwith Curative’s customers. While the Company has employment agreements with itshemophilia service representatives which, where appropriate, contain covenantsnot to compete and other restrictive covenants that apply if the hemophiliaservice representatives cease employment with Curative, the loss of any hemophiliaservice representatives could result in the loss of a significant number ofcustomers and corresponding revenue from the sale of blood-clotting products tosuch customers.

 

On October 21,2005, six hemophilia service representatives resigned. The Company estimatesthat the patients serviced by these employees represented approximately $25.0million of revenue annually. While it is not certain that the Company will losethe full $25.0 million of revenue, it is likely that it will experience asignificant decrease in revenue as a result of these resignations. The Company may experiencethe loss of other hemophilia services representatives in the future which couldadversely affect its business and prospects.

 

8

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*AdditionalFactor Affecting the Company’s Liquidity*

 

Inaddition to the factors adversely affecting the Company’s revenue generationdescribed above, its future liquidity may also be affected by thefollowing additional factor:

 

•                  *The Pharmacy Claims.*Two of the Company’ssubsidiaries Apex and eBioCare, might be subject to potential indemnificationliabilities to three independent retail pharmacies that previously did businesswith Curative. The indemnification claims are in connection with an audit conductedby the Department of Health Services of the State of California (“DHS”) relatedto the pharmacies’ medical billing for clotting factor supplied to thepharmacies by Apex and eBioCare, and the pharmacies’ medical billings for theanti-inhibitor product “FEIBA” supplied to the pharmacies by Apex and eBioCare.While the liability with respect to these claims is uncertain at this time,Apex and eBioCare believe that some amount of monetary loss is reasonablypossible if the pharmacies assert and prevail on indemnification claims. Apexand eBioCare estimate that the range of loss may be anywhere from $0 to$39.3 million. Moreover, any liability of Apex or eBioCare resulting from theseclaims will be compromised under the Plan if the Plan is implemented withoutmodification. As the amount of potential exposure cannot be estimated at thistime, no related loss provision has been accrued in the consolidated financialstatements as of March 31, 2006.

 

**Debtor-In-PossessionFinancing**

 

TheCompany had approximately $213.2 million in outstanding debt as of March 31,2006, including $185.0 million aggregate principal amount of 10.75% seniornotes due 2011 (the “Notes”) and approximately $26.7 million outstanding underits $40 million secured revolving credit facility with General Electric CapitalCorporation (“GE Capital”). On April 5, 2006 the Company entered into a$45 million secured debtor-in-possession (“DIP”) revolving credit facility withGE Capital. The proceeds of the DIP Financing were used to pay, in full, allamounts outstanding under the Company’s Pre-Petition Credit Facility on April 5,2006. Pursuant to a Forbearance Agreement dated December 1, 2005, GECapital had agreed to forbear from exercising remedies related to thecross-default under the Pre-petition Credit Facility arising from failure bythe Company to pay interest on the Notes as described below. Pursuant to theterms of the Forbearance Agreement and the DIP Financing, GE Capital alsoagreed to waive approximately $1.2 million in early termination penalties (the “PrepaymentPenalty Amounts”) and $0.2 million in default interest (defined in theForbearance Agreement as the “PIK interest”) that were otherwise payable underthe Pre-petition Credit Facility. The waiver of such amounts is subject to thecondition that GE Capital continue as a lender for the Company’s exit financingupon emergence from the Chapter 11 Cases. The Company has recorded as of December 31,2005 the Prepayment Penalty Amounts and the PIK interest as current liabilitiesin the accompanying financial statements (See also notes contained in theCompany’s Annual Report on Form 10-K).

 

Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern.

 

**Note 2.****                        Reorganization Expenses**

 

Reorganizationexpenses represent amounts incurred by the Company as a result of the Chapter11 bankruptcy proceedings and are presented separately in the CondensedConsolidated Statement of Operations in accordance with SOP 90-7. The Companyrecorded costs of professionals of $4.1 million related to the Chapter 11bankruptcy proceeding and charges of $8.4 million associated with the write-offof the deferred financing costs related to its Senior Subordinated debt. SeniorSubordinated debt is included in liabilities subject to compromise in theCondensed Consolidated Balance Sheet.

 

**Note 3.****                        Liabilities Subject to Compromise**

 

As aresult of the Chapter 11 filings, certain pre-petition indebtedness of theDebtors is subject to compromise or other treatment under the Plan ofReorganization. Generally, actions to enforce or otherwise effect payment ofthe pre-petition liabilities are stayed. These claims are reflected in the March 31,2006 unaudited

 

9

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Condensed Consolidated BalanceSheet as “Liabilities Subject to Compromise”. Pre-petition claims secured bythe Debtors’ assets are also stayed, although the holders of such claims havethe right to move the Court for relief from the stay. Pre-petition securedclaims (primarily representing amounts borrowed under the Debtors’ pre-petitioncredit facility) are secured by a substantial portion of the Company’s accountsreceivable and inventories. These secured claims have not been reflected as “LiabilitiesSubject to Compromise”. Although pre-petition claims are generally stayed, as part ofthe first day orders and subsequent motions granted by the Court, the Courtapproved the Debtors’ motions to pay certain pre-petition obligations essentialfor the ongoing operation of the Debtors’ business. Such Petition obligationsinclude, for example, employee wages, benefits and reimbursements, all of whichwere approved for payment as a part of first day orders and have not beenreflected as “Liabilities Subject to Compromise”. The Debtors have been andintend to continue to pay undisputed post-petition claims of all vendors andsuppliers in the ordinary course of business.

 

As of March 31,2006, the Liabilities Subject to Compromise include the following:

 

| Senior subordinated notes  |   | $      | 185,000 |   |
|----------------------------|--------|--------|---------|--------|
| Accrued interest           |   | 18,064 |    |
| Convertible note           |   | 1,524  |    |
| Accounts payable - trade   |   | 663    |    |
| Employee accrued severance |   | 419    |    |
| Lease terminations         |   | 766    |    |
|                       |   | $      | 206,436 |   |

 

**Note 4.****                        Share- Based Compensation Plans**

 

The Company has two share-based compensation plans for employees and non-employee directors, which authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans (see Note 15 to the Company’s Consolidated Financial Statements included in the 2005 Form 10-K). The plans authorize granting up to 8,394,595 shares of the Company’s common stock at the market value at the date of such grants. At March 31, 2006, 1,716,366 shares were reserved for future issuance, excluding shares reserved for options outstanding. Stock options granted under these plans are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest at 33.33% after year one and 8.33% per quarter thereafter and expire ten years from the date of grant. Upon the confirmation of the Company’s Plan of Reorganization (see Note 1), all of the Company’s outstanding stock options and plans will be cancelled. The Company has assumed that the Plan of Reorganization will be confirmed and the Company’s outstanding stock options and restricted stock units will be cancelled by the end of the second quarter 2006.

 

Prior to January 1, 2006, the Company accounted for its stock based compensation under the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations because the Company believed the alternate fair value accounting provided for under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” required the use of option valuation models that were not developed for use in valuing stock options. In accordance with APB Opinion No. 25, no stock-based compensation cost was reflected in the Company’s prior year operating results for grants of stock options to employees because the Company granted stock options with an exercise price equal to the market value of the stock on the date of grant.

 

10

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Had the Company used the fair value based accounting method for stock compensation expense prescribed by SFAS No. 123 for the first quarter ended March 31, 2005, the Company’s consolidated net loss and net loss per share would have been increased to the pro-forma amounts illustrated as follows:

 
| ** **                                                                                                                        | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                                              |       |                                             |       |
| Net loss – as reported                                                                                                       |       | $                                                | (3,364     | ) |
| Deduct: Total stock-based employee compensation  included in reported net loss, net of related tax effects                        |       | 288                                              |       |
|                                                                                                                              |       |                                             |       |
| Add: Total stock-based compensation expense  determined under Fair-value based method for all awards, net of related tax  effects |       | (1,186                                           | )          |
|                                                                                                                              |       |                                             |       |
| Pro forma, net loss                                                                                                               |       | $                                                | (4,262     | ) |
|                                                                                                                              |       |                                             |       |
| Net loss per share (1):                                                                                                           |       |                                             |       |
| Basic and Diluted – as reported                                                                                              |       | $                                                | (0.26      | ) |
| Basic and Diluted – pro forma                                                                                                |       | $                                                | (0.33      | ) |

 

----

(1)  See Note 6 for the net loss per share calculation.

 

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. Under this method, compensation cost in the first quarter of 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to December 31, 2005, if any based on the grant date fair value estimated using the Black-Scholes option-pricing model. Before adoption of SFAS No. 123R, pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 
| ** **                | ** ** | **December 31,  2005** | ** ** |
|---------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | ** **                  | ** ** |
| Dividend yield            |       | 0.0                         | %          |
| Expected Volatility       |       | 73.7                        | %          |
| Risk-free interest rate   |       | 3.99                        | %          |
| Expected lives (in years) |       | 4.0                         |       |

 

Under the Black-Scholes option-pricing model, the Company estimated volatility using only its historical share price performance over the expected life of the option. Results of prior periods do not reflect any restated amounts and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

 

The adoption of SFAS No. 123R increased the Company’s first quarter 2006 reported loss from continuing operations and net loss from continuing operations by $0.5 million, and reported basic and diluted net loss per share by $(0.04) per share. The expense, before income tax effect, is included in selling, general and administrative expense. There were no options exercised or cash received that affected the cash flow operating or financing activities. The Company’s adoption of SFAS No. 123R did not affect income from continuing operations, loss from continuing operations before income taxes, net loss, cash flow from operations, cash flow from financing activities, basic and diluted net loss per share in the comparable first quarter of 2005.

 

11

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Compensation cost for share-based payment arrangements recognized in selling, general and administrative expenses for the first quarter of 2006 was $0.5 million for stock options and $0.3 million for restricted stock. There were no options exercised during the first quarter of 2006.

 

No stock option grants were awarded in the first quarter of 2006. A summary of the Company’s stock option activity as of March 31, 2006, and changes during the first quarter of 2006 is presented in the following table:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------------------|------------|
|                                |       |       |       |                                       |       |
| Outstanding at January 1, 2006 |       | 2,512,945  |       | $                                          | 10.80      |   |
| Granted                             |       | 0          |       | N/A                                        |       |
| Exercised                           |       | 0          |       | N/A                                        |       |
| Forfeited/Expired                   |       | (66,023    | )          | $                                          | 8.77       |   |
| Outstanding at March 31, 2006  |       | 2,446,922  |       | $                                          | 10.85      |   |
| Exercisable at March 31, 2006  |       | 1,845,945  |       | $                                          | 12.13      |   |

 

A summary of the Company’s nonvested stock option activity as of March 31, 2006, and changes during the first quarter of 2006 is presented in the following table:

 
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------------------------|------------|
|                              |       |       |       |                                       |       |
| Nonvested at January 1, 2006 |       | 836,616    |       | $                                          | 6.71       |   |
| Granted                           |       | 0          |       | N/A                                        |       |
| Vested                            |       | (197,804   | )          | $                                          | 6.35       |   |
| Forfeited/Expired                 |       | (37,835    | )          | $                                          | 5.08       |   |
| Nonvested at March 31, 2006  |       | 600,977    |       | $                                          | 6.93       |   |

 

As of March 31, 2006, there was $0.2 million of total unrecognized compensation cost related to unvested option plans that are expected to be recognized over a weighted-average period of 3 months.

 

Restricted stock grants consist of the Company’s common stock and generally vest over 3 years. The fair value of each restricted stock grant is equal to the market price of the Company’s stock at the date of grant.

 

No restricted stock was awarded in the first quarter of 2006. A summary of the Company’s restricted stock activity during the first quarter of 2006 is presented in the following table:

 
| **Restricted Stock Units** | ** ** | **Units** | ** ** | **Weighted-Average  Grant Date Fair  Value** | ** ** |
|--------------------------------------|------------|-----------|------------|--------------------------------------------------------|------------|
|                                 |       |      |       |                                                   |       |
| Nonvested at January 1, 2006    |       | 171,987   |       | $                                                      | 8.56       |   |
| Granted                              |       | 0         |       | N/A                                                    |       |
| Vested                               |       | (38,118   | )          | $                                                      | 7.05       |   |
| Forfeited                            |       | (0        | )          | N/A                                                    |       |
| Nonvested at March 31, 2006     |       | 133,869   |       | $                                                      | 8.99       |   |

 

As of March 31, 2006, there was $0.3 million of total unrecognized compensation cost related to unvested restricted stock units that are expected to be recognized over a weighted-average period of 3 months.

 

12

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During the first quarter of 2006, there was no cash received or restricted stock awards exercised or tax benefit realized.

 

**Note 5.****                        Reclassifications**

 

Certain prior year amounts in the condensedconsolidated financial statements and accompanying notes have been reclassifiedto conform to the current year classifications.

 

**Note 6.****                        Net Lossper Share**

 

Netloss per share, basic, is computed by dividing the net loss by the weightedaverage number of shares outstanding. Net loss per share, diluted, is computedby dividing net loss by the weighted average number of shares outstanding plusdilutive share equivalents. Basic shares were used to calculate net loss pershare, diluted, for the three months ended March 31, 2006 and 2005, asincluding the effects of stock options and convertible notes would have ananti-dilutive effect on net loss per share.

 

**Note 7.****                        DiscontinuedOperations**

 

On December 2,2005, the Company sold certain assets related to its specialty injectable andoral medications business (the “Business”), including Synagis® (collectively, the “Assets Sold”) to ProCarePharmacy, Inc. and ProCare Pharmacy Direct, Inc. (collectively, “ProCare”)for a total consideration of $1.75 million.

 

Inconnection with the sale, the Company closed five specialty pharmacy branchesthat resulted in charges totaling $2.6 million which the Company recorded inthe fourth quarter of 2005. During the first quarter of 2006, the Companyrecorded an additional charge of $0.3 million related to additional bad debtreserves on accounts receivable associated with this business that were notsold. The results of the discontinued operations are classified as such in aseparate component of (loss) income on the accompanying Condensed ConsolidatedStatements of Operations.

 

The followingtable summarizes the results for the first quarter 2005 for discontinuedoperations and continuing operations:

 
| ** **                                     | ** ** | **Discontinued  Operations** | ** ** | **Continuing  Operations** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| Revenues                                       |       | $                            | 27,413     |                       | $          | 59,330 |   |
| Net income (loss)                              |       | $                            | 984        |                       | $          | (4,348 | ) |
| Net income (loss) per share, basic and diluted |       | $                            | 0.08       |                       | $          | (0.34 | ) |

 

**Note 8.****                        SegmentInformation**

 

TheCompany evaluates segment performance based on (loss) income from operations.For the three months ended March 31, 2006, management estimated thatcorporate general and administrative expenses allocated to the reportablesegments were 64% for Specialty Infusion and 36% for Wound Care Management,except for charges totaling $2.1 million specifically related to only SpecialtyInfusion. For the three months ended March 31, 2005, management estimatedthat corporate general and administrative expenses allocated to the reportablesegments were 63% for Specialty Infusion and 37% for Wound Care Management.Intercompany transactions were eliminated to arrive at consolidated totals.

 

13

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Thefollowing tables present the results of operations and total assets of thereportable segments of the Company at and for the three months ended March 31(in thousands):

 
| ** **                               | ** ** | **At and for the Three Months Ended March 31, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Specialty  Infusion**                                                                           | ** ** | **Wound Care  Management** | ** ** | **Totals** | ** ** |
| Revenues                                 |       | $                                                                                                 | 59,566     |   | $ | 7,477 |   | $ | 67,043 |   |
| Income (loss) from continuing operations |       | $                                                                                                 | (1,650     | ) | $ | 1,313 |   | $ | (337 | ) |
| Total assets                             |       | $                                                                                                 | 137,283    |   | $ | 13,797 |   | $ | 151,080 |   |

 
| ** **                        | ** ** | **At and for the Three Months Ended March 31, 2005** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Specialty  Infusion (1)**                                                                  | ** ** | **Wound Care  Management** | ** ** | **Totals (1)** | ** ** |
| Revenues                          |       | $                                                                                                 | 52,562     |   | $ | 6,768 |   | $ | 59,330 |   |
| Income from continuing operations |       | $                                                                                                 | 211        |   | $ | 1,099 |   | $ | 1,310 |   |
| Total assets                      |       | $                                                                                                 | 250,995    |   | $ | 16,560 |   | $ | 267,555 |   |

 

----

(1) The results ofoperations shown above exclude amounts from discontinued operations.

 

**Note 9.****                        Goodwilland Intangible Assets**

 

Asmore fully described in the Company’s Annual Report on form 10-K, duringthe third quarter of 2005, the Company conducted its impairment test related tothe carrying values of goodwill and other intangible assets, attributedentirely to the Specialty Infusion business unit, in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” respectively. Based on theresults of this evaluation, the Company recorded non-cash impairment charges of$78.5 million in goodwill and $0.2 million in other intangible assets relatedto the Specialty Infusion business unit as of September 30, 2005. Thetotal charge of $78.7 resulted primarily from changes in the economics of theSpecialty Infusion business unit. The fair value of the Specialty Infusionbusiness unit was estimated by performing a discounted cash flow analysis forthe reporting unit. The Company conducted an additional analysis as of December 31,2005 and, based on those results, no further impairment was identified. TheCompany continues to monitor its goodwill and intangibles for impairmentindicators which include, among others, the Company’s performance versus itsforecast, changes in contracts or reimbursement by payors and criticalpersonnel departures and has not identified further indicators of impairmentduring the first quarter 2006.

 

**Note 10.****                 Employee andFacility Termination Costs**

 

TheCompany adheres to SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities,” which establishes fair value as the objective forinitial measurement of liabilities related to exit or disposal activities andrequires that such liabilities be recognized when incurred.

 

In2003, the Company consolidated its pharmacy operations in California whichresulted in the termination of a total of 25 employees and the abandonment of aleased facility. In the fourth quarter of 2004, the Company recorded severancecharges for the consolidation of its corporate headquarters and corporatefunctions related to the termination of 19 employees and facility terminationcosts. The aforementioned activities resulted in accrued amounts that areincluded in the beginning balance of the three month period ended March 31,2005. During 2005, the Company recorded costs related to its headquartersconsolidation of approximately $2.0 million of which $0.03 was recorded as of March 31,2005. The consolidation was completed as of September 30, 2005.

 

14

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Thefollowing provides a reconciliation of the related accrued costs associatedwith the pharmacy consolidation and headquarters consolidation, which areincluded in Selling, General and Administrative expenses in the accompanyingcondensed consolidated financial statements, at and for the three months ended March 31,(in thousands):

 
| ** **                 | ** ** | **At and for the Three Months Ended March 31, 2006** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Beginning  Balance**                                                                            | ** ** | **Costs Charged  to Expense** | ** ** | **Costs Paid or  Otherwise Settled** | ** ** | **Ending  Balance** | ** ** |
| Employee termination costs |       | $                                                                                                 | 45         |   | $ | — |   | $ | 45 |   | $ | — |   |
| Facility termination costs |       | 276                                                                                               |       | — |   | 73 |   | 203 |   |
|                       |       | $                                                                                                 | 321        |   | $ | — |   | $ | 118 |   | $ | 203 |   |

 
| ** **                 | ** ** | **At and for the Three Months Ended March 31, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Beginning  Balance**                                                                            | ** ** | **Costs Charged  to Expense** | ** ** | **Costs Paid or  Otherwise Settled** | ** ** | **Ending  Balance** | ** ** |
| Employee termination costs |       | $                                                                                                 | 666        |   | $ | 3 |   | $ | 412 |   | $ | 257 |   |
| Facility termination costs |       | 660                                                                                               |       | — |   | 88 |   | 572 |   |
|                       |       | $                                                                                                 | 1,326      |   | $ | 3 |   | $ | 500 |   | $ | 829 |   |

 

**Note 11.****                 DerivativeInstruments, Hedging Activities and Debt**

 

In April 2004and in conjunction with the Company’s issuance of the Notes, which bearinterest at 10.75%, payable semi-annually, the Company entered into a $90.0million notional amount interest rate swap agreement. This agreement was usedby the Company to reduce interest expense and modify exposure to interest raterisk by converting its fixed rate debt to a floating rate liability. Under theagreement, the Company received, on the portion of the senior subordinatednotes hedged, 10.75% fixed rate amounts in exchange for floating interest rate(the 6-month London Interbank Offered Rate (“LIBOR”) rate plus a premium)payments over the life of the agreement without an exchange of the underlyingprincipal amount.

 

Theswap was a cash flow hedge. Due to hedge ineffectiveness, measured by comparingthe change in the fair value of debt caused only by changes in the LIBOR yieldcurve to the change in the value of the swap, changes in fair value of the swapwere recognized in earnings, and the carrying value of the Company’s debt wasnot marked to fair value. The fair value of the swap agreement as of March 31,2005 was approximately $3.1 million and was recorded in other long-termliabilities on the balance sheet. The change in fair value for the three monthsended March 31, 2005 of $2.0 million was recorded in other expense on thestatement of operations.

 

In June 2005,the Company exercised its right to terminate its interest rate swap agreementand, as a result, the Company paid $0.5 million in fair market value toNational City Bank in June of 2005. The swap was scheduled to mature on May 2,2011. No early termination penalties were incurred by the Company.

 

On April 5, 2006, the Bankruptcy Court entered aninterim order, which was approved on a final basis on April 17, 2006,authorizing the Company to enter into a $45.0 million debtor-in-possession(DIP) credit facility agreement with GECC Capital Markets Group, Inc., asthe lead arranger, General Electric Capital Corporation, as agent, and thelenders referred to therein (the “CreditAgreement****“). The CreditAgreement is secured by all or substantially all of the Company’s and itssubsidiaries’ assets and a pledge of the equity interests of each of theCompany’s subsidiaries. The proceeds of the DIP Financing were used topay, in full, all amounts outstanding under the Company’s Pre-petition CreditFacility and also will be used for general corporate purposes (includingworking capital) during the Chapter 11 Cases.

 

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The DIP Financing provides for a secured revolvingcredit facility of up to $45.0 million, of which the Company can use up to $7.5million as a letter of credit sub-facility and up to $5.0 million as aswingline sub-facility ( i.e*.*, a short-term loan advancefacility). As of May 15, 2006, the Company had outstanding borrowings ofapproximately $26.3 million under the secured revolving credit facilityincluding $3.6 million of issued letters of credit.

 

The Company will pay all accrued interest onoutstanding LIBOR loans on the last day of the applicable LIBOR period,provided in the case of any LIBOR period greater than three months in duration,interest shall be payable at three month intervals and on the last day of suchLIBOR period. All accrued interest on outstanding revolving credit LIBOR loanadvances bears interest at an annual rate equal to the LIBOR rate plus anadditional amount based on the Company’s senior leverage ratio, whichadditional amounts may range from 3% to 3.5%. For outstanding base rateloans, the Company will pay all accrued interest on the first business day ofeach calendar quarter. All accrued interest on outstanding revolving creditbase rate loans bears interest at an annual rate equal to the base rate plus anadditional amount based on its senior leverage ratio, which additional amounts may rangefrom 1.75% to 2.25% for the revolving credit base rate loans. Pursuant to theterms of the Credit Agreement, all commitments made under the DIP Facilityterminate upon the earliest of: (i) 12 months from the filing of theChapter 11 Cases, (ii) the effective date of the plan of reorganization, (iii) 15days after the filing of the Chapter 11 Cases if an interim order approving theCredit Agreement has not been entered or (iv) 45 days after the filing ofthe Chapter 11 Cases if a final order approving the Credit Agreement has notbeen entered. The commitments made under the DIP Facility may be extended,subject to certain conditions, by six months, to a period of up to eighteenmonths. In no event will the commitments extend later than the effective dateof the Plan.

 

In the Credit Agreement, the Company and itssubsidiaries have made certain representations and warranties to lenders, andare subject to certain reporting requirements and financial and othercovenants. The Credit Agreement restricts the Company’s and its subsidiaries’ability to incur additional indebtedness or to permit any of its properties orassets to be encumbered by liens. The Credit Agreement also restricts theCompany’s ability to make certain types of payments relating to its capitalstock, including the declaration or payment of dividends. Consolidations, mergers,sales of assets and the creation of additional subsidiaries are alsorestricted, as is the Company’s ability to purchase assets and to makeinvestments. The covenants also restrict transactions with the Company’saffiliates and require the Company to maintain certain levels with respect toits total leverage ratio, senior leverage ratio and fixed charge coverageratio.

 

In connection with the Pre-petition Credit Facility,on December 1, 2005, the Company entered into a Forbearance Agreement withGE Capital pursuant to which it agreed to forbear from exercising remediesrelated to the cross-default under the Pre-petition Credit Facility arisingfrom failure by the Company to pay interest on the Notes.

 

Although all amounts outstanding under the Company’sPre-petition Credit Facility were paid in full on April 5, 2006, theForbearance Agreement remains in effect.

 

TheForbearance Agreement provides that interest on outstanding amounts due underthe Pre-petition Credit Facility was to accrue at the default rate under theagreement, but paid at the rate in the agreement as if no event of default hadoccurred. The difference between interest accrued and interest paid, the “PIK”spread, becomes due and payable at the end of the forbearance period, provided howeverthat GE Capital has agreed to waive such additional interest due as long as GECapital continues as a lender for the Company’s exit financing upon emergencefrom the Chapter 11 Cases. In addition, the Forbearance Agreement waivespayment of an early termination fee under the Pre-petition Credit Facility thatbecame due and payable of $1.2 million, subject to the same conditions as thePIK interest. The Company has recorded the Prepayment Penalty Amounts and thePIK interest as a current liability in the accompanying financial statements.

 

16

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TheCompany’s debt and other obligations consisted of the following as of March 31,2006 and December 31, 2005 (in thousands):

 
| ** **                                                   | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior subordinated notes                                    |       | $                        | 185,000    |                        | $          | 185,000 |   |
| Revolving loan facility                                      |       | 26,681                   |       | 26,346                      |       |
| Note payable-DOJ settlement                                  |       | —                   |       | 375                         |       |
| Convertible note used in purchase of Apex – in  dispute |       | 1,524                    |       | 1,524                       |       |
| Total debt and other obligation                              |       | 213,205                  |       | 213,245                     |       |
| Less amounts due within one year                             |       | 213,205                  |       | 213,245                     |       |
| Total long-term liabilities                                  |       | $                        | —     |                        | $          | — |   |

 

As of March 31, 2006,the Company’s Senior Subordinated Notes and Convertible Note used in purchaseof Apex totaling $186,524 are reported on the accompanying CondensedConsolidated Balance Sheet as Liabilities Subject to Compromise (See Note 3 tothe Condensed Consolidated Financial Statements).

 

**Note 12.****                 Income Taxes**

 

The Company’s income tax provision for the quarterended March 31, 2006 totals $75,000, resulting in an effective tax rate ofapproximately 0.4%. The provision relates to state income taxes. No federalprovision or benefit has been recorded as the Company has significant netoperating losses which have been fully reserved.

 

**Note 13.****                 Note Guarantees**

 

On April 23,2004, the Company issued Notes under an Indenture (the “Indenture”), among theCompany, its subsidiaries and Wells Fargo Bank, National Association. The Notesare jointly and severally guaranteed by all of the Company’s existing andfuture restricted subsidiaries (“Restricted Subsidiaries”), as defined in theIndenture, on a full and unconditional basis, and no separate considerationwill be received for the issuance of these guarantees. However, under certaincircumstances, the Company may be permitted to designate any of itsRestricted Subsidiaries as Unrestricted Subsidiaries.

 

**Note 14.****                 Legal Proceedings**

 

In thenormal course of our business, we are involved in lawsuits, claims, audits andinvestigations, including any arising out of services or products provided byor to our operations, personal injury claims and employment disputes, theoutcome of which, in the opinion of management, will not have a materialadverse effect on the Company’s financial position, cash flows or results ofoperations.

 

On March 27, 2006, the Petition Date, the Companyfiled a Prepackaged Joint Plan of Reorganization under Chapter 11 of theBankruptcy Code in the United States Bankruptcy Court for the Southern Districtof New York. The Chapter 11 proceedings are discussed in Note 1 of Notes toCondensed Consolidated Financial Statements included in this Quarterly Reporton Form 10-Q. The Chapter 11 proceedings were entered into in response tovarious issues that have negatively affected the Company’s liquidity and ourability to service our debt obligations (see Note 1).

 

Material pending legal proceedings, other than theChapter 11 proceedings above and other than ordinary, routine litigationincidental to the business, to which we became or were a party during thequarter ended March 31, 2006, or subsequent thereto but before the filingof this report, are summarized below:

 

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***ApexTherapeutic Care Litigation***

 

On October 26,2005, the Company commenced litigation in the United States District Court forthe Central District of California, entitled “Curative Health Services, Inc.vs. James H. Williams, et al.,” docket number EDCV 05-00992 SVW, against formerstockholders of Apex alleging, among other things, that stockholders of Apexmade material misrepresentations in connection with their sale of Apex stock toCurative in 2002. As part of the action, in addition to seekingcompensatory and punitive damages, the Company is disputing its obligation tomake further payments under an amended and restated promissory note, dated May 30,2002, made in favor of the former stockholders in connection with theacquisition of Apex. Prior to commencement of the action, Curative sent aletter to the representative of the former stockholders indicating thatCurative would not be making the installment payment due on September 30,2005 or any further payments pending resolution of this dispute. Thestockholders’ representative responded with a notice on October 18, 2005declaring an event of default under the above-referenced note and anacceleration of payment of the outstanding principal balance under the note inthe amount of approximately $1.6 million. This event is not expected to cause adefault under, or acceleration of, any other obligations of the Company. On February 14,2006, the Company filed an amended Complaint, bringing nine counts intotal. Of those counts,one was dismissed, and on April 24, 2006, Defendants filedan Answer to the remaining eight counts in the amended Complaint. On April 24,2006, Defendants also filed a counter-claim against the Companyasserting a single count for breach of contract. Discovery in the matteris underway and a trial date has been set for September 26, 2006.

 

***DHS Audit and Related Pharmacy Complaint***

 

Two of the Company’s subsidiaries, Apex and eBioCare,might be subject to potential indemnification liabilities to three independentretail pharmacies that previously did business with Curative. Theindemnification claims are in connection with an audit conducted by theDepartment of Health Services (“DHS”) of the State of California related to thepharmacies’ medical billing for clotting factor supplied to the pharmacies byApex and eBioCare, and the pharmacies’ medical billing for the anti-inhibitorproduct “FEIBA” supplied to the pharmacies by Apex and eBioCare. Whileliability with respect to these claims is uncertain at this time, Apex andeBioCare believe that some amount of monetary loss is reasonably possible ifthe pharmacies assert and prevail on indemnification claims. Apex and eBioCareestimate that the loss may range from $0 to $39.3 million. Moreover, anyliability of Apex or eBioCare resulting from these claims will be compromisedunder the Plan if the Plan is implemented without modification.

 

ParkPharmacy filed a complaint in the Superior Court of the state of California forthe County of Los Angeles on March 24, 2006 styled as Park CompoundingPharmacy, Inc. v. Curative Health Services, Inc., Case No. 00349600for breach of contract, indemnification, unjust enrichment, and declaratoryrelief arising from the Company’s alleged failure to indemnify Park Pharmacyfor final audit amounts assessed by DHS on December 14, 2005. Thecomplaint also includes a claim for rescission of all amounts paid to Curativeunder the third party pharmacy agreement between Apex Therapeutic Care, Inc.,a subsidiary of Curative Health Services, Inc., and Park Pharmacy. Thiscase is stayed in accordance with the automatic stay in effectunder section 362 of the Bankruptcy Code during the pendancy ofthe Company’s Chapter 11 cases. The plaintiff’s claims are pre-petition claimsthat will be capped at 5.2% in accordance with the Company’s Plan ofReorganization if the Plan is consummated by the Company without modification. Inaddition, the Company will pursue all available defenses in the litigationfiled by Park Pharmacy, and therefore at this time liability in this case isuncertain.

 

As theamount of potential exposure for these matters cannot be estimated at thistime, no related loss provision has been accrued in the consolidated financialstatements as of March 31, 2006.

 

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**Item 2.****                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**OVERVIEW**

 

TheCompany had approximately $213.2 million in outstanding debt as of March 31,2006, including the $185.0 million of Senior Notes and $26.7 millionoutstanding under it $40 million secured revolving credit facility with GECapital, and incurred significant losses during 2005 and 2004. In August 2005,the Company announced it had formed a special committee and hired a financialadvisor to assist it in evaluating the financial alternatives available givenits significant debt and continuing losses. In October 2005, the Companycommenced discussions with an Ad Hoc committee representing holders ofapproximately 80% of the aggregate principal amount of the Senior Notesregarding a possible restructuring of the Senior Notes. In connection withthese discussions, the Company elected not to pay the interest payment due onthe Senior Notes on November 1, 2005 and instead elected to use the 30-daygrace period under the Senior Note indenture.

 

Asdescribed further in Note 1 of the Condensed Consolidated Financial Statementsto this Quarterly Report on Form 10-Q, on March 27, 2006, Curativeand each of its direct and indirect subsidiaries filed voluntary petitionsunder Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Courtfor the Southern District of New York. The Company filed its Chapter 11 Casesto implement and effect the Plan. Prior to commencement of the Chapter 11Cases, the Company solicited votes to accept or reject the Plan from theholders of the Notes issued by the Company and the holders of known generalunsecured claims against the Company as of February 6, 2006. Prior to thecommencement of the Chapter 11 Cases, the Company received the requisite votesfor the Plan to be confirmable under Section 1129 of the Bankruptcy Code.

 

ThePlan was filed with the Bankruptcy Court on March 27, 2006. The Plan,which is described in more detail under Item 1 of the Company’s Annual Reporton Form 10-K for the year ended December 31, 2005 under the caption, “PlannedReorganization and Chapter 11 Bankruptcy Proceedings,” will, if confirmed and consummated,result in the cancellation and discharge of all claims relating to the Notes.Each Senior Noteholder will receive a cash payment of approximately 54.9% ofits respective claim related to the Senior Notes, unless a Senior Noteholderwas qualified to elect and did elect to receive its pro rata share of certaincash consideration provided in the Plan and the new Curative common stock.Holders of existing shares of old Curative common stock and options will notreceive any distributions under the Plan and all shares of old Curative commonstock and options will be extinguished.

 

Inconnection with the reorganization to be effected by the Plan, the Companyintends to terminate the registration of its common stock under the SecuritiesExchange Act of 1934, and become a non-reporting private company upon itsemergence from Chapter 11.

 

Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern (see Note 2 of Notes to Consolidated Financial Statementscontained in the Company’s Annual Report on Form 10K).

 

**THECOMPANY’S BUSINESS UNITS**

 

Curativeoperates a Specialty Infusion business unit and a Wound Care Managementbusiness unit to deliver high-quality care and positive clinical outcomes forpatients experiencing serious acute or chronic medical conditions.

 

Throughits Specialty Infusion business unit, the Company provides intravenous andinjectable biopharmaceutical and compounded pharmaceutical products andcomprehensive infusion services to patients with chronic and critical diseasestates. All patient care is delivered through a national footprint ofcommunity-based branches. Each local branch has an experiencedmultidisciplinary team of pharmacists, nurses, reimbursement specialists andpatient service representatives who comprehensively manage all aspects of apatient’s infusion and related support needs. In its Specialty Infusionoperations, the Company purchases biopharmaceutical and other pharmaceuticalproducts from suppliers and contracts with insurance companies and other payorsto provide its services, which include coordination of patient care, 24-hournursing and pharmacy availability, patient education

 

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and reimbursement billingand collection services. The Company’s Specialty Infusion revenues are derivedprimarily from fees paid by the payors under these contracts for thedistribution of these biopharmaceutical and other pharmaceutical products andfor the injection or infusion services provided. Additional revenues areacquired through biopharmaceutical and pharmaceutical product distribution andsupport services under contracts with retail pharmacies for which the Company receivesrelated service fees. The products distributed and the injection or infusiontherapies offered by Curative are used by patients with chronic or severeconditions such as hemophilia, immune system disorders, chronic or severeinfections, nutritionally compromised and other severe conditions requiringnutritional support, cancer, rheumatoid arthritis, hepatitis C and multiplesclerosis. As of March 31, 2006, the Company had approximately 507 payorcontracts and provided products or services in approximately 45 states.

 

Thefollowing provides approximate percentages of the Specialty Infusion businessunit’s patient revenues for the three months ended March 31 and the yearended December 31:

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Year Ended**             | ** ** |
|----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **     | ** ** | **March 31, 2006**     | ** ** | **December 31, 2005** | ** ** |
| Private Payors |       | 62.0                             | %          | 65.2                            | %          |
| Medicaid       |       | 18.4                             | %          | 24.5                            | %          |
| Medicare       |       | 19.6                             | %          | 10.3                            | %          |

 

TheWound Care Management business unit contracts with hospitals to manageoutpatient Wound Care Center® programs thatoffer a comprehensive range of services and enable the Wound Care Managementbusiness unit to provide patient specific wound care diagnosis and treatmentson a cost-effective basis. Wound Care Management currently operates two typesof Wound Care Center® programs with hospitals:  a managementmodel and an “under arrangement” model, with a primary focus on developingmanagement models.

 

In themanagement model, Wound Care Management provides management and supportservices for a chronic wound care facility owned or leased by the hospital andstaffed by employees of the hospital, and generally receives a fixed monthlymanagement fee or a combination of a fixed monthly management fee and avariable case management fee. In the “under arrangement” model, Wound CareManagement provides management and support services, as well as the clinicaland administrative staff, for a chronic wound care facility owned or leased bythe hospital, and generally receives fees based on the services provided toeach patient. In both models, physicians remain independent. Wound CareManagement offers assistance in recruiting and provides training in wound careto the physicians and staff associated with the Wound Care Center® programs. As of March 31, 2006, the WoundCare Center® network consisted of 108 outpatient clinics(103 operating and 5 contracted) located on or near campuses of acute carehospitals in approximately 30 states.

 

**DISCONTINUEDOPERATIONS**

 

On December 2,2005, the Company sold certain assets related to its specialty injectable andoral medications business (the “Business”), including Synagis® (collectively, the “Assets Sold”) to ProCarePharmacy, Inc. and ProCare Pharmacy Direct, Inc. (collectively, “ProCare”)for a total consideration of $1.75 million.

 

Inconnection with the sale, the Company closed five specialty pharmacy branchesthat resulted in charges totaling $2.6 million which the Company recorded inthe fourth quarter of 2005. During the first quarter of 2006, the Companyrecorded an additional charge of $0.3 million related to added bad debt reserveson accounts receivable associated with this business that were not sold. Theresults of the discontinued operations are classified as such in a separatecomponent of (loss) income on the accompanying Condensed ConsolidatedStatements of Operations.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s condensed consolidated financial statements which havebeen prepared in accordance with accounting

 

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principles generallyaccepted in the United States. The preparation of these consolidated financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, management evaluates its estimates and judgments, includingthose related to revenue recognition, bad debts, inventories, income taxes andintangibles. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Management believes thefollowing critical accounting policies, among others, affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements:

 

***Revenue recognition***

 

TheCompany’s Specialty Infusion business unit’s revenues and related accountsreceivable are recorded, net of any contractual allowances, when the product isshipped to a patient or physician’s office, or when the service is provided.

 

TheCompany’s Wound Care Management business unit’s revenues are recognized afterthe management services are rendered and are billed monthly in arrears, thus nocontractual allowances are required for this portion of the Company’s business.

 

***Trade receivables***

 

Considerablejudgment is required in assessing the ultimate realization of receivables,including the current financial condition of the customer, age of thereceivable and the relationship with the customer. The Company estimates itsallowances for doubtful accounts using these factors. If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. In circumstances where the Company is aware of a specific customer’sinability to meet its financial obligations (e.g., bankruptcy filings), aspecific reserve for bad debts is recorded against amounts due to reduce thereceivable to the amount the Company reasonably believes will be collected. Forall other customers, the Company has reserves for bad debt based upon the totalaccounts receivable balance. Although the Company believes its reserve foraccounts receivable at March 31, 2006 is reasonable, there can be noassurance that additional reserves will not be needed in the future. The recordingof any such reserve may have a negative impact on the Company’s operatingresults.

 

TheCompany verifies benefits with third-party payors and obtains authorizationprior to shipping products or rendering services and, as such, the Company doesnot have accounts receivable pending approval from third-party payors.

 

**Inventories**

 

Inventoriesare carried at the lower of cost or market on a first in, first out basis.Inventories consist of high-cost biopharmaceutical and pharmaceutical productsthat, in many cases, require refrigeration or other special handling. As aresult, inventories are subject to spoilage or shrinkage. On a quarterly basis,the Company performs a physical inventory and determines whether any shrinkageor spoilage adjustments are needed. Although the Company believes itsinventories balance at March 31, 2006 is reasonably accurate, there can beno assurance that spoilage or shrinkage adjustments will not be needed in thefuture. The recording of any such reserve may have a negative impact onthe Company’s operating results.

 

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**Deferredincome taxes**

 

TheCompany had approximately $32.5 million in deferred income tax assets at March 31,2006 (approximately $5.8 million in current assets and $26.7 million inlong-term assets) and approximately $4.1 million in deferred income taxliabilities. The Company has a full valuation allowance against its netdeferred tax assets based on the uncertainty of recovery.

 

**Goodwilland intangibles**

 

Goodwillrepresents the excess of purchase price over the fair value of net assetsacquired. Intangible assets consist of separately identifiable intangibles,such as payor contracts, pharmacy and customer relationships and covenants notto compete. The Company accounts for goodwill and intangible assets inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”which requires goodwill and intangible assets with indefinite lives to not beamortized but rather to be reviewed annually, or more frequently if impairmentindicators arise, for impairment. Separable intangible assets that are notdeemed to have an indefinite life are amortized over their useful lives. Inassessing the recoverability of the Company’s goodwill and intangibles, theCompany must make assumptions regarding estimated future cash flows and otherfactors to determine the fair value of the respective assets. Due primarily tounfavorable changes in the economics of the Specialty Infusion business unit,the Company recorded non-cash impairment charges from continuing operations of$78.5 million in goodwill and $0.2 million in other intangible assets duringthe third quarter of 2005 (see Note 9 of Notes to Condensed ConsolidatedFinancial Statements). The Company conducted an additional analysis as of December 31,2005 and, based on those results, no further impairment was identified. Thefair value of the Specialty Infusion business unit was estimated by performinga discounted cash flows analysis for the reporting unit. The Company continuesto monitor its goodwill and intangibles for impairment indicators whichinclude, among others, the Company’s performance versus its forecast, changesin contracts or reimbursement by payors and critical personnel departures andhas not identified further indicators of impairment during the first quarter2006.

 

**KEYPERFORMANCE INDICATORS**

 

Thefollowing provides a summary of some of the key performance indicators that may beused to assess the Company’s results of operations. These comparisons, which excludeamounts from discontinued operations (See Item 2 section entitled “DiscontinuedOperations”) are not necessarily indicative of future results (dollars inthousands).

 

| ** **                              | ** ** | **For the Three Months Ended March 31** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                              | ** ** | **2005** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
| Specialty Infusion revenues             |       | $                                                                     | 59,566     |   | $ | 52,562 |   | $ | 7,004 |   | 13 | % |
| Wound Care Management revenues          |       | 7,477                                                                 |       | 6,768 |   | 709 |   | 10 | % |
| Total revenues                          |       | $                                                                     | 67,043     |   | $ | 59,330 |   | $ | 7,713 |   | 13 | % |
|                                    |       |                                                                  |       |   |   |   |   |   |   |
| Specialty Infusion revenues to total    |       | 89                                                                    | %          | 89 | % |   |   |   |   |
| Wound Care Management revenues to total |       | 11                                                                    | %          | 11 | % |   |   |   |   |
| Total                                   |       | 100                                                                   | %          | 100 | % |   |   |   |   |
|                                    |       |                                                                  |       |   |   |   |   |   |   |
| Specialty Infusion gross margin         |       | $                                                                     | 9,338      |   | $ | 9,012 |   | $ | 326 |   | 4 | % |
| Wound Care Management gross margin      |       | 4,159                                                                 |       | 3,720 |   | 439 |   | 12 | % |
| Total gross margin                      |       | $                                                                     | 13,497     |   | $ | 12,732 |   | $ | 765 |   | 6 | % |
|                                    |       |                                                                  |       |   |   |   |   |   |   |
| Specialty Infusion gross margin %       |       | 16                                                                    | %          | 17 | % |   |   |   |   |
| Wound Care Management gross margin %    |       | 56                                                                    | %          | 55 | % |   |   |   |   |
| Total gross margin %                    |       | 20                                                                    | %          | 21 | % |   |   |   |   |
|                                    |       |                                                                  |       |   |   |   |   |   |   |
| Specialty Infusion SG&A             |       | $                                                                     | 5,709      |   | $ | 5,562 |   | $ | 147 |   | 3 | % |
| Wound Care Management SG&A          |       | 1,071                                                                 |       | 775 |   | 296 |   | 38 | % |
| Corporate SG&A                      |       | 4,931                                                                 |       | 4,734 |   | 197 |   | 4 | % |
| Charges(1)                              |       | 2,123                                                                 |       | 351 |   | 1,772 |   | (505 | )% |
| Total SG&A                          |       | $                                                                     | 13,834     |   | $ | 11,422 |   | $ | 2,412 |   | 21 | % |
|                                    |       |                                                                  |       |   |   |   |   |   |   |
| Operating margin (deficit)              |       | $                                                                     | (337       | ) | $ | 1,310 |   | $ | (1,647 | ) | (126 | )% |
| Operating margin (deficit) %            |       | (1                                                                    | )%         | 2 | % |   |   |   |   |

 

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(1)          The Company’s charges are discussed under Results of Operations - *Selling, General and Administrative*.

 

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**RESULTSOF OPERATIONS**

 

***Revenues.***The Company’s revenues for the firstquarter of 2006 increased $7.7 million, or 13%, to $67 million compared to$59.3 million for the first quarter of 2005.

 

Productrevenues, attributed entirely to the Specialty Infusion business unit,increased $7.0 million or 13%, to $59.6 million in the first quarter of 2006from $52.6 million in the first quarter of 2005. The increase in productrevenues was primarily attributable to the operation of 46 Specialty InfusionBranches in the first quarter of 2006 compared to operations of 39 SpecialtyInfusion Branches in the first quarter of 2005. In the first quarter of 2006the hemophilia revenue accounted for 37% of product revenues or $21.8 millioncompared to hemophilia revenues of $21.5 million in the first quarter of 2005representing 41% of product revenues.

 

Servicerevenues, attributed entirely to the Wound Care Management business unit,increased $0.7 million, or 10% to $7.5 million in the first quarter of 2006from $6.8 million in the first quarter of 2005. The increase in service revenuewas primarily attributable to the operation of 103 Wound Care ManagementPrograms in the first quarter of 2006 compared to 96 in the first quarter of2005. In the first quarter of 2006, the Company opened 2 new Wound CareManagement Programs and closed 2. Additionally, the Company signed one newWound Care Management contract in the first quarter of 2006.

 

***Cost of Product Sales.***Cost of product sales,attributed entirely to the Specialty Infusion business unit, increased $6.7million, or 15%, to $50.2 million in the first quarter of 2006 compared to$43.6 million in the first quarter 2005. The increase in cost of product saleswas primarily attributable to the increase in product sales associated with the7 additional Infusion Branches operating in 2006. As a percentage of productrevenues, cost of product sales for the first quarter of 2006 was 84% comparedto 83% for the same period in 2005. The increased percentage for 2006 wasprimarily attributable to the additional Infusion Branches and increased costsof IVIG products.

 

***Cost of Services.***Cost of Services, attributedentirely to the Wound Care Management business unit, increased $0.3 million, or10%, to $3.3 million in the first quarter of 2006 from $3.0 million in thefirst quarter of 2005. The increase was primarily attributed to the operationof an additional 7 Wound Care Management Programs in the first quarter of 2006compare to the 2005 period. As a percentage of service revenues, cost ofservices for the first quarter of 2006 was 44% compared to 45% for the sameperiod in 2005.

 

***Gross Margin.***Gross margin increased $0.8million, or 6%, to $13.5 million in the first quarter of 2006 from $12.7million for the first quarter of 2005. Specialty Infusion’s gross marginincreased to $9.3 million for the first quarter of 2006 from $9.0 million forthe same period in 2005, an increase of $0.3 million, or 4%. As a percentage ofits revenues, Specialty Infusion’s gross margin was 16% in the first quarter of2006 as compared to 17% for the same period in 2005. The increase in grossmargin dollars was due to the increase in product sales while the 1% decline ingross margin was due to the 7 additional infusion branches and increasedproduct costs related to IVIG. Wound Care Management’s gross margin increasedto $4.2 million in the first quarter of 2006 from $3.7 million in the sameperiod of 2005, an increase of $0.5 million, or 14%. As a percentage of itsrevenues,

 

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Wound Care Management’sgross margin was 56% in the first quarter of 2006 compared to 55% for the sameperiod in 2005.

 

***Selling, General and Administrative.***Selling,general and administrative expenses increased by $2.4 million, or 21%, to $13.8million for the first quarter of 2006 compared to $11.4 million for the firstquarter of 2005 and consisted of $5.7 million related to the Specialty Infusionbusiness unit, $1.1 million related to the Wound Care Management business unit,$4.9 million related to corporate services (including $0.5 million of stockcompensation expense) and $2.1 million in charges, including $0.7 millionrelated to litigation expenses, $1.2 million related to the write-off of costsrelated to an abandoned software project and $0.2 million of the write-off ofcapital costs associated with closing an infusion branch. All of these chargesare related to the Company’s Specialty Infusion business.

 

Theincrease in selling, general and administrative expenses of $2.4 million wasdue primarily to the charges of $2.1 million and $0.5 million of stockcompensation expense in the first quarter of 2006 compared to $0.4 million ofcharges in the first quarter of 2005. As a percentage of total revenues,selling general and administrative expenses were 20.6% compared to 19.3% in thefirst quarter of 2005.

 

***Interest Expense.***Netinterest expense in the first quarter 2006 was $6.2 million compared to $5.8million in the same period 2005. The increase of $0.4 is primarily due toaccrued PIK interest and a higher borrowings on the revolver for the firstquarter of 2006.

 

***Other Expense.***Otherexpense of $2.0 million in 2005, primarily represented the fair valueadjustments of the Company’s interest rate swap agreement. The Companyterminated the interest rate swap agreement in June of 2005 (see Note 11of Notes to Condensed Consolidated Financial Statements).

 

***Reorganization expense*.** During the first quarterof 2006 the Company recognized a net charge of $12.5 million associated withthe Chapter 11 cases. Approximately $8.4 million of the charge related to thenon-cash write-off of deferred financing fee related its senior subordinatednotes and $4.1 for fees payable to professionals retained to assist with thefiling of the Chapter 11 cases.

 

***Net Loss***. Loss fromcontinuing operations in the first quarter 2006 was $19.1 million, or $1.46 pershare, compared to a loss from continuing operations of $4.3 million, or $0.34per share. The loss from continuing operations for first quarter 2006 wasattributable to the Reorganization expenses of $12.5 million, charges of $2.1million and stock compensation expense of $0.5 million.

 

TheCompany also recorded a loss from discontinued operations in first quarter 2006of $0.3 million, or $0.03 per share, compared to an income from discontinued operationsnet of income taxes in first quarter 2005 of $1.0 million, or $0.08 per share. Asa result, the Company had a total net loss in the first quarter of 2006 of$19.4 million, or $1.49 per share, compared to a total net loss in the firstquarter 2005 of $3.4 million or $0.26.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

WorkingCapital was $31.5 million at March 31, 2006 compared to a working capitaldeficit of $157.0 million at December 31, 2005. The improvement in workingcapital is the result of the Company classifying certain debt and otherobligations from current liabilities to Liabilities Subject to Compromise. (SeeNote 3 to the Condensed Consolidated Financial Statements) offset by theCompany’s net loss of $19.4 million recorded for the first quarter 2006. Totalcash and cash equivalents at March 31, 2006 was $0.7 million. The ratio ofcurrent assets to current liabilities was 1.6 to 1 at March 31, 2006 and0.39 to 1 at December 31, 2005.

 

Cashflows used in continuing operating activities for the first quarter of 2006totaled $10.5 million,  primarily attributable to the net loss fromcontinuing operations of $19.1 for the first quarter of 2006 and a $1.1 millionincrease in inventory, offset by depreciation and amortization of $1.3 million,bad debt provision of $1.8 million, increase in accounts payable and accruedexpenses of $2.7 million, and decreases in accounts receivable, and prepaidsand other of $1.5, million and $1.1 million respectively.

 

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Cashflows provided by continuing investing activities totaled $1.4 million,attributable to $0.4 million in property and equipment purchases, net of $1.8million in disposals.

 

Cashflows used in continuing financing activities totaled $0.5 million, attributableto $0.3 million in borrowings against credit facilities offset by $0.5 millionin deferred financing costs and 0.4 million in repayments of notes payable.

 

At March 31,2006, the Company experienced a net decrease in accounts receivable of $3.3million. Days sales outstanding (“DSO”) was 85 days at March 31, 2006, ascompared to 87 days at December 31, 2005. At March 31, 2006, DSO forthe Specialty Infusion business unit was 89 days and for the Wound CareManagement business unit, DSO was 51 days, compared to 91 days and 56 days,respectively, at December 31, 2005.

 

As of March 31,2006, the Company’s debt and other obligation of $213.2 million included $185.0million in Senior Notes, $26.7 million in borrowed funds from the Company’scommercial lender, and $1.5 million representing the convertible note used inconnection with the purchase of Apex in February 2002. On October 26,2005, the Company commenced litigation against former stockholders of Apexalleging, among other things, that stockholders of Apex made materialmisrepresentations in connection with their sale of Apex stock to Curative in2002. Prior to commencement of the action, Curative notified the representativeof the former stockholders indicating that it would not be making the installmentpayment due on September 30, 2005 or any further payments pendingresolution of this dispute (see Part II, Item 1, “Legal Proceedings”). TheCompany’s debt and other obligation were classified as current liabilitiesunder generally accepted accounting principles as of December 31, 2005. Asdescribed in Note 3 to the Condensed Consolidated Financial Statements, theCompany’s Senior Subordinated Notes and Convertible Note used in connectionwith the purchase of Apex have been classified as Liabilities Subject toCompromise in the Condensed Consolidated Balance Sheet.

 

Aspreviously disclosed, the Company hired a financial advisor to assess thefinancial alternatives available to the Company given its significant debt andcontinuing losses. In addition, the Ad Hoc Committee comprised of the holdersof approximately 80% of the Company’s Senior Notes hired a financial advisor aswell.

 

On December 2,2005, the Company reached an agreement with the Ad Hoc Committee on the generalterms of a financial restructuring and entered into a Plan Support Agreement.The financial restructuring, as contemplated by the Plan Support Agreement andthe Plan, is designed to (a) de-leverage the Company’s balance sheet, (b) providesubstantial liquidity to conduct business operations, (c) ensure thatbusiness operations are unaffected by the Chapter 11 Cases and that the Companyis able to retain existing management and employees and (d) provide thegreatest return to creditors. Under the Plan Support Agreement, the SeniorNoteholders party thereto agreed to forbear from exercising remedies withrespect to any defaults and events of defaults arising, or that may arise,under the Senior Notes, and agreed further to take all commercially reasonableactions to oppose and object to, and not to support, any person’s taking actionto exercise remedies with respect to the Senior Notes. The Plan SupportAgreement will terminate on July 31, 2006, or upon the earlier failure tosatisfy certain milestones with respect to the Plan.

 

Asdiscussed above in Note 1 of this Quarterly Report on Form 10Q, on March 27,2006, Curative and each of its direct and indirect subsidiaries filed voluntarypetitions under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. TheCompany filed the Chapter 11 Cases to implement and effect the Plan. Prior tocommencement of the Chapter 11 Cases, the Company solicited votes to accept orreject the Plan from the holders of the Senior Notes issued by Curative and theholders of known general unsecured claims against the Company as of February 6,2006. Prior to the commencement of the Chapter 11 Cases, the Company receivedthe requisite votes for the Plan to be confirmable under Section 1129 ofthe Bankruptcy Code.

 

ThePlan was filed with the Bankruptcy Court on March 27, 2006. The Plan will,if confirmed and consummated, result in the cancellation and discharge of allclaims relating to the Senior Notes. Each Senior Noteholder will receive a cashpayment of approximately 54.9% of its respective claim related to the SeniorNotes, unless a Senior Noteholder was qualified to elect and did elect toreceive its pro rata share of certain cash consideration provided in the Planand the New Curative Common Stock. Holders of existing shares of Old CurativeCommon Stock and options will not receive any distributions under the Plan andall shares of Old Curative Common Stock and options will be extinguished.

 

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On April 5, 2006, the Bankruptcy Court entered aninterim order, which was approved on a final basis on April 17, 2006,authorizing the Company to enter into a $45.0 million debtor-in-possessioncredit facility agreement with GECC Capital Markets Group, Inc., as thelead arranger, General Electric Capital Corporation, as agent, and the lendersreferred to therein (the “CreditAgreement****“). The CreditAgreement is secured by all or substantially all of the Company’s and itssubsidiaries’ assets and a pledge of the equity interests of each of theCompany’s subsidiaries (the “ DIPFinancing****“). Theproceeds of the DIP Financing were used to pay, in full, all amountsoutstanding under the Company’s Pre-petition Credit Facility and also will beused for general corporate purposes (including working capital) during theChapter 11 Cases.

 

The DIP Financing provides for a secured revolvingcredit facility of up to $45.0 million, of which the Company can use up to $7.5million as a letter of credit sub-facility and up to $5.0 million as aswingline sub-facility ( *i.e.*, ashort-term loan advance facility). As of May 15, 2006, the Company hadoutstanding borrowings of approximately $26.3 million under the securedrevolving credit facility.

 

TheCompany will pay all accrued interest on outstanding LIBOR loans on the lastday of the applicable LIBOR period, provided in the case of any LIBOR periodgreater than three months in duration, interest shall be payable at three monthintervals and on the last day of such LIBOR period. All accrued interest onoutstanding revolving credit LIBOR loan advances will bear interest at anannual rate equal to the LIBOR rate plus an additional amount based on theCompany’s senior leverage ratio, which additional amounts may range from3% to 3.5%. For outstanding base rate loans, the Company will pay all accruedinterest on the first business day of each calendar quarter. All accruedinterest on outstanding revolving credit base rate loans bears interest at anannual rate equal to the base rate plus an additional amount based on theCompany’s senior leverage ratio, which additional amounts may range from1.75% to 2.25% for the revolving credit base rate loans.

 

In theDIP Financing Credit Agreement, the Company has made certain representationsand warranties to GECC and is subject to certain reporting requirements andfinancial and other covenants. The credit facility restricts the Company’sability to incur or to permit any of its properties or assets to be encumberedby liens. The credit facility also restricts the Company’s ability to makecertain types of payments relating to its capital stock, including thedeclaration or payment of dividends. Consolidations, mergers, sales of assetsand the creation of additional subsidiaries are also restricted, as is theCompany’s ability to purchase assets and to make investments. The covenantsalso restrict transactions with the Company’s affiliates and require theCompany to maintain certain levels with respect to its total leverage ratio,senior leverage ratio and fixed charge coverage ratio. The DIP facilityprovided for conditions to close which included covenants related to levels ofthe Company’s fixed charges coverage ratio, senior secured leverage ratio andtotal leverage ratio. The Company was in compliance with these as well as otherrequirements as of the close date.

 

In connection with the Pre-petition Credit Facility,on December 1, 2005, the Company entered into a Forbearance Agreement withGE Capital pursuant to which it agreed to forbear from exercising remedies onaccount of the cross-default under the Pre-petition Credit Facility arisingfrom failure by the Company to pay interest on the Notes.

 

TheForbearance Agreement provides that interest on outstanding amounts on thePre-petition Credit Facility were to accrue at the default rate under theagreement, but paid at the rate in the agreement as if no event of default hadoccurred. The difference between interest accrued and interest paid, the “PIK”spread, becomes due and payable at the end of the forbearance period, providedhowever that GE Capital has agreed to waive such additional interest due aslong as GE Capital continues as a lender for the Company’s exit financing uponemergence from the Bankruptcy Cases. In addition, the Forbearance Agreementwaives payment of an early termination fee under the Pre-petition CreditFacility that became due and payable of $1.2 million, subject to the sameconditions as the PIK interest. The Company has recorded the Prepayment PenaltyAmounts and the PIK interest as a current liability in the accompanyingfinancial statements.

 

TheCompany’s longer term cash requirements include working capital for theexpansion of its Specialty Infusion business branch pharmacy network andservicing of the Company’s substantial debt. Other cash requirements areanticipated for capital expenditures in the normal course of business,including the acquisition of software, computers and equipment related to theCompany’s management information systems.

 

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**SHARE-BASEDCOMPENSATION AND ADOPTION OF FAS 123R**

 

TheCompany adopted FAS No. 123(R) on January 1, 2006 using the modifiedprospective method. (See Note 4 to the Condensed Consolidated FinancialStatements). The adoption of SFAS No. 123(R) increased the Company’s firstquarter 2006 reported net loss from continuing operations by $0.5 million. Priorto January 1, 2006, the Company accounted for its stock based compensationunder the intrinsic value method of Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issue to Employees,” and in accordance with APB No. 25,no stock-based compensation cost was reflected in the Company’s prior yearresults. Upon the confirmation of the Company’s Plan of Reorganization (seeNote 1 to the Condensed consolidated Financial Statements), all of the Company’soutstanding stock options and plans will be cancelled. The Company has assumedthat the Plan of Reorganization will be confirmed and the Company’s outstandingstock options will be cancelled by the end of the second quarter 2006. The compensationcost related to nonvested awards for the remaining life of three months is $0.2million.

 

**Item 3.****           Quantitative andQualitative Disclosures About Market Risk**

 

The Company currently does not have market risksensitive instruments entered into for trading purposes and does not haveoperations subject to risks of material foreign currency fluctuations. TheCompany does not enter into derivative instruments other than for cash flowhedging purposes and does not speculate using derivative instruments.

 

Thefollowing table provides information about the Company’s financial instrumentsat March 31 (dollars in millions):

 
| ** **                                                          | ** ** | **March 31, 2006** | ** ** | **Outstanding Balances  December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                          | ** ** | **Balance**                  | ** ** | **Fair  Value**                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-  after** | ** ** |
| **Liability:**** **                                            |       |                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt (Senior Notes)                                       |       |                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($US)(1)                                                 |       | $                            | 185.0      |                                             | $          | 101.8 |   | $ | 185.0 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Average interest  rate(1)                                           |       |                         | 10.75      | %                                                |       | 27.79 | % |   | 10.75 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt (Revolver)                                           |       |                         |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate ($US)(2)                                              |       | $                            | 26.7       |                                             | $          | 26.7 |   | $ | 26.7 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Average interest rate(2)                                            |       |                         | 8.09       | %                                                |       | 8.09 | % |   | 8.79 | % |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible note used in purchase of Apex Average  interest rate(3) |       | $                            | 1.5  4.4   | %                                                | $          | 1.5  4.4 | % | $ | 1.5  4.4 | % | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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(1)          TheSenior Notes mature in May of 2011 and bear interest at a fixed rate of10.75%.

 

(2)          Theaverage interest rates are based on the LIBOR forward yield curves at March 31,2006 plus the applicable 3.5% premium. The senior secured revolving creditfacility terminates on April 23, 2009. The LIBOR interest rate in effectat March 31, 2006 was the 30-day LIBOR rate of 4.59% plus 3.5%. On amonthly basis, a Base Rate of prime plus 2.25% is applied to the differencebetween the LIBOR period loan and the actual outstanding balance of therevolving facility. As of March 31, 2006, the prime rate in effect was7.75%. In addition to the LIBOR and Base Rate interest rate, there is a monthlyunused line fee of between 0.5% and 0.75% of the unused balance on thefacility.

 

(3)          Averageinterest rates are contractual amounts. The Company is disputing thisobligation (see Note 1)

 

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**Item 4.****          ****Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Underthe supervision and with the participation of the Company’s management,including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),the Company evaluated the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange”)) as of the endof the period covered by this report on Form 10-Q. Based upon thatevaluation and due to the material weakness discussed below which wasremediated after the end of the period covered by this report, the CEO and CFOconcluded that the Company’s disclosure controls and procedures were noteffective as of March 31, 2006.

 

Aspreviously reported in the Company’s Form 10-K for the year ended December 31,2005, in connection with the preparation of this Form 10-K, the Companynoted a deficiency in the effectiveness of its financial statement closeprocess in three non-routine, judgmental areas relating to the allowance fordoubtful accounts, certain accrued liabilities relating to the Company’srevolving credit facility and certain income tax accounts. As a result of thismaterial weakness in the Company’s internal control, audit adjustments increasingthe Company’s net loss for fiscal 2005 in the aggregate amount of $6.2 millionwere recorded by the Company.

 

Inorder to remediate the material weakness noted above, the Company revised itsfinancial statement closing procedures in April 2006 to provide forbroader review and discussion of such non-routine judgments involving, asappropriate, legal counsel, additional internal financial staff, and outsidefinancial advisors. Based on these changes in the financial statement closingprocess, management of the Company believes that the Company’s disclosurecontrols and procedures are effective as of the date of filing of this reporton Form 10-Q.

 

Anysystem of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system willbe met. In addition, the design of any control system is based, in part, uponcertain assumptions about the likelihood of future events. Because of these andother inherent limitations of control systems, there is only reasonableassurance that the Company’s controls will succeed in achieving their goalsunder all potential future conditions.

 

**Changesin Internal Controls**

 

Therehave been no changes in the Company’s internal control over financial reportingthat occurred during the Company’s most recently completed fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**Part II****             Other Information**

 

**Item 1.****           Legal Proceedings**

 

In thenormal course of our business, we are involved in lawsuits, claims, audits andinvestigations, including any arising out of services or products provided byor to our operations, personal injury claims and employment disputes, theoutcome of which, in the opinion of management, will not have a materialadverse effect on our financial position, cash flows or results of operations.

 

On March 27, 2006, the Petition Date,  Curative and it subsidiaries filed aPrepackaged Joint Plan of Reorganization under Chapter 11 of the United StatesBankruptcy Code in the United States Bankruptcy Court for the Southern Districtof New York. The Chapter 11 proceedings are further discussed above and in Note1 of Notes to Condensed Consolidated Financial Statements included in thisQuarterly Report on Form 10-Q. The Chapter 11 proceedings were enteredinto in response to various issues that have negatively affected our liquidityand our ability to service our debt obligations.

 

Material pending legal proceedings, other than theChapter 11 proceedings above and other than ordinary, routine litigationincidental to the business, to which we became or were a party as of March 31,2006 or subsequent thereto but before the filing of this report, are summarizedbelow.

 

***ApexTherapeutic Care Litigation***

 

Aspreviously disclosed, on October 26, 2005, the Company commencedlitigation in the United States District Court for the Central District ofCalifornia, entitled “Curative Health Services, Inc. vs. James H.Williams, et al.,” docket number EDCV 05-00992 SVW, against former stockholdersof Apex alleging, among other things, that stockholders of Apex made materialmisrepresentations in connection with their sale of Apex stock to Curative in2002. As part of the action, in addition to seeking compensatory andpunitive damages, the Company is disputing its obligation to make furtherpayments under an amended and restated promissory note, dated May 30,2002, made in favor of the former stockholders in connection with theacquisition of Apex. Prior to commencement of the action, Curative sent aletter to the representative of the former stockholders indicating thatCurative would not be making the installment payment due on September 30,2005 or any further payments pending resolution of this dispute. Thestockholders’ representative responded with a notice on October 18, 2005declaring an event of default under the above-referenced note and an accelerationof payment of the outstanding principal balance under the note in the amount ofapproximately $1.6 million. This event is not expected to cause a defaultunder, or acceleration of, any other obligations of the Company. On February 14,2006, the Company filed an amended Complaint, bringing nine counts intotal. Of those counts,one was dismissed, and on April 24, 2006, Defendants filedan Answer to the remaining eight counts in the amended Complaint. On April 24,2006, Defendants also filed a counter-claim against the Companyasserting a single count for breach of contract. Discovery in the matteris underway and a trial date has been set for September 26, 2006.

 

***DHS Audit and Related Pharmacy Complaint***

 

Two of the Company’s subsidiaries, Apex and eBioCare,might be subject to potential indemnification liabilities to three independentretail pharmacies that previously did business with Curative. Theindemnification claims are in connection with an audit conducted by theDepartment of Health Services of the State of California related to thepharmacies’ medical billing for clotting factor supplied to the pharmacies byApex and eBioCare, and the pharmacies’ medical billing for the anti-inhibitorproduct “FEIBA” supplied to the pharmacies by Apex and eBioCare. Whileliability with respect to these claims is uncertain at this time, Apex andeBioCare believe that some amount of monetary loss is reasonably possible ifthe pharmacies assert and prevail on indemnification claims. Apex and eBioCareestimate that the range of loss may be anywhere from $0 to $39.3 million. Moreover,any liability of Apex or eBioCare resulting from these claims will becompromised under the Plan if the Plan is implemented without modification.

 

ParkPharmacy filed a complaint in the Superior Court of the state of California forthe County of Los Angeles on March 24, 2006 styled as Park CompoundingPharmacy, Inc. v. Curative Health Services, Inc., Case No. 00349600for breach of contract, indemnification, unjust enrichment, and declaratoryrelief arising from the 

 

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Company’s alleged failureto indemnify Park Pharmacy for final audit amounts assessed by the CaliforniaDepartment of Health Services (“DHS Audit”) on December 14, 2005. Thecomplaint also includes a claim for rescission of all amounts paid to Curativeunder the third party pharmacy agreement between Apex Therapeutic Care, Inc.,a subsidiary of Curative Health Services, Inc., and Park Pharmacy. Thiscase is stayed in accordance with the automatic stay in effectunder section 362 of the Bankruptcy Code during the pendancy ofthe Company’s Chapter 11 cases. The plaintiff’s claims are pre-petition claimsthat will be compromised at 5.2% in accordance with the Company’s Plan of Reorganizationif the Plan is consummated by the Company without modification. In addition,the Company will pursue all available defenses in the litigation filed by ParkPharmacy, and therefore at this time liability in this case is uncertain.

 

As theamount of potential exposure cannot be estimated at this time, no related lossprovision has been accrued in the consolidated financial statements as of March 31,2006.

 

**Item 1A. Risk Factors**

 

The statements contained in this Quarterly Report on Form 10-Qinclude forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 (the “PSLRA”). When used in this QuarterlyReport on Form 10-Q and in future filings by us with the Securities andExchange Commission (the “SEC”), in our news releases, presentations tosecurities analysts or investors, and in oral statements made by or with theapproval of one of our executive officers, the words or phrases “believes,” “anticipates,”“expects,” “plans,” “seeks,” “intends,” “will likely result,” “estimates,” “projects”or similar expressions are intended to identify such forward-looking statements.These statements are only predictions. Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Actual events or results may differ materially from theresults discussed in the forward-looking statements.

 

The following text contains cautionary statementsregarding our business that investors and others should consider. Thisdiscussion is intended to take advantage of the “safe harbor” provisions of thePSLRA. Except to the extent otherwise required by federal securities laws, wedo not undertake to address or update forward-looking statements in futurefilings with the SEC or communications regarding our business or operatingresults, and do not undertake to address how any of these factors may havecaused results to differ from discussions or information contained in previousfilings or communications. You should not place undue reliance onforward-looking statements, which speak only as of the date they are made. Inaddition, any of the matters discussed below may have affected past, aswell as current, forward-looking statements about future results so that ouractual results in the future may differ materially from those expressed inprior communications.

 

In addition to the other information set forth in thisreport and our other SEC filings, you should carefully consider the riskfactors discussed in Part I, Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2005, which could have a material impacton our business, financial condition or results of operations. In addition, youshould consider the risk factors set forth below in this section whichinclude updated information concerning the risks facing Curative. The risksdescribed below and in our Annual Report on Form 10-K are not the onlyrisks we face. Additional risks and uncertainties not presently known to us orthat we currently believe to be immaterial may also adversely affect ourbusiness, financial condition or results of operations.

 

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***Certain Bankruptcy Considerations***

 

**Under the terms of our Plan, we expect our existingshareholders’ investment to be extinguished and intend to become a “privatecompany.”**

 

If our Plan is confirmed and implemented, existingcommon stock will be cancelled and current shareholders will receive no distributionor other consideration in exchange for their shares. Furthermore, effective February 21,2006, Curative’s existing common stock was delisted from the NASDAQ NationalMarket System. Since that date, Curative’s existing common stock has beenquoted in the over-the-counter market.

 

In connection with the reorganization to be effectedby the Plan, we intend to deregister our existing securities under theSecurities Exchange Act of 1934, and become a “private company” upon ouremergence from Chapter 11. After such time, Curative’s obligation to filereports and other information under the Securities Exchange Act of 1934, suchas Forms 10-K and 10-Q, will be terminated.

 

**Operating in bankruptcy imposes significant risks on ouroperations. We cannot predict when we will successfully emerge from bankruptcy.**

 

The timing of our emergence from bankruptcy and theterms of our emergence may affect our relationships with our creditors,customers, suppliers and employees and have a significant impact on ourbusiness, financial condition and results of operations. If our bankruptcy isprotracted, our ability to continue operating in bankruptcy as a going concernand to emerge from bankruptcy will depend upon the following factors, amongothers:

 

•                  our management’s ability to balance time and effortdealing with the reorganization and business operations at the same time in aprolonged continuation of our Chapter 11 Cases;

 

•                  our ability to obtain additional financing, either asa part of the debtor-in-possession financing or otherwise, during thependency of our Chapter 11 Cases on commercially favorable terms;

 

•                  our ability to comply with and operate under the termsof the debtor-in-possession financing we obtained upon filing for bankruptcyand any cash management orders entered by the bankruptcy court from time totime;

 

•                  our ability to pay costs for professional fees andother expenses associated with the Chapter 11 Cases;

 

•                  our ability to attract and retain management and otherkey employees; and

 

•                  our ability to maintain good customer and supplierrelationships in light of developments in our bankruptcy proceedings and theterms of our emergence.

 

For further information regarding the status of ourChapter 11 Cases, please see Note 1 of Notes to Condensed ConsolidatedFinancial Statements included elsewhere in this Quarterly Report on Form 10-Q.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

On February 6, 2006, the Company commenced thesolicitation of votes to accept or reject the Prepackaged Joint Plan ofReorganization of the Company and its Subsidiaries, dated February 6, 2006(the “Plan”) from the holders,as of February 8, 2006 of the Notes and other general unsecured claimsagainst the Company and its 

 

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subsidiariesas described in the Plan. See the Current Reports on Form 8-K filed by theCompany on February 6, 2006 and March 27, 2006 for furtherinformation concerning this solicitation and its outcome.

 

**Item 6.****           Exhibits**

 
| 2.1    | Plan of Merger, dated  as of August 15, 2003, by and among Curative Health Services, Inc.,  Curative Holding Co., and Curative Health Services Co. (incorporated by  reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K,  filed August 19, 2003, of Curative Health Services, Inc., the  predecessor company)   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 2.2    | Stock Purchase  Agreement relating to Critical Care Systems, Inc., by and among Curative  Health Services, Inc., Critical Care Systems, Inc. and each of the  persons listed therein, dated February 24, 2004 (incorporated by  reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K,  filed April 30, 2004) |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 2.3    | Letter Agreement  supplementing the Stock Purchase Agreement, dated April 23, 2004, by and  between Curative Health Services, Inc. and Christopher J. York, as  Seller’s Representative (incorporated by reference to Exhibit 2.2 to the  Company’s Current Report on Form 8-K, filed April 30, 2004)                             |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1    | Amended and  Restated Articles of Incorporation of Curative Health Services, Inc.  (incorporated by reference to Exhibit 3.1 to the Company’s Current  Report on Form 8-K, filed August 19, 2003)                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 3.2    | By-Laws of  Curative Health Services, Inc. (incorporated by reference to Exhibit 3.2  to the Company’s Current Report on Form 8-K, filed August 19, 2003)                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1    | Indenture, dated April 23, 2004, by and among  Curative Health Services, Inc., certain of its subsidiaries as  Guarantors and Wells Fargo Bank, N.A., as Trustee (incorporated by reference  to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed April 30,  2004)                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2    | Registration Rights Agreement, dated April 23,  2004, by and among Curative Health Services, Inc., certain of its  subsidiaries as Guarantors and UBS Securities LLC (incorporated by reference  to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed April 30,  2004)                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3    | Specimen of 144A Notes (incorporated by reference to  Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed April 30,  2004)                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4    | Specimen of Regulation S Notes (incorporated by  reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K,  filed April 30, 2004)                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5    | Specimen of Guarantees (incorporated by reference to  Exhibit 4.5 to the Company’s Current Report on Form 8-K, filed April 30,  2004)                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6    | Specimen of Registered Notes (incorporated by  reference to Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q,  filed November 9, 2004)                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1   | Amendment to Forbearance Agreement, entered into on December 28,  2005 and effective as of December 23, 2005, by and among Curative, the  Subsidiaries, and GE Capital (incorporated by reference to Exhibit 10.1  to the Company’s Current Report on Form 8-K, filed January 4,  2006).                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   | Second Amendment to Plan Support Agreement, dated February 3,  2006, by and among Curative, its subsidiaries, and the Supporting Noteholders  (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed February 6, 2006)                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   | Second Amendment to Forbearance Agreement, dated January 30,  2006, by and among Curative, its subsidiaries, and GE Capital (incorporated  by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K,  filed February 6, 2006)                                                                                               |

 

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| 10.4   | Form of Election and Subscription Agreement,  dated as of February 3, 2006, by and among the Company entered into with  each of Barclays Bank PLC, BlackRock Financial Management, Inc., Merrill  Lynch, Pierce, Fenner & Smith Incorporated and RCG Carpathia Master  Fund, Ltd. (collectively the Subscription Parties) (incorporated by reference  to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed February 6,  2006), and the disclosure schedule attached thereto (incorporated by  reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K,  filed on February 7, 2006) |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5   | Third Amendment to Forbearance Agreement, dated as  of March 14, 2006, by and among Curative, its subsidiaries, and GE  Capital (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K, filed March 21, 2006)                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6   | Third Amendment to Plan Support Agreement, entered  into on March 24, 2006 and effective as of March 15, 2006, by and  among Curative, its subsidiaries, and the Supporting Noteholders  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report  on Form 8-K, filed March 27, 2006)                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   | Settlement and Separation Agreement of the Current  Chief Financial Officer dated as March 22, 2006 (the separation  agreement of the current Chief Financial Officer) (incorporated by reference  to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed March 27,  2006)                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   | Debtor In Possession Credit Agreement, dated as of March 30,  2006 and effective as of April 5, 2006, by and among the Company, its  subsidiaries, and GECC Capital Markets Group, Inc., as the lead  arranger, General Electric Capital Corporation, as agent, and the lenders  referred to therein (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed April 10, 2006).                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1   | Certification of the Chief Executive Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.2   | Certification of the Chief Financial Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

TheCompany has excluded from the exhibits filed with this report instrumentsdefining the rights of holders of long-term convertible debt of the Companywhere the total amount of the securities authorized under such instruments doesnot exceed 10% of its total assets. The Company hereby agrees to furnish a copyof any of these instruments to the SEC upon request.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: May 22,  2006 |                                    |   |                           |
|--------------------------|-----------------------------------------|--------|--------------------------------|
|                     |                                    |   |                           |
| ** **               | **CURATIVE HEALTH SERVICES, INC.** |
|                     | (Registrant)                            |
|                     |                                    |   |                           |
|                     | By:                                     | /s/    | Paul  F. McConnell             |   |
|                     |                                    |   | Paul  F. McConnell             |
|                     |                                    |   | Chief  Executive Officer       |
|                     |                                    |   | (Principal  Executive Officer) |
|                     |                                    |   |                           |
|                     |                                    |   |                           |
|                     | By:                                     | /s/    | John  C. Prior                 |   |
|                     |                                    |   | John  C. Prior                 |
|                     |                                    |   | Chief  Financial Officer       |
|                     |                                    |   | (Principal  Financial Officer) |
|                          |                                         |        |                                |  |  |

 

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