**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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| **(Mark One)**                                       |
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| **ý**                                           | ** ** | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|                                                 |   |   |
| **For the fiscal year ended December 31, 2005** |
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| **OR**                                               |
|                                                 |   |   |
| **o**                                                | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|                                                 |   |   |
| **Commission File Number: 000-50371**                |

 

**Curative Health Services, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

**61 Spit Brook Road**

**Nashua, New Hampshire  03060**

 (Address of principal executive offices)

 

**(603) 888-1500**

(Registrant’s telephone number, including areacode)

 

Internet Website:  **http://www.curative.com**

 

Securities registered pursuant to section 12(b) ofthe Act:

**None**

 

Securities registered pursuant to section 12(g) ofthe Act:

**Common Stock, par value $.01 pershare**

(Title of Class)

 

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Indicate by check mark if the registrant is awell-known seasonal issuer, as defined in Rule 405 of the Securities Act.  Yes o  No ý

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No ý

 

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 90 days:  Yes ý  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act):

 
| 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 Act.  Yes o  No ý

 

The aggregate market value of voting stock held bynon-affiliates of the registrant, as of June 30, 2005, was approximately$22.4 million (based on the last sale price of such stock as reported by theNasdaq National Market).

 

As of March 1, 2006, there were 13,043,133shares of the Registrant’s Common Stock, $.01 par value, outstanding.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

The information required by Part III of this Form 10-Kis incorporated by reference to portions of our definitive proxy statement forour 2006 Annual Meeting of Shareholders to be filed with the Securities andExchange Commission on or before April 30, 2006.

 

 

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**PART I**

 

Inthis Annual Report on Form 10-K, unless the context requires otherwise, “Curative,”“Company,” “we,” “our,” and “us” refer collectively to Curative Health Services, Inc.and its consolidated subsidiaries

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Annual Report on Form 10-K containsforward-looking statements within the meaning of section 27A of the SecuritiesAct and section 21C of the Securities Exchange Act of 1934, as amended,including statements concerning possible or assumed future results ofoperations of the Company and those preceded by, followed by, or that includethe word “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”“estimates,” “predicts,” “potential,” or “continue” or the negative of suchterms and other comparable terminology. These statements are only predictions.  Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements.  You should understand that the factorsdescribed below, in addition to those discussed under Item 1A, “Risk Factors,”and elsewhere in this Annual Report on Form 10-K, could materially affect ourfuture results and could cause those results to differ materially from thoseexpressed in such forward looking statements. These factors include:

 

•                  material adverse changes in economicconditions in the markets we serve;

 

•                  uncertainties with respect to thebankruptcy process and confirmation of our Prepackaged Joint Plan ofReorganization (see “Planned Reorganization and Chapter 11 BankruptcyProceedings” below);

 

•                  increases in labor costs;

 

•                  potential difficulties in attracting andretaining quality management and key personnel to execute the our currentbusiness strategy;

 

•                  failure to obtain new customers orretain existing customers;

 

•                  issues related to our financialsituation and liquidity needs;

 

•                  inability to carry out our business strategies;

 

•                  changes in reimbursement policies andother legislative or regulatory initiatives aimed at reducing costs associatedwith the Medicaid and Medicare programs;

 

•                  integration risks in connection with ourmultiple acquisitions;

 

•                  relationships with a limited number ofbiopharmaceutical and pharmaceutical suppliers;

 

•                  relationships with our key community-basedrepresentatives;

 

•                  relationships with our payors;

 

•                  relationships with our shippers;

 

•                  the competitive nature of our business;

 

•                  changes in the extensive governmentregulations to which we are subject;

 

•                  our substantial indebtedness;

 

•                  our ability to generate sufficient cash;

 

•                  the ultimate resolution of litigationand indemnification claims against us; and

 

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•                  other risks and uncertainties as may bedetailed from time to time in our public announcements and SEC filings.

 

Except as required by law, we are under noobligation to update any forward-looking statement, whether as a result of newinformation, future events or otherwise. Forward-looking statements are provided in this Annual Report on Form 10-Kpursuant to the safe harbor established under the Private Securities LitigationReform Act of 1995 and should be evaluated in the context of the estimates,assumptions, uncertainties, and risks described herein.

 

**ITEM 1.****                             BUSINESS**

 

**OVERVIEW**

 

CurativeHealth Services, Inc. operates a Specialty Infusion business unit and aWound Care Management business unit to deliver high-quality care and positive clinical outcomes forpatients experiencing serious acute or chronic medical conditions.

 

OurSpecialty Infusion business unit provides intravenous and injectable biopharmaceuticaland compounded pharmaceutical products and comprehensive infusion services topatients with chronic and critical disease states.  All patient care is delivered through anational footprint of community-based branches. Each local branch has an experienced multidisciplinary team ofpharmacists, nurses, reimbursement specialists and patient servicerepresentatives who comprehensively manage all aspects of a patient’s infusionand related support needs.  We purchase biopharmaceutical andother pharmaceutical products from suppliers and contract with insurancecompanies and other payors to provide our services, which include coordinationof patient care, 24-hour nursing and pharmacy availability, patient educationand reimbursement billing and collection services.  The products distributed and the injection orinfusion therapies offered by Curative are used by patients with chronic orsevere conditions such as hemophilia, immune system disorders, chronic orsevere infections, nutritionally compromised and other severe conditionsrequiring nutritional support, cancer, rheumatoid arthritis, hepatitis C andmultiple sclerosis.  Examples ofbiopharmaceutical products used by Curative’s patients include hemophiliaclotting factor, intravenous immune globulins (“IVIG”) and Remicade®.  Examples of pharmaceutical products used byCurative’s patients include compounded pharmaceuticals, such as totalparenteral nutrition (“TPN”) products, anti-infectives, chemotherapy agents andpain management products.  As of December 31,2005, we had approximately 485 payor contracts and provided products orservices in approximately 45 states.

 

OurWound Care Management business unit is a leading provider of wound careservices specializing in chronic wound care management.  It manages, on behalf of hospital clients, anationwide network of Wound Care Center® programs that offer acomprehensive range of services across a continuum of care for treatment ofchronic wounds.  Our Wound ManagementProgramSMconsists of diagnostic and therapeutic treatment procedures that are designedto meet each patient’s specific wound care needs on a cost-effectivebasis.  Our treatment procedures aredesigned to achieve positive results for wound healing based on significantexperience in the field.  We maintain a proprietary database of patientresults that we have collected since 1988 containing over 534,000 patientcases.  Our treatment procedures, whichare based on extensive patient data, have allowed us to achieve an overall rateof healing of approximately 89% at December 31, 2005 for patientscompleting therapy.  As of December 31,2005, our Wound Care Center® network consisted of 109 outpatientclinics (103 operating and 6 contracted) located on or near campuses of acutecare hospitals in approximately 30 states.

 

Ourpredecessor was incorporated in the State of Minnesota in 1984 under the nameCuratech, Inc.  It changed its nameto Curative Technologies, Inc. in March 1990 and to Curative HealthServices, Inc. in June 1996. In August 2003, our predecessor effected a holding companyreorganization in which we became the holding company of our predecessor, whichis now the direct parent of all of our other current subsidiaries, except forCurative Health Services of New York, Inc. and Critical Care Systems, Inc.which are our direct subsidiaries.  Weassumed the name Curative Health Services, Inc. and our predecessorchanged its name to Curative Health Services Co.  Our principal executive offices are currentlylocated at 61 Spit Brook Road, Nashua, New Hampshire 03060, telephone number(603) 888-1500.

 

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**PLANNEDREORGANIZATION AND CHAPTER 11 BANKRUPTCY PROCEEDINGS**

 

On March 27,2006, Curative and each of its direct and indirect subsidiaries filed voluntarypetitions under chapter 11 of title 11 of the United States Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the Southern District of NewYork (the “Bankruptcy Court”).  We filedour chapter 11 cases (the “Chapter 11 Cases”) to implement and effect our PrepackagedJoint Plan of Reorganization, dated February 6, 2006 (the “Plan”).  Prior to commencement of the Chapter 11Cases, we solicited votes to accept or reject the Plan from the holders of the$185.0 million aggregate principal amount of 10.75% senior notes due 2011 (the “SeniorNotes”) issued by Curative and the holders of known general unsecured claimsagainst the Company as of February 6, 2006.  Prior to the commencement of the Chapter 11Cases, the Company received the requisite votes for the Plan to be confirmableunder Section 1129 of the Bankruptcy Code.

 

ThePlan was filed with the Bankruptcy Court on March 27, 2006.  The Plan, which is described in more detailbelow, will, if confirmed and consummated, result in the cancellation anddischarge of all claims relating to the Senior Notes.  Each holder of Senior Notes (each, a “SeniorNoteholder”) will receive a cash payment of approximately 54.9% of itsrespective claim related to the Senior Notes, unless a Senior Noteholder wasqualified to elect and did elect to receive its pro rata share of certain cashconsideration provided in the Plan and the common stock of reorganized Curative(the “New Curative Common Stock”). Holders of existing shares of Curative common stock (“Old CurativeCommon Stock”) and options will not receive any distributions under the Planand all shares of Old Curative Common Stock and options will be extinguished.

 

Inconnection with the reorganization to be effected by the Plan, we intend toderegister our existing securities under the Securities Exchange Act of 1934,and become a “private company” upon our emergence from Chapter 11.

 

**EventsLeading to Chapter 11 Cases**

 

***FactorsAffecting our Liquidity***

 

Since June 2004,we have faced various issues that have negatively affected our liquidity andour ability to service our debt obligations. Specifically, and as described in further detail below, we haveexperienced reduced revenue generation as a result of:

 

•                  California’s modification of its blood-product reimbursement methodology,

 

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

 

•                  slow maturation of certain new branch locations,

 

•                  the resignation of certain customer sales and service representatives, and

 

•                  additional future liquidity risks, including potential indemnificationclaims.

 

*SignificantDecrease in Blood-Product Reimbursement*

 

On April 23,2004, we acquired Critical Care Systems, Inc. (“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.  Theacquisition of CCS was financed with a portion of the proceeds obtained fromthe issuance of the Senior Notes and additional borrowings.

 

At thetime of the CCS acquisition, a significant portion of the Company’s businessinvolved the sale of blood-clotting products by us to hemophilia patients whoare beneficiaries of California’s Medicaid (“Medi-Cal”) program or other statefunded programs for hemophilia patients. These blood products were dispensed directly to patients or through ourrelationships 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’s reimbursement methodology amounted to anapproximate 30-40% reduction from the acquisition cost plus 1% methodologypreviously in effect.  The implementationof this reduction in 

 

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reimbursement fromMedi-Cal, and changes in regulations governing such reimbursement,significantly impacted the Company’s revenues from the sale of blood-clottingproducts.

 

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 would negativelyaffect our revenues.  Prior to January 1,2005, we were able to seek reimbursement from Medicare for blood-clottingproducts at a rate of 95% of the average wholesale price (“AWP”).  After January 1, 2005, Medicarereimbursed for blood-clotting products at a rate of ASP plus 6% plus a $0.14per unit dispensing fee.

 

*UnderperformingBranch Expansion*

 

Ouroverall growth strategy, and our approach to offsetting the decreased revenueresulting from the change in Medi-Cal reimbursement methodology describedabove, included opening 13 new branches throughout the United States since June 2004.  We projected that these new branches wouldquickly 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, including slower than anticipated managedcare contract signings, certain of these branches have not matured as quicklyas planned and have not generated anticipated revenues.

 

*Resignation of Hemophilia ServiceRepresentatives*

 

Thesuccess of our Specialty Infusion business unit depends in part upon our abilityto retain key employees, referred to as hemophilia services representatives,who service hemophilia patients.  Thehemophilia service representatives are the chief contacts and maintain theprimary relationship with our customers. While we have employment agreements with our hemophilia servicerepresentatives which, where appropriate, contain covenants not to compete andother restrictive covenants that apply if the hemophilia servicerepresentatives cease employment with us, the loss of any hemophilia servicerepresentatives could result in the loss of a significant number of customersand corresponding revenue from the sale of blood-clotting products to suchcustomers.

 

On October 21,2005, six hemophilia service representatives resigned.  We estimate that the patients serviced bythese employees represent approximately $25.0 million of revenue annually.  While it is not certain that we will lose thefull $25.0 million of revenue, it is likely that we will experience asignificant decrease in revenue as a result of these resignations.  We may experience the loss of otherhemophilia services representatives in the future which could adversely affectour business and prospects.

 

Inaddition to the factors adversely affecting our revenue generation describedabove, our future liquidity may also be affected by the following additionalfactor:

 

•                  *The Pharmacy Claims.*  Two of our subsidiaries, Apex TherapeuticCare, Inc. (“Apex”) and eBioCare.com, Inc. (“eBioCare”), might besubject to potential indemnification liabilities to three independent retailpharmacies that previously did business with us.  The indemnification claims are in connectionwith an audit conducted by the Department of Health Services of the State ofCalifornia (the “DHS Audit”) related to the pharmacies’ medical billing forclotting factor supplied to the pharmacies by Apex and eBioCare, and thepharmacies’ medical billing for the anti-inhibitor product “FEIBA” supplied tothe pharmacies by Apex and eBioCare. While 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.  Apex and eBioCare estimate that the range ofloss may be anywhere from $0 to $39.3 million.

 

***PlanNegotiations and Solicitation of Votes on the Prepackaged Plan***

 

As aresult of the foregoing factors, in June 2005, we began evaluatingstrategic alternatives and subsequently retained UBS Securities LLC as ourfinancial advisors.  In September 2005,certain holders of our Senior Notes formed an Ad Hoc Committee and we begandiscussions with them with respect to a de-leveraging of our balancesheet.  On November 1, 2005, we wererequired to make an interest payment in the amount of approximately $9.9million to the Senior Noteholders.  Weelected not to make this interest payment and to use the 30-day grace periodavailable under the indenture.  Uponexpiration of the grace period on November 30, 2005, we did not make the 

 

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interest payment and anevent of default occurred under the Senior Notes, which also triggered an eventof default under our prepetition credit facility (the “Existing Credit Facility”)with General Electric Capital Corporation (“GECC”).

 

In connection with the Existing CreditFacility, on December 1, 2005, we entered into a Forbearance Agreement, asamended (“Forbearance Agreement”) with GECC. The Forbearance Agreement provides that, subject to certain conditions,GECC, together with the other lenders under the Existing Credit Facility, whichis governed by a Credit Agreement dated April 23, 2004, as amended (the “Credit Agreement”), will forbear fromexercising remedies on account of the cross-default under the Credit Agreementarising from our failure to pay interest on the Senior Notes.  Subject to certain termination events,including additional events of default under the Credit Agreement, theForbearance Agreement will expire on June 10, 2006.  Under the terms of the Forbearance Agreement,we may continue to draw-down under the Credit Agreement as if such existingevents of default had not occurred.  Upontermination of the Forbearance Agreement, all obligations under the CreditAgreement, together with interest, will be immediately due and payable and thelenders may exercise any rights or remedies thereunder.

 

TheForbearance Agreement provides that interest on outstanding amounts on therevolver facility will accrue at the default rate under the agreement, but paidat the rate in the agreement as if no event of default had occurred.  The difference between interest accrued andinterest paid, the “PIK” spread, becomes due and payable at the end of theforbearance period, provided however that GECC will waive such additionalinterest due as long as:  1) aterminating event under the facility does not occur, 2) we accept GECC’sproposal for a DIP Credit facility and 3) GECC provides the Exit Facility (seeNote 1 of Notes to Consolidated Financial Statements).  In addition, the Forbearance Agreement waivespayment of an early termination fee that became due and payable of $1.2million, subject to the same conditions as the PIK interest.  We recorded the $1.2 million terminationpenalty and PIK interest in the accompanying financial statements.  As of April 5, 2006, our obligations underour Existing Credit Facility with GECC have been paid in full in connectionwith the interim order of the Bankruptcy Court authorizing the DIP Financingdescribed below.  The DIP Financingremains subject to approval by the Bankruptcy Court on a final basis.  If the Bankruptcy Court does not enter afinal order approving the DIP Financing, the Existing Credit Facility will bereinstated.

 

On December 2,2005, we reached an agreement with the Ad Hoc Committee on the general terms ofa financial restructuring and entered into a Plan Support Agreement.  The financial restructuring, as contemplatedby the Plan Support Agreement and the Plan, is designed to (a) de-leverageour balance sheet, (b) provide us with substantial liquidity to conductour business operations, (c) ensure that our business operations areunaffected by the Chapter 11 Cases and that we are able to retain our existingmanagement and employees and (d) provide the greatest return to ourcreditors.  Under the Plan SupportAgreement, the Senior Noteholders party thereto agreed to forbear fromexercising remedies with respect to any defaults and events of defaultsarising, or that may arise, under the Senior Notes, and agreed further to takeall commercially reasonable actions to oppose and object to, and not tosupport, any person’s taking action to exercise remedies with respect to theSenior Notes.  The Plan Support Agreementwill terminate on July 31, 2006, or upon the earlier failure to satisfycertain milestones with respect to the Prepackaged Plan.

 

On February 6,2006, pursuant to the Plan Support Agreement, we commenced solicitation ofvotes on the Prepackaged Plan.  Inconnection with the solicitation, we circulated the Disclosure Statement insupport of the Prepackaged Plan (the “Disclosure Statement”) to the SeniorNoteholders and the holders of known general unsecured claims against theCompany as of February 6, 2006.

 

Thesolicitation period with respect to votes on the Plan ended on March 13,2006.  The Plan was accepted by 93.2% innumber and 99.7% in amount of the beneficial holders of the Senior Noteholdersvoting on the Plan.  Holders of generalunsecured claims against Curative and its subsidiaries, excluding Apex andeBioCare, (the “Curative Debtors”) voted to accept the Plan (62.5% in numberand 91.1% in amount).  The only classesof creditors entitled to vote on the Plan and who did not vote to accept thePlan were general unsecured claims against Apex and eBioCare.

 

ThePlan was filed with the Bankruptcy Court on March 27, 2006, along with theDisclosure Statement, our chapter 11 petition, the chapter 11 petitions foreach of our subsidiaries, and various motions and applications requestingrelief from the Bankruptcy Court to facilitate the administration of ourChapter 11 Cases.

 

On February 21,2006, Curative’s existing common stock was delisted from the NASDAQ NationalMarket System, due to Curative’s continuing failure to satisfy the continuedlisting requirements of that market. Since that date, Curative’s existing common stock has traded in theover-the-counter market.

 

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***GeneralStructure of the Plan***

 

Underthe Plan, we have established three groups of classes of claims:  (i) claims against the Curative Debtors,(ii) claims against Apex and (iii) claims against eBioCare.  The Plan achieves a consensual de-leveragingof our balance sheet and ensures that we will be a private company uponemergence from bankruptcy.  The Planincludes, among other things, the following key terms:

 

•                  OldCurative Common Stock.  On thedate the Plan becomes effective, all shares of Old Curative Common Stock andoptions will be cancelled and Curative’s obligation to file reports and otherinformation under the Securities Exchange Act of 1934, such as Forms 10-K and10-Q, will be terminated.  The soleequity interests in reorganized Curative will consist of the New CurativeCommon Stock.  Holders of Old CurativeCommon Stock and options will not receive any distributions pursuant to thePlan.

 

•                  SeniorNotes.  Pursuant to the elections madeunder the Plan, eligible Senior Noteholders representing approximately 88% inaggregate principal amount of Senior Notes, or $162.9, will receive theirrespective pro rata shares of cash consideration and shares of New CurativeCommon Stock on the effective date of the Plan. The remaining Senior Noteholders will receive cash in an aggregateamount as provided in the Plan in exchange for their claims and will notreceive any shares of New Curative Common Stock.

 

•                  RightsOffering.  Prior to solicitation of votes on the Plan, we issuednon-certificated subscription rights to certain members of the Ad Hoc Committeeentitling them to purchase shares of New Curative Common Stock on the effectivedate of the Plan.  Pursuant to Electionand Subscription Agreements, the members of the Ad Hoc Committee have agreed toexercise their rights on the Plan’s effective date.  The proceeds from the exercise of the rightswill be used to fund a substantial majority of the cash distributions under thePlan to those holders of Senior Notes who will not receive New Curative CommonStock.

 

•                  Treatmentof General Unsecured Claims. Each holder of an undisputed general unsecured claim against the Company(other than those against Apex and eBioCare) will receive a promissory note ina face amount equal to approximately 56% of its respective claim.  Each holder of an undisputed generalunsecured claim against each of Apex and eBioCare will receive a promissorynote in a face amount equal to approximately 5.2% of its respective claim.  Prior to the commencement of the Chapter 11Cases, each holder of a general unsecured claim against each of the CurativeDebtors, Apex and eBioCare had the option to elect to receive a cash payment inan amount equal to 50% of the face amount of its respective promissory note.  No such holder exercised the cash option.  In accordance with certain orders entered bythe Bankruptcy Court and the Plan, certain general unsecured claims will beunimpaired and paid in full.

 

Existing Credit Facility.  As of April 5, 2006, our obligationsunder our Existing Credit Facility with GECC have been paid in full inconnection with the interim order of the Bankruptcy Court authorizing thedebtor-in-possession financing facility described below.  The DIP Financing remains subject to approvalby the Bankruptcy Court on a final basis. If the Bankruptcy Court does not enter a final order approving the DIPFinancing, the Existing Credit Facility will be reinstated.

 

•                  OtherSecured Claims.  Securedclaims against the Company (other than the claims relating to the ExistingCredit Facility) will be unimpaired.

 

•                  Debtor-in-PossessionFinancing.  The Bankruptcy Court entered aninterim order authorizing the Company to enter into a $45.0 milliondebtor-in-possession credit facility that is secured by all or substantiallyall of our assets and a pledge of the equity interests of each of oursubsidiaries (the “DIP Financing”).  Subject to approval by the BankruptcyCourt on a final basis, he proceeds of the DIP Financing were used to pay, infull, all amounts outstanding under our Existing Credit Facility as of April 5,2006 and also will be used for working capital and other general corporatepurposes during the Chapter 11 Cases.

 

TheDIP Financing provides for a secured revolving credit facility of up to $45.0million, of which we can use up to $7.5 million as a letter of credit subfacility and up to $5.0 million as a swingline sub facility (i.e., a short-termloan advance facility).  We used thefacility immediately to pay all of our outstanding borrowings under theprevious facility.

 

Wewill pay all accrued interest on outstanding LIBOR loans on the last day of theapplicable LIBOR period, provided in the case of any LIBOR period greater thanthree months in duration, interest shall be payable at three month intervalsand on the last day of such LIBOR period. All accrued interest on 

 

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outstandingrevolving credit LIBOR loan advances will bear interest at an annual rate equalto the LIBOR rate plus an additional amount based on our senior leverage ratio,which additional amounts may range from 3% to 3.5%.  For outstanding base rate loans, we will payall accrued interest on the first business day of each calendar quarter.  All accrued interest on outstanding revolvingcredit base rate loans bears interest at an annual rate equal to the base rateplus an additional amount based on our senior leverage ratio, which additionalamounts may range from 1.75% to 2.25% for the revolving credit base rate loans.

 

Pursuantto the terms of the credit agreement governing the DIP Financing, (the “DIPCredit Agreement”), we have made certain representations and warranties to GECCand are subject to certain reporting requirements and financial and othercovenants.  The credit facility restrictsour ability to incur or to permit any of our properties or assets to beencumbered by liens.  The credit facilityalso restricts our ability to make certain types of payments relating to ourcapital stock, including the declaration or payment of dividends.  Consolidations, mergers, sales of assets andthe creation of additional subsidiaries are also restricted, as is our abilityto purchase assets and to make investments. The covenants also restrict transactions with our affiliates and requireus to maintain certain levels with respect to our total leverage ratio, seniorleverage ratio and fixed charge coverage ratio. The DIP facility provided for conditions to close which includedcovenants related to levels of our fixed charges coverage ratio, senior securedleverage ratio and total leverage ratio. We were in compliance with these as well as other requirements as of theclose date.

 

•                  NewManagement Incentive Plan.  Uponemergence from Chapter 11, we will adopt a new management incentive plan thatis intended to provide incentives after the effective date to certain employeesto continue their efforts to foster and promote the long-term growth andperformance of our businesses.

 

•                  Certificateof Incorporation and By-laws of reorganized Curative.  Pursuant to the Plan, reorganized Curativewill adopt a revised certificate of incorporation and by-laws which will besubstantially in the form set forth in the Plan Supplement (as filed on Form 8-Kon March 7, 2006, and as the same may be revised in accordance with thePlan).  The form of by-laws includesprovisions requiring the affirmative vote of 62.5% of the outstanding NewCurative Common Stock to effect: (i) any merger or consolidation in whichreorganized Curative is a constituent corporation, (ii) a sale of all orsubstantially all of the assets of reorganized Curative, (iii) anyamendment of the certificate of incorporation or bylaws of reorganizedCurative, (iv) any issuance of greater than 20% of the New Curative CommonStock then outstanding or (v) any agreement between reorganized Curativeor any subsidiary of reorganized Curative and any of its affiliates (subject tocertain exceptions, including for contracts in the ordinary course ofreorganized Curative’s business).  Theform of by-laws also includes certain supermajority voting requirements for theboard of directors of reorganized Curative that will be required for theissuance of senior equity securities or the incurrence of indebtedness abovecertain levels.  The form of certificateof incorporation also provides that stockholders will have preemption rights inrespect of future issuances of New Curative Common Stock.

 

•                  StockholdersAgreement and Registration Rights Agreement of Reorganized Curative.  Pursuant to the Plan, all persons receivingNew Curative Common Stock will execute a joinder to the Stockholders Agreement,and persons receiving 5% or more of the New Curative Common Stock will executea joinder to the Registration Rights Agreement. The Stockholders Agreement and the Registration Rights Agreement will besubstantially in the form set forth in the Plan Supplement (as filed on Form 8-Kon March 7, 2006, and as the same may be revised in accordance with thePlan).  The form of StockholdersAgreement prevents a party to the agreement from selling any of its shares to aperson if, as a result of such sale, the purchaser would own more than 62.5% ofthe New Curative Common Stock then outstanding unless the purchaser agrees topurchase all shares of New Curative Common Stock held by any party to theStockholders Agreement who wishes to sell its shares, at the highest price paidby the purchaser for any shares of Curative common stock acquired during thepreceding 18 months.   The form ofStockholders Agreement also provides that parties to the agreement shall voteto elect two directors to the board of directors of reorganized Curative whoare nominated by any person or group owning 33.3% or more of the New CurativeCommon Stock and one director who is nominated by any person owing more than16.7% of the New Curative Common Stock but less than 33.3%.  The form of Registration Rights Agreementprovides that registration rights holders holding at least a majority of theoutstanding shares of New Curative Common Stock will have the right to requirereorganized Curative to register an initial public offering that includes (a) sharesto be sold by such stockholders after the second anniversary of the effectivedate of the Plan and (b) registration rights holders beneficially owningat least 25% of the 

 

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outstanding shares of New Curative CommonStock will have the right to require such an initial public offering on orafter the date that is 42 months following the Effective Date of the Plan.  The form of Registration Rights Agreementalso provides for certain demand and “piggy back” registration rights followingan initial registered public offering until the seventh anniversary of the Plan’seffective date.

 

The Plan issubject to formal approvals by the Bankruptcy Court prior to consummation.  There can be no assurance that the BankruptcyCourt will approve and confirm the Plan.

 

**SPECIALTYINFUSION BUSINESS UNIT**

 

OurSpecialty Infusion business unit provides high-cost, injectable or infusiblebiopharmaceutical and compounded pharmaceutical products to patients withchronic health conditions for which there is no known cure and to patients withcritical disease states that require specialized expertise in “high touch”injectable and infusion therapies.  Hightouch therapies require clinical management, special product handling andspecialized nursing administration.  OurSpecialty Infusion business unit focuses on and has core strengths in several therapies,including hemophilia clotting factor, anti-infective therapy, IVIG and TPN.  These products are used by patients withchronic or severe conditions such as hemophilia, RSV, immune system disorders,chronic or severe infections, nutritionally compromised and other severeconditions requiring nutritional support, cancer, rheumatoid arthritis,hepatitis C and multiple sclerosis.  Ourlocal pharmacies provide biopharmaceutical and compounded pharmaceuticalproducts which are generally injected or administered intravenously to patientsin their homes and other alternative locations by a team of clinicalprofessionals.  We also provide patienteducation and instruction regarding the administration of medications, clinicalsupervision of patient compliance, specialized delivery services, includingrefrigerated delivery and expedited overnight mail or courier service, patientand community advocacy and reimbursement services for or on behalf of patientsand payors.  Additionally, we provideintravenous infusion services to patients in their home by an experienced teamof clinical professionals or in our ambulatory infusion suites located in someof our branch pharmacies.

 

OurSpecialty Infusion business unit purchases biopharmaceutical and otherpharmaceutical products from suppliers and manufacturers and contracts withinsurance companies and other payors, including managed care organizations,Medicare and Medicaid programs, to provide clinical management and relatedinjectable and infusible services. Specialty Infusion revenues are derived primarily from fees paid by thepayors for the distribution of these biopharmaceutical and other pharmaceuticalproducts and for the injection or infusion services provided.  Additional revenues are acquired throughbiopharmaceutical and pharmaceutical product distribution and support servicesunder contracts with retail pharmacies for which we receive related service fees.

 

Priorto December 2, 2005, our Specialty Infusion business unit offered Synagis®through injections to patients infected with respiratory syncytial virus, orRSV.  On December 2, 2005, we soldto ProCare Pharmacy Inc. and ProCare Pharmacy Direct, Inc. (collectively, “ProCare”)for $1.75 million in cash certain personal property, licenses, permits,contracts, leases and patient files related to our specialty injectable andoral medications business, including Synagis®.  In addition, ProCare assumed all liabilitiesand obligations related to the operation of the specialty injectable and oralmedications business and the purchased assets arising after the consummation ofthe sale.  We agreed not to engage in thebusiness of providing Synagis® in any territory covered by thepurchased assets for three years after the closing.  See Note 5 of Notes to ConsolidationFinancial Statements included elsewhere in this Annual Report on Form 10-Kfor additional information regarding this sale.

 

Financialinformation with respect to the Specialty Infusion business unit, includinginformation concerning revenues, operating (loss) profit from continuingoperations and total assets may be found under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and in Note 17 ofNotes to Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K.

 

**Specialty Infusion - Disease Marketsand Products**

 

As aspecialty infusion company, we focus on high-margin infused therapies thatrequire complex clinical management.  Thespecialty infusion industry, which is a hybrid of the specialty pharmacy andtraditional home infusion industries, has evolved as the approval and demand ofnew biopharmaceutical and pharmaceutical products has expanded.  These specialty products are expensive,require temperature-sensitive storage and delivery, patient education, trainingand monitoring of their proper use and require the patient to inject or infusethe product.  

 

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Intravenouslyadministered therapies tend to be more complex and potent than oral orinjectable drugs.  Our core servicesrequire patient training, specialized equipment and clinical monitoring by ateam of pharmacists, nurses, dietitians and support staff.  Our specialty infusion offeringdifferentiates itself by specializing in complex therapies delivered by a localteam of clinicians and support staff who provide a continuum of care focused onpatient satisfaction, cost savings and positive clinical outcomes.

 

Forthe year ended December 31, 2005, the Specialty Infusion business unitrecorded the majority of its revenues from three disease states:  hemophilia (approximately 38%) for which weprovide both factor VIII and factor IX blood-clotting products, immune systemdisorders (approximately 10%) which are typicallytreated with IVIG and infectious diseases (approximately 17%) for which weprovide antibiotics.  Additionalinformation with respect to the Specialty Infusion business unit’s revenuesfrom disease states may be found under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included elsewhere in thisAnnual Report on Form 10-K.  Anoverview of the disease states we service and products we offer follows.

 

*Hemophilia.*  Hemophilia is a genetically inherited andcurrently incurable bleeding disorder resulting from a deficiency in thebloodstream of a plasma protein, called factor, which helps the blood toclot.  This blood-clotting factor isessential in helping to cease the bleeding after a cut or injury and preventingspontaneous bleeding.  There are twotypes of hemophilia:  hemophilia A andhemophilia B.  Hemophilia A, whichrepresents approximately 80% of the hemophiliac population, is the result of adeficiency of factor VIII, while hemophilia B is the result of a deficiency offactor IX.  The greater the deficiency ofthese plasma proteins, the greater the severity of the disease, measured as mild,moderate or severe.

 

It isestimated that there are approximately 18,000 persons, predominantly male, inthe United States that suffer from hemophilia and that about seven out of tensuffer from a severe form of the disease. Treatment of hemophilia involves intravenously infusing the missingclotting factor in order to replace deficientproteins.  The two types of clottingfactor available are non-recombinant, made from human blood plasma, andrecombinant which is laboratory produced. Patients with severe hemophilia may require multiple injections ofclotting factor per week.  Patients withless severe forms of hemophilia may only require clotting factor treatmentafter bleeding starts or before participating in an activity having a high riskof injury.  Our Specialty Infusionbusiness unit provides hemophilia patients with both factor VIII and factor IXblood-clotting products under prescription from a physician.

 

*Infectious diseases.*  Anti-infective therapy involves theinfusion of antibiotic, antiviral and antifungal medications for the treatmentof a variety of infections, such as osteomyelitis (bone infections), bacterialendocarditis (infection of the heart valves), wound infections, infectionsassociated with HIV/AIDS, cancer and post-kidney transplant treatmentprotocols.  Anti-infective drugs are moreeffective when infused directly into the patient’s blood as compared to oralingestion.  Once discharged from ahospital, a vast majority of patients utilizing the anti-infective therapyrequire daily treatment for approximately three to four weeks.  Our Specialty Infusion business unit, inaddition to offering a full range of pharmaceutical services, also offers nursevisitations to the patient’s home to educate, train and monitor the patient.

 

*Immune system disorders.*  The immune system acts as a natural defensesystem that recognizes foreign substances, such as bacteria and viruses, asbeing different from the body’s own tissues. A healthy immune system allows the body to fight off infections while anunhealthy immune system, or immune system disorder, reduces the body’s ability tofight off infections.  Some immunedisorders occur when the body treats its own tissues and cells as if they wereforeign, prompting the immune system to produce antibodies that destroy thosetissues and cells.  Most of thesedisorders are progressive in nature and, therefore, cannot be cured.  Treatment of immune disorders typicallyconsists of intravenous infusion of immune globulins which are concentratedlevels of antibodies derived from pooled human plasma designed to strengthenthe immune system.  Clinical oversight isgenerally necessary for injecting immune globulins due to the high toxicitylevel, length of treatment and the potential for a negative reaction to theinfusion.  Our Specialty Infusion businessunit operates ambulatory infusion suites in some of its branch pharmacies andoffers nurse visitation to the home to administer infusions to the patientthere.

 

*Nutritional Support.*  Certain diseases, such as inflammatory boweldisease, short bowel syndrome, pancreatitis or other gastrointestinal illnessesthat prohibit oral digestion, require the patient to obtain life-sustainingnutrients through infusion.  TPN is asolution that contains one or more of the following:  amino acids, dextrose, fatty acids,electrolytes, trace elements, minerals and vitamins.  Accordingly, TPN is mixed for each patientspecifically and requires a high 

 

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degree of pharmacymanipulation.  TPN therapy is alsoutilized to augment the nutritional status of patients with cancer, hyperemesisand eating disorders.  Certain patientsrequire TPN for life, while others may only need short-term therapy.  Our Specialty Infusion business unit offersnutritional assessments, clinical pharmacy consultants, nurse visitations tothe patient’s home, patient education, blood draws and patient monitoring.

 

*Cancer.* Chemotherapy, the use of drugs to treat cancer, works by seeking out anddestroying fast-growing cells.  However,chemotherapy not only attacks cancer cells, but also healthy cells which areneeded for strength.  One of the commonside effects of chemotherapy, and the most prevalent, is anemia which occurswhen the body does not have enough red blood cells.  Red blood cells carry hemoglobin, whichtransports oxygen to cells and organs. Once depleted of red blood cells, the body is then unable to adequatelytransport oxygen and fatigue results, stealing the physical and emotionalstrength needed to fight cancer.  Anemiaaffects up to two out of three chemotherapy patients.  Another side effect of chemotherapy is asevere drop in infection-fighting white blood cells, a condition calledneutropenia.  About half of cancer chemotherapypatients develop neutropenia, placing them at risk for life-threateninginfections which may require hospitalization and can delay chemotherapytreatment and reduce its effectiveness. Our Specialty Infusion business unit provides chemotherapeutic regimensfor cancer treatments, anti-infective therapy for infections associated withcancer treatments, TPN for nutritionally compromised cancer patients and otheradjunctive chemotherapy treatments, such as Epogen®, Procrit®and Neupogen® to treat red and white blood cell deficiencies.

 

*Rheumatoid arthritis.*  Rheumatoid arthritis is a chronicinflammatory disease of the synovium, or lining of the joint, that results inpain, stiffness, swelling, deformity and loss of function in the joints ascartilage and bone is destroyed.  Thisinflammation is most common in the hands and the feet.  It is estimated that approximately 2.1million people in the United States, or 1% of the population, have rheumatoidarthritis.  The treatment of rheumatoidarthritis involves specialty biopharmaceuticals and pharmaceuticals.  Our Specialty Infusion business unit providesspecialty anti-inflammatory biopharmaceuticals to treat the symptoms ofrheumatoid arthritis, such as Enbrel®, generally taken several timesweekly, and Remicade®, an infused therapy generally taken bi-monthlyand administered in a physician’s office, the patient’s home or in one of ourlocal ambulatory infusion suites.

 

*Hepatitis C.*  Hepatitis C is a blood-borne infection thatcan attack and damage the liver.  Thehepatitis C virus is spread predominately through contact with infected bloodand can lead to cirrhosis, liver cancer or liver failure.  Hepatitis C is characterized by a consistentelevation of liver enzymes and is the principal reason for liver transplant.  The virus affects an estimated four millionpersons in the United States; however, with proper treatment, about 40% - 80%of all patients can now be cured.  OurSpecialty Infusion business unit provides hepatitis C treatments such asPEG-Intron®, Rebetron® and Rebetol®.

 

*Multiple sclerosis.*  Multiple sclerosis is a chronic disease ofthe central nervous system for which neither a cause nor a cure is currentlyknown.  The central nervoussystem is made up of nerves that act as the body’s messenger system.  Nerves are protected by substances calledmyelin, which insulate the nerves and aid in the transmission of nerveimpulses, or messages between the brain and other parts of the body.  In patients with multiple sclerosis, the body’simmune cells enter the brain and spinal cord and attack the protective myelincovering.  Once the myelin is gone andreplaced with scar tissue, a process called demyelination, nerve impulses sentthroughout the central nervous system can become disrupted.  The brain then becomes unable to properlysend and receive messages.  The type andseverity of multiple sclerosis varies by the location and the extent ofdemyelination.  It is estimated thatmultiple sclerosis affects approximately 2.5 million people worldwide,including 400,000 Americans.  In recentyears, the U.S. Food and Drug Administration (“FDA”) approved severalbiopharmaceutical and pharmaceutical products that have been shown to help slowthe progression of multiple sclerosis, including Avonex®, Betaseron®,Copaxone® and Rebif®.

 

**Specialty Infusion - ProductDistribution**

 

Wedistribute our products by specialized delivery services, includingrefrigerated delivery and expedited overnight mail or courier.  Our products are shipped from our variouswholesale or retail pharmacies and include the drugs, educational materials andany supplies necessary for the patient to administer themedication.  In addition, the SpecialtyInfusion business unit provides intravenous infusion services to patients intheir home by an experienced team of clinical professionals or in our ambulatoryinfusion suites located in some of our branch pharmacies.

 

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**Specialty Infusion - ProductSuppliers**

 

Wepurchase products directly from manufacturers and wholesale distributors.  The majority of our hemophilia-relatedproducts is purchased from five suppliers with whom we have supply arrangementsand our IVIG and other products from multiple suppliers.

 

Someof the products that we distribute, such as factor VIII blood-clotting productsand IVIG products, have experienced shortages in the past due to the inabilityof suppliers to increase production to meet rising global demand.  Although such shortages have ended, demandcontinues to grow.  We are currentlyexperiencing allocation restrictions of IVIG products.  We currently have a contract to purchase asubstantial amount of various pharmaceuticals that will expire in August 2006,one contract to purchase a substantial amount of factor that will expire in December 2006and another contract to purchase medical supplies that will expire in March 2007.  While we cannot be certain, we believe thatunder our arrangements with suppliers, we will have adequate supply of theproducts we offer, other than IVIG, to serve our existing patients and to addnew patients in 2006.

 

**Specialty Infusion - Strategy**

 

Thestrategy of our Specialty Infusion business unit is to achieve same store salesgrowth by continuing to focus on our core therapies (hemophilia clottingfactor, IVIG,anti-infective therapy and TPN) with which we havesignificant clinical experience, delivery capabilities and strong payorrelationships.  As of December 31,2005, we operated 46 locally-based full service pharmacies where we endeavor todeliver positive clinical outcomes through locally-based clinical teamscomprised of Company-employed pharmacists, nurses, dietitians and otherexperts.  We continue to leverage andbuild upon our approximately 485 local, regional and national payorrelationships.  Utilizing our localpresence, we plan to further expand our existing relationships and cultivatenew opportunities with physician and hospital referral sources.  We will expand into new disease states thatrequire high-touch, local distribution, similar to our core therapies.  We will use scale and clinical expertise tocompete against both local and national competitors in the fragmented specialtypharmacy and home infusion markets.  Wealso expect to grow by opening new locations that leverage our corporateinfrastructure and state-level regulatory expertise and contacts.  Additionally, we may selectively acquirecomplementary businesses that we believe will expand our service and productofferings and our customer base, deepen our penetration in existing markets andincrease our operating leverage.

 

**SpecialtyInfusion – Marketing**

 

Wehave assembled an industry-experienced sales force to execute our growthstrategy.  As of December 31, 2005,we had more than 85 Specialty Infusion sales and service representatives, 31of whom are exclusively dedicated to servicing the hemophilia community.  Our dedicated hemophilia sales and servicerepresentatives are responsible for distributing patient education materials,providing product inventory support, ensuring patient compliance according totheir diagnoses and increasing the patient base they serve.  The majority of our Specialty Infusion salesforce is focused on selling our complete portfolio of core therapies directlyto physicians, case managers and other patient influencers.  They are responsible for enhancing existingrelationships while developing new referral sources.  Through our dedicated contracting department,we continue to expand upon existing managed care relationships while adding newcontracts.

 

**Specialty Infusion - Payors**

 

As of December 31,2005, the Specialty Infusion business unit had approximately 485 payorcontracts.  We typically contract withlarge health maintenance organizations, major healthinsurers, government agencies and physician practices.  The following provides approximate percentagesof our Specialty Infusion business unit’s patient revenues for the years ended December 31:

 

| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Private payors |       | 65.2     | %          | 58.5     | %          | 40.6     | %          |
| Medicaid       |       | 24.5     | %          | 32.4     | %          | 50.6     | %          |
| Medicare       |       | 10.3     | %          | 9.1      | %          | 8.8      | %          |

 

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**Specialty Infusion - Reimbursement**

 

Theprofitability of our Specialty Infusion operations depends, in large part, onthe reimbursement we receive from third-party payors, including managed careorganizations and Medicare and Medicaid programs.  In recent years, competition for patients,efforts by traditional third-party payors to contain or reduce health carecosts and the increasing influence of managed care payors, such as healthmaintenance organizations, have resulted in reduced rates ofreimbursement for health care providers and suppliers.  Changes in reimbursement policies of privateand governmental third-party payors, including policies relating to Medicare,Medicaid and other federally funded programs, could reduce the amounts reimbursedto us for our products and services.

 

OurSpecialty Infusion business unit offers a local reimbursement model for all ofour products, supporting both the patient and payor.  Prior to shipping the productor administering the product in the patient’s home, our local reimbursementstaff obtains authorization from the patient’s insurer, easing the process forthe patients and avoiding billing disputes with payors which might otherwiseoccur.

 

Manygovernment payors, including Medicare (in 2004) and many state Medicaidprograms, as well as a number of private payors, pay us directly or indirectlybased upon a drug’s AWP.  Most of ourSpecialty Infusion business unit’s revenues result from reimbursementmethodologies based on the AWP of our products.  The AWP for most drugs is compiled andpublished by third-party price reporting services, such as First DataBank, Inc.,from information provided by manufacturers and/or wholesalers.  Various federal and state government agencieshave been investigating whether the published AWP of many drugs, including somethat we distribute and sell, is an appropriate or accurate measure of themarket price of the drugs.  There arealso several lawsuits pending against various drug manufacturers in connectionwith the appropriateness of the manufacturers’ AWP for a particulardrug(s).  These government investigationsand lawsuits involve allegations that manufacturers reported artificiallyinflated AWPs of various drugs to third-party price reporting services, which,in turn, reported these prices to its subscribers, including many stateMedicaid agencies who then included these AWPs in the state’s reimbursementpolicies.

 

In December 2003,the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”)was signed into federal law, providing for a Medicare prescription drug benefitand other changes to the Medicare program, including changes to paymentmethodologies for products we distribute that are covered by Medicare.  Prior to MMA, Medicare reimbursement for manyof the products we distribute was based on 95% of the products’ AWP.  Under MMA, Medicare reimbursement for many ofthe products we distribute, including most physician-administered drugs andbiologicals, was lowered to 80-85% of AWP effective January 1, 2004.  This 2004 change did not affect Medicarereimbursement for blood-clotting factor products, which continued to bereimbursed at 95% of AWP during 2004.

 

EffectiveJanuary 1, 2005, the Medicare reimbursement methodology for blood-clottingfactor products changed from an AWP-based system to one based upon ASP whichhas lowered Medicare reimbursement.  Inaddition to the payment we receive from the Medicare program for blood-clottingfactor, beginning in January 2005, we receive a separate payment of $0.14for each unit of factor furnished to Medicare beneficiaries.  It is possible that states and/or commercialpayors may adopt the new Medicare reimbursement methodology.  In addition, MMA changes the relationshipbetween the Medicare and Medicaid programs such that we may receive lessreimbursement in the future for individuals who receive benefits under both ofthese programs.

 

Inaddition to these federal initiatives, many states are also makingmodifications to the manner with which they reimburse providers of pharmacyservices.  For example, in California,where approximately 5% and 12% of our total revenues for the years ended December 31,2005 and 2004, respectively, were derived from blood-clotting productsreimbursed by California state funded health programs, the state legislature in2003 passed legislation that modified the reimbursement methodology forblood-clotting factor products under various California state funded healthprograms.  Under the new reimbursementmethodology, blood-clotting factor products are reimbursed based upon ASP, asprovided by the manufacturers, plus 20%.

 

EffectiveJune 1, 2004, Medi-Cal implemented the ASP reimbursement methodology forblood-clotting factor products which amounted to an approximate 30-40% cut fromrates previously in effect.  Theimplementation of the reduction in the reimbursement from Medi-Cal, and changesin regulations governing such reimbursement, has adversely impacted ourrevenues and profitability from the sale of products by us or by retailpharmacies to which we 

 

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provide products orservices for hemophilia patients who are Medi-Cal beneficiaries orbeneficiaries of other state funded programs for hemophilia patients.

 

InDecember, 2004, we and certain named individual plaintiffs entered into aSettlement Agreement which resolved both a lawsuit previously filed on behalfof two individual Medi-Cal recipients with hemophilia in the United StatesDistrict Court for the Eastern District of California against the State ofCalifornia relating to the implementation of the new ASP reimbursementmethodology, and a lawsuit previously filed by us in the Superior Court for theCounty of Sacramento relating to, among other things, the State of California’sfailure to comply with certain applicable federal procedural requirementsrelating to the reimbursement rates.  Inreturn for dismissal of both lawsuits, DHS agreed to process, on a prioritybasis, all pending and future Medi-Cal, California Children’s Services andGenetically Handicapped Persons Program claims submitted by us.  In addition, DHS agreed to expedite itsefforts to implement electronic billing and payment for blood-clotting factorclaims.

 

Inaddition, the California legislature approved a proposal by the Governor ofCalifornia to expand the Medi-Cal managed care program and to phase inmandatory enrollment for parents and children who are Medi-Calbeneficiaries.  The Governor’s proposalfor mandatory enrollment of seniors and disabled individuals was rejected bythe legislature, except for those individuals who may reside in an expansioncounty where a County Organized Health System (“COHS”) model is proposed.  Under the COHS model, all eligible Medi-Calbeneficiaries are mandatorily enrolled into the managed care plan, includingseniors and persons with disabilities. We understand there may be significant concern by various constituenciesover mandatory enrollment of medically fragile populations, and the outcome ofthese proposals is uncertain at this time.

 

**Specialty Infusion - Competition**

 

Weface a high degree of competition from companies in the specialty pharmacy andtraditional home infusion industry.  Ourcompetitors include traditional home infusion providers, other specialty pharmacycompanies, prescription benefit managers, retail chain pharmacies, mail orderpharmacies, physician office infusion suites and hospital basedpharmacies.  We compete in areas such asquality of service, pricing, reliability and availability of pharmacists andpatient service representatives.  Toremain competitive, our Specialty Infusion business unit must maintain strongrelationships with physicians, hospitals, payors, patients and manufacturers.

 

**WOUND CARE MANAGEMENT BUSINESS UNIT**

 

OurWound Care Management business unit is a leading provider of wound caremanagement services that manages, on behalf of hospital clients,a nationwide network of Wound Care Center® programs that offer acomprehensive range of services for treatment of chronic wounds.

 

Financialinformation with respect to the Wound Care Management business unit, includinginformation concerning revenues, operating profitfrom continuing operations and total assets may be found under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andin Note 17 of Notes to Consolidated Financial Statements included elsewhere inthis Annual Report on Form 10-K.

 

**Wound Care Management - Market**

 

*Market overview.*  Chronic wounds are common in patients withdiabetes and venous stasis disease, as well as patients who are immobilized andafflictedwith pressure sores.  A chronic woundgenerally is a wound which shows no signs of significant healing in four weeksor has not healed in eight weeks.  Thehealing of a wound is dependent upon adequate blood flow to stimulate new cellgrowth and combat infection.  Whenadequate blood flow does not occur, the healing process is retarded, oftenresulting in a chronic wound that can last for months or years.  Without effective treatment, a chronic woundmay lead to more severe medical conditions, such as infection, gangrene andamputation, which are costly to payors and impede the quality of life for thepatient.

 

*Traditional approach to chronic wound care.*  Traditional chronic wound care treatment,which is typically administered by a primary care physician, relies principally oncleansing and dressing the wound, controlling infection with antibiotics andprotecting the wound.  For example,topical or oral antibiotics are administered to decrease the bacterial count inthe wound, protective dressings are used to decrease tissue trauma and augmentrepair and various 

 

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topical agents areapplied that chemically cleanse the wound and remove wound exudate.  These passive treatments do not directlystimulate the underlying wound healing process. In many cases, the patient may have to see a number of health careprofessionals before effective treatment is received.  In addition, under this traditional caremodel, patients must manage their own care, which often leads to non-complianceand treatment failure which may lead to infection, gangrene andamputation.  Although wound care programshave begun to evolve to more specialized and aggressive treatment regimens, webelieve that a significant medical need and market opportunity exists forproducts and services that improve and accelerate the wound healing process.

 

**Wound Care Management - The CurativeApproach to Chronic Wound Care**

 

OurWound Care Management ProgramSM is a comprehensive array of diagnostic and therapeutictreatment regimens with all the components of care necessary to treat chronicwounds.  The Wound Care ManagementProgramSM isadministered primarily through a nationwide network of Wound Care Center®programs.  We believe the Wound CareManagement ProgramSMprovides a better approach to chronic wound management than the traditionalapproach, which we believe lacks a comprehensive solution, effectivetechnology, positive outcomes and cost efficiency.  Each Wound Care Management ProgramSM offers its patients aninter-disciplinary team of health care professionals, typically includinggeneral and specialty surgeons and a medical director, nurse, case manager,nutritionist and endocrinologist.

 

Inmost cases, patients arriving at a Wound Care Center® program havebeen treated with traditional wound healing techniques but continue to sufferfrom chronic wounds.  In some cases,patients come to a Wound Care Center® program after they havereceived an opinion from their primary physician that limb amputation may berequired.  After being treated under ourWound Care Management ProgramSM, for the quarter ended December 31, 2004, 101 outof 114 patients who were recommended for amputation, or approximately 88% didnot require a limb amputation.  WoundCare Management believes that this demonstrates the impact that the Wound CareManagement business unit’s Wound Management ProgramSM has on reducing health care costs and improving the qualityof life.  Upon the commencement oftreatment under our Wound Management ProgramSM, medical personnel conduct a systematic diagnosticassessment of the patient.  Specializedtreatment plans are then established for the patient, based on the underlying causeof the wound and the unique status of the patient.  After the assessment phase, the course oftreatment in the Wound Management ProgramSM may include revascularization, infection control, wounddebridement, skin grafting, nutrition, protection devices, patient education,referrals and effective management of care through patient/providercommunications.

 

Tomeasure the effectiveness of our Wound Management ProgramSM, we have developed afunctional assessment scoring system to measure the healing of a wound.  Under this system, a chronic wound isassessed when (i) it is less than 100% epithelialized (i.e., the wound iscovered by a membranous cellular tissue that covers and protects a wound as itheals) and requires a dressing, (ii) it is completely covered byepithelium (i.e., a membranous cellular tissue that covers and protects a woundas it heals) but still requires intervention and dressing, (iii) maturingskin is present, but the wound requires a protective dressing and (iv) matureskin requires preventive care only.  Wehave a proprietary database of patient outcomes that has been collected since1988 containing over 534,000 patient records as of December 31, 2005 whichindicate an overall healing rate of approximately 89% for patients completingtherapy for the quarter ended December 31, 2005.

 

**Wound Care Management - Strategy**

 

Theobjective of our Wound Care Management business unit is to enhance its positionas a leading disease management company in the chronic wound care market.  Its growth strategy is to continue to improveand refine the Wound Management ProgramSM while broadening its deliverymodels to cover the entire continuum of care for wound management.  Key elements of this strategy include:

 

*Continue to develop Wound Care Management business unit’snationwide network of outpatient Wound Care Center® programs.*  We intend to continue pursuing additionaloutpatient Wound Care Center® programs on or near the campuses ofacute care hospitals.  Since December 2003,the total number of net programs contracted and operating increased from 94 to109 as of the end of 2005.  Contractterminations have been effected for such reasons as reduced reimbursement,financial restructuring, hospital bankruptcies or closings.  Additionally, we believe that hospitalschoose to terminate or not renew contracts based upon decisions to terminateour programs or to operate them internally. As of December 31, 2005, Wound Care Management managed 103operating outpatient Wound Care 

 

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Center®programs and believes there is opportunity for growth.  We believe hospitals are continually seekinglow-cost, high-quality solutions to wound management, such as those provided byWound Care Management.  In addition, webelieve the Wound Management ProgramSM enables its hospital clients to differentiate themselvesfrom their competitors through better wound care treatment outcomes, reducedcosts due to decreased inpatient lengths of stay and increased revenue throughthe introduction of new patients.  As aresult, we believe there is a significant opportunity for Wound Care Managementto continue to expand its Wound Care Center® programs throughaffiliation with acute care hospitals.

 

In2002, we signed a multi-year contract with VHA, Inc. (“VHA”), acooperative representing more than 2,200 leading community-owned health careorganizations and their affiliated physicians. Under this agreement, which was renewed in November of 2005, weoffer wound management services to VHA members which comprise 25% of thecommunity-owned hospitals in the United States, including many of the nation’slargest and most respected institutions.

 

*Develop new service models to enhance market penetration.*  We are actively developing new service modelsin new health care delivery settings, such as inpatient programs for acute carehospitals and long-term care facilities (e.g., nursing homes and long-termacute care hospitals).  These new servicemodelsare being operated as a service to existing hospital customers and serve toexpand the continuum of wound care services. Pressure sores, the most common form of a chronic wound, usually occuramong nursing home, acute care and home care patients due to the sedentary lifestyleassociated with those care settings.  Aswe further develop our inpatient service models, we believe we will become morecapable of penetrating the large pressure sore market, as acquired wounds arereceiving increased scrutiny in post-acute and acute care quality requirements.

 

*Provide a comprehensive managed care product.*  We believe that wound care represents asignificant cost to managed care organizations and that Wound Care Managementhas the ability to provide a variety of services to managed care payors.  These services may include, among others,case management, accreditation services and other tools necessary toeffectively manage wound care patients. With its Wound Management ProgramSMand increasing presence in multiple health care delivery settings, Wound CareManagement can offer managed care payors a relationship which we believe willprovide better patient healing outcomes, patient satisfaction and morecost-effective services for subscribers.

 

*Enhance our Wound Management Program*SM*.*  Our Wound CareManagement business unit currently offers a unique Wound Management ProgramSM which includes assessment,vascular studies, revascularization, infection control, wound debridement,growth factor therapy, skin grafting, nutrition, protection devices, patienteducation, referrals and effective management of care through patient/providercommunications.  Wound Care Management iscontinually exploring and seeking advances in wound care management servicesand products which could enhance its current Wound Management ProgramSM.  We are actively pursuing such advancesthrough the continuous development of our current services and co-marketingarrangements with other providers of wound care products and services.  Wound Care Management’s current serviceofferings include furnishing hyperbaric oxygen services to interested hospitalpartners, forming alliances with companies marketing new wound caretechnologies and developing clinical research capabilities for the Wound CareCenter® network.

 

**WoundCare Management - Wound Care Operations**

 

WoundCare Management’s wound care operations offer health care providers theopportunity to create specialty wound care departments designed to meet theneeds of chronic wound patients.  Theinitial focus of Wound Care Management’s wound care operations has beenhospital outpatient Wound Care Center® programs.  Wound Care Management is currently expandingits programmatic approach to wound care to inpatient settings, such as acutecare hospitals and long-term care facilities. In these settings, Wound Care Management offers an inter-disciplinaryapproach to the treatment of chronic wounds in the inpatient settings tocomplement existing hospital Wound Care Center® programs.

 

*Hospital outpatient Wound Care Center® programs.*  Outpatient Wound Care Center®programs, located on or near the campuses of acute care hospitals, representWound Care Management’s core business.  Atypical hospital outpatient Wound Care Center® consists ofapproximately 2,500 square feet of space, comprised of four to eight exam rooms, a nursingstation and physician and administrative offices.  These Wound Care Center® programsare designed to deliver 

 

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all necessary outpatientservices for the treatment of chronic wounds, with the hospital providing anyinpatient care such as revascularization or surgical debridement.

 

WoundCare Management currently offers its hospital clients two outpatient Wound CareCenter® models:  a managementmodel and an “under arrangement” model, with a primary focus on developingmanagement models.  The differencesbetween these two models relate primarily to the employment of the clinicalstaff at the Wound Care Center® program.  In the management model, generally our onlyemployee at the Wound Care Center® program is the center’s ProgramDirector, and Wound Care Management generally receives a fixed monthly managementfee or a combination of a fixed monthly management fee and a variable casemanagement fee.  In the “underarrangement” model, we employ most or all of the clinical and administrativestaff (other than physicians) at the Wound Care Center® program, andstructure our fees similarly to those of the management model with theexception of inclusion of fees to cover additional employee costs.  In all other material respects, the twomodels are identical.  In both models,physicians remain independent contractors, and Wound Care Management recruitsand trains the physicians and staff associated with the Wound Care Center®program.  The physicians providing servicesat a Wound Care Center® program are recruited by Wound CareManagement, primarily from among the doctors who work at the hospital andpractice in related areas.  In addition,in both models, Wound Care Management’s field support departments provide thestaff at each Wound Care Center® program with clinical oversight,quality assurance, reimbursement consulting, community education and marketing,a proprietary database, training and general administrative supportservices.  The terms of Wound Care Management’scontract with each hospital are negotiated individually.  Generally, in addition to the management feesdescribed above, the contracts provide for development fees charged to thehospital.  In both models, the hospitaland the physician bill the patient for the services provided and areresponsible for seeking reimbursement from insurers or other third-partypayors.

 

Thefirst Wound Care Center® program opened in 1988, and, as of December 31,2005, there were 109 hospital outpatient Wound Care Center® programsin operation or under contract in approximately 30 states.  In addition, in 2005, Wound Care Managemententered into contracts with 18 hospitals to open additional Wound Care Center®programs.  Wound Care Management’shospital client base ranges from medium-sized community-based hospitals tolarge hospitals affiliated with national chains and not-for-profit hospitals inlocal markets.  Wound Care Managementselects hospital clients based on a number of criteria.  A suitable hospital client typically canaccommodate at least 100 inpatient beds, has a primary and secondary marketpopulation greater than 100,000 people, offers services which complement theWound Management ProgramSM,including physician specialists in the areas of general, plastic and vascularsurgery, endocrinology and diabetes, is financially stable and has a solidreputation in the community it serves. Of Wound Care Management’s 109 hospital outpatient Wound Care Center®programs, 105 are management model centers and 4 are “under arrangement” modelcenters.

 

Inexpanding its product offering, Wound Care Management furnishes hyperbaricoxygen therapy (“HBO”) services to interested hospital partners operatingoutpatient Wound Care Center® programs.  These services generally include furnishingHBO chambers and managing the program. As of December 31, 2005, there were 28 HBOprograms in operation or under contract complementing existing hospitaloutpatient Wound Care Center® programs of which 22 were operatingand 6 were under contract.

 

*Inpatient wound care programs.*  Wound Care Management is addressing the needsof the inpatient wound care market through the development of new inpatientprograms.  These patients often havepressure sores resulting from inactivity. While not typically as severe as diabetic or venous stasis ulcers,pressure sores represent the largest segment of the chronic wound market.  Wound Care Management has developed aninpatient program for its affiliated acute care hospitals that is directed atassisting those hospitals in identifying and managing inpatients in the acutecare hospital that are at risk of acquired wounds or who already suffer fromchronic wounds.  The program is primarilydirected at reducing the length of stay of those patients in the acute caresetting and related wound care costs. Wound Care Management has also developed a Wound Outreach Program,whereby a nurse practitioner or physician assistant from an affiliatedoutpatient Wound Care Center® program provides wound-relatedservices to long-term care facilities in surrounding areas.  As of December 31, 2005, Wound CareManagement had contracts to manage 32 such inpatient programs at existingacute-care hospital customers of which 23 were operating.  Further, as of December 31, 2005, WoundCare Management had contracts to manage 25 programs that provide outreach woundcare services to local long-term care facilities.  There can be no assurance that these programswill be successful in the future.

 

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*Contracts terms and renewals.*  Substantially all of the revenues of theWound Care Management business unit are derived from management contracts withacute care hospitals.  The contractsgenerally have initial terms of three to five years and many have automaticrenewal terms unless specifically terminated. The contracts often provide for early termination either by the clienthospital, if specified performance criteria are not satisfied, or by Curativeunder various other circumstances. Historically, some contracts have expired without renewal, and othershave been terminated by Wound Care Management or the client hospital forvarious reasons prior to their scheduled expiration.  During 2005, two hospital contracts expiredwithout renewal, and an additional four hospital contracts were terminated bythe client hospital prior to their scheduled expiration.  Generally, Wound Care Management elects tonegotiate a mutual termination of a management contract if a client hospitaldesires to terminate the contract prior to its stated term.  Wound Care Management believes that therewere a number of reasons why hospitals chose to terminate their contract,including hospital financial difficulties and the Medicare reimbursementchanges which reduced hospital revenues. The continued success of the Wound Care Management business unit issubject to its ability to renew or extend existing management contracts andobtain new management contracts.  Webelieve that hospitals choose to terminate or not to renew contracts based ondecisions to terminate their wound care programs or to convert their programsfrom independently-managed programs to programs operated internally.  There can be no assurance that any hospitalwill continue to do business with Wound Care Management following theexpiration of its management contract or earlier, if such management contractis terminable prior to expiration.  Inaddition, any changes in the Medicare program or third-party reimbursement levels,which generally have the effect of limiting or reducing reimbursement levelsfor health services provided by programs managed by Wound Care Management,could result in the early termination of existing management contracts andwould adversely affect the ability of Wound Care Management to renew or extendexisting management contracts and to obtain new management contracts.  The termination or non-renewal of a materialnumber of management contracts could harm our business.

 

*Managed care operations.*  Wound Care Management’s managed care strategyis currently focused on marketing Wound Care Center® programservices to local managed care organizations in concert with its hospitalclients’ efforts to promote all hospital-based services to such managed careorganizations.  Wound Care Managementseeks to establish relationships with managed care organizations and otherdisease management companies to provide wound care services.  Wound Care Management’s contractualarrangements with managed care organizations and other disease managementcompanies, which will vary based upon the needs of the particular customer, areexpected to provide for Wound Care Management to receive compensation on afee-for-service, fixed-case rate or at-risk capitation basis.  While Wound Care Management anticipates thatmost of its managed care contracts will be fee-for-service or case-ratecontracts, it expects that at-risk capitation could become a contractingmethod.

 

WoundCare Management has developed tools to help managed care organizations andother disease management companies assess their current wound care experiences(both clinical results and costs) against our Wound Management ProgramSM in order to demonstrate that awound care carve-out product can provide added value.  To date, Wound Care Management has been unsuccessfulin establishing managed care or disease management relationships.

 

WoundCare Management’s managed care operations have been limited.  Although Wound Care Management or itshospital clients have been reimbursed for wound treatmentby a number of managed care organizations on a case-by-case basis, Wound CareManagement currently has no contracts that require or offer incentives tosubscribers to use Wound Care Management’s wound care services.  There can be no assurance that Wound CareManagement will be able to successfully expand its managed care operations.

 

**Wound Care Management - CommunityEducation and Marketing**

 

WoundCare Management’s community education and marketing strategy consists of atwo-fold approach involving the development of new wound care programs as wellas the growth in operating Wound Care Center® programs.  The professional community educationcomponent is locally managed and conducted by the WoundCare Center® Program Directors under the supervision of the RegionalManagers with support from Community Education Managers.  The primary community education efforts aredirected at physicians and other health care professionals to expand communityawareness of the Wound Care Center® program services.

 

Inaddition, community education marketing plans are developed each year at eachWound Care Center® program. The development and execution of the plan is the responsibility of theProgram Director at the Wound Care Center® along with the CorporateMarketing Department.  The plan detailsthe anticipated marketing for the year and may 

 

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include radio and printadvertising as well as professional symposiums and other communityeducation.  Wound Care Management marketsthe Wound Care Center® program concept to hospitals as a therapeutic“Center of Excellence.”  Wound CareManagement believes that having a Wound Care Center® program candifferentiate a hospital from its competitors and can increase the hospital’srevenues through the introduction of new patients, which leads to an increasein appropriate ambulatory surgeries, X-rays, laboratory tests and inpatientsurgeries such as debridements, vascular surgeries and plastic surgeries.

 

WoundCare Management’s efforts to develop new wound management programs is theresponsibility of the Directors of Business Development, whose primary role is thedevelopment of new wound care programs with acute care hospitals.  As of December 31, 2005, Wound CareManagement had four Directors of Business Development.

 

**Wound Care Management – Third-PartyReimbursement**

 

WoundCare Management, through its wound care operations, provides contractualmanagement services for fees to acute care hospitals and other health careproviders.  These providers, in turn,seek reimbursement from third-party payors, such as Medicare, Medicaid, healthmaintenance organizations and private insurers, for clinical services renderedto patients insured by these payors.  Theavailability of reimbursement from such payors has been asignificant factor in Wound Care Management’s ability to increase its revenuestreams and will be important for future growth.

 

Eachthird-party payor formulates its own coverage and reimbursements policies.  Although we have not, and we believe that ourclients have not, in general experienced difficulty in securing third-partyreimbursement for Wound Care Center® program services, somehospitals have experienced denials, delays and difficultiesin obtaining such reimbursement.  To ourknowledge, no widespread denials have been received by hospitals regardingreimbursement for Wound Care Center® program clinical services.  We discuss coverage and reimbursement issueswith our hospital clients and third-party payors on a regular basis.  Such discussions will continue as we seek toassure sufficient payments from third-party payors to our hospital customersfor services managed by us so that our hospital customers and potentialcustomers find it financially feasible to renew contracts or enter into contractswith Wound Care Management.  Although noindividual coverage and reimbursement decision is material to us, a widespreaddenial of reimbursement coverage for clinical services provided in the WoundCare Center® programs could have a material adverse effect on ourbusiness, financial position and results of operations.

 

As aresult of the Balanced Budget Act of 1997, the Centers for Medicare &Medicaid Services (“CMS”) implemented the Outpatient Prospective Payment Systemfor most hospital outpatient department services furnished to Medicare patientsbeginning August 2000, under which a predetermined rate is paid to eachhospital for clinic services rendered, regardless of the hospital’s cost.  We believe the new payment system does notprovide comparable reimbursement for services previously reimbursed on areasonable cost basis, and we believe the payment rates for many services areinsufficient for many of our hospital customers, resulting in revenue andincome shortfalls for the Wound Care Center® programs we manage onbehalf of the hospitals.  As a result,during 2004, we renegotiated and modified many of our management contractsrelated to our Wound Care Management business unit, which has resulted inreduced revenue and income to us from those modified contracts and, in numerouscases, contract termination.  We expectthat contract renegotiation and modification with many of our hospitalcustomers will continue, and this could result in reduced revenues and incometo us from those contracts and even contract terminations.  These results could have a material effect onWound Care Management’s business, financial condition and results ofoperations.

 

TheWound Care Center® programs managed by our Wound Care Managementbusiness unit on behalf of acute care hospitals are generally treated as “providerbased entities” for Medicare reimbursement purposes.  This designation is required for thehospital-based program to be covered under the Medicare outpatientreimbursement system.  Although webelieve that the programs we manage substantially meet the current criteria tobe designated “provider based entities,” a widespread denial of suchdesignation could harm our business.

 

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**Wound Care Management - Competition**

 

Ourprincipal competition in the chronic wound care market consists of specialtyclinics that have been established by some hospitals or physicians.  Additionally, there are a number of privatecompanies which provide wound care services through an HBO program format.  In the market for disease management productsand services, we face competition from other disease management entities,general health care facilities and service providers, biopharmaceuticalcompanies, pharmaceutical companies and other competitors.  Many of these companies havesubstantially greater capital resources, marketing staffs and experience incommercializing products and services than we have.  In addition, recently developed technologies,or technologies that may be developed in the future, are or may be the basisfor products which compete with our chronic wound program.  There can be no assurance that we will beable to enter into co-marketing arrangements with respect to these products orthat we will be able to compete effectively against such companies in thefuture.

 

**GOVERNMENT REGULATION**

 

Ouroperations and the marketing of our services are subject to extensiveregulation by numerous governmental authorities in the United States, bothfederal and state.  We believe that we arecurrently in substantial compliance with applicable laws, regulations andrules.  However, there can be noassurance that a governmental agency or a third party will not contend thatcertain aspects of our business are subject to or are not in compliance withsuch laws, regulations or rules or that the state or federal regulatoryagencies or courts would interpret such laws, regulationsand rules in our favor.  Thesanctions for failure to comply with such laws, regulations or rules couldinclude denial of the right to conduct business, significant fines and criminaland civil penalties.  Additionally, anincrease in the complexity or substantive requirements of such laws,regulations or rules could have a material adverse effect on our business.

 

Any changein current regulatory requirements or related interpretations by, or positionsof, state officials in states where we operate could adversely affect ouroperations within those states.  Instates where we are not currently located but where we may operate in thefuture, we intend to utilize the same approaches adoptedelsewhere for achieving state compliance. However, state regulatory requirements could adversely affect ourability to establish operations in such other states.

 

Variousstate and federal laws and agencies regulate providers of health care servicesand suppliers of biopharmaceutical and pharmaceutical products, including theproducts and services that we distribute and sell.  These laws include, but are not limited to,the following:

 

**Licensure and Registration**

 

We arerequired by various states to be licensed as an in-statepharmacy and, within most other states where we distribute prescription drugs,we are required to be licensed as an out-of-state pharmacy.

 

Inaddition, federal controlled substance laws mandate that weregister our pharmacy and repackaging locations with the federal DrugEnforcement Administration as well as conform with recordkeeping, labeling andsecurity regulations when dispensing controlled substances.

 

Webelieve that we are currently in substantial compliance with all statelicensing and registration laws applicable to our business.  However, if we are found to not be incompliance, we could be subject to fines and penalties which could have anadverse effect on our business.

 

**Fraudand Abuse Laws**

 

Theselaws, specifically the anti-kickback laws, include the fraud and abuseprovisions and referral restrictions of the Medicare and Medicaid statutes, aswell as other federally funded programs, which prohibit the solicitation,payment, receipt or offering of any direct or indirectremuneration for the referral of Medicare and Medicaid patients or forpurchasing, arranging for or recommending the purchasing, leasing or orderingof Medicare or Medicaid covered services, items or equipment.

 

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TheHealth Insurance Portability and Accountability Act of 1996 (“HIPAA”) createdviolations for fraudulent activity applicable to both public and private healthcare benefit programs and prohibits inducements to Medicare or Medicaideligible patients.

 

TheOffice of Inspector General (“OIG”) from time to time publishes itsinterpretations on various fraud and abuse issues and about fraudulent or abusiveactivities OIG deems suspect and potentially in violation of the federal laws,regulations and rules.  If our actionsare found to be inconsistent with OIG’s interpretations, such actions couldhave a material adverse effect on our business.

 

Due tothe complexity of such anti-kickback laws, HHS has established certain safeharbor regulations whereby various payment practices maybe protected from criminal or civil penalties. However, an activity that is outside a safe harbor is not necessarilydeemed illegal.

 

Violationsof these fraud and abuse laws may result in fines and penalties as well ascivil or criminal penalties for individuals or entities, including exclusionfrom participation in the Medicare or Medicaid programs.  Several states have adopted similar laws thatcover patients in both private and government programs.  Because the anti-fraud and abuse laws havebeen broadly interpreted, they limit the manner in which we can operate ourbusiness and market our services to, and contract for services with, otherhealth care providers.

 

**TheStark Law**

 

Federaland some state laws impose restrictions on the relationships between providersof health care services or products and other persons or entities,such as physicians and other clinicians, including with respect to employmentor service contracts, investment relationships and referrals for certaindesignated health services.  Outpatientprescription drugs are one of the designated services to which the Stark Lawapplies.  On March 26, 2004, CMSissued the second phase of its final regulations addressing physicianself-referrals, which became effective July 24, 2004.  We believe we have structured our operationsin an attempt to comply with these provisions. Periodically, there are efforts to expand the scope of these referralrestrictions from its application to government health care programs to allpayors and to additional health care services. Certain states are considering adopting similar restrictions orexpanding the scope of existing restrictions. There can be no assurance that the federal government, or other statesin which we operate, will not enact similar or more restrictive legislation orrestrictions or interpret existing laws and regulations in a manner that couldharm our business.

 

**ProfessionalFee Splitting**

 

Thelaws of many states prohibit physicians from sharingprofessional fees with non-physicians and prohibit non-physician entities, suchas us, from practicing medicine and from employing physicians to practicemedicine.  The laws in most statesregarding the corporate practice of medicine have been subjected to judicialand regulatory interpretation.

 

**PharmacyOperation Laws**

 

Ourpharmacies are subject to various state laws relating to pharmacy operation,including requirements regarding licensure and handling, securing, storing,labeling, dispensing, recordkeeping and reporting forpharmaceutical products, as well as patient confidentiality requirements andprohibitions on fee-splitting by pharmacies. Additionally, many state boards of pharmacy require pharmacies toprovide counseling to customers.  Ourpharmacy business marketing activities may also be regulated by the FDA,including with respect to any promotion of off-label uses of products (forindications which have not been approved by the FDA).  We believe we are in substantial compliancewith these requirements.  However, if weare found not to be in compliance, we could be subject to fines and penaltieswhich could have an adverse effect on our business.

 

**ProfessionalLicenses**

 

Statelaws prohibit the practice of medicine, pharmacy and nursing without alicense.  To the extent that we assistpatients and providers with prescribed treatment programs, a state couldconsider our activities to constitute the practice of medicine.  In addition, in some states, coordination ofnursing services for patients could necessitate licensure as a home healthagency or other licensed entity and/or could necessitate the need to uselicensed nurses to provide certain 

 

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patient directedservices.  If we are found to haveviolated state licensure laws, we could face civil and criminal penalties andbe required to reduce, restructure or even cease our business in that state.

 

**FalseClaims Act**

 

Federaland some state laws impose requirements in connection with the submission ofclaims for payment for health care services and products, including prohibitingthe knowing submission of false or fraudulent claims and submission of falserecords or statements.  Such requirementswould apply to the operations of our pharmacies and to the hospital customersto which we provide wound care management services.  Not only are government agencies active ininvestigating and enforcing actions with respect to applicable health laws, butalso health care providers are often subject to actions brought by individualson behalf of the government.  As suchsuits are generally filed under seal with a court to allow thegovernment adequate time to investigate and determine whether it will intervenein the action, implicated health care providers are often unaware of the suituntil the government has made its determination and the seal is lifted.

 

Thefederal False Claims Act (the “False Claims Act”) generally provides for theimposition of civil penalties and for treble damages, resulting in thepossibility of substantial financial penalties for smallbilling errors that are replicated in a large number of claims, as eachindividual claim could be deemed to be a separate violation of the False ClaimsAct.  Criminal provisions that aresimilar to the False Claims Act provide that if a corporation is convicted ofpresenting a claim or making a statement that it knows to be false, fictitiousor fraudulent to any federal agency, it may be fined.  Some states also have enacted statutessimilar to the False Claims Act which may include criminal penalties,substantial fines and treble damages.

 

**HIPAA - Administrative Simplificationand other State and Federal Privacy Laws**

 

TheAdministrative Simplification Provisions of HIPAA required HHS to adoptstandards to protect the security and privacy of health-relatedinformation.  In February 2002, HHSissued final rules concerning the security standards.  These rules do not require the use ofspecific technologies (e.g., no specific hardware or software is required), butinstead require health plans, health care clearinghouses and health careproviders to comply with certain minimum security procedures in order toprotect data integrity, confidentiality and availability.  These security regulations, with whichcompliance was required as of April 2005, impose on covered entitiescertain administrative, technical, and physical safeguard requirements withrespect to individually identifiable health information maintained ortransmitted electronically.

 

Theprivacy regulations, with which compliance was required as of April 2003,impose on covered entities (including hospitals, pharmacies and other healthcare providers) significant new restrictions on the use and disclosure ofindividually identifiable health information. Improper use or disclosure of identifiable health information covered byHIPAA privacy regulations can result in the following fines and/orimprisonment:  (i) civil moneypenalties for HIPAA privacy violations are $100 per incident, up to $25,000,per person, per year, per standard violated; (ii) a person who knowinglyand in violation of HIPAA privacy regulations obtains individually identifiablehealth information or discloses individually identifiable health information toanother person may be fined up to $50,000 and imprisoned up to one year, orboth; (iii) if the offense is committed under false pretenses, the finemay be up to $100,000 and imprisonment for up to five years; and (iv) ifthe offense is done with the intent to sell, transfer or use individuallyidentifiable health information for commercial advantage, personal gain ormalicious harm, the fine may be up to $250,000 and imprisonment for up to tenyears.

 

HIPAAalso required HHS to adopt national standards establishing electronictransaction standards that all health care providers must use when submittingor receiving certain health care transactions electronically.  Although these standards were to becomeeffective October 2002, Congress extended the compliance deadline until October 2003for organizations, such as ours, that submitted a request for an extension.  We have taken the appropriate actions toensure that patient data kept on our computer networks are in compliance withthese regulations.  We believe that weare substantially in compliance with the HIPAA electronic standards and arecapable of delivering HIPAA standard transactions electronically.  In addition, if we choose to distribute drugsthrough new distribution channels, such as the Internet, we will have to complywith government regulations that apply to those distribution channels, whichcould harm our business.

 

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Inaddition to HIPAA, a number of states have adopted privacy laws and/orregulations applicable to the use and disclosure of patient health informationthat are more stringent than comparable provisions under HIPAA.  If we were found to have violated one of thesestate laws, we could be subject to fines, penalties and other actions whichcould have an adverse effect on our business.

 

**OngoingInvestigations**

 

Federaland state investigations and enforcement actions continue to focus on thehealth care industry, scrutinizing a wide range of items such as joint venturearrangements, referral and billing practices, product discount arrangements,home health care services, dissemination of confidential patient information,promotion of off-label drug indications use, clinical drug research trials andgifts for patients or referral sources. We believe our current and planned activities are substantially incompliance with applicable legal requirements. There can be no assurance, however, that a governmental agency or athird party will not contend that certain aspects of our business are subjectto, or are not in compliance with, such laws, regulations or rules, or thatstate or federal regulatory agencies or courts would interpretsuch laws, regulations and rules in our favor, or that futureinterpretations of such laws will not require structural or organizationalmodifications of our existing business or have a negative impact on ourbusiness. Applicable laws and regulations are very broad and complex, and, inmany cases, the courts interpret them differently, making compliancedifficult.  Although we try to complywith such laws, regulations and rules, a violation could result in denial ofthe right to conduct business, significant fines and criminal penalties.  Additionally, an increase in the complexityor substantive requirements of such laws, regulations or rules, or reform ofthe structure of health care delivery systems and payment methods, could have amaterial adverse effect on our business.

 

**INTELLECTUALPROPERTY**

 

Oursuccess depends, in part, on our ability to maintain trade secret protectionand operate without infringing on or violating the proprietary rights of thirdparties.  In addition, we also rely, inpart, on trade secrets, proprietary know-how and technological advances whichwe seek to protect by measures, such as confidentiality agreements with ouremployees, consultants and other parties with whom we do business.  There can be no assurance that theseagreements will not be breached, that we will have adequate remedies for anybreach or that our trade secrets and proprietary know-how will not otherwisebecome known, be independently discovered by others or found to be unprotected.

 

WoundCare Center®, Wound Care Management ProgramSM, the name Critical CareSystems® and its logo and our logo with our name, Curative HealthServices®, are our trademarks. This report also includes trade names and marks of other companies.

 

**EMPLOYEES**

 

As of December 31,2005, we employed 1,292 full-time, part-time and per diem hourly employees,including skilled health care professionals such as nurses, pharmacists,hospital administrators, community –based representatives, reimbursementspecialists and patient service representatives in 46 states and the Districtof Columbia.  The Specialty Infusionbusiness unit employed 1,102 of such employees and 190 employees were employedby the Wound Care Management business unit. We believe that our relations with our employees are good.

 

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**ITEM 1A.****                    RISK FACTORS**

 

Thestatements contained in this Annual on Form 10-K include forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 (the “PSLRA”).  When used in thisAnnual Report on Form 10-K and in future filings by us with the Securitiesand Exchange 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-lookingstatements.  These statements are onlypredictions.  Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements.  Actual events or resultsmay differ materially from the results discussed in the forward-lookingstatements.

 

Thefollowing text contains cautionary statements regarding our business thatinvestors and others should consider. This discussion is intended to take advantage of the “safe harbor”provisions of the PSLRA.  Except to theextent otherwise required by federal securities laws, we do not undertake toaddress or update forward-looking statements in future filings with the SEC orcommunications regarding our business or operating results, and do notundertake to address how any of these factors may have caused results to differfrom discussions or information contained in previous filings orcommunications.  You should not placeundue reliance on forward-looking statements, which speak only as of the datethey are made.  In addition, any of thematters discussed below may have affected past, as well as current,forward-looking statements about future results so that our actual results inthe future may differ materially from those expressed in prior communications.

 

**CERTAINBANKRUTPCY CONSIDERATIONS**

 

**Under theterms of our Plan, we expect our existing shareholders’ investment to beextinguished and intend to become a “private company.”**

 

If ourPlan is confirmed and implemented, existing common stock will be cancelled andcurrent shareholders will receive no distribution or other consideration inexchange for their shares.  Furthermore, effective February 21, 2006, Curative’sexisting common stock was delisted from the NASDAQ National Market System.  Since that date, Curative’s existing commonstock has been quoted in the over-the-counter market.

 

Inconnection with the reorganization to be effected by the Plan, we intend toderegister our existing securities under the Securities Exchange Act of 1934,and become a “private company” upon our emergence from Chapter 11.  After such time, Curative’s obligation tofile reports and other information under the Securities Exchange Act of 1934,such as Forms 10-K and 10-Q, will be terminated.

 

**Operatingin bankruptcy imposes significant risks on our operations.  We cannot predict when we will confirm a planof reorganization and successfully emerge from bankruptcy.**

 

Thetiming of our emergence from bankruptcy and the terms of our emergence mayaffect our relationships with our creditors, customers, suppliers and employeesand have a significant impact on our business, financial condition and resultsof 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 balancetime and effort dealing with the reorganization and business operations at thesame time in a prolonged continuation of our Chapter 11 Cases;

 

•                  our ability to obtain additionalfinancing, either as a part of the debtor-in-possession financing or otherwise,during the pendency of our Chapter 11 Cases on commercially favorable terms;

 

•                  our ability to comply with andoperate under the terms of the debtor-in-possession financing we obtained uponfiling for bankruptcy and any cash management orders entered by the bankruptcycourt from time to time;

 

•                  our ability to pay costs forprofessional fees and other expenses associated with the Chapter 11 Cases;

 

•                  our ability to attract and retainmanagement and other key employees; and

 

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•                  our ability to maintain good customerand supplier relationships in light of developments in our bankruptcyproceedings and the terms of our emergence.

 

**We maynot be able to obtain confirmation of the Plan.**

 

Evenif we received the requisite acceptances to confirm the Plan, a number offactors could result in the Bankruptcy Court not confirming the Plan.  Even if the Bankruptcy Court determined thatthe balloting procedures and results were appropriate, the Bankruptcy Courtcould still decline to confirm the Plan if it found that any of the statutoryrequirements for confirmation had not been met, including that the terms of thePlan are fair and equitable to non-accepting classes.  Section 1129 of the Bankruptcy Code setsforth the requirements for confirmation and requires, among other things, afinding by the Bankruptcy Court that:

 

•                  the Plan “does not unfairlydiscriminate” and is “fair and equitable” with respect to any non-acceptingclasses;

 

•                  confirmation of the Plan is notlikely to be followed by a liquidation or a need for further financialreorganization; and

 

•                  the value of distributions tonon-accepting holders of claims within a particular class under the Plan willnot be less than the value of distributions such holders would receive if thedebtors were liquidated under Chapter 7 of the Bankruptcy Code.

 

**TheBankruptcy Court may determine that the Plan does not satisfy one or more ofthese requirements, in which case it would not be confirmable by the BankruptcyCourt.**

 

If thePlan is not confirmed by the Bankruptcy Court, it is unclear whether we will beable to reorganize our businesses and what, if any, distributions holders ofclaims against Curative ultimately would receive with respect to theirclaims.  If an alternative reorganizationcould not be agreed upon, it is possible that we would have to liquidate ourassets, in which case it is likely that holders of claims would receivesubstantially less favorable treatment than they would receive under the Plan.

 

Forfurther information regarding the status of our Chapter 11 Cases, please seeNote 1 of Notes to Consolidated Financial Statements included elsewhere in thisAnnual Report on Form 10-K.

 

**BUSINESSAND INDUSTRY RISKS**

 

**We areinvolved in litigation which may harm the value of our business.**

 

Inaddition to the Chapter 11 Cases discussed under the caption, “PlannedReorganization and Chapter 11 Bankruptcy Proceedings,” two of our subsidiaries,Apex and eBioCare, might be subject to potential indemnification liabilities tothree independent retail pharmacies that previously did business with us.  The indemnification claims are in connectionwith the DHS Audit related to the pharmacies’ medical billing for clottingfactor supplied to the pharmacies by Apex and eBioCare, and the pharmacies’medical billing for the anti-inhibitor product “FEIBA” supplied to thepharmacies by Apex and eBioCare.  Whileliability with respect to these claims is not certain 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 eBioCare estimate that the range ofloss may be anywhere from $0 to $39.3 million.

 

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, employment disputes andcontractual claims, the outcome of which, in our opinion, should not have amaterial adverse effect on our financial position and results ofoperations.  However, we may becomesubject to future lawsuits, claims, audits and investigations that could resultin substantial costs and divert our attention and resources.

 

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**If wefail to comply with the terms of our settlement agreement with the government,we could be subject to additional litigation or other governmental actionswhich could be harmful to our business.**

 

On December 28,2001, we entered into a settlement with the U.S. Department of Justice (“DOJ”),the U.S. Attorney for the Southern District of New York, the U.S. Attorney forthe Middle District of Florida and the U.S. Department of Health and Human Services,Office of the Inspector General, in connection with all federal investigationsand legal proceedings related to whistleblower lawsuits previously pendingagainst us in the U.S. District Court for the Southern District of New York andthe U.S. District Court for the District of Columbia.  These lawsuits included allegations that weimproperly caused our hospital customers to seek reimbursement for a portion ofour management fees that included costs related to advertising and marketingactivities by our personnel and allegations that we violated the federalanti-kickback law and the federal False Claims Act.  Under the terms of the settlement, thelawsuits were dismissed, the United States and the whistleblowers released usfrom the claims asserted in the lawsuits, and we agreed to pay to the UnitedStates a $9.0 million initial payment, with an additional $7.5 million to bepaid over the next four years.  As of December 31,2005, a balance of approximately $0.4 million was outstanding on this obligation.  Pursuant to the settlement, we have beenrequired to fulfill certain additional obligations, including abiding by afive-year Corporate Integrity Agreement, avoiding violations of law andproviding certain information to the DOJ from time to time.  As of December 17, 2003, we werereleased from part of our obligations under the Corporate IntegrityAgreement.  The independent revieworganization that conducts the audit of our records pursuant to the CorporateIntegrity Agreement is no longer required to conduct the general compliancereview.  If we fail or if we are accusedof failing to comply with the terms of the settlement, we may be subject toadditional litigation or other governmental actions, including our Wound CareManagement business unit being barred from participating in the Medicareprogram and other federal health care programs. In addition, as part of the settlement, we consented to the entry of ajudgment against us for $28.0 million, less any amounts previously paid underthe settlement, that would be imposed only if we fail to comply with the termsof the settlement, which, if required to be paid, could have a material adverseeffect on our financial position.

 

**Theindustry in which we operate is subject to extensive government regulation, andnon-compliance by us, our suppliers, our customers or our referral sourcescould harm the business.**

 

Themarketing, labeling, dispensing, storing, provision, selling, pricing andpurchasing of drugs, health supplies and health services, including thebiopharmaceutical products we provide, are extensively regulated by federal andstate governments, and if we fail or are accused of failing to comply with lawsand regulations, our business could be harmed. Our business could also be harmed if the suppliers, customers orreferral sources we work with are accused of violating laws orregulations.  The applicable regulatoryframework is complex, and the laws are very broad in scope.  Many of these laws remain open tointerpretation and have not been addressed by substantive court decisions.  The federal government or states in which weoperate could, in the future, enact more restrictive legislation or interpretexisting laws and regulations in a manner that could limit the manner in whichwe can operate our business and have a negative impact on our business.

 

**Asubstantial percentage of our revenue is attributable to the Medicaid andMedicare programs and has been significantly adversely impacted by recentchanges in Medi-Cal reimbursement policies and will continue to be subject tochanges in reimbursement policies and other legislative or regulatoryinitiatives aimed at reducing costs associated with various governmentprograms.**

 

In theyear ended December 31, 2005, approximately 24.5%of our Specialty Infusionbusiness unit’ revenues were derived from products and/or services provided topatients covered under various state Medicaid programs, most of which were fromCalifornia, and approximately 10.3% of our Specialty Infusion business unit’srevenues were derived from products and/or services provided to patientscovered under the Medicare program.  Suchprograms are highly regulated and subject to frequent and substantial changesand cost-containment measures that may limit and reduce payments to providers.  In the recent past, many states experiencedbudget deficits that may require future reductions in health care relatedexpenditures.  State cost containmentactivity continued to focus heavily on reducing provider payments andcontrolling prescription drug spending.

 

In December 2003,MMA was signed into federal law, providing for a Medicare prescription drugbenefit and other changes to the Medicare program, including changes to paymentmethodologies for products we distribute that are covered by Medicare.  Prior to MMA, Medicare reimbursement for manyof the products we distribute was based on 95% of the products’ AWP.  Under MMA, Medicare reimbursement for many ofthe products we distribute, including most physician-administered drugs andbiologicals, was lowered to 80-85% of AWP effective January 1, 

 

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2004.  This 2004 change did not affect Medicarereimbursement for blood-clotting factor products, which continued to bereimbursed at 95% of AWP during 2004.

 

EffectiveJanuary 1, 2005, the Medicare reimbursement methodology for blood-clottingfactor products changed from an AWP-based system to one based upon ASP whichhas lowered Medicare reimbursement.  Inaddition to the payment we receive from the Medicare program for blood-clottingfactor, beginning in January 2005, we receive a separate payment of $0.14for each unit of factor furnished to Medicare beneficiaries.  It is possible that states and/or commercialpayors may adopt the new Medicare reimbursement methodology.  The conversion to a system based upon ASPcould have a material adverse effect on our business, financial condition andresults of operations.  In addition, MMAchanges the relationship between the Medicare and Medicaid programs such thatwe may receive less reimbursement in the future for individuals who receivebenefits under both of these programs.

 

Inaddition to these federal initiatives, many states are also makingmodifications to the manner with which they reimburse providers of pharmacyservices.  For example, in California,where approximately 5% of our total revenues for the year ended December 31,2005 was derived from blood-clotting products reimbursed by California statefunded health programs, the state legislature in 2003 passed legislation thatmodified the reimbursement methodology for blood-clotting factor products undervarious California state funded health programs.  Under the new reimbursement methodology,blood-clotting factor products are reimbursed based upon ASP, as provided bythe manufacturers, plus 20%.

 

EffectiveJune 1, 2004, Medi-Cal implemented the ASP reimbursement methodology forblood-clotting factor products, which amounted to an approximate 30-40% cutfrom rates previously in effect.  Theimplementation of the reduction in the reimbursement from Medi-Cal, and changesin regulations governing such reimbursement, has adversely impacted ourrevenues and profitability from the sale of products by us or by retailpharmacies to which we provide products or services for hemophilia patients whoare Medi-Cal beneficiaries or beneficiaries of other state funded programs forhemophilia patients.

 

InDecember, 2004, we and certain named individual plaintiffs entered into aSettlement Agreement which resolved both a lawsuit previously filed on behalfof two individual Medi-Cal recipients with hemophilia in the United StatesDistrict Court for the Eastern District of California against the State ofCalifornia relating to the implementation of the new ASP reimbursementmethodology, and a lawsuit previously filed by us in the Superior Court for theCounty of Sacramento relating to, among other things, the State of California’sfailure to comply with certain applicable federal procedural requirementsrelating to the reimbursement rates.  Inreturn for dismissal of both lawsuits, DHS agreed to process, on a prioritybasis, all pending and future Medi-Cal, California Children’s Services andGenetically Handicapped Persons Program claims submitted by us.  In addition, DHS agreed to expedite itsefforts to implement electronic billing and payment for blood-clotting factorclaims.  There can be no assurance,however, that the Company’s accounts receivable collections from the State ofCalifornia will improve as the result of this settlement agreement.  A failure of the Company to improve itsaccounts receivable collections from the State of California could have amaterial adverse effect on the Company’s business, financial condition andoperating results.

 

Inaddition, the California legislature approved a proposal by the Governor ofCalifornia to expand the Medi-Cal managed care program into additional countiesand to phase in mandatory enrollment for parents and children who are Medi-Calbeneficiaries.  The Governor’s proposalfor mandatory enrollment of seniors and disabled individuals was rejected bythe legislature, except for those individuals who may reside in an expansioncounty where a COHS model is proposed. Under the COHS model, all eligible Medi-Cal beneficiaries aremandatorily enrolled into the managed care plan, including seniors and personswith disabilities.  We understand theremay be significant concern by various constituencies over mandatory enrollmentof medically fragile populations, and the outcome of these proposals is notcertain at this time.

 

We arein the process of evaluating the impact various federal and state legislativeand related initiatives may have on our business, financial position andresults of operations.

 

We arein the process of evaluating the impact various federal and state legislativeand related initiatives may have on our business, financial position andresults of operations.

 

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**Ourgrowth strategy includes the expansion of our branch pharmacy network by theopening of new branch pharmacy locations.**

 

Animportant element of the growth strategy of our Specialty Infusion businessunit is the expansion of our branch pharmacy network through the opening of newbranch locations.  This expansion willinvolve significant planning and execution processes, such as identifying newmarkets, leasing facility space, hiring qualified personnel, obtaining payorcontracts and obtaining patient referrals. In addition, we will need to invest capital in facility build out,computers, offices and other furniture and equipment.  It is expected that these branch pharmacieswill incur losses during their startup periods. Any failure by us to effectively execute this expansion strategy,including the successful transition of expansion branches from loss positionsto profitability, could have a material adverse effect on our business,financial condition, operating results and cash flows.

 

**We haveexperienced rapid growth by acquisitions. If we are unable to manage our growth effectively or purchase orintegrate new companies, our business could be harmed.**

 

Ourgrowth strategy will likely strain our resources, and if we cannot effectivelymanage our growth, our business could be harmed.  In connection with our growth strategy, wewill likely experience an increase in the number of our employees in our branchnetwork, the size of our programs and the scope of our operations.  Our ability to manage this growth and to be successfulin the future will depend partly on our ability to retain skilled employees,enhance our management team and improve our management information andfinancial control systems.

 

Aspart of our growth strategy, we may evaluate acquisition opportunities.  Acquisitions involve many risks, includingthe following:

 

•                  Since the specialty pharmacy industryis undergoing consolidation, we may experience difficulty in identifyingsuitable candidates and negotiating and consummating acquisitions on attractiveterms, if at all.

 

•                  In the industry in which ourSpecialty Infusion business unit operates, there are customers who have astrong affiliation with their community-based representatives; accordingly, wemay experience difficulty in retaining and assimilating the community-basedrepresentatives of companies it acquires.

 

•                  Because of the relationships betweencommunity-based representatives and customers in certain of our product lines,the loss of a single community-based representative may entail the loss of asignificant amount of revenue.

 

•                  Our operational, financial andmanagement systems may be incompatible with or inadequate to cost effectivelyintegrate and manage the acquired business’ systems.  As a result, billing practices could beinterrupted, and cash collections on the newly acquired business could bedelayed pending conversion of patient files onto our billing systems andreceipt of provider numbers from government payors.

 

•                  A growth strategy that involvessignificant acquisitions diverts management’s attention from existing operations.

 

•                  Acquisitions may involve significanttransaction costs which we may not be able to recoup.

 

•                  We may not be able to integrate newlyacquired businesses appropriately.

 

Inaddition, we may become subject to litigation and other liabilities resultingfrom the conduct of an acquired business prior to its acquisition by us.

 

**Weoperate in a rapidly changing, consolidating and competitive environment.  If we are unable to adapt quickly to thesechanges, our business and results of operations could be seriously harmed.**

 

Thespecialty infusion industry is experiencing rapid consolidation.  We believe that technological and regulatorychanges will continue to attract new entrants to the market.  Industry consolidation among our competitorsmay increase their financial resources, enabling them to compete moreeffectively based on price and services offered.  This could require us either to reduce ourprices or increase our service levels, or risk losing market share.  Moreover, industry consolidation may resultin stronger competitors that are better able to compete.  

 

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If we are unable toeffectively execute our growth strategy, our ability to compete in a rapidlychanging and consolidating specialty pharmacy industry may be negativelyimpacted.

 

**We mayneed additional capital to finance our growth and capital requirements, whichcould prevent us from fully pursuing our growth strategy.**

 

Inorder to implement our present growth strategy, we may need substantial capitalresources and may incur, from time to time, short- and long-term indebtedness,the terms of which will depend on market and other conditions.  Due to uncertainties inherent in the capitalmarkets (*e.g.,* availability of capital,fluctuation of interest rates, etc.), we cannot be certain that existing oradditional financing will be available to us on acceptable terms, if atall.  Even if we are able to obtainadditional debt financing, we may incur additional interest expense, which maydecrease our earnings, or we may become subject to contracts that restrict ouroperations.  As a result, we could beunable to fully pursue our growth strategy. Further, additional financing may involve the issuance of equitysecurities that would dilute the interests of our existing shareholders andpotentially decrease the market price of our common stock.

 

**Animpairment of the significant amount of goodwill on our financial statementscould adversely affect our results of operations.**

 

Ourspecialty infusion acquisitions resulted in the recording of a significantamount of goodwill on our financial statements. The goodwill was recorded because the fair value of the net assetsacquired was less than the purchase price. We may not realize the full value of this goodwill.  As such, we evaluate, at least on an annualbasis, whether events and circumstances indicate that all or some of thecarrying value of goodwill is no longer recoverable, in which case we wouldwrite off the unrecoverable goodwill as a charge against our earnings.  Due primarily to changes in the economics ofthe Specialty Infusion business unit, we recorded a non-cash impairment chargefrom continuing operations of $79.8 million in goodwill and $0.l million inother intangible assets, respectively, in the third quarter of 2005.  We conducted an additional analysis as of December 31,2005 and, based on our results, no further impairment was identified.  We will continue to monitor our goodwill andintangibles for impairment indicators.

 

As of December 31,2005, we had goodwill of approximately $36.4 million, or 21% of total assets.

 

**We arehighly dependent on our relationships with a limited number ofbiopharmaceutical and pharmaceutical suppliers, and the loss of any of theserelationships could significantly affect our ability to sustain or grow ourrevenues.**

 

Thebiopharmaceutical and pharmaceutical industries are susceptible to productshortages.  Some of the products that wedistribute, such as factor VIII blood-clotting products and IVIG, have experiencedshortages in the past due to the inability of suppliers to increase productionto meet rising global demand.  Althoughsuch shortages have ended, demand continues to grow.  We are currently experiencing allocationrestrictions of IVIG products.  Supplierswere unable to increase production to meet rising global demand.  We purchase the majority of our supplies ofblood-clotting products from five suppliers, who we believe representsubstantially all of the production capacity for recombinant factor VIII.  In the event that one of these suppliers isunable to continue to supply us with products, it is uncertain whether theremaining suppliers would be able to make up any shortfall resulting from suchinability.  Our ability to take onadditional customers or to acquire other specialty pharmacy or infusionservices businesses with significant hemophilia customer bases could beaffected negatively in the event we are unable to secure adequate supplies ofour products from these suppliers.  Wehave recently been put on allocation of product for IVIG by our largestsupplier of IVIG product.  Although webelieve we will have sufficient supply of IVIG to service our existingcustomers, we may not be able to increase our market share of providinginfusion services related to IVIG.  Therecan be no assurance as to when the allocation for IVIG products willterminate.  In addition, it is possiblethat we will experience price increases for these products.  Although we believe the price increase forthese products will be absorbed by our customers, there can be no assurancethat we will be successful in passing on any such price increase.  If these products, or any of the other drugsor products that we distribute, are in short supply for long periods of time, ourbusiness could be harmed.

 

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**Somebiopharmaceutical suppliers in the specialty pharmacy industry have chosen tolimit the number of distributors of their products.  If we are not selected as a preferred distributorof one or more of our core products, our business and results of operationscould be seriously harmed.**

 

Wehave identified a trend among some of our suppliers toward the retention of alimited number of preferred distributors to market certain of theirbiopharmaceutical products.  If thistrend continues, we cannot be certain that we will be selected and retained asa preferred distributor or can remain a preferred distributor to market theseproducts.  Although we believe we caneffectively meet our suppliers’ requirements, there can be no assurance that wewill be able to compete effectively with other specialty pharmacy companies toretain our position as a distributor of each of our core products.  Adverse developments with respect to this trendcould have a material adverse effect on our business and results of operations.

 

**If wefail to cultivate new or maintain established relationships with the physicianreferral sources, our revenues may decline.**

 

Oursuccess, in part, is dependent upon referrals and our ability to maintain goodrelationships with physician referral sources. Physicians referring patients to us are not our employees and are freeto refer their patients to our competitors. If we are unable to successfully cultivate new referral sources andmaintain strong relationships with our current referral sources, our revenuesand profits may decline.

 

**Ifadditional providers obtain access to products we handle at more favorableprices, our business could be harmed.**

 

Becausewe do not receive federal grants under the Public Health Service Act, we arenot eligible to participate directly in a federal pricing program administeredby the Federal Health Resources and Services Administration’s Public HealthService, which allows certain entities with such grants, such as certainhospitals and hemophilia treatment centers, to obtain discounts on drugs,including certain biopharmaceutical products (*e.g*.,hemophilia-clotting factor and IVIG) that represented approximately 47% of ourtotal revenues at December 31, 2005. To the best of our knowledge, these entities benefit by being able toacquire, pursuant to this federal program, products competitive with our atprices lower than our cost for the same products.  Our customers, where eligible, may elect toobtain hemophilia-clotting factor, or other products, from such lower-costentities, which could result in a reduction of revenue to us.

 

**Recent investigations into reporting of averagewholesale prices could reduce our pricing and margins.**

 

Manygovernment payors, including Medicare (in 2004) and many state Medicaidprograms, as well as a number of private payors, pay us directly or indirectlybased upon a drug’s AWP.  Most of ourSpecialty Infusion business unit’s revenues result from reimbursementmethodologies based on the AWP of our products. The AWP for most drugs is compiled and published by third-party pricereporting services, such as First DataBank, Inc., from informationprovided by manufacturers and/or wholesalers. Various federal and state government agencies have been investigatingwhether the published AWP of many drugs, including some that we distribute andsell, is an appropriate or accurate measure of the market price of thedrugs.  There are also several lawsuitspending against various drug manufacturers in connection with theappropriateness of the manufacturers’ AWP for a particular drug(s).  These government investigations and lawsuitsinvolve allegations that manufacturers reported artificially inflated AWPs ofvarious drugs to third-party price reporting services, which, in turn, reportedthese prices to its subscribers, including many state Medicaid agencies whothen included these AWPs in the state’s reimbursement policies.

 

Moreover,as discussed above, as a result of MMA, Medicare reimbursement for many of theproducts we distribute, including most physician-administered drugs andbiologicals, was lowered to 80-85% of AWP effective January 1, 2004.  Although this 2004 change did not affectMedicare reimbursement for blood-clotting factor products, which continued tobe reimbursed at 95% of AWP in 2004, effective January 1, 2005, theMedicare reimbursement methodology for blood-clotting factor products changedfrom an AWP-based system to a system based upon ASP (plus, in the case ofhemophilia products, 6% plus an additional administrative fee most recentlyproposed by CMS to be $0.14 per unit), which has lowered Medicarereimbursement.  It is possible thatstates and/or commercial payors may adopt the new Medicare reimbursementmethodology.  While we cannot predict theeventual results of any law changes, government proposals, investigations orlawsuits, if government or private payors revise their pricing based on 

 

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new methods ofcalculating AWP for products we supply, or implement reimbursement methodologybased on a value other than AWP, this could have a material adverse effect onour business, financial condition and results of operations.

 

**Areduction in the demand for our products and services could result in ourreducing the pricing and margins on certain of our products.**

 

Anumber of circumstances could reduce demand for our products and services,including:

 

•                  customer shifts to treatment regimensother than those we offer;

 

•                  new treatments or methods of deliveryof existing drugs that do not require our specialty products and services;

 

•                  the recall of a drug or adversereactions caused by a drug;

 

•                  the expiration or challenge of a drugpatent;

 

•                  competing treatment from a new drug,a new use of an existing drug or genetic therapy;

 

•                  drug companies ceasing to develop,supply and generate demand for drugs that are compatible with the services weprovide;

 

•                  drug companies stopping outsourcingthe services we provide or failing to support existing drugs or develop newdrugs;

 

•                  governmental or private initiativesthat would alter how drug manufacturers, health care providers or pharmaciespromote or sell products and services;

 

•                  the loss of a managed care or otherpayor relationship covering a number of high-revenue customers; or

 

•                  the cure of a disease w service.

 

**Ourbusiness involves risks of professional, product and hazardous substanceliability, and any inability to obtain adequate insurance may adversely affectour business.**

 

Theprovision of health services entails an inherent risk of professionalmalpractice, regulatory violations and other similar claims.  Claims, suits or complaints relating tohealth services and products provided by physicians, pharmacists or nurses inconnection with our Specialty Infusion and Wound Care Management businesses maybe asserted against us in the future.

 

Ouroperations involve the handling of bio-hazardous materials.  Our employees, like those of all companiesthat provide services dealing with human blood specimens, may be exposed torisks of infection from AIDS, hepatitis and other blood-borne diseases ifappropriate laboratory practices are not followed.  Although we believe that our safetyprocedures for handling and disposing of such materials comply with thestandards prescribed by state and federal regulations, we cannot completelyeliminate the risk of accidental infection or injury from these materials.  In the event of such an accident, we could beheld liable for any damages that result, and such liability could harm ourbusiness.

 

Ouroperations expose us to product and professional liability risks that areinherent in managing the delivery of wound care services and the provision andmarketing of biopharmaceutical and pharmaceutical products.  We currently maintain professional andproduct liability insurance coverage of $15.0 million in the aggregate.  Because we cannot predict the nature offuture claims that may be made, there can be no assurance that the coveragelimits of our insurance would be adequate to protect us against any potentialclaims, including claims based upon the transmission of infectious diseases,contaminated products, negligent services or otherwise.  In addition, we may not be able to obtain ormaintain professional or product liability insurance in the future onacceptable terms, if at all, or with adequate coverage against potentialliabilities.

 

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**We rely on key community-based representativeswhose absence or loss could harm the business.**

 

Thesuccess of our Specialty Infusion business unit depends upon our ability toretain key employees known as community-based representatives, and the loss oftheir services could adversely affect our business and prospects. Ourcommunity-based representatives are our chief contacts and maintain the primaryrelationship with our customers, and the loss of a single community-basedrepresentative could result in the loss of a significant number of customers. Wedo not have key person insurance on any of our community-based representatives.In addition, our success depends upon, among other things, the successfulrecruitment and retention of qualified personnel, and we may not be ableto retain all of our key management personnel or be successful in recruitingadditional replacements should that become necessary. On October 21, 2005,six hemophilia service representatives in our Specialty Infusion business unitresigned. We estimate that the patients serviced by these employees representapproximately $25.0 million of revenue annually. While it is not certain thatwe will lose the full $25.0 million of revenue, it is likely that we willexperience a significant decrease in revenue as a result of these resignations.We may experience the loss of other hemophilia services representatives inthe future which could adversely affect our business and prospects.

 

**Ourinability to maintain a number of important contractual relationships couldadversely affect our operations.**

 

Substantiallyall of the revenues of our Wound Care Management operations are derived frommanagement contracts with acute care hospitals. At December 31, 2005, wehad 109 management contracts (103 operating and 6 contracted). The contractsgenerally have initial terms of three to five years, and many have automaticrenewal terms unless specifically terminated. The contracts often provide forearly termination either by the client hospital if specified performancecriteria are not satisfied, or by us under various other circumstances. Historically,some contracts have expired without renewal, and others have been terminated byus or the client hospital for various reasons prior to their scheduledexpiration. During the year ended December 31, 2005, two hospitalcontracts expired without renewal, and an additional four hospital contractswere terminated by the client hospital prior to the scheduled expiration. Hospitalcontracts have been terminated for reasons such as hospital financialdifficulties, Medicare reimbursement changes which reduced hospital revenuesand the desire of the hospital to exit the business or manage it on its own. Ourcontinued success is subject to, among other things, our ability to renew orextend existing management contracts and obtain new management contracts. Anyhospital may decide not to continue to do business with us followingexpiration of its management contract, or earlier if such management contractis terminable prior to expiration. In addition, any changes in the Medicareprogram or third-party reimbursement levels which generally have the effect oflimiting or reducing reimbursement levels for health services provided byprograms managed by us could result in the early termination of existingmanagement contracts and could adversely affect our ability to renew or extendexisting management contracts and to obtain new management contracts. Thetermination or non-renewal of a material number of management contracts couldharm our business.

 

**Ourbusiness will suffer if we lose relationships with payors.**

 

We arepartially dependent on reimbursement from non-governmental payors. Many payorsseek to limit the number of providers that supply drugs to their enrollees. Fromtime to time, payors with whom we have relationships require that we and ourcompetitors bid to keep their business and, therefore, due to the uncertaintiesinvolved in any bidding process, we either may not be retained or may haveto reduce our margins to retain business. The loss of a significant number ofpayor relationships, or an adverse change in the financial condition of asignificant number of payors, could result in the loss of a significant numberof patients and harm our business.

 

**Changesin reimbursement rates which cause reductions in the revenues of our operationshave adversely affected our Wound Care Management business unit.**

 

As aresult of the Balanced Budget Act of 1997, CMS implemented the OutpatientProspective Payment System for most hospital outpatient department servicesfurnished to Medicare patients beginning August 2000, under which apredetermined rate is paid to each hospital for clinical services rendered,regardless of the hospital’s cost. We believe the new payment system does notprovide comparable reimbursement for services previously reimbursed on areasonable cost basis, and we believe the payment rates for many services areinsufficient for many of our hospital customers, resulting in revenue andincome shortfalls for the Wound Care Center® programs we manage on behalf ofthe hospitals. As a result, during 2004, we renegotiated and modified many ofour management contracts related to our Wound Care Management business unit,which has resulted in reduced revenue and income to us from those 

 

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modified contracts and,in numerous cases, contract termination. We expect that contract renegotiationand modification with many of our hospital customers will continue, and thiscould result in reduced revenues and income to us from those contracts and evencontract terminations. These results could harm our business.

 

TheWound Care Center® programs managed by our Wound Care Management business uniton behalf of acute care hospitals are generally treated as “provider basedentities” for Medicare reimbursement purposes. This designation is required forthe hospital-based program to be covered under the Medicare outpatientreimbursement system. Although we believe that the programs we managesubstantially meet the current criteria to be designated “provider basedentities,” a widespread denial of such designation could harm our business.

 

**We aresubject to pricing pressures and other risks involved with third-party payors.**

 

Inrecent years, competition for patients, efforts by traditional third-partypayors to contain or reduce health care costs, and the increasing influence ofmanaged care payors, such as health maintenance organizations, have resulted inreduced rates of reimbursement. Commercial payors, such as managed careorganizations and traditional indemnity insurers, increasingly are requestingfee structures and other arrangements providing for health care providers toassume all or a portion of the financial risk of providing care. Changes inreimbursement policies of governmental third-party payors, including policiesrelating to Medicare, Medicaid and other federally funded programs, couldreduce the amounts reimbursed to our customers for our products and, in turn,the amount these customers would be willing to pay for our products andservices, or could directly reduce the amounts payable to us by such payors. Thelowering of reimbursement rates, increasing medical review of bills forservices and negotiating for reduced contract rates could harm our business. Pricingpressures by third-party payors may continue, and these trends may adverselyaffect our business.

 

Also,continued growth in managed care and capitated plans have pressured health careproviders to find ways of becoming more cost competitive. Managed careorganizations have grown substantially in terms of the percentage of thepopulation they cover and in terms of the portion of the health care economythey control. Managed care organizations have continued to consolidate toenhance their ability to influence the delivery of health care services and toexert pressure to control health care costs. A rapid increase in the percentageof revenue derived from managed care payors or under capitated arrangementswithout a corresponding decrease in our operating costs could harm ourbusiness.

 

**There issubstantial competition in the specialty pharmacy, home infusion and wound careservices industries, and we may not be able to compete successfully.**

 

OurSpecialty Infusion business unit faces competition from other specialtyinfusion, specialty pharmacy, home infusion and disease management entities,general health care facilities and service providers, biopharmaceuticalcompanies, pharmaceutical companies as well as other competitors. Many of thesecompanies have substantially greater capital resources, marketing staffs andexperience in commercializing products and services than we have, and may beable to obtain better pricing from suppliers of products we purchase anddistribute. The principal competition with our Wound Care Management businessunit consists of specialty clinics that have been established by some hospitalsor physicians. Additionally, there are some private companies which providewound care services through a hyperbaric oxygen therapy program format. Furthermore,recently developed technologies, or technologies that may be developed inthe future, are or may be the basis for products which compete with ourspecialty infusion business or chronic wound care services. We may not beable to enter into co-marketing arrangements with respect to these products ormaintain pricing arrangements with suppliers that preserve margins, and we may notbe able to compete effectively against such companies in the future.

 

**If we are unable to effectively adapt to changesin the health care industry, our business will be harmed.**

 

Political,economic and regulatory influences are subjecting the health care industry inthe United States to fundamental change. We anticipate that Congress and statelegislatures may continue to review and assess alternative health caredelivery and payment systems and may in the future propose and adoptlegislation effecting fundamental changes in the health care delivery system aswell as changes to Medicare’s coverage and payments of the drugs and serviceswe provide.

 

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It ispossible that legislation enacted by Congress or state legislatures could harmour business or could change the operating environment of our targetedcustomers (including hospitals and managed care organizations). Health careindustry participants may react to such legislation by curtailing ordeferring expenditures and initiatives, including those relating to ourprograms and services. It is possible that the changes to the Medicare programreimbursement may serve as precedent to possible changes in other payors’reimbursement policies in a manner adverse to us. In addition, such legislationand regulatory changes could encourage integration or reorganization of thehealth care delivery system in a manner that could materially and adverselyaffect our ability to compete or to continue our operations without substantialchanges.

 

**There area number of state and federal laws and regulations that apply to our operationswhich could harm our business.**

 

Anumber of state and federal laws and regulations apply to, and could harm, ourbusiness. These laws and regulations include, among other things, thefollowing:

 

•      Thefederal “anti-kickback law” prohibits the offering or solicitation ofremuneration in return for the referral of patients covered by almost allgovernmental programs, or the arrangement or recommendation of the purchase ofany item, facility or service covered by those programs. HIPAA created newviolations for fraudulent activity applicable to both public and private healthcare benefit programs and prohibits inducements to Medicare or Medicaideligible patients to influence their decision to seek specific items andservices reimbursed by the government or to choose a particular provider. Thepotential sanctions for violations of these laws include significant fines,exclusion from participation in Medicare and Medicaid and criminal sanctions. Althoughsome “safe harbor” regulations attempt to clarify when an arrangement may notviolate the anti-kickback law, our business arrangements and the services weprovide may not fit within these safe harbors. Failure to satisfy a safeharbor requires further analysis of whether the parties violated theanti-kickback law. In addition to the anti-kickback law, many states haveadopted similar kickback and/or fee-splitting laws, which can affect thefinancial relationships we may have with our customers, physicians,vendors, other retail pharmacies and patients. The finding of a violation ofthe federal laws or one of these state laws could harm our business.

 

•      HHSissued final regulations implementing the Administrative SimplificationProvisions of HIPAA concerning the maintenance, transmission, and security ofindividually identifiable health information. The privacy regulations, withwhich compliance was required as of April 2003, impose on covered entities(including hospitals, pharmacies and other health care providers) significantnew restrictions on the use and disclosure of individually identifiable healthinformation. The security regulations, with which compliance was required as ofApril 2005, impose on covered entities certain administrative, technical,and physical safeguard requirements with respect to individually identifiablehealth information maintained or transmitted electronically. The regulationsestablishing electronic transaction standards that all health care providersmust use when electronically submitting or receiving individually identifiablehealth information in connection with certain health care transactions becameeffective October 2002, but Congress extended the compliance deadlineuntil October 2003 for organizations, such as ours, that submitted arequest for an extension. As a result of these HIPAA regulations, we have takenthe appropriate actions to ensure that patient data kept on our computernetworks are in compliance with these regulations. We believe that we aresubstantially in compliance with the HIPAA electronic standards and are capableof delivering HIPAA standard transactions electronically. In addition, if wechoose to distribute drugs through new distribution channels, such as theInternet, we will have to comply with government regulations that apply tothose distribution channels, which could harm our business. In addition toHIPAA, a number of states have adopted laws and/or regulations applicable tothe use and disclosure of patient health information that are more stringentthan comparable provisions under HIPAA. The finding of a violation of HIPAA orone of these state laws could harm our business.

 

•      TheEthics in Patient Referrals Act of 1989, as amended, commonly referred to asthe “Stark Law,” prohibits physician referrals to entities with which thephysician or his or her immediate family members have a “financial relationship”and prohibits the entity receiving the referral from presenting a claim toMedicare or Medicaid programs for services furnished under the referral. On March 26,2004, CMS issued the second phase of its final regulations, addressingphysician self-referrals, which became effective July 24, 2004. Aviolation of the Stark Law is punishable by civil sanctions, includingsignificant fines, a denial of payment or a requirement to refund certainamounts collected, and exclusion from participation in 

 

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Medicareand Medicaid. A number of states have adopted laws and/or regulations thatcontain provisions that track, or are otherwise similar to, the Stark Law. Thefinding of a violation of the Stark Law or one or more of these state lawscould harm our business.

 

•      Statelaws prohibit the practice of medicine, pharmacy and nursing without a license.To the extent that we assist patients and providers with prescribed treatmentprograms, a state could consider our activities to constitute the practice ofmedicine. Our nurses must obtain state licenses to provide nursing services tosome of our patients. In addition, in some states, coordination of nursingservices for patients could necessitate licensure as a home health agencyand/or could necessitate the need to use licensed nurses to provide certainpatient-directed services. If we are found to have violated those laws, we couldface civil and criminal penalties and be required to reduce, restructure oreven cease our business in that state.

 

•      Pharmacies(retail, mail-order and wholesale) as well as pharmacists often must obtainstate licenses to operate and dispense drugs. Pharmacies must also obtainlicenses in some states in order to operate and provide goods and services toresidents of those states. In addition, our pharmacies may be required bythe federal Drug Enforcement Agency, as well as by similar state agencies, to obtainregistration to handle controlled substances, including certain prescriptiondrugs, and to follow specified labeling and recordkeeping requirements for suchsubstances. If we are unable to maintain our pharmacy licenses, or if statesplace burdensome restrictions or limitations on non-resident pharmacies, thiscould limit or otherwise affect our ability to operate in some states, whichcould harm our business.

 

•      Federaland state investigations and enforcement actions continue to focus on thehealth care industry, scrutinizing a wide range of items such as joint venturearrangements, referral and billing practices, product discount arrangements,home health care services, dissemination of confidential patient information,promotion of off-label drug indications use, clinical drug research trials andgifts for patients or referral sources. From time to time, and like others inthe health care industry, we receive requests for information from governmentagencies in connection with their regulatory or investigative authority.

 

•      Weare subject to federal and state laws prohibiting entities and individuals fromknowingly and willfully making claims to Medicare and Medicaid and othergovernmental programs and third-party payors that contain false or fraudulentinformation. The federal False Claims Act encourages private individuals tofile suits on behalf of the government against health care providers such as us.As such suits are generally filed under seal with a court to allow thegovernment adequate time to investigate and determine whether it will intervenein the action, the implicated health care providers are often unaware of thesuit until the government has made its determination and the seal is lifted. Violationsor alleged violations of such laws, and any related lawsuits, could result insignificant financial or criminal sanctions (including treble damages) orexclusion from participation in the Medicare and Medicaid programs. Some statesalso have enacted statutes similar to the False Claims Act which may providefor large penalties, substantial fines and treble damages if violated.

 

**There isa delay between our performance of services and our reimbursement.**

 

Billingand collection for our services is a complex process requiring constantattention and involvement by senior management and ongoing enhancements toinformation systems and billing center operating procedures. The health careindustry is characterized by delays that typically range from three to ninemonths from the time services are provided to the time when the reimbursementor payment for these services is received, which makes working capitalmanagement, including prompt billing and collection, an important factor in ouroperating results and liquidity. Trends in the industry may further extendthe collection period and impact our working capital.

 

Werecognize revenues when we provide services to patients. However, our abilityto collect these receivables depends, in part, on our submissions to payors ofaccurate and complete documentation. In order for us to bill and receivepayment for our services, the physician and the patient must provideappropriate billing information. Failure to meet the billing requirements ofthe different payors could have a significant impact on our revenues,profitability and cash flow. If we are unable to collect our accountsreceivable on a timely basis, our revenues, profitability and cash flow couldbe adversely affected.

 

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**We relyheavily on a limited number of shipping providers, and our business could beharmed if their rates are increased or our providers are unavailable.**

 

Asignificant portion of our revenues result from the sale of drugs we deliver toour patients, and a significant amount of our products are delivered byovernight mail or courier or through retail pharmacies. The costs incurred inshipping are not passed on to our customers and, therefore, changes in thesecosts directly impact our margins. We depend heavily on these outsourced shippingservices for efficient, cost-effective delivery of our products. The risksassociated with this dependence include: any significant increase in shipping rates; strikes or other serviceinterruptions by these carriers; and spoilage of high-cost drugs duringshipment since our drugs often require special handling, such as refrigeration.

 

**If we donot maintain effective and efficient information systems, our operations may beadversely affected.**

 

Ouroperations depend, in part, on the continued and uninterrupted performance ofour information systems. Failure to maintain reliable information systems ordisruptions in our information systems could cause disruptions in our businessoperations, including billing and collections, loss of existing patients anddifficulty in attracting new patients, patient and payor disputes, regulatoryproblems, increases in administrative expenses or other adverse consequences,any or all of which could have a material adverse effect on our operations.

 

**Provisionsof our articles of incorporation and Minnesota law may make it moredifficult for a person to receive a change-in-control premium.**

 

OurBoard’s ability to designate and issue up to 10 million shares of preferredstock and issue up to 50 million shares of common stock could adversely affectthe voting power of the holders of common stock, and could have the effect ofmaking it more difficult for a person to acquire, or could discourage a personfrom seeking to acquire, control of the Company. If this occurred, a personcould lose the opportunity to receive a premium on the sale of his or hershares in a change of control transaction.

 

Inaddition, the Minnesota Business Corporation Act contains provisions that wouldhave the effect of restricting, delaying or preventing altogether certainbusiness combinations with any person who becomes an interested stockholder. Interestedstockholders include, among others, any person who, together with affiliatesand associates, acquires 10% or more of a corporation’s voting stock in atransaction which is not approved by a duly constituted committee of the Boardof the corporation. These provisions could also limit a person’s ability toreceive a premium in a change of control transaction.

 

**ITEM 1B.****       UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.****          PROPERTIES**

 

Ourheadquarters are currently located in Nashua, New Hampshire. We lease this approximately26,000 square foot facility under a lease which expires in February 2012.Additionally, through our Specialty Infusion business unit, we lease office,pharmacy and warehouse space in various states. We have leases for our 46branch pharmacy locations, totaling approximately 247,000 square feet. Webelieve that our facilities are adequate and suitable for our operation. OurWound Care Management business unit operates hospital outpatient Wound CareCenter programs in facilities which are owned or leased by the hospitals.

 

**ITEM 3.****          LEGALPROCEEDINGS**

 

In thenormal course of our business, we may be involved in lawsuits, claims, 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.

 

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On March 27,2006, the Petition Date, we filed a Prepackaged Joint Plan of Reorganizationunder Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Courtfor the Southern District of New York. The Chapter 11 proceedings are furtherdiscussed above and in Note 1 of Notes to Consolidated Financial Statementsincluded elsewhere in this Annual Report on Form 10-K. The Chapter 11proceedings were entered into in response to various issues that havenegatively affected our liquidity and our ability to service our debtobligations.

 

Materialpending legal proceedings, other than the Chapter 11 proceedings above andother than ordinary, routine litigation incidental to the business, to which webecame or were a party during the year ended December 31, 2005, orsubsequent thereto but before the filing of this report, are summarized below.

 

***ApexTherapeutic Care Litigation***

 

Aspreviously disclosed, on October 26, 2005, we commenced litigation in theUnited States District Court for the Central District of California, entitled “CurativeHealth Services, Inc. vs. James H. Williams, et al.,” 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 seeking $60.0million in compensatory damages and available punitive damages, we aredisputing our obligation to make further payments under an amended and restatedpromissory note, dated May 30, 2002, made in favor of the formerstockholders in connection with the acquisition of Apex. Prior to commencementof the action, Curative sent a letter to the representative of the formerstockholders indicating that Curative would not be making the installmentpayment due on September 30, 2005 or any further payments pendingresolution of this dispute. The stockholders’ representative responded with anotice on October 18, 2005 declaring an event of default under theabove-referenced note and an acceleration of payment of the outstandingprincipal balance under the note in the amount of approximately $1.5 million. Thisevent did not cause a default under, or acceleration of, any other obligationsof Curative.

 

***DHSAudit***

 

Two ofthe Company’s subsidiaries, Apex and eBioCare, might be subject to potentialindemnification liabilities to three independent retail pharmacies thatpreviously did business with Curative. The indemnification claims are inconnection with an audit conducted by the Department of Health Services of theState of California related to the pharmacies’ medical billing for clottingfactor supplied to the pharmacies by Apex and eBioCare, and the pharmacies’medical billing for the anti-inhibitor product “FEIBA” supplied to thepharmacies by Apex and eBioCare. While liability with respect to these claimsis uncertain at this time, Apex and eBioCare believe that some amount ofmonetary loss is reasonably possible if the pharmacies assert and prevail onindemnification claims. Apex and eBioCare estimate that the range of loss may beanywhere from $0 to $39.3 million. As the amount of potential exposure cannotbe estimated at this time, no related loss provision has been accrued in theconsolidated financial statements as of December 31, 2005. 

 

**ITEM 4.****          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

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**PART II**

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

 

 

TheCompany’s common stock was traded on the NASDAQ National Market System underthe symbol “CURE.”  As previously reportedin a Form 8-K filed on February 13, 2006, due to its continuingfailure to satisfy the minimum aggregate market value of publicly held sharesrequirement for continued listing, the Company’s common stock was delisted fromthe NASDAQ National Market System effective February 21, 2006. Since thatdate, Curative’s existing common stock has been quoted in the over-the-countermarket.

 

Thefollowing table sets forth the range of high and low sales prices of theCompany’s common stock as quoted on the NASDAQ National Market System prior todelisting:

 

| **2005**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 0.92       |    | $          | 0.15 |   |
| Third Quarter  |       | 3.48     |       | 0.94    |       |
| Second Quarter |       | 3.48     |       | 1.44    |       |
| First Quarter  |       | 7.00     |       | 2.82    |       |
|                |            |          |            |         |            |  |  |

 

| **2004**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 6.91       |    | $          | 4.79 |   |
| Third Quarter  |       | 8.63     |       | 5.22    |       |
| Second Quarter |       | 13.74    |       | 8.58    |       |
| First Quarter  |       | 14.22    |       | 11.82   |       |
|                |            |          |            |         |            |  |  |

 

Theclosing sale price for the common stock as quoted on the NASDAQ National MarketSystem on February 17, 2006 was $0.21.

 

*Holders.*Asof March 10, 2006, there were 140 holders of record of the Company’scommon stock.

 

*Dividends.*The Company has not paid any cash dividends since itsinception, nor does it currently intend to pay cash dividends in theforeseeable future. The Company intends to retain all earnings, if any, for usein its business operations. The Company has entered into an indenture pursuantto its Senior Notes. Under this indenture, the Company cannot, directly orindirectly, make any dividend payment if at the time of such payment:

 

1.     there is adefault under the Senior Notes or a default under those Notes shall occur as aconsequence of such payment;

 

2.     the Companycannot incur $1.00 of additional indebtedness under the Coverage RatioException (as defined in the indenture); or

 

3.     the dividend,when added to the aggregate amount of all other restricted payments (as definedin the indenture) made after April 23, 2004, exceeds a certain RestrictedPayments Basket (as defined in the indenture).

 

TheCompany is currently in default under the Senior Notes and so is prohibitedfrom making any dividend payments.

 

*Recentsales of unregistered securities.*There were no unregisteredsecurities sold by the Company during the fiscal year ended December 31,2005.

 

*Issuerpurchases of equity securities.*The Company did notrepurchase any of its common stock during the fiscal quarter ended December 31,2005.

 

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**ITEM 6.****          SELECTED CONSOLIDATED FINANCIAL DATA**

 

Thefollowing should be read in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” as well as theconsolidated financial statements and notes thereto contained elsewhere in thisAnnual Report on Form10-K. Financial Highlights and Results of Operations should be read togetherwith the accompanying Consolidated Financial Statements and Notes. Theperiod-to-period comparability of the Company’s selected consolidated financialdata is affected by its acquisition activity. Please see discussion in the section titled“Management’s Discussion and Analysis of Financial Condition and Results of Operations- Overview.”

 

Fiveyear selected consolidated financial data of Curative Health Services, Inc.and Subsidiaries for the years ended December 31 is as follows (inthousands, except per share data):

 
| ** **                                                    | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|----------|------------|
| **Statements of Operations Data:**                            |       |        |       |        |       |        |       |     |       |     |       |
| Total revenues                                                |       | $           | 261,059    |        | $          | 224,980     |       | $        | 163,494    |     | $          | 139,229 |   | $ | 81,638 |   |
| Costs and operating expenses:                                 |       |        |       |        |       |        |       |     |       |     |       |
| Costs of product sales and services                           |       | 206,191     |       | 168,930     |       | 102,465     |       | 89,297   |       | 55,666   |       |
| Selling, general and administrative                           |       | 55,702      |       | 50,042      |       | 40,995      |       | 26,401   |       | 51,466   |       |
| Goodwill and intangible asset impairment                      |       | 77,608      |       | 133,969     |       | —      |       | —   |       | —   |       |
| Total costs and operating expenses                            |       | 339,501     |       | 352,941     |       | 143,460     |       | 115,698  |       | 107,132  |       |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| (Loss) income from operations                                 |       | (78,442     | )          | (127,961    | )          | 20,034      |       | 23,531   |       | (25,494  | )          |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| Interest (expense) income, net                                |       | (25,468     | )          | (15,726     | )          | (2,280      | )          | (1,111   | )          | 816      |       |
| Other income (expense), net                                   |       | 712         |       | (1,081      | )          | 2,327       |       | 1,907    |       | —   |       |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| (Loss) income from continuing operations                      |       | (103,198    | )          | (144,768    | )          | 20,081      |       | 24,327   |       | (24,678  | )          |
| Income tax (benefit) provision                                |       | (3,415      | )          | (3,949      | )          | 7,909       |       | 9,682    |       | (2,473   | )          |
| (Loss) income from continuing operations                      |       | (99,783     | )          | (140,819    | )          | 12,172      |       | 14,645   |       | (22,205  | )          |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| (Less) Income from discontinued operations                    |       | (1,809      | )          | (586        | )          | 903         |       | —   |       | —   |       |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| Net (loss) income                                             |       | $           | (101,592   | )           | $          | (141,405    | )          | $        | 13,075     |     | $          | 14,645 |   | $ | (22,205 | ) |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| **Per Share Data – Basic**                               |       |        |       |        |       |        |       |     |       |     |       |
| (Loss) income - continuing operations                         |       | $           | (7.67      | )           | $          | (10.89      | )          | $        | 0.97       |     | $          | 1.30 |   | $ | (3.09 | ) |
| (Loss) Income - discontinued operations                       |       | (0.14       | )          | (0.04       | )          | 0.07        |       | —   |       | —   |       |
| Net (loss) income                                             |       | $           | (7.81      | )           | $          | (10.93      | )          | $        | 1.04       |     | $          | 1.30 |   | $ | (3.09 | ) |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| **Per Share Data – Diluted**                             |       |        |       |        |       |        |       |     |       |     |       |
| (Loss) income - continuing operations                         |       | $           | (7.67      | )           | $          | (10.89      | )          | $        | 0.89       |     | $          | 1.20 |   | $ | (3.09 | ) |
| (Loss) income - discontinued operations                       |       | (0.14       | )          | (0.04       | )          | 0.07        |       | —   |       | —   |       |
| Net (loss) income                                             |       | $           | (7.81      | )(2)        | $          | (10.93      | )(2)(3)    | $        | 0.96       | (2)(3)   | $          | 1.20 |   | $ | (3.09 | ) |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| Weighted average common shares, basic                         |       | 13,002      |       | 12,932      |       | 12,536      |       | 11,280   |       | 7,193    |       |
|                                                          |       |        |       |        |       |        |       |     |       |     |       |
| Weighted average common shares assuming conversions,  diluted |       | 13,002      |       | 12,932      |       | 13,816      |       | 12,207   |       | 7,193    |       |
|                                                               |            |             |            |             |            |             |            |          |            |          |            |  |  |  |  |  |  |

 

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| ** **                              | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|----------|------------|
| **Balance Sheet Data:**                 |       |        |       |        |       |        |       |     |       |     |       |
| Working capital (deficit)               |       | $           | (156,875   | )           | $          | 50,788      |       | $        | 25,468     |     | $          | 17,353 |   | $ | 2,525 |   |
| Total assets                            |       | 169,288     |       | 283,784     |       | 233,938     |       | 186,886  |       | 76,439   |       |
| Long-term liabilities                   |       | 6,329       |       | 215,711     |       | 40,906      |       | 26,153   |       | 6,000    |       |
| (Accumulated deficit) retained earnings |       | (212,879    | )          | (111,287    | )          | 30,118      |       | 17,043   |       | 2,398    |       |
| Stockholders’ (deficit) equity     |       | (94,333     | )          | 4,453       |       | 143,720     |       | 120,901  |       | 36,004   |       |
|                                         |            |             |            |             |            |             |            |          |            |          |            |  |  |  |  |  |

 

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(1)   Excludes amounts from discontinued operationsfor revenues and operating expenses. See Note 5 of Notes to ConsolidatedFinancial Statements.

 

(2)   See Note 18 of Notes to Consolidated FinancialStatements for net (loss) income per share calculation.

 

(3)   Weightedaverage shares used in the above calculations have been corrected for 2004.  Such correction resulted in an increase in netloss per share of $.01 for the fourth quarter of 2004, and had no impact on2003.

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

 

**OVERVIEW**

 

TheCompany had approximately $213.2 million in outstanding debt as of December 31,2005, including the $185.0 million of Senior Notes and a $26.3 millionrevolving credit facility with GECC, and incurred significant losses during2005 and 2004. In August 2005, the Company announced it had formed aspecial committee and hired a financial advisor to assist it in evaluating thefinancial alternatives available given its significant debt and continuinglosses. In September 2005, the Company commenced discussions with an AdHoc committee representing holders of approximately 80% of the aggregateprincipal amount of the Senior Notes regarding a possible restructuring of theSenior Notes. In connection with these discussions, the Company elected not topay the interest payment due on the Senior Notes on November 1, 2005 andinstead elected to use the 30-day grace period under the Senior Note indenture.In addition, the Company executed a waiver agreement with GECC for failing tomeet the financial covenants of total leverage ratio and senior securedleverage ratio related to its revolving credit facility for the quarter ended September 30,2005. Additionally, this waiver agreement included a temporary waiver until December 1,2005 of any default under the credit facility related to the Company’s notpaying the November 1, 2005 coupon on the Senior Notes for 30 days. On December 1,2005, the Company entered into a Forbearance Agreement with GECC which providesthat, subject to certain conditions, GECC, together with the other lendersunder the Existing Credit Facility, which is governed by the Credit Agreement,will forbear from exercising remedies on account of the cross-default under theCredit Agreement arising from the Company’s failure to pay interest on theSenior Notes. Subject to certain termination events, including additionalevents of default under the Credit Agreement, the Forbearance Agreement willexpire on June 10, 2006. Under the terms of the Forbearance Agreement,Curative may continue to draw-down under the Credit Agreement as if suchexisting events of default had not occurred. Upon termination of theForbearance Agreement, all obligations under the Credit Agreement, together withinterest, will be immediately due and payable and the lenders may exerciseany rights or remedies thereunder.  As ofApril 5, 2006, our obligations under our Existing Credit Facility with GECChave been paid in full in connection with the interim order of the BankruptcyCourt authorizing the DIP Financing described below.  The DIP Financing remains subject to approvalby the Bankruptcy Court on a final basis. If the Bankruptcy Court does not enter a final order approving the DIPFinancing, the Existing Credit Facility will be reinstated.

 

As aresult of these developments, all of the Company’s outstanding debt is indefault and has been classified as current in the accompanying financialstatements. These conditions raise substantial doubt about the Company’sability to continue as a going concern (see Note 2 of Notes to ConsolidatedFinancial Statements).

 

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 

 

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pharmaceutical productsfrom suppliers and contracts with insurance companies and other payors toprovide its services, which include coordination of patient care, 24-hournursing and pharmacy availability, patient education 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 Companyreceives related service fees. The products distributed and the injection orinfusion therapies offered by Curative are used by patients with chronic orsevere conditions such as hemophilia, immune system disorders, chronic orsevere infections, nutritionally compromised and other severe conditions requiringnutritional support, cancer, rheumatoid arthritis, hepatitis C and multiplesclerosis. As of December 31, 2005, the Company had approximately 485payor contracts and provided products or services in approximately 45 states.

 

TheWound Care Management business unit contracts with hospitals to manageoutpatient Wound Care Center® programs that offer a comprehensiverange of services and enable the Wound Care Management business unit to providepatient specific wound care diagnosis and treatments on acost-effective basis. Wound Care Management currently operates two types ofWound Care Center® programs with hospitals:  a management model and an “under arrangement”model, with a primary focus on developing management 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 by thehospital, and generally receives fees based on the services provided to eachpatient. In both models, physicians remain independent. Wound Care Managementoffers assistance in recruiting and provides training in wound care to thephysicians and staff associated with the Wound Care Center® programs.As of December 31, 2005, the Wound Care Center® networkconsisted of 109 outpatient clinics (103 operating and 6 contracted) located onor near campuses of acute care hospitals in approximately 30 states.

 

**CHAPTER11 BANKRUPTCY PROCEEDINGS**

 

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 its Chapter 11 Cases to implement and effect the Plan. Prior tocommencement of the Chapter 11 Cases, Curative solicited votes to accept orreject the Plan from the holders of the Senior Notes issued by the Company andthe 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 under the caption, “PlannedReorganization and Chapter 11 Bankruptcy Proceedings,” will, if confirmed andconsummated, result in the cancellation and discharge of all claims relating tothe Senior Notes. Each Senior Noteholder will receive a cash payment ofapproximately 54.9% of its respective claim related to the Senior Notes, unlessa Senior Noteholder was qualified to elect and did elect to receive its prorata share of certain cash consideration provided in the Plan and the NewCurative Common Stock. Holders of existing shares of Old Curative Common Stock andoptions will not receive any distributions under the Plan and all shares of OldCurative 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.

 

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**EventsLeading to Chapter 11 Cases**

 

***FactorsAffecting 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,

 

•      a modification ofthe federal government’s blood-product reimbursement methodology,

 

•      slow maturation ofcertain new branch locations,

 

•      the resignation ofcertain customer sales and service representatives, and

 

•      additional futureliquidity risks, including potential indemnification claims.

 

*SignificantDecrease in Blood-Product Reimbursement*

 

On April 23,2004, the Company acquired CCS, a leading national provider of specialtyinfusion pharmaceuticals and related services for a purchase price of $154.2million, including working capital adjustments of approximately $4.1 million. Theacquisition of CCS was financed with a portion of the proceeds obtained fromthe issuance of the Senior Notes and additional borrowings. See Note 4 of Notesto Consolidated Financial Statements included elsewhere in this Annual Reporton 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 ASP (as provided bythe manufacturer) plus 20%. This change in California’s reimbursementmethodology amounted to an approximate 30-40% reduction from the acquisitioncost plus 1% methodology previously in effect. The implementation of thisreduction in reimbursement from Medi-Cal, and changes in regulations governingsuch reimbursement, significantly impacted the Company’s revenues from the saleof 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 AWP. After January 1, 2005, Medicarereimbursed for blood-clotting products at a rate of ASP plus 6% plus a $0.14per unit dispensing fee.

 

*UnderperformingBranch Expansion*

 

TheCompany’s overall growth strategy, and its approach to offsetting the decreasedrevenue resulting from the change in Medi-Cal reimbursement methodologydescribed above, included opening 13 new branches throughout the United Statessince June 2004. The Company projected that these new branches wouldquickly 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 generated anticipatedrevenues.

 

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*Resignation of Hemophilia ServiceRepresentatives*

 

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 anyhemophilia service representatives could result in the loss of a significantnumber of customers and corresponding revenue from the sale of blood-clottingproducts to such customers.

 

On October 21,2005, six hemophilia service representatives resigned. The Company estimatesthat the patients serviced by these employees represent 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.

 

*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’s 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 the “DHSAudit related to the pharmacies’ medical billing for clotting factor supplied tothe pharmacies by Apex and eBioCare, and the pharmacies’ medical billing forthe anti-inhibitor product “FEIBA” supplied to the pharmacies by Apex andeBioCare. While liability with respect to these claims is uncertain at thistime, 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. As the amount of potential exposure cannot be estimated at thistime, no related loss provision has been accrued in the consolidated financialstatements as of December 31, 2005.

 

**DISCONTINUEDOPERATIONS**

 

On December 2, 2005, the Company sold certainassets related to its specialty injectable and oral 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.

 

Under the Asset Purchase Agreement between Curativeand ProCare, the Company sold and ProCare purchased or assumed certain personalproperty, licenses, permits, contracts, leases and patient files related to theBusiness. In addition, ProCare assumed and the Company is no longer responsiblefor all liabilities and obligations related to the operation of the Businessand the Assets Sold arising after the sale. Also in connection with thesale, the Company closed its branches in Albany, New York; Lake Charles,Louisiana; Birmingham, Alabama; Columbus, Mississippi; and Hurricane, WestVirginia. As a result, the Company recorded approximately $0.7 million forfacility terminations, $0.6 million in inventory and bad debt reserves, $0.7million in goodwill and intangible write offs, $0.3 million for severance andvacation payouts related to the termination of 88 employees, $0.1 million inequipment write off costs and $0.2 million in other related costs, for a totalcost of $2.6 million.

 

TheCompany recorded a pre-tax loss on the sale of approximately $0.9 million whichwas recorded in the accompanying statements of operations for the year ended December 31,2005. The results of the discontinued operation are classified as such in aseparate component of (loss) income on the accompanying Consolidated Statementsof Operations. Excluded from the salewas the Company’s accounts receivable related to the Business which had abalance of approximately $1.9 million. The Company expects to collectsubstantially all of those receivables within one year. Thereafter, theCompany will have no continuing cash flows or operations related to thediscontinued operation. See Note 5 to Notes to Consolidated FinancialStatements.

 

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in the UnitedStates. The preparation of these consolidated financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. On anongoing 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 reasonableunder the 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 records contractual allowances on a payor-by-payor basis in accordancewith its interpretation of contractual terms, applicable regulations or payorrequirements. Reimbursement rates may be subject to adjustments by payorsthat could result in payments that differ from the Company’s estimates. Additionally,any health care regulation changes or contract amendments may require theCompany to review the estimation process. Curative is reimbursed for theproducts and services it provides from third-party payors, including managedcare organizations and Medicare and Medicaid programs, as well as privatepayors.

 

Generally,the Company records any required contractual allowances at the time it recordsrevenue and applies amounts against those allowances when cash is received. Thisprocess is completed at the transaction level and on atransaction-by-transaction basis. The Company does not track its contractualreserves by date of service nor does it track the amount of increased ordecreased reserve recorded when a transaction is closed out. Therefore, theCompany cannot provide an analysis of estimate changes by transaction or year.

 

On aconsolidated basis, the Company had a contractual reserve balance of $1.1million at the end of 2003, reduced reserves by $7.9 million and added reservesof $7.4 million during 2004, a net decrease of $0.5 million, for a balance ofcontractual reserves at the end of 2004 of $0.6 million. The increase in theCompany’s contractual allowance was primarily attributed to the acquisition ofCritical Care Systems, Inc. in April of 2004. Additionally, includedin the net change for 2004 is an increase of $1.0 million recorded in thesecond quarter of 2004 related to a retroactive reimbursement change theCompany experienced. This was previously disclosed in the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2004 and CurrentReport on Form 8-K filed on August 4, 2004 because of the uniquenature of the adjustment. In 2005, the Company reduced reserves by $14.5million and added reserves of $16.3 million, a net increase of $1.8 million,for a balance of contractual reserves at the end of 2005 of $2.4 million. Theincrease in the Company’s contractual allowance was primarily attributed to theacquisition of Critical Care Systems, Inc. in April of 2004.

 

TheCompany’s Wound Care Management business unit’s revenues are recognized after themanagement 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 

 

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Company has reserves forbad debt based upon the total accounts receivable balance. As of December 31,2005, the Company’s reserve for accounts receivable was approximately 10% oftotal receivables. Although the Company believes its reserve for accounts receivableat December 31, 2005 is reasonable, there can be no assurance thatadditional reserves will not be needed in the future. The recording of any suchreserve may have a negative impact on the Company’s operating results.

 

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.

 

Thefollowing table breaks down the Company’s gross accounts receivable intoapproximate percentages by payor group and aging classification as of December 31:

 
| ** **              | ** ** | **As of December 31, 2005** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|
| **Payor Group**    | ** ** | **0 –   90 Days**           | ** ** | **91 –   180 Days** | ** ** | **181 –   365 Days** | ** ** | **> 365 Days** | ** ** | **Total** | ** ** |
| Commercial and other(1) |       | 43                                              | %          | 8 | % | 9 | % | 10 | % | 70 | % |
| Medicaid                |       | 9                                               | %          | 2 | % | 2 | % | 3 | % | 16 | % |
| Medicare                |       | 8                                               | %          | 2 | % | 2 | % | 2 | % | 14 | % |
| Self-pay(2)             |       | *                                               |       | * |   | * |   | * |   | * |   |
| Total(3)                |       | 60                                              | %          | 12 | % | 13 | % | 15 | % | 100 | % |

 
| ** **              | ** ** | **As of December 31, 2004** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|
| **Payor Group**    | ** ** | **0 –   90 Days**           | ** ** | **91 –   180 Days** | ** ** | **181 –   365 Days** | ** ** | **> 365 Days** | ** ** | **Total** | ** ** |
| Commercial and other(1) |       | 33                                              | %          | 8 | % | 10 | % | 9 | % | 60 | % |
| Medicaid                |       | 12                                              | %          | 6 | % | 5 | % | 5 | % | 28 | % |
| Medicare                |       | 7                                               | %          | * |   | 2 | % | 3 | % | 12 | % |
| Self-pay(2)             |       | *                                               |       | * |   | * |   | * |   | * |   |
| Total(3)                |       | 52                                              | %          | 14 | % | 17 | % | 17 | % | 100 | % |

 

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(1)   Excludes allowances for contractualadjustments of approximately $2.4 million and $0.6 million as of December 31,2005 and 2004, respectively.

 

(2)   Self-pay amounts primarily consist of patientco-payments, deductibles and self-pay balances on accounts that have not beenpaid by the primary payor. The Company considers the patient’s potentialpayment obligation in its evaluation of the allowance for doubtful accountsbased on the current financial condition of the customer, age of the receivableand the relationship with the customer.

 

(3)   Amounts are calculated as percent of accountsreceivable, and excludes allowances for doubtful accounts of $7.4 million and$3.6 million as of December 31, 2005 and 2004, respectively, which are notspecifically tracked by payor group and aging classification.

 

*      Less than 1%.

 

**Inventories**

 

Inventoriesare carried at the lower of cost or market on a first in, first out basis. Inventoriesconsist of high-cost biopharmaceutical and pharmaceutical products that, inmany cases, require refrigeration or other special handling. As a result,inventories are subject to spoilage or shrinkage. On a quarterly basis, theCompany performs a physical inventory and determines whether any shrinkage orspoilage adjustments are needed. Although the Company believes its inventoriesbalance at December 31, 2005 is reasonably accurate, there can be noassurance 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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**Deferred income taxes**

 

The Company accounts for income taxes underStatement of Financial Accounting Standards (“SFAS”) No. 109, “Accountingfor Income Taxes,” which requires the use of the asset and liability method ofaccounting for income taxes. Under this method, deferred taxes are determinedby calculating the future tax consequences attributable to differences betweenthe financial accounting and tax bases of existing assets and liabilities. Avaluation allowance is recorded against deferred tax assets when, in theopinion of management, it is more likely than not that the Company will be ableto use the deferred tax assets benefit.

 

The Company records and periodically reviews itsestimated income tax reserves. Income tax reserves are established for exposureitems related to various federal and state tax matters. Income tax reserves arerecorded when an exposure is identified and when, in the opinion of management,it is probable that a liability has been incurred and the amount of the liabilitycan be estimated. While the Company believes that its income tax reserves areadequate, the settlement of any such exposures at amounts that differ fromcurrent reserves may require the Company to materially increase ordecrease its income tax reserves.

 

TheCompany had approximately $25.3 million in deferred income tax assets at December 31,2005 (approximately $5.8 million in current assets and $19.5 million inlong-term assets) and approximately $5.9 million in deferred income taxliabilities. The Company has a full valuation allowance against its netdeferred tax assets based on the uncertainty of recovery.

 

**Goodwill and intangibles**

 

Goodwillrepresents the excess of purchase price over the fair value of net assetsacquired. Intangibles consist of separately identifiable intangibles, such aspayor contracts, pharmacy and customer relationships and covenants not tocompete. The Company accounts for goodwill and intangible assets in accordancewith SFAS No. 142, “Goodwill and Other Intangible Assets,” which requiresgoodwill and intangible assets with indefinite lives to not be amortized butrather to be reviewed annually, or more frequently if impairment indicatorsarise, for impairment. Separable intangible assets that are not deemed to havean indefinite life are amortized over their useful lives. In assessing therecoverability of the Company’s goodwill and intangibles, the Company must makeassumptions regarding estimated future cash flows and other factors todetermine the fair value of the respective assets. Due primarily to unfavorablechanges in the economics of the Specialty Infusion business unit, the Companyrecorded non-cash impairment charges from continuing operations of $77.5million in goodwill and $138 thousand in other intangible assets during thethird quarter of 2005 and $133.9 million in goodwill and $68 thousand in otherintangible assets during the fourth quarter of 2004 (see Note 6 of Notes toConsolidated Financial Statements). The Company conducted an additionalanalysis as of December 31, 2005 and, based on those results, no furtherimpairment was identified. The fair value of the Specialty Infusion businessunit was estimated by performing a discounted cash flows analysis for thereporting unit. The Company will continue to monitor its goodwill andintangibles for impairment indicators which include, among others, the Company’sperformance versus its forecast, changes in contracts or reimbursement bypayors and critical personnel departures.

 

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**KEY PERFORMANCE 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, whichexclude amounts from discontinued operations (see Note 5), are not necessarilyindicative of future results (dollars in thousands).

 
| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|---------------|------------|---------------|------------|----------|------------|----------|------------|---------------|------------|---------------|------------|
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Specialty Infusion revenues              |       | $        | 232,169    |     | $          | 198,055       |       | $             | 34,114     |     | 17         | %        | $          | 198,055       |       | $             | 134,596    |   | $ | 63,459 |   | 47 | % |
| Wound Care Management revenues           |       | 28,890   |       | 26,925   |       | 1,965         |       | 7             | %          | 26,925   |       | 28,898   |       | (1,973        | )          | (7            | )%         |
| Total revenues                           |       | $        | 261,059    |     | $          | 224,980       |       | $             | 36,079     |     | 16         | %        | $          | 224,980       |       | $             | 163,494    |   | $ | 61,486 |   | 38 | % |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Specialty Infusion revenues to total     |       | 89       | %          | 88       | %          |          |       |          |       | 88       | %          | 82       | %          |          |       |          |       |
| Wound Care Management revenues to total  |       | 11       | %          | 12       | %          |          |       |          |       | 12       | %          | 18       | %          |          |       |          |       |
| Total                                    |       | 100      | %          | 100      | %          |          |       |          |       | 100      | %          | 100      | %          |          |       |          |       |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Specialty Infusion gross margin          |       | $        | 38,963     |     | $          | 41,201        |       | $             | (2,238     | )        | (5         | )%       | $          | 41,201        |       | $             | 45,355     |   | $ | (4,154 | ) | (9 | )% |
| Wound Care Management gross margin       |       | 15,905   |       | 14,849   |       | 1,056         |       | 7             | %          | 14,849   |       | 15,674   |       | (825          | )          | (5            | )%         |
| Total gross margin                       |       | $        | 54,868     |     | $          | 56,050        |       | $             | (1,182     | )        | (2         | )%       | $          | 56,050        |       | $             | 61,029     |   | $ | (4,979 | ) | (8 | )% |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Specialty Infusion gross margin %        |       | 17       | %          | 21       | %          |          |       |          |       | 21       | %          | 34       | %          |          |       |          |       |
| Wound Care Management gross margin %     |       | 55       | %          | 55       | %          |          |       |          |       | 55       | %          | 54       | %          |          |       |          |       |
| Total gross margin %                     |       | 21       | %          | 25       | %          |          |       |          |       | 25       | %          | 37       | %          |          |       |          |       |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Specialty Infusion SG&A              |       | $        | 27,262     |     | $          | 17,858        |       | $             | 9,404      |     | 53         | %        | $          | 17,858        |       | $             | 14,100     |   | $ | 3,758 |   | 27 | % |
| Wound Care Management SG&A           |       | 3,754    |       | 3,971    |       | (217          | )          | (5            | )%         | 3,971    |       | 4,641    |       | (670          | )          | (14           | )%         |
| Corporate SG&A                       |       | 17,367   |       | 18,267   |       | (900          | )          | (5            | )%         | 18,267   |       | 15,502   |       | 2,765         |       | 18            | %          |
| Charges(1)                               |       | 7,319    |       | 9,946    |       | (2,627        | )          | (26           | )%         | 9,946    |       | 6,752    |       | 3,194         |       | 47            | %          |
| Total SG&A                           |       | $        | 55,702     |     | $          | 50,042        |       | $             | 5,660      |     | 11         | %        | $          | 50,042        |       | $             | 40,995     |   | $ | 9,047 |   | 22 | % |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Goodwill and intangible asset impairment |       | $        | 77,608     |     | $          | 133,969       |       | $             | (56,361    | )        | (42        | )%       | $          | 133,969       |       | $             | —     |   | $ | 133,969 |   | 100 | % |
|                                     |       |     |       |     |       |          |       |          |       |     |       |     |       |          |       |          |       |
| Operating margin (deficit)               |       | $        | (78,442    | )        | $          | (127,961      | )          | 49,519        |       | (39      | )%         | $        | (127,961   | )             | $          | 20,034        |       | $ | (147,995 | ) | (739 | )% |
| Operating margin (deficit) %             |       | (30      | )%         | (57      | )%         |          |       |          |       | (57      | )%         | 12       | %          |          |       |          |       |

 

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(1)     The Company’s charges are discussed underResults of Operations - *Selling, General andAdministrative.*

 

**RESULTS OF OPERATIONS**

 

**Fiscal Year 2005 vs. Fiscal Year 2004**

 

***Revenues.***The Company’srevenues increased $36.1 million, or 16%, to $261.1 million for the fiscal yearended December 31, 2005 compared to $225.0 million for the fiscal yearended December 31, 2004. The increase in revenues for 2005 was the resultof the April 2004 acquisition of CCS, offset by a reduction in hemophiliarevenue related to reduced reimbursement from California state programs.

 

Productrevenues, attributed entirely to the Specialty Infusion business unit,increased $34.1 million, or 17%, to $232.2 million in 2005 from $198.1 millionin 2004. The increase in product revenues for the twelve-month period wasprimarily attributable to the 2004 acquisition of CCS, offset by a reduction inhemophilia revenue related to the reduced reimbursement from California stateprograms. As a percentage of Specialty Infusion’s revenues, hemophilia revenuesaccounted for approximately 42% for the year ended December 31, 2005.

 

Servicerevenues, attributed entirely to the Wound Care Management business unit,increased $2.0 million, or 7%, to $28.9 million in 2005 from $26.9 million in2004. During 2005, the Company signed 17 new Wound Care Management contractsand 6 contracts were terminated.

 

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***Cost of Product Sales.***Costof product sales, attributed entirely to the Specialty Infusion business unit,increased $36.4 million, or 23%, to $193.2 million in 2005 compared to $156.9million in 2004. The increase in cost of product sales was primarilyattributable to the 2004 acquisition of CCS and increased costs for IVIGproducts. As a percentage of product revenues, cost of product sales in 2005was 83% compared to 79% in 2004. The dollar and percentage increases for 2005were primarily attributable to the acquisition of CCS which resulted in areduction of the percentage of the Company’s revenues derived from hemophiliaproducts, which have a lower product cost as a percentage of revenue, as wellas the reduction in hemophilia revenue related to the reduced reimbursementfrom California state programs.

 

***Cost of Services.***Costof services, attributed entirely to the Wound Care Management business unit,increased $0.9 million, or 8%, to $13.0 million in 2005 from $12.1 million in2004. As a percentage of service revenues, cost of services was flat at 45% in2005 and 2004.

 

***Gross Margin.***Grossmargin decreased $1.2 million, or 2%, to $54.9 million in 2005 from $56.0million in 2004. Specialty Infusion’s gross margin declined to $39.0 million in2005 from $41.2 million in 2004, a decrease of $2.2 million, or 5%. As apercentage of its revenues, Specialty Infusion’s gross margin was 17% in 2005as compared to 21% in 2004. The decreases in gross margin dollars andpercentage for the year ended December 31, 2005 were attributed to loweraverage revenue per unit for hemophilia products as a result of changes inreimbursement rates, lower average revenue per unit for IVIG products atpharmacies operating before the CCS acquisition due to a higher mix of managedcare business and a higher product cost. These decreases were partially offsetby the inclusion of the gross margin from the CCS acquisition.

 

WoundCare Management’s gross margin increased 7% to $15.9 million in 2005 comparedto $14.8 million in 2004. As a percentage of its revenues, Wound CareManagement’s gross margin was flat at 55% in 2005 and 2004.

 

***Selling, General and Administrative.***Selling,general and administrative expenses increased by $5.7 million, or 11%, to $55.7million in 2005 compared to $50.0 million in 2004 and consisted of $27.3million related to the Specialty Infusion business unit, $3.7 million relatedto the Wound Care Management business unit, $17.4 million related to corporateservices and $7.3 million in charges related to the Company’s corporatereorganization and financial advisory fees. The increase in selling, generaland administrative expenses of $5.7 million was primarily due to the inclusionof CCS’s results for a full year in 2005, offset by the charges of $7.3 millionin 2005 compared to $9.9 million in 2004, or $2.6 million. The charges incurredduring 2005 related to the corporate office relocation and financialrestructuring advisory and legal fees. As a percentage of total Companyrevenues, selling, general and administrative expenses were 21% in 2005compared to 22% in 2004.

 

***Goodwill Impairment.***Duringthe third quarter of 2005, the Company conducted an interim impairment testrelated to the carrying values of goodwill and other intangible assets,attributed entirely to the Specialty Infusion business unit, in accordance withSFAS No. 142 and SFAS No. 144, respectively. Based on the results ofthis evaluation, in the third quarter of 2005, the Company recorded non-cashimpairment charges from continuing operations of $77.5 million in goodwill and$0.1 million in other intangible assets related to the Specialty Infusionbusiness unit. The total charge of $77.6 million resulted primarily fromchanges in the economics of the Specialty Infusion business unit, includingreimbursement changes and resulting decline in gross margin. The Companyconducted an additional analysis as of December 31, 2005 and, based on thoseresults, no further impairment was identified. The fair value of the SpecialtyInfusion business unit was estimated by performing a discounted cash flowanalysis for the reporting unit. See Note 6 of Notes to Consolidated FinancialStatements.

 

***Interest (Expense) Income.***Net interest expensein 2005 was $25.5 million compared to $15.7 million in 2004. The increase of$9.7 million was primarily due to the Company’s increased debt used to fund theCCS acquisition in April of 2004 (see Notes 4 and 11 of Notes toConsolidated Financial Statements).

 

***Other (Income) Expense.***Other income of $0.7million and $0 in 2005 and 2004, respectively, and other expense of $0 and $1.1million in 2005 and 2004, respectively, primarily represented the fair valueadjustments of the Company’s interest rate swap agreement for those periods. TheCompany terminated the interest rate swap agreement in June of 2005 (seeNote 12 of Notes to Consolidated Financial Statements).

 

***Income tax benefit.***The Companyrecorded an income tax benefit of approximately $3.4 million in 2005 comparedto a benefit of $3.9 million in 2004. The tax benefit in 2005 resultedprimarily from the Company reversing certain tax reserve items, offset by therecording of a full valuation allowance of $1.4 million against its deferredtax assets.

 

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***Net Loss.***Loss from continuing operations in 2005was $99.8 million, or ($7.67) per share, compared to a loss from continuingoperations of $140.8 million, or ($10.89) per share in 2004. The loss fromcontinuing operations for 2005 was attributed to the goodwill and intangibleasset impairment charges, the increased interest expense related to the Company’sSenior Notes, the decreased gross margins for Specialty Infusion and thecharges taken primarily related to the Company’s corporate office relocationand financial advisory fees.

 

TheCompany also recorded loss from discontinued operations of $1.8 million, or $0.14per share compared to a loss from discontinued operations of $0.6 million, or($0.04) per share. As a result, the Company had a total net loss in 2005 of$101.6 million, or ($7.81) per share compared to a net loss of $141.4 million,or ($10.93) per share, in 2004.

 

**Fiscal Year 2004 vs. Fiscal Year 2003**

 

***Revenues.***TheCompany’s revenues increased $61.5 million, or 38%, to $225.0 million for thefiscal year ended December 31, 2004 compared to $163.5 million for thefiscal year ended December 31, 2003. The increase in revenues was theresult of the 2004 acquisition of CCS, offset by a reduction in hemophiliarevenue related to the reduced reimbursement from California state programs anda reduction in service revenues in the Wound Care Management business unit.

 

Productrevenues, attributed entirely to the Specialty Infusion business unit,increased $63.5 million, or 47%, to $198.1 million in 2004 from $134.6 millionin 2003. The increase in product revenues was primarily attributable to the2004 acquisition of CCS**,** offset by areduction in hemophilia revenue related to the reduced reimbursement fromCalifornia state programs and a reduction in IVIG sales. Product revenues forthe years ended December 31 included the following:

 
| ** **                        | ** ** | **2004**               | ** ** | **2003**                                                       | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------------------------------------------|------------|
| ** **                        | ** ** | **In   millions** | ** ** | **% of   Specialty   Infusion   Revenues** | ** ** | **In   millions** | ** ** | **% of   Specialty   Infusion   Revenues** | ** ** |
| Hemophilia                        |       | $                      | 111.4      |                                                           | 56         | % | $ | 115.3 |   | 86 | % |
| Other branch pharmacy revenue(1)  |       | 86.7                   |       | 44                                                             | %          | 19.3 |   | 14 | % |
| Total Specialty Infusion revenues |       | $                      | 198.1      |                                                           | 100        | % | $ | 134.6 |   | 100 | % |

 

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(1)   Includes product, service and per diemrevenues for products such as, among others, antibiotics, IVIG, TPN, Remicaid®and chemotherapy.

 

Servicerevenues, attributed entirely to the Wound Care Management business unit,decreased $2.0 million, or 7%, to $26.9 million in 2004 from $28.9 million in2003. The decrease in service revenues was primarily attributable to contractterminations, contract renegotiations resulting in lower average revenues perprogram and the conversion over the last two years of four under arrangementprograms to management service programs where revenues are lower. As of thefiscal year ended 2004, the Company signed 13 new Wound Care Managementcontracts and 6 contracts were terminated. The improvement in the total numberof contracts signed in 2004 versus contracts terminated was the result of amore favorable climate for outsourcing within the hospital market as well asimproved financial stability of hospitals generally. Program terminations byclient hospitals have been effected for such reasons as reduced reimbursement,financial restructuring, layoffs, bankruptcies, hospital closings or a hospital’sdecision to maintain a wound care center without external management. Thecontinued termination, non-renewal or renegotiations of a material number ofmanagement contracts or the inability to sign new contracts could result in acontinued decline in the Company’s Wound Care Management business unit revenue.The Wound Care Management business unit has a number of initiatives to counterthe decline in revenue, although there can be no assurance that the initiativeswill be successful. These initiatives include new product offerings such asinpatient wound care programs at acute care hospitals focusing on pressuresores, and wound outreach programs whereby nurse practitioners or physiciansfrom affiliated Wound Care Centers provide related services to long-term carefacilities in surrounding areas. All of these programs are currently beingoffered to hospitals.

 

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***Cost of Product Sales.***Cost of product sales,attributed entirely to the Specialty Infusion business unit, increased $67.6million, or 76%, to $156.9 million in 2004 compared to $89.2 million in 2003. Theincrease in cost of product sales was primarily attributable to the 2004acquisition of CCS. As a percentage of product revenues, cost of product salesin 2004 was 79% compared to 66% in 2003. The increased percentage for 2004 wasprimarily attributable to the acquisition of CCS which resulted in thereduction of the percentage of the Company’s revenues derived from hemophiliaproducts, which have a lower product cost as a percentage of revenue, as wellas the reduction in hemophilia revenue related to the reduced reimbursementfrom California state programs.

 

***Cost of Services.***Cost of services, attributedentirely to the Wound Care Management business unit, decreased $1.1 million, or9%, to $12.1 million in 2004 from $13.2 million in 2003. The decrease in costof services for 2004 was primarily attributed to the conversion over the lasttwo years of four under arrangement programs to management service programswhere expenses are lower. As a percentage of service revenues, cost of servicesin 2004 was 45% compared to 46% in 2003.

 

***Gross Margin.***Gross margin decreased $5.0million, or 8%, to $56.1 million in 2004 from $61.0 million in 2003. SpecialtyInfusion’s gross margin declined to $41.2 million in 2004 from $45.4 million in2003, a decrease of $4.2 million, or 9%. As a percentage of its revenues,Specialty Infusion’s gross margin was 21% in 2004 as compared to 34% in 2003. Thedecreases in gross margin dollars and percentage were attributed to loweraverage revenue per unit for hemophilia as a result of changes in reimbursementrates, lower average revenue per unit for IVIG at pharmacies operating beforethe CCS acquisition due to a higher mix of managed care business, and a highercost of service. These decreases were partially offset by the inclusion of thegross margin from the CCS acquisition. Wound Care Management’s gross marginslightly decreased to $14.8 million in 2004 from $15.7 million in 2003, or 5%. Asa percentage of its revenues, Wound Care Management’s gross margin was 55% in2004 compared to 54% in 2003. The increase was attributed to the conversionover the past two years of four under arrangement contract programs tomanagement services contracts where gross margins are typically higher.

 

***Selling, General andAdministrative.***Selling, general and administrativeexpenses increased by $9.0 million, or 22%, to $50.0 million in 2004 comparedto $41.0 million in 2003 and consisted of $17.8 million related to theSpecialty Infusion business, $4.0 million related to the Wound Care Managementbusiness, $18.3 million related to corporate services and $9.9 million incharges. The total 2004 charges of $9.9 million included the following:

 

| **Charge**                        | ** ** | **In   Millions** | ** ** |
|-----------------------------------|------------|------------------------|------------|
| Critical Care Systems integration |       | $                      | 6.8        |   |
| Litigation expense                |       | 1.8                    |       |
| Corporate reorganization          |       | 1.3                    |       |
| Total charges                     |       | $                      | 9.9        |   |

 

Theincrease in selling, general and administrative expenses of $9.0 million wasdue to the charges of $9.9 million in 2004 compared to $6.7 million in chargesin 2003 and the 2004 acquisition of CCS which accounted for increases ofapproximately $3.7 million in Specialty Infusion expenses and $2.8 million dueto growth in corporate departments in support of the CCS, offset by a decreaseof approximately $0.7 million in Wound Care Management expenses. As apercentage of total revenues, selling, general and administrative expenses were22% for 2004 compared to 25% for 2003.

 

***Goodwill Impairment.***During the fourth quarter of2004, the Company conducted its impairment test related to the carrying valuesof goodwill and other intangible assets, attributed entirely to the SpecialtyInfusion business unit, in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets” and SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets,” respectively. Based on the results of thisevaluation, the Company recorded non-cash impairment charges of $133.9 millionin goodwill and $68 thousand in other intangible assets related to theSpecialty Infusion business unit. The total charge of $134.0 resulted primarilyfrom changes in the economics of the Specialty Infusion business unit,including the changes in reimbursement methodology that occurred in 2004.

 

***Interest (Expense) Income.***Net interest expensein 2004 was $15.7 million compared to $2.3 million in 2003. The increase of$13.4 million was due to the Company’s increased debt used to fund the CCSacquisition in April of 2004 (see Notes 4 and 11 of Notes to ConsolidatedFinancial Statements).

 

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***Other Expense.***Other expense in 2004 was $1.1million compared to $0 in 2003 and represents the fair value adjustments of theCompany’s interest rate swap agreement as of December 31, 2004 (see Note12 of Notes to Consolidated Financial Statements).

 

***Income tax (benefit) provision.***The Companyrecorded an income tax benefit of $3.9 million in 2004 compared to an expenseof $7.9 million in 2003. The benefit in 2004 is primarily related to the netpre-tax loss adjusted for non-deductible items such as goodwill impairment.

 

***Net (Loss) Income.***Loss from continuingoperations in 2004 was $140.8 million, or ($10.89) per share, compared toincome from continuing operations of $12.2 million, or $0.89 per diluted sharein 2003 (calculated under the “as if converted” method as described in Note 18of Notes to Consolidated Financial Statements). The loss from continuingoperations for 2004 was attributable to the increase in charges incurred in2004, increased interest expense related to the Company’s Senior Notes, thegoodwill impairment charge and the reductions in hemophilia revenue related tothe reduced reimbursement from California state programs. The Company alsorecorded a loss from discontinued operations of $0.6 million or ($0.04) pershare, compared to income from discontinued operations of $0.9 million, or $0.07per diluted share in 2003 (see Note 5 of Notes to Consolidated FinancialStatements). As a result, the Company had a total net loss in 2004 of $141.4million, or ($10.93) per share compared to net income of $13.1 million, or$0.96 per diluted share, in 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Workingcapital deficit was $156.9 million at December 31, 2005 compared toworking capital of $50.8 million at December 31, 2004. The decrease inworking capital is the result of the Company classifying its debt and otherobligation as current (see Notes 2 and 11 of Notes to Consolidated FinancialStatements). Total cash and cash equivalents at December 31, 2005 was $1.1million. The ratio of current assets to current liabilities was 0.39 to 1 at December 31,2005 and 1.8 to 1 at December 31, 2004.

 

Cashflows provided by continuing operating activities for 2005 totaled $3.8million,  primarily attributable to thenet loss from continuing operations of $99.8 for the year, a $1.1 millionchange in the fair value of the interest rate swap and a decrease in accountspayable and accrued expenses of $4.0 million, offset by depreciation andamortization of $5.9 million, bad debt provision of $8.4 million, the goodwilland intangible asset impairment charges of $77.6 million and decreases ofapproximately $0.5 million, $5.2 million and $6.3 million in accountsreceivable, inventories and prepaids and other, respectively.

 

Cashflows provided by continuing investing activities totaled $0.1 million,attributable to $5.9 million in fixed asset purchases, net of $1.6 million indisposals, offset by proceeds of $4.4 million related to the Prescription CitySettlement (see Note 4 to Consolidated Financial Statements).

 

Cashflows used in continuing financing activities totaled $0.6 million,attributable to $1.6 million in borrowings against credit facilities, net ofdeferred financing costs and $1.5 million in proceeds from repayments of notesreceivable from stockholders, offset by $3.7 million in repayments of notespayable.

 

At December 31,2005, the Company experienced a net decrease in accounts receivable of $7.1million primarily attributable to approximately $4.2 million of additionalreserves the Company recorded in the fourth quarter of 2005 and a reduction indays sales outstanding (“DSO”). DSO was 87 days at December 31, 2005, ascompared to 88 days at December 31, 2004. At December 31, 2005, DSOfor the Specialty Infusion business unit was 91 days and for the Wound CareManagement business unit, DSO was 56 days, compared to 89 days and 73 days,respectively, at December 31, 2004.

 

As of December 31,2005, the Company’s debt and other obligation of $213.2 million included $185.0million in Senior Notes, $26.3 million in borrowed funds from the Company’scommercial lender, $0.4 million representing the DOJ obligation and $1.5million representing the convertible note used in connection with the purchaseof Apex in February 2002. On October 26, 2005, the Company commencedlitigation against former stockholders of Apex alleging, among other things,that stockholders of Apex made material misrepresentations in connection withtheir sale of Apex stock to Curative in 2002. Prior to commencement of theaction, Curative notified the representative of the former stockholdersindicating that it would not be making the installment payment due on December 31,2005 or any further payments pending resolution of this dispute (see Item 3, “LegalProceedings”). The Company’s debt 

 

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and other obligation wereclassified as current liabilities under generally accepted accountingprinciples as of December 31, 2005 (see Notes 2 and 11 of Notes toConsolidated Financial Statements).

 

Thetotal of the Company’s debt and other obligation and long-term liabilitiesdecreased $4.2 million to $213.2 million compared to $217.5 million at December 31,2004. The decrease was primarily due to a decrease in the DOJ obligationresulting from payments made in 2005, the release of the obligation to pay a$1.0 million promissory note entered into in connection with the asset purchaseof Prescription City (see Note 11 of Notes to Consolidated FinancialStatements) and the repayment of the $3.0 million note payable in connectionwith the purchase of Home Care of New York, Inc.

 

TheCompany’s current liquidity needs include those related to working capitalneeds for the servicing of its debt, approximately $19.9 million in interestexpense, paid semi-annually, related principally to the Company’s outstandingSenior Notes, a $0.4 million obligation payable to the DOJ related to thesettlement of its litigation previously disclosed and the expansion of theCompany’s branch network of full-service pharmacies, including capitalexpenditure requirements of approximately $3.0 million.

 

On May 2,2005, the Company made the first 2005 semi-annual interest payment ofapproximately $9.75 million on the Senior Notes, and on October 23, 2005,the Company paid the $3.0 million convertible note related to the purchase ofHome Care. The Company made these payments by drawing against its revolvingcredit facility. The Company did not, however, pay the November 1, 2005coupon due on the Senior Notes and instead elected to use the 30-day graceperiod under the Note indenture to continue to negotiate with the Ad HocCommittee of the bondholders and their financial advisor regarding arestructuring of the Senior Notes.

 

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.

 

In connection with the Existing CreditFacility, on December 1, 2005, the Company entered into a ForbearanceAgreement with GECC. The Forbearance Agreement provides that, subject tocertain conditions, GECC, together with the other lenders under the ExistingCredit Facility, which is governed by the Credit Agreement, will forbear fromexercising remedies on account of the cross-default under the Credit Agreementarising from the Company’s failure to pay interest on the Senior Notes. Subjectto certain termination events, including additional events of default under theCredit Agreement, the Forbearance Agreement will expire on June 10, 2006. Underthe terms of the Forbearance Agreement, Curative may continue to draw-downunder the Credit Agreement as if such existing events of default had notoccurred. Upon termination of the Forbearance Agreement, all obligations underthe Credit Agreement, together with interest, will be immediately due andpayable and the lenders may exercise any rights or remedies thereunder.

 

TheForbearance Agreement provides that interest on outstanding amounts on therevolver facility will accrue at the default rate under the agreement, but paidat the rate in the agreement as if no event of default had occurred. Thedifference between interest accrued and interest paid, the “PIK” spread,becomes due and payable at the end of the forbearance period, provided howeverthat GECC will waive such additional interest due as long as:  1) a terminating event under the facilitydoes not occur, 2) the Company accepts GECC’s proposal for a DIP Credit facilityand 3) GECC provides the Exit Facility (see Note 1 of Notes to ConsolidatedFinancial Statements). In addition, the Forbearance Agreement waives payment ofan early termination fee that became due and payable of $1.2 million, subjectto the same conditions as the PIK interest. The Company recorded the $1.2million termination penalty and PIK interest in the accompanying financialstatements. Further, the Company was not in compliance with the financialcovenants of total leverage, senior secured leverage and fix charges coverageratios under its revolving credit facility at December 31, 2005, and theCompany and GECC executed a waiver agreement related to these covenants.  As of April 5, 2006, our obligations under ourExisting Credit Facility with GECC have been paid in full in connection withthe interim order of the Bankruptcy Court authorizing the DIP Financingdescribed below.  The DIP Financingremains subject to approval by the Bankruptcy Court on a final basis.  If the Bankruptcy Court does not enter afinal order approving the DIP Financing, the Existing Credit Facility will bereinstated.

 

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. Thefinancial restructuring, as contemplated by the Plan Support Agreement and thePlan, 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 

 

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Notes, and agreed furtherto take all commercially reasonable actions to oppose and object to, and not tosupport, any person’s taking action to exercise remedies with respect to theSenior Notes. The Plan Support Agreement will terminate on July 31, 2006,or upon the earlier failure to satisfy certain milestones with respect to thePlan.

 

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.

 

The Bankruptcy Court entered an interimorder authorizing the Company to enter into a $45.0 milliondebtor-in-possession credit facility that is secured by all or substantiallyall of the Company’s assets and a pledge of the equity interests of each of itssubsidiaries, or “DIP Financing”). The proceeds of the DIP Financing were usedto pay, in full, all amounts outstanding under the Existing Credit Facility asof April 5, 2006 and alsowill be used for working capital and other general corporate purposes duringthe Chapter 11 Cases.

 

TheDIP Financing provides for a secured revolving credit facility of up to $45.0million, of which the Company can use up to $7.5 million as a letter of creditsub facility and up to $5.0 million as a swingline sub facility (i.e., ashort-term loan advance facility). The Company used the facility immediately topay all of its outstanding borrowings under the previous 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.

 

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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**COMMITMENTSAND CONTRACTUAL OBLIGATIONS**

 

At December 31,2005, the Company had an approximate $0.4 million obligation, payable in February 2006,to the DOJ related to the settlement of its litigation previously disclosed, aswell as bank debt and convertible and promissory notes totaling $212.9 millionpayable over various periods through 2011 that were used in the SpecialtyInfusion acquisitions (see Note 4****of Notes toConsolidated Financial Statements). In addition, the Company has contractualobligations under various operating leases.

 

Thefollowing table details total future payments under these obligations at December 31,2005 (in thousands):

 
| ** **                   | ** ** | **Total**  | ** ** | **Less than   1 year** | ** ** | **1 – 3   years** | ** ** | **3 – 5   years** | ** ** | **More   than 5   years** | ** ** |
|------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                               | ** ** |
| Senior subordinated notes(1) |       | $          | 185,000    |                                  | $          | 185,000                               |       | $                                     | —     |                                     | $          | — |   | $ | — |   |
| Revolving loan facility(1)   |       | 26,346     |       | 26,346                                |       | —                                |       | —                                |       | —                                   |       |
| DOJ obligation               |       | 375        |       | 375                                   |       | —                                |       | —                                |       | —                                   |       |
| Convertible note payable(2)  |       | 1,524      |       | 1,524                                 |       | —                                |       | —                                |       | —                                   |       |
| Operating leases             |       | 16,338     |       | 4,201                                 |       | 7,059                                 |       | 3,898                                 |       | 1,180                                    |       |
| Total                        |       | $          | 229,583    |                                  | $          | 217,446                               |       | $                                     | 7,059      |                                     | $          | 3,898 |   | $ | 1,180 |   |

 

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(1)   Due to the Company’s current financialcondition, all of the Company’s outstanding debt has been classified as currentin the accompanying financial statements (see Notes 2 and 11 of Notes toConsolidated Financial Statements).

 

(2)   Currently in dispute (see Note 21 of Notes toConsolidated Financial Statements).

 

Theeffects of inflation and changing prices are considered immaterial.

 

**RECENTLY ISSUED ACCOUNTING STANDARD**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”) whicheliminated the alternative of accounting for share-based compensationtransactions under the intrinsic value method of APB No. 25. Instead, SFASNo. 123(R) requires companies to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. The grant-date fair value of employee share optionsand similar instruments will be estimated using option-pricing models adjustedfor the unique characteristics of those instruments. The Company adopted SFAS No. 123(R)on January 1, 2006.

 

Giventhe Company’s filing for Chapter 11 reorganization as described above, thecancellation of the Company’s stock as well as existing options and theexpected issuance of new options at prices to be determined, the impact ofadoption of SFAS No. 123(R) on future net income cannot be predicted atthis time. SFAS No. 123(R) also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing activity,rather than as an operating activity as currently presented. This requirementwill reduce net operating cash flows and increase net financing cash flows inperiods after adoption. While future tax deduction amounts cannot be determinedat this time, the amount of tax benefit from stock option exercises recorded inoperating cash flows recognized in prior periods included no benefit in 2005 or2004 and $1.5 million in 2003.

 

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**ITEM 7A.****       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

TheCompany currently does not have market risk sensitive instruments entered intofor trading purposes and does not have operations subject to risks of materialforeign currency fluctuations. The Company does not enter into derivativeinstruments other than for cash flow hedging purposes and does not speculateusing derivative instruments.

 

Fornon-trading purposes, the Company is subject to interest rate risk under its ExistingCredit Facility. In conjunction with the acquisition of CCS on April 23,2004, the Company restructured its previous credit facility with GECC toprovide for a $40.0 million senior secured revolving credit facility. Loansunder this Existing Credit Facility may, at the Company’s option, be obtainedas Base Rate loans, LIBOR loans or any combination thereof. This creditfacility was to terminate on April 23, 2009.

 

In connection with the Existing CreditFacility, on December 1, 2005, the Company entered into a ForbearanceAgreement with GECC. The Forbearance Agreement provides that, subject tocertain conditions, GECC, together with the other lenders under the ExistingCredit Facility, which is governed by the Credit Agreement, will forbear fromexercising remedies on account of the cross-default under the Credit Agreementarising from the Company’s failure to pay interest on the Senior Notes. Subjectto certain termination events, including additional events of default under theCredit Agreement, the Forbearance Agreement will expire on June 10, 2006. Underthe terms of the Forbearance Agreement, Curative may continue to draw-downunder the Credit Agreement as if such existing events of default had notoccurred. Upon termination of the Forbearance Agreement, all obligations underthe Credit Agreement, together with interest, will be immediately due andpayable and the lenders may exercise any rights or remedies thereunder.

 

TheForbearance Agreement provides that interest on outstanding amounts on therevolver facility will accrue at the default rate under the agreement, but paidat the rate in the agreement as if no event of default had occurred. Thedifference between interest accrued and interest paid, the “PIK” spread,becomes due and payable at the end of the forbearance period, provided howeverthat GECC will waive such additional interest due as long as:  1) a terminating event under the facilitydoes not occur, 2) the Company accepts GECC’s proposal for a DIP Creditfacility and 3) GECC provides the Exit Facility (see Note 1 of Notes toConsolidated Financial Statements). In addition, the Forbearance Agreementwaives payment of an early termination fee that became due and payable of $1.2million, subject to the same conditions as the PIK interest. The Companyrecorded the $1.2 million termination penalty and PIK interest in theaccompanying financial statements.  As ofApril 5, 2006, our obligations under our Existing Credit Facility with GECChave been paid in full in connection with the interim order of the BankruptcyCourt authorizing the DIP Financing.  TheDIP Financing remains subject to approval by the Bankruptcy Court on a finalbasis.  If the Bankruptcy Court does notenter a final order approving the DIP Financing, the Existing Credit Facilitywill be reinstated.

 

Thetable below provides information about the Company’s financial instruments, inaccordance with stated terms of related agreements, that are sensitive tochanges in interest rates. For debt obligations, the table presents principalamounts outstanding and related weighted average interest rates. As a result ofthe Company’s financial condition and its filing of a Plan of Reorganizationunder Chapter 11, all of the Company’s outstanding indebtedness is classifiedas current.

 

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

 
| ** **                                                                                             | ** ** | **December 31, 2005** | ** **  | **Outstanding Balances   December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|--------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **Balance**                     | ** **  | **Fair   Value**                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-after** | ** ** |
| **Liability:**** **

Long-term debt (Senior Notes)  Fixed rate ($US)(1)  Average interest rate(1) |       | $

                        | 185.0 10.75 | %                                                      | $

   | 118.4 22.72 | % | $

  | 185.0 10.75 | % | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   |
| Long-term debt (Revolver)   Variable rate ($US)(2)   Average interest rate(2)                     |       | $

                        | 26.3   7.9  | %                                                      | $

   | 26.3   7.9 | % | $

  | 26.3 8.63 | % | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   |
| Convertible note used in purchase of Apex Average  interest rate(3)                                    |       | $

                        | 1.5   4.4   | %                                                      | $

   | 1.5   4.4 | % | $

  | 1.5   4.4 | % | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   |
| Department of Justice obligation   Average interest rate(4)                                            |       | $

                        | 0.4   6.0   | %                                                      | $

   | 0.4 6.0 | % | $

  | 0.4

6.0 | %  | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   | $

  | —

  |   |

 

----

(1)   The Senior Notes mature in May of 2011and bear interest at a fixed rate of 10.75%.

 

(2)   The average interest rates are based on theLIBOR forward yield curves at December 31, 2005 plus the applicable 3.5%premium. The senior secured revolving credit facility terminates on April 23,2009. The LIBOR interest rate in effect at December 31, 2005 was the 30-dayLIBOR rate of 4.4% plus 3.5%. On a monthly basis, a Base Rate of prime plus2.25% is applied to the difference between the LIBOR period loan and the actualoutstanding balance of the revolving facility. As of December 31, 2005,the prime rate in effect was 7.0%. In addition to the LIBOR and Base Rateinterest rate, there is a monthly unused line fee of between 0.5% and 0.75% ofthe unused balance on the facility.

 

(3)   Average interest rates are contractual amounts.The Company is disputing this obligation (see Part I, Item 3, “LegalProceedings”).

 

(4)   Average interest rates are contractual amounts.

 

56

----

 

**ITEM****8.****          CONSOLIDATED FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

** **

Theinformation required by this item is incorporated herein by reference to theConsolidated Financial Statements listed in Item 15(a) of Part IV ofthis Report.

 

Thistable should be read together with the accompanying Consolidated FinancialStatements and Notes. The period-to-period comparability of the Company’sselected consolidated financial data is affected by its acquisition activity. SeeNote 4 of Notes to Consolidated Financial Statements.

 

Thefollowing table sets forth the unaudited financial results of the Company forthe eight quarters ended December 31, 2005 (in thousands, except per sharedata)(1):

 
| ** **        | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | **Income**               | ** ** | **Net Loss**             | ** ** |
|-------------------|------------|-----------------|------------|---------------|------------|------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **        | ** ** | **Total**       | ** ** | **Gross**     | ** ** | **Net**    | ** ** | **Per Common**      | ** ** | **Per Common**           | ** ** |
| ** **        | ** ** | **Revenues(1)** | ** ** | **Profit(1)** | ** ** | **Loss**   | ** ** | **Share, Basic(3)** | ** ** | **Share, Diluted(2)(3)** | ** ** |
| **Quarter Ended** |       |            |       |          |       |       |       |                     |       |                          |       |
| **2005**          |       |            |       |          |       |       |       |                     |       |                          |       |
| December 31  |       | $               | 68,715     |          | $          | 14,803     |       | $                        | (12,528    | )                             | $          | (0.96 | ) | $ | (0.96 | ) |
| September 30 |       | 67,135          |       | 14,020        |       | (80,926    | )          | (6.22                    | )          | (6.22                         | )          |
| June 30      |       | 65,879          |       | 13,313        |       | (4,774     | )          | (0.37                    | )          | (0.37                         | )          |
| March 31     |       | 59,330          |       | 12,732        |       | (3,364     | )          | (0.26                    | )          | (0.26                         | )          |
|              |       |            |       |          |       |       |       |                     |       |                          |       |
| **2004**          |       |            |       |          |       |       |       |                     |       |                          |       |
| December 31  |       | $               | 62,018     |          | $          | 12,638     |       | $                        | (139,340   | )                             | $          | (10.77 | ) | $ | (10.77 | ) |
| September 30 |       | 64,398          |       | 15,115        |       | (2,066     | )          | (0.16                    | )          | (0.16                         | )          |
| June 30      |       | 59,190          |       | 15,117        |       | (3,132     | )          | (0.24                    | )          | (0.24                         | )          |
| March 31     |       | 39,374          |       | 13,180        |       | 3,133      |       | 0.24                     |       | 0.23                          |       |

 

----

(1)   Excludes amounts from discontinued operations.See Note 5 of Notes to Consolidated Financial Statements.

 

(2)   See Note 18 of Notes to Consolidated FinancialStatements for net (loss) income per share calculation.

 

(3)   Weighted average shares used in the abovecalculations have been corrected for 2004. Such correction resulted in anincrease in net loss per share of $.01 for the fourth quarter of 2004

 
| **ITEM  9.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|--------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 

57

----

 

**ITEM 9A.****                    CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Under the supervision and with the participation ofthe Company’s management, including its Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), the Company evaluated the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) as of the end of the period covered by thisreport on Form 10-K. Based on this evaluation, the Company noted adeficiency in the effectiveness of the Company’s 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 thisdeficiency, audit adjustments increasing the Company’s net loss in theaggregate amount of $6.2 million were recorded by the Company. Accordingly, theCEO and CFO concluded that, due to the material weakness in the Company’sinternal controls, the Company’s disclosure controls and procedures were noteffective as of December 31, 2005.

 

Any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system will be met. In addition, the design of any controlsystem is based, in part, upon certain assumptions about the likelihood offuture events. Because of these and other inherent limitations of controlsystems, there is only reasonable assurance that the Company’s controls willsucceed in achieving their goals under all potential future conditions.

 

**Changes in Internal Controls**

 

Except as noted above, there were no changes in theCompany’s internal control over financial reporting that occurred during thefourth quarter of 2005 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

**Remediation of Material Weakness inInternal Control over Financial Reporting**

 

Inorder to address the material weakness noted above, the Company has revised itsfinancial statement closing procedures to provide for broader review anddiscussion of such non-routine judgments in the future which will involve, 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 disclosure controlsand procedures are effective as of the date of filing of this report on Form 10-K.

 

**ITEM 9B.****       OTHER INFORMATION**

 

None.

 

58

----

 

**PART III**

 

Theinformation required by Part III of this Form 10-K is omitted fromthis Report in that the Registrant will file a definitive proxy statementpursuant to Regulation 14(a) for its 2006 Annual Meeting of Shareholders(the “Proxy Statement”) not later than 120 days after the end of the fiscalyear covered by this Report, and certain information included therein isincorporated herein by reference.

 

**ITEM 10.****       DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Theinformation required by this Item is incorporated by reference to the sections “Electionof Directors,” “Executive Officers” and “Section 16(a) BeneficialOwnership Reporting Compliance” of the Company’s Proxy Statement. The Companyhas adopted a Code of Ethics that applies to the Company’s Chief ExecutiveOfficer and senior financial officers. The text of such Code of Ethics has beenposted on the Company’s website at www.curative.com. Any amendment to, orwaiver from, a provision of such Code of Ethics shall be posted on the Company’swebsite at www.curative.com. In addition, the Company has adopted a Code ofBusiness Practices as part of its compliance program, and a copy of suchCode of Business Practices is available upon written request to the Company.

 

**ITEM 11.****       EXECUTIVE COMPENSATION**

 

Theinformation required by this Item is incorporated by reference to the sections “ExecutiveCompensation” and “Election of Directors – Compensation of Directors” of theCompany’s Proxy Statement.

 

**ITEM 12****        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT**

 

Theinformation required by this Item is incorporated by reference to the sections “StockOwnership of Certain Beneficial Owners and Management” and “Equity CompensationPlan Information” of the Company’s Proxy Statement.

 

**ITEM 13.****       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Theinformation required by this Item is incorporated by reference to the section ”CertainTransactions” of the Company’s Proxy Statement.

 

**ITEM 14.****       PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Theinformation required by this Item is incorporated by reference to the section ”Ratificationof Appointment of Independent Auditors” of the Company’s Proxy Statement.

 

59

----

 

**PART IV**

 

**ITEM 15.****       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 
| **(a)**    | **The  following documents are included with the filing of this report:**                                                                                                    |                                                                                                                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                         |                                                                                                                                                                                            |   |
| ** ** | **1.**                                                                                                                                                                       | **Index to Financial Statements**                                                                                                                                                               |   |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      |   |
|       |                                                                                                                                                                         | Report of  Independent Registered Public Accounting Firm                                                                                                                                        |   |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Consolidated Balance  Sheets at December 31, 2005 and 2004                                                                                                                                 | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Consolidated  Statements of Operations for the years ended                                                                                                                                      |   |
|       |                                                                                                                                                                         | December 31,  2005, 2004 and 2003                                                                                                                                                          | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Consolidated  Statements of Stockholders’ Equity for the years ended                                                                                                                       |   |
|       |                                                                                                                                                                         | December 31,  2005, 2004 and 2003                                                                                                                                                          | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Consolidated  Statements of Cash Flows for the years ended                                                                                                                                      |   |
|       |                                                                                                                                                                         | December 31,  2005, 2004 and 2003                                                                                                                                                          | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Notes to  Consolidated Financial Statements                                                                                                                                                     | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
| ** ** | **2.**                                                                                                                                                                       | **Financial Statement Schedules**                                                                                                                                                               | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | Schedule II  - Consolidated Schedule - Valuation and Qualifying Accounts                                                                                                              | ** ** |
| ** ** | ** **                                                                                                                                                                   | ** **                                                                                                                                                                                      | ** ** |
|       |                                                                                                                                                                         | All other  schedules are omitted because they are not applicable, or not required, or  because the required information is included in the consolidated financial  statements or notes thereto. |   |
|       |                                                                                                                                                                         |                                                                                                                                                                                            |   |
| **(b)**    | **Exhibits**                                                                                                                                                                 | ** **                                                                                                                                                                                      |
|       |                                                                                                                                                                         |                                                                                                                                                                                            |   |
|       | The list of  exhibits, entitled “Exhibits,” immediately following the financial statement  schedules accompanying this report is incorporated herein by reference. |                                                                                                                                                                                            |

 

60

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | **CURATIVE  HEALTH SERVICES, INC.** |
|--------|------------------------------------------|
|   |                                     |   |
|   | By:                                      | /s/ | Paul F.  McConnell |   |
|   |                                     |   | Paul F.  McConnell |
|   |                                     |   | Chief Executive  Officer |
|   |                                     |   | (Principal  Executive Officer) |

Date:  April 10, 2006

 

**POWER OFATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Paul F. McConnell, John C. Prior and Thomas Axmacher, jointly andseverally, his attorneys-in-fact, each with the power of substitution, for himin any and all capacities, to sign any amendments to this Report on Form 10-K,and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Signature** | ** **            | **Title**  | ** ** | **Date**                                      |
|---------------|-----------------------|------------|------------|-----------------------------------------------|
|          |                  |       |       |                                          |   |
| /s/           | Paul F.  McConnell    |       |       | Chief Executive  Officer                      |   | April 10,  2006 |
|          | Paul F.  McConnell    |       |       | (Principal  Executive Officer, Director)      |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Thomas Axmacher       |       |       | Chief Financial  Officer                      |   | April 10,  2006 |
| ** **    | Thomas Axmacher       | ** ** |       | (Principal  Financial and Accounting Officer) |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | John C. Prior         |       |       | Chief Operating  Officer                      |   | April 10,  2006 |
| ** **    | John C. Prior         | ** ** |       | Director                                      |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Paul S.  Auerbach, MD |       |       | Director                                      |   | April 10,  2006 |
|          | Paul S.  Auerbach, MD |       |       |                                          |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Daniel E. Berce       |       |       | Director                                      |   | April 10,  2006 |
|          | Daniel E. Berce       |       |       |                                          |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Lawrence English      |       |       | Director                                      |   | April 10,  2006 |
|          | Lawrence English      |       |       |                                          |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Timothy I.  Maudlin   |       |       | Chairman of the  Board                        |   | April 10,  2006 |
|          | Timothy I.  Maudlin   |       |       |                                          |   |   |
|          |                  |       |       |                                          |   |   |
| /s/           | Gerard Moufflet       |       |       | Director                                      |   | April 10,  2006 |
|          | Gerard Moufflet       |       |       |                                          |   |   |
|               |                       |            |            |                                               |  |  |  |  |  |  |  |  |  |  |

 

----

 

**Report ofIndependent Registered Public Accounting Firm**

 

The Board of Directors and Stockholders of Curative Health Services, Inc.

 

We have audited the accompanying consolidated balance sheets ofCurative Health Services, Inc. and subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of operations,stockholders’ (deficit) equity, and cash flows for each of the three years inthe period ended December 31, 2005. Our audits also included the financialstatement schedule listed in the Index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements and schedule basedon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company’s internal control overfinancial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofCurative Health Services, Inc. and subsidiaries at December 31, 2005and 2004, and the consolidated results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

The accompanying financial statements have been prepared assuming thatCurative Health Services, Inc. and subsidiaries will continue as a goingconcern. As more fully described in Note 1, the Company defaulted on itsoutstanding debt obligations during 2005 and, subsequent to year end, has filedvoluntary petitions under chapter 11 of the United States Bankruptcy Code.These conditions raise substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans in regard to these matters arealso described in Notes 1 and 2. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities that may resultfrom the outcome of this uncertainty.

 

 

 
|                                                | /s/ Ernst & Young LLP |   |
|-----------------------------------------------------|--------------------------------|--------|
| Manchester, New Hampshire                           |                           |
| March 27, 2006, except for Notes 1, 2  and 11, |                           |
| as to which  the date is April 5, 2006         |                           |

 

F-1

----

 

**CURATIVE HEALTH SERVICES, INC.AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars inthousands)**

 
| ** **                                                                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                   |       |                  |       |   |   |
| **Current  assets:**                                                                                                                         |       |                  |       |   |   |
| Cash and  cash equivalents                                                                                                                   |       | $                     | 1,099      |   | $ | 415 |   |
| Accounts  receivable (less allowance of $7,416 and $3,560 at December 31, 2005 and  2004, respectively)                                 |       | 66,487                |       | 73,544 |   |
| Inventories                                                                                                                                  |       | 10,495                |       | 15,381 |   |
| Prepaids and  other current assets                                                                                                           |       | 3,529                 |       | 5,650 |   |
| Deferred  financing fees                                                                                                                     |       | 9,913                 |       | — |   |
| Federal  income tax refund receivable                                                                                                        |       | 756                   |       | 3,431 |   |
| Deferred  income taxes                                                                                                                       |       | 5,860                 |       | 3,977 |   |
| Current  assets of discontinued operations                                                                                                   |       | 2,278                 |       | 12,010 |   |
| Total  current assets                                                                                                                        |       | 100,417               |       | 114,408 |   |
|                                                                                                                                         |       |                  |       |   |   |
| Property and  equipment, net                                                                                                                 |       | 11,934                |       | 10,906 |   |
| Intangibles  subject to amortization, net                                                                                                    |       | 18,548                |       | 20,383 |   |
| Intangibles  not subject to amortization (trade names)                                                                                       |       | 1,440                 |       | 1,446 |   |
| Goodwill                                                                                                                                     |       | 36,387                |       | 119,559 |   |
| Other assets                                                                                                                                 |       | 367                   |       | 12,979 |   |
| Non-current  assets of discontinued operations                                                                                               |       | 195                   |       | 4,103 |   |
| Total assets                                                                                                                                 |       | $                     | 169,288    |   | $ | 283,784 |   |
|                                                                                                                                         |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ (DEFICIT) EQUITY**                                                                                     |       |                  |       |   |   |
| **Current  liabilities:**                                                                                                                    |       |                  |       |   |   |
| Accounts  payable                                                                                                                            |       | $                     | 13,133     |   | $ | 23,774 |   |
| Accrued  expenses and other current liabilities                                                                                              |       | 29,879                |       | 21,026 |   |
| Debt in  default and other obligation                                                                                                        |       | 213,245               |       | 5,496 |   |
| Current  liabilities of discontinued operations                                                                                              |       | 1,035                 |       | 13,324 |   |
| Total  current liabilities                                                                                                                   |       | 257,292               |       | 63,620 |   |
|                                                                                                                                         |       |                  |       |   |   |
| Long-term  liabilities                                                                                                                       |       | —                |       | 210,991 |   |
| Deferred  income taxes                                                                                                                       |       | 5,860                 |       | 3,511 |   |
| Other  long-term liabilities                                                                                                                 |       | 74                    |       | 1,209 |   |
| Non-current  liabilities of discontinued operations                                                                                          |       | 395                   |       | — |   |
| Total  long-term liabilities                                                                                                                 |       | 6,329                 |       | 215,711 |   |
|                                                                                                                                         |       |                  |       |   |   |
| Commitments  and contingencies                                                                                                               |       |                  |       |   |   |
| **Stockholders’  (deficit) equity:**                                                                                                    |       |                  |       |   |   |
| Preferred  stock, $.01 par value per share; 10,000,000 shares authorized, none issued                                                        |       | —                |       | — |   |
| Preferred  stock, Series A Junior Participating, par value $.01 per share, 500,000  shares authorized, none issued                      |       | —                |       | — |   |
| Common  stock, $.01 par value per share; 50,000,000 shares authorized, 13,043,133  shares issued and outstanding (12,951,462 shares in 2004) |       | 129                   |       | 128 |   |
| Additional  paid in capital                                                                                                                  |       | 120,293               |       | 119,449 |   |
| Accumulated  deficit                                                                                                                         |       | (212,879              | )          | (111,287 | ) |
| Deferred  compensation                                                                                                                       |       | (1,876                | )          | (2,364 | ) |
| Notes  receivable – stockholders                                                                                                        |       | —                |       | (1,473 | ) |
| Total  stockholders’ (deficit) equity                                                                                                   |       | (94,333               | )          | 4,453 |   |
| Total  liabilities and stockholders’ (deficit) equity                                                                                   |       | $                     | 169,288    |   | $ | 283,784 |   |

 

See accompanying notes

 

F-2

----

 

**CURATIVEHEALTH SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Allamounts in thousands, except per share data)**

 
| ** **                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                                  |       |                                        |       |   |   |   |   |
| Products                                                                                                   |       | $                                           | 232,169    |   | $ | 198,055 |   | $ | 134,596 |   |
| Services                                                                                                   |       | 28,890                                      |       | 26,925 |   | 28,898 |   |
| Total  revenues                                                                                            |       | 261,059                                     |       | 224,980 |   | 163,494 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Costs and  operating expenses:                                                                             |       |                                        |       |   |   |   |   |
| Cost of  product sales                                                                                     |       | 193,206                                     |       | 156,854 |   | 89,241 |   |
| Cost of  services                                                                                          |       | 12,985                                      |       | 12,076 |   | 13,224 |   |
| Selling,  general and administrative                                                                       |       | 55,702                                      |       | 50,042 |   | 40,995 |   |
| Goodwill and  intangible asset impairment                                                                  |       | 77,608                                      |       | 133,969 |   | — |   |
| Total costs  and operating expenses                                                                        |       | 339,501                                     |       | 352,941 |   | 143,460 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| (Loss)  income from operations                                                                             |       | (78,442                                     | )          | (127,961 | ) | 20,034 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Interest  expense                                                                                          |       | (25,491                                     | )          | (15,833 | ) | (2,300 | ) |
| Interest  income                                                                                           |       | 23                                          |       | 107 |   | 20 |   |
| Other  expense                                                                                             |       | —                                      |       | (1,081 | ) | — |   |
| Other income                                                                                               |       | 712                                         |       | — |   | 2,327 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| (Loss)  income from continuing operations before income taxes                                              |       | (103,198                                    | )          | (144,768 | ) | 20,081 |   |
| Income tax  (benefit) provision                                                                            |       | (3,415                                      | )          | (3,949 | ) | 7,909 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| (Loss)  income from continuing operations                                                                  |       | (99,783                                     | )          | (140,819 | ) | 12,172 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Discontinued  operations:                                                                                  |       |                                        |       |   |   |   |   |
| Income (loss)  from discontinued operations                                                                |       | (1,254                                      | )          | (471 | ) | 1,490 |   |
| Loss on sale  of discontinued operations                                                                   |       | (933                                        | )          | — |   | — |   |
| Income tax  (benefit) provision                                                                            |       | (378                                        | )          | 115 |   | 587 |   |
| (Loss) Income  from discontinued operations                                                                |       | (1,809                                      | )          | (586 | ) | 903 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Net (loss)  income                                                                                         |       | $                                           | (101,592   | ) | $ | (141,405 | ) | $ | 13,075 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Basic net  (loss) income per share:                                                                        |       |                                        |       |   |   |   |   |
| (Loss)  income from continuing operations                                                                  |       | $                                           | (7.67      | ) | $ | (10.89 | ) | $ | 0.97 |   |
| Income  (loss) from discontinued operations                                                                |       | (0.14                                       | )          | (0.04 | ) | 0.07 |   |
| Net (loss)  income                                                                                         |       | $                                           | (7.81      | ) | $ | (10.93 | ) | $ | 1.04 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Diluted net  (loss) income per share:(1)                                                                   |       |                                        |       |   |   |   |   |
| (Loss)  income from continuing operations                                                                  |       | $                                           | (7.67      | ) | $ | (10.89 | ) | $ | 0.89 |   |
| Income  (loss) from discontinued operations                                                                |       | (0.14                                       | )          | (0.04 | ) | 0.07 |   |
| Net (loss) income                                                                                          |       | $                                           | (7.81      | ) | $ | (10.93 | ) | $ | 0.96 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Denominator  for basic net (loss) income per share, weighted average common shares                         |       | 13,002                                      |       | 12,932 |   | 12,536 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |
| Denominator  for diluted net (loss) income per share, weighted average common shares  assuming conversions |       | 13,002                                      |       | 12,932 |   | 13,816 |   |

 

----

(1)                                  See Note 18 of Notes to Consolidated FinancialStatements for net (loss) income per share calculation.

 

See accompanying notes

 

F-3

----

 

**CURATIVE HEALTH SERVICES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(Dollars in thousands)**

 
| ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Retained**     | ** ** | ** **       | ** ** | ** **       | ** ** | **Total**              | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **Common** | ** ** | **Common** | ** ** | **Additional** | ** ** | **Earnings**     | ** ** | ** **       | ** ** | **Notes**        | ** ** | **Stockholders’** | ** ** |
| ** **                                  | ** ** | **Stock**  | ** ** | **Stock**  | ** ** | **Paid-In**    | ** ** | **(Accumulated** | ** ** | **Deferred**     | ** ** | **Receivable**   | ** ** | **Equity**             | ** ** |
| ** **                                  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Deficit)**     | ** ** | **Compensation** | ** ** | **Stockholders** | ** ** | **(Deficit)**          | ** ** |
| ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **             | ** ** |
| **Balance, December 31, 2002**         |       | 12,142,106 |       | $          | 121        |           | $          | 106,124          |       | $                | 17,043     |             | —     |                   | $          | (2,387 | ) | $ | 120,901 |   |
| Exercise of options                         |       | 485,863    |       | 4          |       | 4,136          |       | —           |       | —           |       | —           |       | 4,140                  |       |
| Exercise of rights under convertible notes  |       | 300,389    |       | 3          |       | 4,828          |       | —           |       | —           |       | —           |       | 4,831                  |       |
| Tax benefit from stock option exercises     |       | —     |       | —     |       | 1,517          |       | —           |       | —           |       | —           |       | 1,517                  |       |
| Repayment of notes receivable-stockholders  |       | —     |       | —     |       | —         |       | —           |       |             |       | 780              |       | 780                    |       |
| Shares repurchased and retired              |       | (97,070    | )          | (1         | )          | (1,523         | )          | —           |       | —           |       | —           |       | (1,524                 | )          |
| Net income for 2003                         |       | —     |       | —     |       | —         |       | 13,075           |       | —           |       | —           |       | 13,075                 |       |
|                                        |       |       |       |       |       |           |       |             |       |             |       |             |       |                   |       |
| **Balance, December 31, 2003**         |       | 12,831,288 |       | 127        |       | 115,082        |       | 30,118           |       | —           |       | (1,607           | )          | 143,720                |       |
| Exercise of options and other               |       | 47,459     |       | 1          |       | 303            |       | —           |       | —           |       | —           |       | 304                    |       |
| Grant of restricted common stock            |       | —     |       | —     |       | 2,896          |       | —           |       |             | (2,896     | )                | —     |                   | —     |   |
| Amortization of deferred stock compensation |       | —     |       | —     |       | —         |       | —           |       | 532              |       | —           |       | 532                    |       |
| Exercise of rights under convertible notes  |       | 72,715     |       | —     |       | 1,168          |       | —           |       | —           |       | —           |       | 1,168                  |       |
| Repayment of notes receivable-stockholders  |       | —     |       | —     |       | —         |       | —           |       | —           |       | 134              |       | 134                    |       |
| Net loss for 2004                           |       | —     |       | —     |       | —         |       | (141,405         | )          | —           |       | —           |       | (141,405               | )          |
|                                        |       |       |       |       |       |           |       |             |       |             |       |             |       |                   |       |
| **Balance, December 31, 2004**         |       | 12,951,462 |       |       | 128        |           |       | 119,449          |       |             | (111,287   | )                |       | (2,364                 | )          |   | (1,473 | ) |   | 4,453 |   |
|                                        |       |       |       |       |       |           |       |             |       |             |       |             |       |                   |       |
| Grant/issuance of restricted stock          |       | 91,671     |       | 1          |       | 844            |       | —           |       | (844             | )          | —           |       | 1                      |       |
| Amortization of deferred stock compensation |       | —     |       | —     |       | —         |       | —           |       | 1,332            |       | —           |       | 1,332                  |       |
| Repayment of notes receivable-stockholders  |       | —     |       | —     |       | —         |       | —           |       | —           |       | 1,473            |       | 1,473                  |       |
| Net loss for 2005                           |       | —     |       | —     |       | —         |       | (101,592         | )          | —           |       | —           |       | (101,592               | )          |
|                                        |       |       |       |       |       |           |       |             |       |             |       |             |       |                   |       |
| **Balance, December 31, 2005**         |       | 13,043,133 |       | $          | 129        |           | $          | 120,293          |       | $                | (212,879   | )                | $          | (1,876                 | )          | $ | — |   | $ | (94,333 | ) |
|                                             |            |            |            |            |            |                |            |                  |            |                  |            |                  |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes

 

F-4

----

 

**CURATIVEHEALTH SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

 
| ** **                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **OPERATING  ACTIVITIES:**                                                                                      |       |     |       |     |       |     |       |
| (Loss)  income from continuing operations                                                                       |       | $        | (99,783    | )        | $          | (140,819 | )          | $ | 12,172 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by (used in) continuing operating  activities: |       |     |       |     |       |     |       |
| Depreciation  and amortization                                                                                  |       | 5,883    |       | 4,925    |       | 2,602    |       |
| Provision  for doubtful accounts                                                                                |       | 8,409    |       | 2,336    |       | 2,164    |       |
| Gain on sale  of equity investment                                                                              |       | —   |       | —   |       | (2,327   | )          |
| Stock based  compensation                                                                                       |       | 1,332    |       | 532      |       | —   |       |
| Change in  fair value of interest rate swap                                                                     |       | (1,081   | )          | 1,081    |       | —   |       |
| Deferred  income taxes                                                                                          |       | 1,375    |       | 595      |       | 2,423    |       |
| Amortization  of deferred financing fees                                                                        |       | 1,986    |       | 1,382    |       | —   |       |
| Tax benefit  from stock option exercises                                                                        |       | —   |       | —   |       | 1,517    |       |
| Goodwill and  intangible asset impairment                                                                       |       | 77,608   |       | 133,969  |       | —   |       |
| Changes in  operating assets and liabilities, net of effects from Specialty Infusion  acquisitions:             |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                            |       | 557      |       | (385     | )          | (17,146  | )          |
| Inventories                                                                                                     |       | 5,246    |       | (3,878   | )          | 3,872    |       |
| Swap  interest receivable                                                                                       |       | —   |       | (211     | )          | —   |       |
| Prepaids and  other                                                                                             |       | 6,274    |       | (5,608   | )          | 1,052    |       |
| Accounts  payable and accrued expenses                                                                          |       | (3,967   | )          | (2,186   | )          | 614      |       |
| **Net cash  provided by (used in) continuing operating activities**                                             |       | 3,839    |       | (8,267   | )          | 6,943    |       |
| **Net cash  (used in) provided by discontinued operations**                                                     |       | (2,660   | )          | 1,221    |       | (24,118  | )          |
| **NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES**                                                        |       | 1,179    |       | (7,046   | )          | (17,175  | )          |
|                                                                                                            |       |     |       |     |       |     |       |
| **INVESTING  ACTIVITIES:**                                                                                      |       |     |       |     |       |     |       |
| Specialty  Infusion acquisitions, net of cash acquired                                                          |       | 4,400    |       | (154,420 | )          | (867     | )          |
| Sale of  Accordant Health Services, Inc.                                                                   |       | —   |       | 2,815    |       | —   |       |
| Purchases of  property and equipment                                                                            |       | (5,902   | )          | (5,296   | )          | (6,550   | )          |
| Disposal of  property and equipment and other                                                                   |       | 1,612    |       | 1,514    |       | —   |       |
| **NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES**                                                        |       | 110      |       | (155,387 | )          | (7,417   | )          |
|                                                                                                            |       |     |       |     |       |     |       |
| **FINANCING  ACTIVITIES:**                                                                                      |       |     |       |     |       |     |       |
| Shares  repurchased and retired                                                                                 |       | —   |       | —   |       | (1,524   | )          |
| Net proceeds  from issuance of senior subordinated notes                                                        |       | —   |       | 173,401  |       | —   |       |
| Proceeds  from exercise of stock options                                                                        |       | —   |       | 165      |       | 3,989    |       |
| Proceeds  from repayment of notes receivable – stockholders                                                |       | 1,473    |       | 134      |       | 780      |       |
| Borrowing  from credit facilities, net                                                                          |       | 1,575    |       | 12,730   |       | 34,001   |       |
| Repayments  of long-term liabilities                                                                            |       | —   |       | (24,000  | )          | (13,368  | )          |
| Repayment of  notes payable                                                                                     |       | (3,653   | )          | (871     | )          | —   |       |
| **NET CASH  (USED IN) PROVIDED BY FINANCING ACTIVITIES**                                                        |       | (605     | )     | 161,559  |       | 23,878   |       |
|                                                                                                            |       |     |       |     |       |     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                           |       | 684      |       | (874     | )          | (714     | )          |
| CASH AND  CASH EQUIVALENTS AT BEGINNING OF YEAR                                                                 |       | 415      |       | 1,289    |       | 2,003    |       |
| CASH AND  CASH EQUIVALENTS AT END OF YEAR                                                                       |       | $        | 1,099      |     | $          | 415      |       | $ | 1,289 |   |

 

See accompanying notes

 

F-5

----

 

**CURATIVEHEALTH SERVICES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2005**

 

**NOTE 1 - ORGANIZATION AND SIGNIFICANTACCOUNTING POLICIES**

 

**ORGANIZATION**

 

The Company was organized under the laws ofthe State of Minnesota in October 1984. In August 2003, the Companyeffected a holding company reorganization in which each share of the registrant’soutstanding common stock was deemed to have been exchanged for one share ofcommon stock in a newly formed corporation (the “new holding company”). Pursuantto Section 302A.626 (subd. 7) of the Minnesota Business Corporation Act,the articles of incorporation, bylaws and name of the new holding company, andthe authorized capital stock of the new holding company (including thedesignations, rights, powers and preferences of such capital stock and thequalifications, limitations and restrictions thereof) are all consistent withthose of the registrant as it existed prior to the reorganization. In addition,the directors and executive officers of the new holding company were the sameindividuals who were directors and executive officers, respectively, of theregistrant prior to the reorganization. The terms “Curative” and the “Company”as used in these financial statements and accompanying notes refer, for periodsprior to the reorganization, to the corporation that was the registrant priorto the reorganization, and, for periods after the reorganization, to the newholding company.

 

The Company operates a Specialty Infusionbusiness unit and a Wound Care Management business unit to deliver high-qualitycare and positive clinical outcomes for patients experiencing serious acute orchronic medical conditions. Through its Specialty Infusion business unit, theCompany provides intravenous and injectable biopharmaceutical and compoundedpharmaceutical products and comprehensive infusion services to patients withchronic and critical disease states. All patient care is delivered through anational footprint of community-based branches. Each local branch has anexperienced multidisciplinary team of pharmacists, nurses, reimbursementspecialists and patient service representatives who comprehensively manage allaspects of a patient’s infusion and related support needs. The Company purchasesbiopharmaceutical and other pharmaceutical products from suppliers andcontracts with insurance companies and other payors to provide its services,which include coordination of patient care, 24-hour nursing and pharmacyavailability, patient education and reimbursement billing and collectionservices. The products distributed and the injection or infusion therapiesoffered by Curative are used by patients with chronic or severe conditions suchas hemophilia, immune system disorders, chronic or severe infections,nutritionally compromised and other severe conditions requiring nutritionalsupport, cancer, rheumatoid arthritis, hepatitis C and multiple sclerosis. Examplesof biopharmaceutical products used by Curative’s patients include hemophilia clottingfactor, IVIG and Remicade®. Examples of pharmaceutical products usedby Curative’s patients include compounded pharmaceuticals, such as TPNproducts, anti-infectives, chemotherapy agents and pain management products. Asof December 31, 2005, the Company had approximately 485 payor contractsand provided products or services in approximately 45 states.

 

Curative’s Wound Care Management businessunit is a leading provider of wound care services specializing in chronic woundcare management. It manages, on behalf of hospital clients, a nationwidenetwork of Wound Care Center® programs that offer a comprehensiverange of services across a continuum of care for treatment of chronic wounds. TheCompany’s Wound Management ProgramSM consists of diagnostic andtherapeutic treatment procedures that are designed to meet each patient’sspecific wound care needs on a cost-effective basis. The treatment proceduresare designed to achieve positive results for wound healing based on significantexperience in the field. The Company maintains a proprietary database ofpatient results that it has collected since 1988 containing over 534,000patient cases. The treatment procedures, which are based on extensive patientdata, have allowed the Company to achieve an overall rate of healing ofapproximately 89% at December 31, 2005 for patients completing therapy. Asof December 31, 2005, the Wound Care Center® network consistedof 109 outpatient clinics (103 operating and 6 contracted) located on or nearcampuses of acute care hospitals in approximately 30 states.

 

F-6

----

 

**PLANNED REORGANIZATION AND CHAPTER 11BANKRUPTCY PROCEEDINGS**

 

On March 27, 2006, Curative and each ofits direct and indirect subsidiaries filed voluntary petitions under chapter 11of title 11 of the United States Code (the “Bankruptcy Code”) in the UnitedStates Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”). The Company filed its chapter 11 cases (the “Chapter 11 Cases”) toimplement and effect its Prepackaged Joint Plan of Reorganization, dated February 6,2006 (the “Plan”). Prior to commencement of the Chapter 11 Cases, Curativesolicited votes to accept or reject the Plan from the holders of the $185.0million aggregate principal amount of 10.75% senior notes due 2011 (the “SeniorNotes”) issued by the Company and the holders of known general unsecured claimsagainst the Company as of February 6, 2006. Prior to the commencement ofthe Chapter 11 Cases, the Company received the requisite votes for the Plan tobe confirmable under Section 1129 of the Bankruptcy Code.

 

The Plan was filed with the Bankruptcy Courton March 27, 2006. The Plan, which is described in more detail below,will, if confirmed and consummated, result in the cancellation and discharge ofall claims relating to the Senior Notes. Each holder of Senior Notes (each, a “SeniorNoteholder”) will receive a cash payment of approximately 54.9% of itsrespective claim related to the Senior Notes, unless a Senior Noteholder wasqualified to elect and did elect to receive its pro rata share of certain cashconsideration provided in the Plan and the common stock of reorganized Curative(the “New Curative Common Stock”). Holders of existing shares of Curativecommon stock (“Old Curative Common Stock”) and options will not receive anydistributions under the Plan and all shares of Old Curative Common Stock andoptions will be extinguished.

 

In connection with the reorganization to beeffected by the Plan, the Company intends to deregister its existing securitiesunder the Securities Exchange Act of 1934, and become a “private company” uponits emergence from Chapter 11.

 

**Events Leading to Chapter 11 Cases**

 

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

 

Since June 2004, Curative has facedvarious issues that have negatively affected its liquidity and its ability toservice its debt obligations. Specifically, and as described in further detailbelow, Curative has experienced reduced revenue generation as a result of:

 

•                  California’s modification of its blood-product reimbursement methodology,

 

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

 

•                  slow maturation of certain new branch locations,

 

•                  the resignation of certain customer sales and service representatives, and

 

•                  additional future liquidity risks, including potential indemnificationclaims.

 

*Significant Decrease in Blood-ProductReimbursement*

 

On April 23, 2004, the Company acquiredCritical Care Systems, Inc. (“CCS”), a leading national provider ofspecialty infusion pharmaceuticals and related services for a purchase price of$154.2 million, including working capital adjustments of approximately $4.1million. The acquisition of CCS was financed with a portion of the proceedsobtained from the issuance of the Senior Notes and additional borrowings. SeeNote 4.

 

F-7

----

 

At the time of the CCS acquisition, asignificant portion of the Company’s business involved the sale ofblood-clotting products by the Company to hemophilia patients who arebeneficiaries of California’s Medicaid (“Medi-Cal”) program or other statefunded programs for hemophilia patients. These blood products were dispenseddirectly to patients or through the Company’s relationships with third partypharmacies.

 

In May 2004, California announced that,effective June 1, 2004, California modified its reimbursement methodologyfor blood-clotting products to average selling price (“ASP”) (as provided bythe manufacturer) plus 20%. This change in California’s reimbursementmethodology amounted to an approximate 30-40% reduction from the acquisitioncost plus 1% methodology previously in effect. The implementation of thisreduction in reimbursement from Medi-Cal, and changes in regulations governingsuch reimbursement, significantly impacted the Company’s revenues from the saleof blood-clotting products.

 

In addition to the 30%-40% decrease inrevenue for blood-clotting products generated from Medi-Cal reimbursement, in November 2004,the federal government announced that, effective January 1, 2005, it wouldmodify its reimbursement methodology for blood-clotting products in a mannerwhich would negatively 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”). After 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*

 

The Company’s overall growth strategy, andits approach to offsetting the decreased revenue resulting from the change inMedi-Cal reimbursement methodology described above, included opening 13 newbranches throughout the United States since June 2004. The Companyprojected that these new branches would quickly enter into the necessaryservice contracts and other business and patient relationships in theshort-term and begin generating positive revenue consistent with historicalresults. However, for various reasons, including slower than anticipatedmanaged care contract signings, certain of these branches have not matured asquickly as planned and have not generated anticipated revenues.

 

*Resignation of Hemophilia ServiceRepresentatives*

 

The success of the Company’s SpecialtyInfusion business unit depends in part upon its ability to retain keyemployees, referred to as hemophilia services representatives, who servicehemophilia patients. The hemophilia service representatives are the chiefcontacts and maintain the primary relationship with Curative’s customers. Whilethe Company has employment agreements with its hemophilia servicerepresentatives which, where appropriate, contain covenants not to compete andother restrictive covenants that apply if the hemophilia servicerepresentatives 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 hemophiliaservice representatives resigned. The Company estimates that the patientsserviced by these employees represent approximately $25.0 million of revenueannually. While it is not certain that the Company will lose the full $25.0million of revenue, it is likely that it will experience a significant decreasein 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.

 

F-8

----

 

In addition to the factors adverselyaffecting the Company’s revenue generation described above, its futureliquidity may also be affected by the following additional factor:

 

•                  *The Pharmacy Claims.*Two of the Company’s subsidiaries, ApexTherapeutic Care, Inc. (“Apex”) and eBioCare.com, Inc. (“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 (the “DHS Audit”)related to the pharmacies’ medical billing for clotting factor supplied to thepharmacies by Apex and eBioCare, and the pharmacies’ medical billing for theanti-inhibitor product “FEIBA” supplied to the pharmacies by Apex and eBioCare.While liability with respect to these claims is uncertain at this time, Apexand eBioCare believe that some amount of monetary loss is reasonably possibleif the pharmacies assert and prevail on indemnification claims. Apex andeBioCare estimate that the range of loss may be anywhere from $0 to $39.3million. As the amount of potential exposure cannot be estimated at this time,no related loss provision has been accrued in the consolidated financialstatements as of December 31, 2005.

 

***Plan Negotiations and Solicitation of Voteson the Prepackaged Plan***

 

As a result of the foregoing factors, in June 2005,the Company began evaluating strategic alternatives and subsequently retainedUBS Securities LLC as its financial advisors. In September 2005, certainholders of the Senior Notes formed an Ad Hoc Committee and Curative begandiscussions with them with respect to a de-leveraging of its balance sheet. On November 1,2005, the Company was required to make an interest payment in the amount ofapproximately $9.9 million to the Senior Noteholders. The Company elected notto make this interest payment and to use the 30-day grace period availableunder the indenture. Upon expiration of the grace period on November 30,2005, Curative did not make the interest payment and an event of defaultoccurred under the Senior Notes, which also triggered an event of default underits prepetition credit facility (the “Existing Credit Facility”) with GeneralElectric Capital Corporation (“GECC”).

 

In connection with the Existing CreditFacility, on December 1, 2005, the Company entered into a Forbearance Agreement,as amended (“Forbearance Agreement”) with GECC. The Forbearance Agreementprovides that, subject to certain conditions, GECC, together with the otherlenders under the Existing Credit Facility, which is governed by a CreditAgreement dated April 23, 2004, as amended (the “Credit Agreement”), will forbear from exercising remedies onaccount of the cross-default under the Credit Agreement arising from theCompany’s failure to pay interest on the Senior Notes. Subject to certaintermination events, including additional events of default under the CreditAgreement, the Forbearance Agreement will expire on June 10, 2006. Underthe terms of the Forbearance Agreement, Curative may continue to draw-downunder the Credit Agreement as if such existing events of default had notoccurred. Upon termination of the Forbearance Agreement, all obligations underthe Credit Agreement, together with interest, will be immediately due andpayable and the lenders may exercise any rights or remedies thereunder(see Debtor in Possession).

 

On December 2, 2005, the Company reachedan agreement with the Ad Hoc Committee on the general terms of a financialrestructuring and entered into a Plan Support Agreement. The financialrestructuring, as contemplated by the Plan Support Agreement and the Plan, isdesigned to (a) de-leverage the Company’s balance sheet, (b) provideCurative with substantial liquidity to conduct its business operations, (c) ensurethat the Company’s business operations are unaffected by the Chapter 11 Cases andthat it is able to retain its existing management and employees and (d) providethe greatest return to its creditors. Under the Plan Support Agreement, theSenior Noteholders party thereto agreed to forbear from exercising remedieswith respect 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 Prepackaged Plan.

 

F-9

----

 

On February 6, 2006, pursuant to thePlan Support Agreement, the Company commenced solicitation of votes on thePrepackaged Plan. In connection with the solicitation, Curative circulated theDisclosure Statement in support of the Prepackaged Plan (the “DisclosureStatement”) to the Senior Noteholders and the holders of known generalunsecured claims against the Company as of February 6, 2006.

 

The solicitation period with respect to voteson the Plan ended on March 13, 2006. The Plan was accepted by 93.2% innumber and 99.7 % in amount of the beneficial holders of the Senior Noteholdersvoting on the Plan. Holders of general unsecured claims against Curative andits subsidiaries, excluding Apex and eBioCare, (the “Curative Debtors”) votedto accept the Plan (62.5% in number and 91.1% in amount). The only classes ofcreditors entitled to vote on the Plan and who did not vote to accept the Planwere general unsecured claims against Apex and eBioCare.

 

The Plan was filed with the Bankruptcy Courton March 27, 2006, along with the Disclosure Statement, the Company’schapter 11 petition, the chapter 11 petitions for each of its subsidiaries, andvarious motions and applications requesting relief from the Bankruptcy Court tofacilitate the administration of the Company’s Chapter 11 Cases.

 

On February 21, 2006, Curative’sexisting common stock was delisted from the NASDAQ National Market System, dueto Curative’s continuing failure to satisfy the continued listing requirementsof that market. Since that date, Curative’s existing common stock has traded inthe over-the-counter market.

 

***General Structure of the Plan***

 

Under the Plan, the Company has establishedthree groups of classes of claims:  (i) claimsagainst the Curative Debtors, (ii) claims against Apex and (iii) claimsagainst eBioCare. The Plan achieves a consensual de-leveraging of the Company’sbalance sheet and ensures that it will be a private company upon emergence frombankruptcy. The Plan includes, among other things, the following key terms:

 

•                  OldCurative Common Stock. On the date the Plan becomes effective, allshares of Old Curative Common Stock and options will be cancelled and Curative’sobligation to file reports and other information under the Securities ExchangeAct of 1934, such as Forms 10-K and 10-Q, will be terminated. The sole equityinterests in reorganized Curative will consist of the New Curative Common Stock.Holders of Old Curative Common Stock and options will not receive any distributionspursuant to the Plan.

 

•                  SeniorNotes. Pursuant to the elections made under the Plan, eligible SeniorNoteholders representing approximately 88% in aggregate principal amount ofSenior Notes, or $162.9, will receive their respective pro rata shares of cashconsideration and shares of New Curative Common Stock on the effective date ofthe Plan. The remaining Senior Noteholders will receive cash in an aggregateamount as provided in the Plan in exchange for their claims and will notreceive any shares of New Curative Common Stock.

 

•                  RightsOffering. Prior to solicitation of votes on the Plan, the Company issuednon-certificated subscription rights to certain members of the Ad Hoc Committeeentitling them to purchase shares of New Curative Common Stock on the effectivedate of the Plan. Pursuant to Election and Subscription Agreements, the membersof the Ad Hoc Committee have agreed to exercise their rights on the Plan’seffective date. The proceeds from the exercise of the rights will be used tofund a substantial majority of the cash distributions under the Plan to thoseholders of Senior Notes who will not receive New Curative Common Stock.

 

F-10

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•                  Treatmentof General Unsecured Claims. Each holder of an undisputed generalunsecured claim against the Company (other than those against Apex andeBioCare) will receive a promissory note in a face amount equal toapproximately 56% of its respective claim. Each holder of an undisputed generalunsecured claim against each of Apex and eBioCare will receive a promissorynote in a face amount equal to approximately 5.2% of its respective claim. Priorto the commencement of the Chapter 11 Cases, each holder of a general unsecuredclaim against each of the Curative Debtors, Apex and eBioCare had the option toelect to receive a cash payment in an amount equal to 50% of the face amount ofits respective promissory note. No such holder exercised the cash option. Inaccordance with certain orders entered by the Bankruptcy Court and the Plan,certain general unsecured claims will be unimpaired and paid in full.

 

Existing Credit Facility. As of April 5,2006, the Company’s obligations under its Existing Credit Facility with GECChave been paid in full in connection with the interim order of the BankruptcyCourt authorizing the debtor-in-possession financing facility described below. TheDIP Financing remains subject to approval by the Bankruptcy Court on a finalbasis.  If the Bankruptcy Court does notenter a final order approving the DIP Financing, the Existing Credit Facilitywill be reinstated.

 

•                  OtherSecured Claims. Secured claims against the Company (other thanthe claims relating to the Existing Credit Facility) will be unimpaired.

 

•                  Debtor-in-PossessionFinancing. The Bankruptcy Court entered an interim order authorizing the Companyto enter into a $45.0 million debtor-in-possession credit facility that issecured by all or substantially all of its assets and a pledge of the equityinterests of each of its subsidiaries (the “DIP Financing”). The proceeds ofthe DIP Financing were used to pay, in full, all amounts outstanding under theCompany’s Existing Credit Facility as of April 5, 2006 and also will beused for working capital and other general corporate purposes during theChapter 11 Cases.

 

The DIP Financing provides for a securedrevolving credit facility of up to $45.0 million, of which the Company can useup to $7.5 million as a letter of credit sub facility and up to $5.0 million asa swingline sub facility (i.e., a short-term loan advance facility). TheCompany used the facility immediately to pay all of its outstanding borrowingsunder the previous facility.

 

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 which 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 the Company’s senior leverage ratio, whichadditional amounts may range from 1.75% to 2.25% for the revolving creditbase rate loans.

 

In the DIP Financing Credit Agreement, theCompany has made certain representations and warranties to GECC and is subjectto certain reporting requirements and financial and other covenants. The creditfacility restricts the Company’s ability to incur or to permit any of itsproperties or assets to be encumbered by liens. The credit facility alsorestricts the Company’s ability to make certain types of payments relating toits capital stock, 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 coverage ratio.The DIP facility provided for conditions to close which included covenantsrelated to levels of the Company’s fixed charges coverage ratio, senior securedleverage ratio and total leverage ratio. The Company was in compliance withthese as well as other requirements as of the close date.

 

F-11

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•                  NewManagement Incentive Plan. Upon emergence from Chapter 11, the Company willadopt a new management incentive plan that is intended to provide incentivesafter the effective date to certain employees to continue their efforts tofoster and promote the long-term growth and performance of Curative’sbusinesses.

 

•                  Certificateof Incorporation and By-laws of reorganized Curative. Pursuantto the Plan, reorganized Curative will adopt a revised certificate ofincorporation and by-laws which will be substantially in the form set forthin the Plan Supplement (as filed on Form 8-K on March 7, 2006, and asthe same may be revised in accordance with the Plan). The form ofby-laws includes provisions requiring the affirmative vote of 62.5% of theoutstanding New Curative Common Stock to effect: (i) any merger orconsolidation in which reorganized Curative is a constituent corporation, (ii) asale of all or substantially all of the assets of reorganized Curative, (iii) anyamendment of the certificate of incorporation or bylaws of reorganizedCurative, (iv) any issuance of greater than 20% of the New Curative CommonStock then outstanding or (v) any agreement between reorganized Curativeor any subsidiary of reorganized Curative and any of its affiliates (subject tocertain exceptions, including for contracts in the ordinary course ofreorganized Curative’s business). The form of by-laws also includescertain supermajority voting requirements for the board of directors ofreorganized Curative that will be required for the issuance of senior equitysecurities or the incurrence of indebtedness above certain levels. The form ofcertificate of incorporation also provides that stockholders will havepreemption rights in respect of future issuances of New Curative Common Stock.

 

•                  StockholdersAgreement and Registration Rights Agreement of Reorganized Curative. Pursuantto the Plan, all persons receiving New Curative Common Stock will execute ajoinder to the Stockholders Agreement, and persons receiving 5% or more of theNew Curative Common Stock will execute a joinder to the Registration RightsAgreement. The Stockholders Agreement and the Registration Rights Agreementwill be substantially in the form set forth in the Plan Supplement (asfiled on Form 8-K on March 7, 2006, and as the same may berevised in accordance with the Plan). The form of Stockholders Agreementprevents a party to the agreement from selling any of its shares to a personif, as a result of such sale, the purchaser would own more than 62.5% of theNew Curative Common Stock then outstanding unless the purchaser agrees topurchase all shares of New Curative Common Stock held by any party to theStockholders Agreement who wishes to sell its shares, at the highest price paidby the purchaser for any shares of Curative common stock acquired during thepreceding 18 months. The form of Stockholders Agreement also provides thatparties to the agreement shall vote to elect two directors to the board ofdirectors of reorganized Curative who are nominated by any person or groupowning 33.3% or more of the New Curative Common Stock and one director who isnominated by any person owing more than 16.7% of the New Curative Common Stockbut less than 33.3%. The form of Registration Rights Agreement providesthat registration rights holders holding at least a majority of the outstandingshares of New Curative Common Stock will have the right to require reorganizedCurative to register an initial public offering that includes (a) sharesto be sold by such stockholders after the second anniversary of the effectivedate of the Plan and (b) registration rights holders beneficially owningat least 25% of the outstanding shares of New Curative Common Stock will havethe right to require such an initial public offering on or after the date thatis 42 months following the Effective Date of the Plan. The form ofRegistration Rights Agreement also provides for certain demand and “piggy back”registration rights following an initial registered public offering until theseventh anniversary of the Plan’s effective date.

 

The Plan is subject to formal approvals bythe Bankruptcy Court prior to consummation. There can be no assurance that theBankruptcy Court will approve and confirm the Plan.

 

F-12

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**SIGNIFICANTACCOUNTING POLICIES**

 

**Principlesof Consolidation**

 

The consolidated financial statements includethe accounts of the Company and its wholly-owned subsidiaries. Significantintercompany balances and transactions have been eliminated in consolidation.

 

**Stock BasedCompensation Plans**

 

The Company grants options for a fixed numberof shares to employees and directors with an exercise price equal to the fairvalue of the shares at the date of grant. The Company accounts for stock optiongrants under the intrinsic value method of Accounting Principles Board (“APB”) No. 25,“Accounting for Stock Issued to Employees” (“APB No. 25”), and relatedInterpretations because the Company believes the alternate fair valueaccounting provided for under Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation,” requires the use ofoption valuation models that were not developed for use in valuing employeestock options. Under APB No. 25, because the exercise price of the Company’semployee stock options equals the market price of the underlying stock on thedate of grant, no compensation expense is recorded. See Note 15.

 

The following table illustrates the effect onnet (loss) income and net (loss) income per share for the years ended December 31as if the Company had applied the fair value recognition provisions of SFAS No. 123to stock-based compensation (in thousands, except per share data):

 
| ** **                                                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net (loss)  income, as reported                                                                                                               |       | $        | (101,592   | )        | $          | (141,405 | )          | $ | 13,075 |   |
| Add: Stock  based employee compensation expense included in reported net (loss) income,  net of related tax effects                           |       | 1,220    |       | 476      |       | —   |       |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (4,067   | )          | (5,056   | )          | (4,665   | )          |
| Pro forma  net (loss) income                                                                                                                  |       | $        | (104,439   | )        | $          | (145,985 | )          | $ | 8,410 |   |
|                                                                                                                                          |       |     |       |     |       |     |       |
| (Loss)  income per share:                                                                                                                     |       |     |       |     |       |     |       |
| Basic – as  reported                                                                                                                     |       | $        | (7.81      | )        | $          | (10.93   | )          | $ | 1.04 |   |
| Basic – pro  forma                                                                                                                       |       | (8.03    | )          | (11.29   | )          | 0.67     |       |
|                                                                                                                                          |       |     |       |     |       |     |       |
| Diluted – as  reported(1)                                                                                                                |       | $        | (7.81      | )        | $          | (10.93   | )          | $ | 0.96 |   |
| Diluted –  pro forma                                                                                                                     |       | (8.03    | )          | (11.29   | )          | 0.61     |       |

 

----

(1)          See Note 18 for net (loss) income per sharecalculation.

 

F-13

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**RecentlyIssued Accounting Standard**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS No. 123(R)”) which eliminated the alternative ofaccounting for share-based compensation transactions under the intrinsic valuemethod of APB No. 25. Instead, SFAS No. 123(R) requires companies tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. Thegrant-date fair value of employee share options and similar instruments will beestimated using option-pricing models adjusted for the unique characteristicsof those instruments. The Company adopted SFAS No. 123(R) on January 1,2006.

 

Given the Company’s filing for Chapter 11reorganization as described above, the cancellation of the Company’s stock aswell as existing options and the expected issuance of new options at prices tobe determined, the impact of adoption of SFAS No. 123(R) on future netincome cannot be predicted at this time. SFAS No. 123(R) also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing activity, rather than as an operating activity ascurrently presented. This requirement will reduce net operating cash flows andincrease net financing cash flows in periods after adoption. While future taxdeduction amounts cannot be determined at this time, the amount of tax benefitfrom stock option exercises recorded in operating cash flows recognized inprior periods included no benefit in 2005 or 2004 and $1.5 million in 2003.

 

**Reclassifications**

 

Certain prior year amounts in theconsolidated financial statements have been reclassified to conform to thecurrent year classifications. See Note 5.

 

**Use of Estimates**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

**Net (Loss)Income Per Share**

 

Basic and diluted (loss) income per share arecalculated in accordance with SFAS No. 128, “Earnings Per Share.”  See Note 18.

 

**Inventories**

 

Inventories, which consist of intravenous andinjectable biopharmaceutical and compounded pharmaceutical products held forsale, are stated at the lower of cost (first in, first out method) or market.

 

**Propertyand Equipment**

 

Property and equipment, which are recorded atcost, are depreciated under the straight-line method over their estimateduseful lives (generally four to seven years). Leasehold improvements areamortized over the life of the lease or the estimated useful life of therelated asset, whichever is shorter.

 

F-14

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**Goodwilland Intangibles**

 

Goodwill represents the excess of purchaseprice over the fair value of net assets acquired. Intangibles consist ofseparately identifiable intangibles, such as pharmacy and customerrelationships and covenants not to compete. The Company accounts for goodwilland intangible assets in accordance with SFAS No. 142, “Goodwill and OtherIntangible Assets,” which requires goodwill and intangible assets withindefinite lives not to be amortized but rather to be reviewed annually, ormore frequently if impairment indicators arise, for impairment. Separableintangible assets that are not deemed to have an indefinite life are amortizedover their useful lives. The Company completed an interim goodwill impairmenttest during the third quarter of 2005 and an annual test during the fourthquarter of 2004 and, based on its results, the Company recorded total non-cashimpairment charges from continuing operations of $77.6 million and $134.0 million,respectively. The Company conducted an additional analysis as of December 31,2005 and, based on those results, no further impairment was identified. SeeNote 6.

 

**Deferred Financing Fees**

 

The Company capitalizes fees related to itsfinancing activities and amortizes them over the life of the related financing.The Company capitalized $0 and $11.6 million in 2005 and 2004, respectively,related to its senior subordinated notes and $0.2 million and $1.4 million in2005 and 2004, respectively, in fees related to its revolving credit facility. Thesefees are being amortized over 94 months and 60 months, respectively. As of December 31,2005 and 2004, respectively, approximately $9.9 million and $11.7 millionremained in unamortized deferred financing fees. In 2005, these fees wererecorded in current assets as a result of the classification of all of theCompany’s debt as current. In 2004, these costs were recorded in otherlong-term assets.

 

**Cash andCash Equivalents**

 

Cash and cash equivalents consist of demanddeposits with banks, certificates of deposit with maturities of less than threemonths at the time of purchase and highly liquid money market fund investments.

 

**Concentrationof Credit Risk**

 

The Company’s revenues are generated from itsSpecialty Infusion business unit’s sales of biopharmaceuticals and compoundedpharmaceuticals and from its Wound Care Management business unit’s Wound CareCenter® programs, which have been established as cooperativeventures with acute care hospitals. Specialty Infusion’s receivables consist ofamounts due from various payors, including government programs, insurancecompanies, retail pharmacies and self-pay patient accounts. Credit is extendedbased upon a pre-authorization of coverage check or contractual arrangement. Paymentterms are generally thirty days from date of invoice. Wound Care Management’sreceivables are from its hospital partners under contractual managementservices contracts. Credit is extended based on an evaluation of the hospital’sfinancial condition. Payment terms are generally 30 to 90 days from date ofinvoice. For 2005, 2004 and 2003, the Company’s Specialty Infusion businessunit derived approximately 6%, 12% and 30%, respectively, of consolidatedrevenue from one payor. As a percentage of total, the Company’s accountsreceivable from its largest payor was approximately 9% and 13%, respectively,at December 31, 2005 and 2004.

 

The Company evaluates the collectibility ofaccounts receivable based on numerous factors, including past transaction historywith payors and their credit worthiness. The Company estimates an allowance fordoubtful accounts primarily based on cash collection history. This estimate isperiodically adjusted when the Company becomes aware of a specific payor’sinability to meet its financial obligations (e.g., bankruptcy, etc.) or as aresult of changes in the overall aging of accounts receivable.

 

F-15

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**Revenues**

 

Specialty Infusion’s revenues are recognized,net of any contractual allowances, when the product is shipped to a patient,retail pharmacy or a physician’s office or when services are provided. WoundCare Management’s revenues are recognized after the management services arerendered and are billed monthly in arrears.

 

The current Medicare, Medicaid and otherthird party-payor programs in which the Company participates are based uponextremely complex laws and regulations that are subject to interpretation. Non-compliancewith such laws and regulations could result in fines, penalties and/orexclusion from such programs. The Company is not aware of any allegations ofnon-compliance that could have a material adverse effect on the accompanyingconsolidated financial statements and believes it is in substantial compliancewith all applicable laws and regulations.

 

**Advertising**

 

Advertisingand community education costs are expensed when incurred. SpecialtyInfusion’s advertising and community education expenses were approximately $0.9million, $0.7 million and $0.9 million in 2005, 2004 and 2003, respectively. WoundCare Management’s advertising and community education costs were approximately$0.5 million, $0.7 million and $0.8 million in 2005, 2004 and 2003,respectively.

 

**IncomeTaxes**

 

Income taxes have been provided using theliability method in accordance with SFAS No. 109, “Accounting for IncomeTaxes.”  See Note 16.

 

**Shippingand Handling**

 

Outbound shipping and handling charges wereapproximately $4.0 million, $2.9 million and $0.9 million in 2005, 2004 and2003, respectively, and are included in cost of product sales in theaccompanying consolidated statements of operations. The increase in 2005compared to 2004 and 2003 was due to the acquisition of CCS in April of2004 as well as increased shipping costs experienced during the year.

 

**Fair Valuesof Financial Instruments**

 

*Cash and cash equivalents*.The carrying values of the Company’s cash and cash equivalents approximate fairvalue because of the short maturity of these instruments.

 

*Other Notes Payable*.Fair values approximate carrying values as the notes generally bear interest atmarket rates.

 

*Revolving Loan Facility*.Fair values approximate carrying values as the interest rates are variable.

 

*Senior Subordinated Notes*.The fair value of the Company’s debt is based upon the market price of thedebt.

 

*Interest rate swap*. TheCompany terminated its interest rate swap agreement in June 2005. As of December 31,2004, the fair value of the interest rate swap was based upon a discounted cashflow analysis using then current interest rates.

 

F-16

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For non-trading purposes, the Company enteredinto an interest rate swap agreement to reduce interest expense and modifyexposure to interest rate risk by converting a portion of its fixed rate debtto a floating rate liability. Prior to the termination of the swap agreement,the Company accounted for the swap instrument under the provisions of SFAS No. 133,“Accounting for Derivative Instrumentsand Hedging Activities,” as amended by SFAS No. 138 and SFAS No. 139.Due to hedge ineffectiveness, changes in fair value of the swap were recognizedin earnings, and the carrying value of the Company’s debt was not marked tofair value. See Note 12.

 

The carrying amounts and fair values of theCompany’s financial instruments at December 31 were as follows (inthousands):

 
| ** **                 | ** ** | **2005**                  | ** ** | **2004**              | ** ** |
|----------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **Carrying   Value** | ** ** | **Fair   Value** | ** ** | **Carrying   Value** | ** ** | **Fair   Value** | ** ** |
| Other notes  payable       |       | $                         | 1,899      |                  | $          | 1,899 |   | $ | 7,177 |   | $ | 7,177 |   |
| Revolving  Loan facility   |       | $                         | 26,347     |                  | $          | 26,347 |   | $ | 24,310 |   | $ | 24,310 |   |
| Senior  Subordinated Notes |       | $                         | 185,000    |                  | $          | 118,400 |   | $ | 185,000 |   | $ | 164,650 |   |
| Interest  rate swap        |       | $                         | —     |                  | $          | — |   | $ | 1,081 |   | $ | 1,081 |   |

 

**SupplementalCash Flow Information**

 

Supplemental information with respect to theCompany’s cash flows for the years ended December 31 is as follows (inthousands):

 

| ** **         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest  paid     |       | $        | 12,316     |     | $          | 12,356   |       | $ | 2,119 |   |
| Income taxes  paid |       | $        | 402        |     | $          | 1,076    |       | $ | 5,231 |   |

 

Additionally, certain selling shareholders ofInfinity Infusion Care, Ltd. exercised their rights under convertible notes andconverted approximately $1.2 million of such notes into 72,715 shares of theCompany’s common stock in 2004 and approximately $4.8 million of such notesinto 300,389 shares in 2003.

 

F-17

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**NOTE 2 – GOING CONCERN**

 

The Company had approximately $213.2 millionin outstanding debt as of December 31, 2005, including the $185.0 millionof Senior Notes and a $26.3 million revolving credit facility with GECC, andincurred significant losses during 2005 and 2004. In August 2005, theCompany 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 September 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. In addition, the Company executeda waiver agreement with GECC for failing to meet the financial covenants oftotal leverage ratio and senior secured leverage ratio related to its revolvingcredit facility for the quarter ended September 30, 2005. Additionally,this waiver agreement included a temporary waiver until December 1, 2005of any default under the credit facility related to the Company’s not payingthe November 1, 2005 coupon on the Senior Notes for 30 days.

 

On December 2, 2005, the Company reachedan agreement with the Ad Hoc Committee on the general terms of a financialrestructuring and entered into a Plan Support Agreement. The financialrestructuring, as contemplated by the Plan Support Agreement and the Plan, isdesigned 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 its existing management and employees and (d) providethe greatest return to its creditors. Under the Plan Support Agreement, certainof the Senior Noteholders 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. See Note 1.

 

On March 27, 2006, Curative and each ofits direct and indirect subsidiaries filed voluntary petitions under chapter 11of the Bankruptcy Code in the Bankruptcy Court. They filed the 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 Senior Notes issued by Curative 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.

 

The Plan was filed with the Bankruptcy Courton March 27, 2006. The Plan will, if confirmed and consummated, result inthe cancellation and discharge of all claims relating to the Senior Notes. EachSenior Noteholder will receive a cash payment of approximately 54.9% of itsrespective claim related to the Senior Notes, unless a Senior Noteholder wasqualified to elect and did elect to receive its pro rata share of certain cashconsideration provided in the Plan and the New Curative Common Stock. Holdersof existing shares of Old Curative Common Stock and options will not receiveany distributions under the Plan and all shares of Old Curative Common Stock andoptions will be extinguished. See Note 1.

 

On April 5, 2006, the Bankruptcy Courtentered an interim order authorizing the Company to enter into a $45.0 milliondebtor-in-possession credit facility that is secured by all or substantiallyall of its assets and a pledge of the equity interests of each of itssubsidiaries, or DIP Financing. The proceeds of the DIP Financing were used topay, in full, all amounts outstanding under the Company’s Existing CreditFacility as of April 5, 2006 and also will be used for working capital andother general corporate purposes during the Chapter 11 Cases. The DIP Financingremains subject to approval by the Bankruptcy Court on a final basis.  If the Bankruptcy Court does not enter afinal order approving the DIP Financing, the Existing Credit Facility will bereinstated.

 

F-18

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The DIP Financing provides for a securedrevolving credit facility of up to $45.0 million, of which the Company can useup to $7.5 million as a letter of credit sub facility and up to $5.0 million asa swingline sub facility (i.e., a short-term loan advance facility). TheCompany used the facility immediately to pay all of its outstanding borrowingsunder the previous facility.

 

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 will bear 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 the Company’s senior leverage ratio, whichadditional amounts may range from 1.75% to 2.25% for the revolving creditbase rate loans.

 

In the DIP Financing Credit Agreement, theCompany has made certain representations and warranties to GECC and is subjectto certain reporting requirements and financial and other covenants. The creditfacility restricts the Company’s ability to incur or to permit any of itsproperties or assets to be encumbered by liens. The credit facility alsorestricts the Company’s ability to make certain types of payments relating toits capital stock, 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 coverage ratio.The DIP facility provided for conditions to close which included covenantsrelated to levels of the Company’s fixed charges coverage ratio, senior securedleverage ratio and total leverage ratio. The Company was in compliance withthese as well as other requirements as of the close date.

 

The conditions discussed above raisesubstantial doubt about the Company’s ability to continue as a going concern. Therefore,all of the Company’s outstanding debt has been classified as current in theaccompanying financial statements.

 

**NOTE 3 - INVESTMENT IN ACCORDANT HEALTHSERVICES**

 

In October 2002, the Company sold itsinterest in Accordant Health Services, Inc. (“Accordant”) for an initialsale price of approximately $5.5 million. Approximately $1.0 million of thesale price was placed in escrow subject to customary indemnificationobligations being satisfied of which approximately $0.5 million was paid to theCompany in November 2003 and the remaining $0.5 million was paid in November 2004.

 

In addition, the sale agreement provided foran earn-out payment if Accordant achieved certain 2003 operating goals. Accordantachieved the 2003 operating goals and, in January 2004, the Companyreceived approximately $2.3 million related to this earn-out and has recordedthis as other income in its 2003 financial statements. The Company is notentitled to any other funds related to this transaction.

 

F-19

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**NOTE 4 - SPECIALTY INFUSION ACQUISITIONS**

 

On February 3, 2003, the Companyacquired MedCare, Inc. (“MedCare”), a specialty pharmacy with locations inAlabama, Mississippi and West Virginia. The purchase price for MedCare was $6.3million. A final purchase price allocation based on fair market value ofacquired assets and liabilities has been completed.

 

On April 23, 2003, the Company acquiredthe assets and specialty pharmacy business of All Care Medical, Inc. (“AllCare”), a Louisiana-based Synagis® pharmacy. The purchase price forAll Care was $2.1 million. A final purchase price allocation based on fairmarket value of acquired assets and liabilities has been completed.

 

On June 10, 2003, the Company acquiredcertain assets of Prescription City, Inc. (“Prescription City”), aspecialty pharmacy business specializing in the provision of chemotherapy andcancer drugs. The purchase price for Prescription City was $17.5 million. Afinal purchase price allocation based on fair market value of acquired assetsand liabilities has been completed. During 2005, the Company reached asettlement with Prescription City in connection with a complaint filed by theCompany in November 2003 seeking rescission, compensatory and punitivedamages and other relief relating to a criminal investigation conducted by aU.S. Magistrate Judge, Southern District of New York. Under the terms of thesettlement, the Company received $4.5 million in cash and was released from itsobligation to pay a $1.0 million promissory note entered into in connectionwith the asset purchase of Prescription City.

 

On April 23, 2004, the Company acquiredCCS, a leading national provider of specialty infusion pharmaceuticals andrelated comprehensive clinical services. Total cash consideration wasapproximately $154.2 million, including working capital adjustments ofapproximately $4.1 million. The Company financed the acquisition of CCS with aportion of its $185.0 million Senior Notes and additional borrowings under theCompany’s refinanced credit facility with GECC, as agent and lender. A finalpurchase price allocation based on fair market value of acquired assets andliabilities has been completed.

 

The acquisitions described above(collectively the “Specialty Infusion acquisitions”) were consummated forpurposes of expanding the Company’s Specialty Infusion business and wereaccounted for using the purchase method of accounting. The accounts of theSpecialty Infusion acquisitions and related goodwill and intangibles areincluded in the accompanying consolidated balance sheets. The operating resultsof the Specialty Infusion acquisitions are included in the accompanyingconsolidated statements of operations from the dates of acquisition.

 

Unaudited pro forma amounts for the yearsended December 31, assuming the Specialty Infusion acquisitions hadoccurred on January 1, 2003, were as follows (in thousands, except pershare data):

 
| ** **                                   | ** ** | **2004(1)** | ** ** | **2003(1)** | ** ** |
|----------------------------------------------|------------|-------------|------------|-------------|------------|
| Revenues                                     |       | $           | 258,530    |        | $          | 283,178 |   |
| Net (loss)  income                           |       | $           | (146,292   | )           | $          | 9,482 |   |
| Net (loss)  income per common share, diluted |       | $           | (11.18     | )(2)        | $          | 0.69 | (3) |

 

----

(1)          Excludes the results from discontinued operations. See Note 5.

 

(2)          Basic shares were used since the effects of using stock options andconvertible notes would have an anti-dilutive effect on income per share.

 

(3)          Calculated under the “as if converted” method. See Note 18.

 

F-20

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The pro forma amounts shown above give effectto:  (i) the Company’s issuance of $185.0million aggregate principal amount of 10.75% senior notes due 2011; (ii) therefinancing of the Company’s revolving credit facility and (iii) SpecialtyInfusion acquisitions as if these transactions occurred on January 1, 2003.The above pro forma amounts include adjustments related to the CCS acquisition,including, but not limited to, the amortization of identifiable intangibleassets related to the purchase price allocation, additional compensationexpense and retention incentives, and pro forma tax adjustments.

 

The pro forma operating results shown aboveare not necessarily indicative of operations in the periods following theSpecialty Infusion acquisitions.

 

**NOTE 5 – DISCONTINUED OPERATIONS**

 

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 ProCare Pharmacy, Inc. and ProCarePharmacy Direct, Inc. (collectively, “ProCare”) for a total considerationof $1.75 million.

 

Under theAsset Purchase Agreement between Curative and ProCare, the Company sold andProCare purchased or assumed certain personal property, licenses, permits,contracts, leases and patient files related to the Business. In addition,ProCare assumed and the Company is no longer responsible for all liabilitiesand obligations related to the operation of the Business and the Assets Sold.

 

Also inconnection with the sale, the Company closed its branches in Albany, New York;Lake Charles, Louisiana; Birmingham, Alabama; Columbus, Mississippi; andHurricane, West Virginia. As a result, the Company recorded approximately $0.7million for facility terminations, $0.6 million in inventory and bad debtreserves, $0.7 million in goodwill and intangible write offs, $0.3 million forseverance and vacation payouts related to the termination of 88 employees, $0.1million in equipment write off costs and $0.2 million in other related costs,for a total cost of $2.6 million.

 

The Company recorded a pre-tax loss on thesale of approximately $0.9 million which was recorded in the accompanyingstatements of operations for the year ended December 31, 2005. The resultsof the discontinued operation are classified as such in a separate component of(loss) income on the accompanying Consolidated Statements of Operations. As aresult, certain other financial statement amounts for 2004 and 2003 have beenreclassified.

 

F-21

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The results of the discontinued operationsfor the years ended December 31 were as follows (in thousands):

 
| ** **                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Product  revenues                                               |       | $        | 46,575     |     | $          | 57,388   |       | $ | 51,247 |   |
|                                                            |       |     |       |     |       |     |       |
| Costs and  operating expenses:                                  |       |     |       |     |       |     |       |
| Cost of product sales                                           |       | 46,281   |       | 53,563   |       | 46,208   |       |
| Selling, general and administrative                             |       | 488      |       | 3,510    |       | 3,549    |       |
| Goodwill impairment                                             |       | 1,075    |       | 786      |       | —   |       |
| Total costs and operating expenses                              |       | 47,844   |       | 57,859   |       | 49,757   |       |
|                                                            |       |     |       |     |       |     |       |
| Income  (loss) from discontinued operations                     |       | (1,269   | )          | (471     | )          | 1,490    |       |
|                                                            |       |     |       |     |       |     |       |
| Interest  expense                                               |       | (2       | )          | —   |       | —   |       |
| Other income                                                    |       | 17       |       | —   |       | —   |       |
| Income  (loss) from discontinued operations before income taxes |       | (1,254   | )          | (471     | )          | 1,490    |       |
|                                                            |       |     |       |     |       |     |       |
| Loss on sale  of discontinued operations                        |       | (933     | )          | —   |       | —   |       |
| Income tax  (benefit) provision                                 |       | (378     | )          | 115      |       | 587      |       |
|                                                            |       |     |       |     |       |     |       |
| Net income  (loss) from discontinued operations                 |       | $        | (1,809     | )        | $          | (586     | )          | $ | 903 |   |

 

 

F-22

----

 

Assets and liabilities of discontinued operations consisted of thefollowing at December 31 (in thousands):

 
| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Current  assets:                          |       |     |       |     |       |
| Cash and cash equivalents                 |       | $        | —     |     | $          | 761 |   |
| Accounts receivable, net                  |       | 1,910    |       | 8,222    |       |
| Inventories                               |       | 360      |       | 3,017    |       |
| Prepaids and other current assets         |       | 8        |       | 10       |       |
| Total current assets                      |       | 2,278    |       | 12,010   |       |
|                                      |       |     |       |     |       |
| Property and  equipment, net              |       | 185      |       | 198      |       |
| Intangibles  subject to amortization, net |       | —   |       | 157      |       |
| Intangibles  not subject to amortization  |       | —   |       | 169      |       |
| Goodwill                                  |       | —   |       | 1,566    |       |
| Other assets                              |       | 10       |       | 2,013    |       |
| Total non-current assets                  |       | 195      |       | 4,103    |       |
| Total assets                              |       | $        | 2,473      |     | $          | 16,113 |   |
|                                      |       |     |       |     |       |
| Current  liabilities:                     |       |     |       |     |       |
| Accounts payable                          |       | $        | —     |     | $          | 11,966 |   |
| Accrued expenses                          |       | 1,035    |       | 358      |       |
| Debt and other obligation                 |       | —   |       | 1,000    |       |
| Total current liabilities                 |       | 1,035    |       | 13,324   |       |
|                                      |       |     |       |     |       |
| Non-current liabilities                   |       | 395      |       | —   |       |
| Total liabilities                         |       | $        | 1,430      |     | $          | 13,324 |   |

 

Excluded from the sale was the Company’saccounts receivable related to the Business which had a balance ofapproximately $1.9 million. The Company expects to collect substantially all ofthose receivables within one year. Thereafter, the Company willhave no continuing cash flows or operations related to the discontinuedoperations.

 

F-23

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**NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Acquired intangible assets subject to amortization consisted of thefollowing at December 31 (in thousands):

 
| ** **                | ** ** | **2005**           | ** ** | **2004**         | ** ** |
|---------------------------|------------|--------------------|------------|------------------|------------|
| ** **                | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                | ** ** | **Amount**         | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Payor  contracts          |       | $                  | 20,507     |             | $          | 2,034 |   | $ | 20,507 |   | $ | 828 |   |
| Covenants  not to compete |       | 1,700              |       | 1,684            |       | 1,741 |   | 1,198 |   |
| Injectable  customers     |       | 220                |       | 209              |       | 220 |   | 165 |   |
| Website                   |       | 189                |       | 176              |       | 189 |   | 137 |   |
| Licenses                  |       | 82                 |       | 48               |       | 82 |   | 33 |   |
| Pharmacy  relationships   |       | 20                 |       | 19               |       | 20 |   | 15 |   |
|                      |       | $                  | 22,718     |             | $          | 4,170 |   | $ | 22,759 |   | $ | 2,376 |   |

 

Amortization period by intangible asset class is as follows:

 
| **Asset Class**           | ** ** | **Amortization Period** | ** ** |
|---------------------------|------------|-------------------------|------------|
| Payor  contracts          |       | 17 years                |       |
| Covenants  not to compete |       | 2 - 5 years             |       |
| Injectable  customers     |       | 5 years                 |       |
| Website                   |       | 3 - 5 years             |       |
| Licenses                  |       | 12 - 20 years           |       |
| Pharmacy  relationships   |       | 5 years                 |       |

 

The aggregate amortization expense was approximately $1.8 million, $1.2million and $0.7 million for the years ended December 31, 2005, 2004 and 2003,respectively. The increase in 2005 compared to 2004 and 2003 was primarily theresult of the amortization related to intangibles with definite lives purchasedin connection with the CCS acquisition in April of 2004. The estimatedamortization for future years ending December 31 is as follows (in thousands):

 
| 2006       |   | $      | 1,292  |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 1,232  |   |
| 2008       |   | 1,214  |   |
| 2009       |   | 1,208  |   |
| 2010       |   | 1,208  |   |
| Thereafter |   | 12,394 |   |
| Total      |   | $      | 18,548 |   |

 

F-24

----

 

The changes in the carrying amounts of goodwill for the years endedDecember 31 were as follows (in thousands):

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1                                |       | $        | 119,559    |     | $          | 147,895 |   |
| Goodwill acquired during the year                      |       | —   |       | 109,986  |       |
| Goodwill allocated to discontinued  operations         |       | —   |       | (1,566   | )          |
| Adjustments to goodwill acquired                       |       | (4,136   | )          | —   |       |
| Allocation to loss on sale of discontinued  operations |       | (491     | )          | —   |       |
| Impairment loss                                        |       | (77,470  | )          | (133,901 | )          |
| Impairment loss – discontinued operations         |       | (1,075   | )          | (786     | )     |
| Other adjustments                                      |       | —   |       | (2,069   | )          |
| Balance as of December 31                              |       | $        | 36,387     |     | $          | 119,559 |   |

 

The Company’s goodwill and other intangible assets, attributed entirelyto the Specialty Infusion business unit, were tested for impairment during thethird quarter of 2005 and fourth quarter of 2004. Due primarily to changes inthe economics of the Specialty Infusion business unit, including the changes inreimbursement methodology that occurred during the past two years, the Companyrecorded non-cash impairment charges from continuing operations of $77.5million and $133.9 million in goodwill in 2005 and 2004, respectively, and$138.0 thousand and $68.0 thousand in 2005 and 2004, respectively, in otherintangible assets. The Company conducted an additional analysis as of December31, 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.

 

All of the Company’s goodwill at December 31, 2005 is related to theSpecialty Infusion Services segment. Approximately $10.8 million of the Company’sDecember 31, 2005 goodwill is deductible for tax purposes on a straight linebasis over 15 years.  During 2005, theCompany adjusted goodwill acquired by approximately $4.1 million relatedprincipally to the $5.5 million settlement of Prescription City lawsuit (seeNote 4).

 

As certain of the Company’s acquisitions were accounted for as stockpurchases, goodwill amortization related to those acquisitions is not taxdeductible.

 

**NOTE 7 - PROPERTY AND EQUIPMENT**

 

A summary of property and equipment and related accumulateddepreciation and amortization at December 31 follows (in thousands):

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Property and  equipment                         |       | $        | 27,056     |     | $          | 22,726 |   |
| Leasehold  improvements                         |       | 4,001    |       | 5,531    |       |
| Total                                           |       | 31,057   |       | 28,257   |       |
| Less  accumulated depreciation and amortization |       | 19,123   |       | 17,351   |       |
| Property and equipment, net                     |       | $        | 11,934     |     | $          | 10,906 |   |

 

Depreciationand amortization expense on property and equipment amounted to approximately$4.3 million, $3.4 million and $2.0 million for 2005, 2004 and 2003,respectively. 

 

F-25

----

 

**NOTE 8 -ACCRUED EXPENSES**

 

A summary of accrued expenses and other current liabilities at December31 follows (in thousands):

 
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Incentive  compensation and benefits       |       | $        | 4,422      |     | $          | 2,718 |   |
| Professional  fees                         |       | 697      |       | 889      |       |
| Unapplied  funds                           |       | 6,087    |       | 6,315    |       |
| Accrued  interest                          |       | 13,290   |       | 3,464    |       |
| Accrued  organization costs                |       | —   |       | 3,027    |       |
| Financial  advisory and related legal fees |       | 1,448    |       | —   |       |
| Early  termination fees and PIK interest   |       | 1,246    |       | —   |       |
| Other                                      |       | 2,689    |       | 4,613    |       |
| Total accrued expenses                     |       | $        | 29,879     |     | $          | 21,026 |   |

 

**NOTE 9 - EMPLOYEE AND FACILITY TERMINATION COSTS**

 

The Company adheres to SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities,” which establishes fair value as theobjective for initial measurement of liabilities related to exit or disposalactivities and requires that such liabilities be recognized when incurred.

 

In the first quarter of 2003, the Company consolidated its pharmacyoperations in California which resulted in the termination of a total of 25employees and the vacating of a leased facility. The Company recorded chargesrelated to this activity of $0.4 million in 2004 and $1.6 million in 2003.

 

In the fourth quarter of 2004, the Company recorded severance chargesfor the consolidation of its corporate headquarters and corporate functions ofapproximately $0.7 million related to the termination of 19 employees andfacility termination costs of $0.1 million. During 2005, the Company recordedcosts related to its headquarters consolidation of approximately $2.0 million. Theconsolidation was completed as of September 30, 2005.

 

The following provides a reconciliation of the related accrued costsassociated with the above events related entirely to the Specialty Infusionbusiness unit, which are included in Selling, General and Administrativeexpenses in the accompanying consolidated financial statements, at and for theyears ended December 31 (in thousands):

 
| ** **                  | ** ** | **At and for the year ended December 31, 2005** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Beginning  Balance**                          | ** ** | **Costs Charged  to Expense** | ** ** | **Costs Paid or Otherwise Settled** | ** ** | **Ending  Balance** | ** ** |
| Employee  termination costs |       | $                                               | 666        |   | $ | 1,529 |   | $ | 2,150 |   | $ | 45 |   |
| Facility  termination costs |       | 660                                             |       | 506 |   | 890 |   | 276 |   |
|                        |       | $                                               | 1,326      |   | $ | 2,035 |   | $ | 3,040 |   | $ | 321 |   |

 
| ** **                  | ** ** | **At and for the year ended December 31, 2004** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Beginning  Balance**                          | ** ** | **Costs Charged  to Expense** | ** ** | **Costs Paid or Otherwise Settled** | ** ** | **Ending  Balance** | ** ** |
| Employee  termination costs |       | $                                               | 39         |   | $ | 666 |   | $ | 39 |   | $ | 666 |   |
| Facility termination  costs |       | 431                                             |       | 517 |   | 288 |   | 660 |   |
|                        |       | $                                               | 470        |   | $ | 1,183 |   | $ | 327 |   | $ | 1,326 |   |

 

F-26

----

 
| ** **                  | ** ** | **At and for the year ended December 31, 2003** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **Beginning  Balance**                          | ** ** | **Costs Charged  to Expense** | ** ** | **Costs Paid or Otherwise Settled** | ** ** | **Ending  Balance** | ** ** |
| Employee  termination costs |       | $                                               | —     |   | $ | 871 |   | $ | 832 |   | $ | 39 |   |
| Facility  termination costs |       | —                                          |       | 759 |   | 328 |   | 431 |   |
|                        |       | $                                               | —     |   | $ | 1,630 |   | $ | 1,160 |   | $ | 470 |   |

 

The Company expects to pay approximately $0.3 millionof the costs accrued as of December 31, 2005 throughout 2006 and 2007.

 

**NOTE 10 -LEASES**

 

The Company entered into several non-cancelable operating leases forthe rental of certain office space expiring in various years through 2012. Additionally,through the Specialty Infusion business unit, the Company leases office, branchpharmacy and warehouse space in various states. The principal lease for officespace provides for monthly rent of approximately $30,000. As these leasesexpire, it can be expected that in the normal course of business, they will berenewed or replaced. In addition, certain lease agreements contain renewaloptions and rent escalation clauses. The principal lease for office space inNashua, New Hampshire, expires in February of 2012. The following is a scheduleof future property and other lease payments, by year and in the aggregate,under non-cancelable operating leases with initial or remaining terms of oneyear or more at December 31, 2005 (in thousands):

 
| 2006       |   | $     | 4,201  |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 3,800 |   |
| 2008       |   | 3,259 |   |
| 2009       |   | 2,380 |   |
| 2010       |   | 1,518 |   |
| Thereafter |   | 1,180 |   |
| Total      |   | $     | 16,338 |   |

 

Rent expense for all operating leases was approximately $3.7 million,$3.9 million and $1.2 million for the years ended December 31, 2005, 2004 and2003, respectively. The decrease in rent expense for 2005 was due to therelocation of the Company’s corporate headquarters to Nashua, New Hampshire. Theincrease in rent expense for 2004 was due to additional rent for CCS’scorporate office and branch pharmacies.

 

F-27

----

 

**NOTE 11 -DEBT**

 

Debt and other obligation and long-term liabilities consisted of thefollowing at December 31 (in thousands):

 
| ** **                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Senior  subordinated notes                                   |       | $        | 185,000    |     | $          | 185,000 |   |
| Revolving  loan facility                                     |       | 26,346   |       | 24,310   |       |
| Note payable-DOJ  settlement                                 |       | 375      |       | 2,000    |       |
| Convertible  note used in purchase of Apex – in dispute |       | 1,524    |       | 2,177    |       |
| Convertible  note used in purchase of Home Care              |       | —   |       | 3,000    |       |
| Note payable  used in purchase of Prescription City          |       | —   |       | 1,000    |       |
| Total debt and other obligation                              |       | 213,245  |       | 217,487  |       |
| Less amounts  due within one year                            |       | 213,245  |       | 6,496    |       |
| Total long-term liabilities                                  |       | $        | —     |     | $          | 210,991 |   |

 

In December 2001, the Company entered into a settlement agreement withthe Department of Justice (“DOJ”) related to whistleblower actions broughtagainst the Company. The settlement agreement called for payments to be made tothe DOJ totaling $16.5 million, with an initial payment of $9.0 million and the$7.5 million balance paid over four years, payable in 12 quarterly installmentsof $0.5 million, followed by four quarterly installments of $0.4 million, allbearing interest at a rate of 6% per annum. The final installment under thisagreement was paid in February 2006.

 

On February 28, 2002, in connection with the purchase of Apex, theCompany entered into a $5.0 million promissory note that bore interest at therate of 4.4% per annum and matures on February 28, 2007. This note was subjectto Apex meeting certain operating targets. The Company and the formershareholders of Apex amended and restated the promissory note on May 30, 2002to change the terms relating to the business performance criteria, add aconvertible feature and ultimately adjust the principal amount of thepromissory note to $3.7 million. The amended and restated promissory note isconvertible at a share price of $20.10 into a maximum of 184,080 shares of theCompany’s common stock. Through June of 2005, the Company made timely quarterlyprincipal payments against this note which commenced in April 2003. On October26, 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 theinstallment payment due on September 30, 2005 or any further payments pendingresolution of this dispute. The balance of the Apex note was approximately $1.5million as of December 31, 2005 (see Note 21).

 

On October 23, 2002, in connection with the purchase of Home Care ofNew York, Inc. (“Home Care”), the Company entered into a $3.0 millionconvertible note which bore interest at a rate of 3% per annum, matured onOctober 23, 2005 and was convertible at a price per share of $16.00 into anaggregate of 187,500 shares of the Company’s common stock. The Company paid the$3.0 million convertible note in cash on October 23, 2005.

 

On June 9,2003, the Company completed a new senior secured credit facility with GECC. Underthe credit agreement, the Company obtained a secured revolving credit facility of up to $15.0 million, of which it can utilize up to $5.0million as a letter of credit subfacility and up to $5.0 million as a swingline subfacility (i.e., ashort-term loanadvance facility), and a $20.0 million secured term loan which wassubsequently increased to $25.0 million, for a total facility of $40.0 million.The Company usedthe funds availableunder this newcredit facility to immediatelypay all of itsoutstanding borrowings, accrued interest and termination fees under its credit facility withHealthcare Business Credit Corporation and to finance its acquisition ofcertain assets of Prescription City. The Company paid off allbalances under this facility on April 23, 2004 in connection with a restructureof the agreement (see below).

 

F-28

----

 

The term loan was to mature on July 15, 2007. Interest accrued on theterm loan at an annual rate equal to the applicable London Interbank OfferedRate (“LIBOR”) rate plus an additional amount based on the Company’s seniorleverage ratio, which additional amounts may range from 3.5% to 4.0%. Allaccrued interest outstanding on base rate term loans bore interest at an annualrate equal to the base rate plus an additional amount based on the Company’ssenior leverage ratio, which additional amounts may range from 2.25% to 2.75%for the term base rate loan. At December 31, 2003, the interest rate was LIBORplus 4%, or 5.12%. The Company paid off all balances under this facility onApril 23, 2004 in connection with a restructure of the agreement (see below).

 

On June 10, 2003, in connection with the purchase of certain assets ofPrescription City, the Company entered into a $1.0 million one-year note whichbore interest at a rate of 4% and matured on June 9, 2004. On July 26, 2005,the Company reached a settlement with Prescription City in connection with acomplaint filed by the Company in November 2003 seeking rescission,compensatory and punitive damages and other relief relating to a criminalinvestigation conducted by a U.S. Magistrate Judge, Southern District of NewYork. Under the terms of the settlement, the Company received $4.5 million incash and was released from its obligation to pay the $1.0 million promissorynote.

 

On April 23, 2004 and in conjunction with the acquisition of CCS, theCompany issued the Senior Notes which bear interest at 10.75%, payablesemi-annually. The Senior Notes may not be redeemed prior to May 1, 2008, atwhich time the Company may redeem, at any time at various redemption prices,any amount of the Senior Notes in whole or in part. The Company may also, atany time prior to May 1, 2007, redeem up to 35% of the Senior Notes with cashproceeds from equity offerings at a redemption price equal to 110.75% of theprincipal amount of the Senior Notes redeemed. The Senior Notes also containcertain covenants limiting the Company from, among other restrictions, takingon additional indebtedness, paying dividends and selling assets.

 

Also on April 23, 2004, the Company restructured its previous creditfacility with GECC to provide for a secured revolving credit facility of up to$40.0 million, of which the Company can use up to $5.0 million as a letter ofcredit subfacility and up to $5.0 million as a swingline subfacility (i.e., ashort-term loan advance facility). The Company used the facility immediately topay all of its outstanding borrowings under the previous facility.

 

The revolving creditfacilitywas to mature on April 23, 2009. 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%. At December 31, 2005, theapplicable margin for revolving credit loan advances was LIBOR plus 3.5%, orapproximately 7.9%. For outstanding base rate loans, the Company will pay allaccrued interest on the first business day of each calendar quarter. Allaccrued interest on outstanding revolving credit base rate loans bears interestat an annual rate equal to the base rate plus an additional amount based on theCompany’s senior leverage ratio, which additional amounts may range from 1.75%to 2.25% for the revolving credit base rate loans.

 

In the creditagreement, the Company made certain representations and warranties to GECC andis subject to certain reporting requirements and financial and other covenants.The credit facility restricts the Company’s ability to incur or to permit anyof its properties or assets to be encumbered by liens. The credit facility alsorestricts the Company’s ability to make certain types of payments relating toits capital stock, 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 Company may purchase other businesses that are preferredhealth care provider organizations or are otherwise related to its line ofbusiness as long as the price for any particular such acquisition does notexceed $25.0 million and the aggregate purchase

 

F-29

----

 

price for all such acquisitions during anyfiscal year does not exceed $40.0 million. Acquisitions that do not comply withthe covenant can be made only with the consent of GECC. The covenants also restricttransactions with the Company’s affiliates and require the Company to maintaincertain levels with respect to its total leverage ratio, senior leverage ratioand fixed charge coverage ratio.

 

The Companyhad approximately $213.2 million in outstanding debt as of December 31, 2005,including the $185.0 million of Senior Notes and a $26.3 million revolvingcredit facility with GECC, and incurred significant losses over the past severalquarters. In August 2005, the Company announced it had formed a specialcommittee and hired a financial advisor to assist it in evaluating thefinancial alternatives available given its significant debt and continuinglosses. In September 2005, the Company commenced discussions with an Ad Hoccommittee representing holders of approximately 80% of the aggregate principalamount of the Senior Notes regarding a possible restructuring of the SeniorNotes. In connection with these discussions, the Company elected not to pay theinterest payment due on the Senior Notes on November 1, 2005 and insteadelected to use the 30-day grace period under the Senior Note agreement. Inaddition, the Company executed a waiver agreement with GECC for failing to meetthe financial covenants of total leverage ratio and senior secured leverageratio related to its revolving credit facility for the quarter ended September30, 2005. Additionally, this waiver agreementincluded a temporary waiver until December 1, 2005 of any default under thecredit facility related to the Company’s not paying the November 1, 2005 couponon the Senior Notes for 30 days.

 

Inconnection with the Existing Credit Facility, on December 1, 2005, the Companyentered into a Forbearance Agreement with GECC. The Forbearance Agreementprovides that, subject to certain conditions, GECC, together with the otherlenders under the Existing Credit Facility, which is governed by the CreditAgreement, will forbear from exercising remedies on account of the cross-defaultunder the Credit Agreement arising from the Company’s failure to pay intereston the Senior Notes. Subject to certain termination events, includingadditional events of default under the Credit Agreement, the ForbearanceAgreement will expire on June 10, 2006. Under the terms of the ForbearanceAgreement, Curative may continue to draw-down under the Credit Agreement as ifsuch existing events of default had not occurred. Upon termination of theForbearance Agreement, all obligations under the Credit Agreement, togetherwith interest, will be immediately due and payable and the lenders may exerciseany rights or remedies thereunder. The Forbearance Agreementprovides that interest on outstanding amounts on the revolver facility willaccrue at the default rate under the agreement, but paid at the rate in theagreement as if no event of default had occurred. The difference betweeninterest accrued and interest paid, the “PIK” spread, becomes due and payableat the end of the forbearance period, provided however that GECC will waivesuch additional interest due as long as: 1) a terminating event under the facility does not occur, 2) the Companyaccepts GECC’s proposal for a DIP credit facility and 3) GECC provides the ExitFacility (see Note 1). In addition, the Forbearance Agreement waives payment ofan early termination fee that became due and payable of $1.2 million, subjectto the same conditions as the PIK interest. The Company recorded the $1.2million termination penalty and PIK interest in the accompanying financialstatements. Further, the Company was not in compliance with the financialcovenants of total leverage, senior secured leverage and fixed charges coverageratios under its revolving credit facility at December 31, 2005, and theCompany and GECC executed a waiver agreement related to these covenants.  As of April 5, 2006, our obligations underour Existing Credit Facility with GECC have been paid in full in connectionwith the interim order of the Bankruptcy Court authorizing the DIP Financingdescribed below.  The DIP Financingremains subject to approval by the Bankruptcy Court on a final basis.  If the Bankruptcy Court does not enter afinal order approving the DIP Financing, the Existing Credit Facility will bereinstated.

 

On December 2, 2005, the Company reached an agreement with the Ad HocCommittee on the general terms of a financial restructuring and entered into aPlan Support Agreement. The financial restructuring, as contemplated by thePlan Support Agreement and the Plan, is designed to (a) de-leverage the Company’sbalance sheet, (b) provide substantial liquidity to conduct businessoperations, (c) ensure that business operations are unaffected by the Chapter11 Cases and that the Company is able to retain its existing management andemployees and (d) provide the greatest return to its creditors. Under the PlanSupport Agreement, certain of the Senior Noteholders agreed to forbear fromexercising remedies with respect to any defaults and events of defaultsarising, or that may arise, under the Senior Notes, and agreed further to takeall commercially reasonable actions to oppose and object to, and not tosupport, any person’s taking action to exercise remedies with respect to theSenior Notes. The Plan Support Agreement will terminate on July 31, 2006, orupon the earlier failure to satisfy certain milestones with respect to the Plan.See Note 1.

 

F-30

----

 

On March 27, 2006, Curative and each of its direct and indirectsubsidiaries filed voluntary petitions under chapter 11 of the Bankruptcy Codein the Bankruptcy Court. They filed the Chapter 11 Cases to implement andeffect the Plan. Prior to commencement of the Chapter 11 Cases, the Companysolicited votes to accept or reject the Plan from the holders of the SeniorNotes issued by Curative and the holders of known general unsecured claimsagainst the Company as of February 6, 2006. Prior to the commencement of theChapter 11 Cases, the Company received the requisite votes for the Plan to beconfirmable under Section 1129 of the Bankruptcy Code.

 

The Plan was filed with the Bankruptcy Court on March 27, 2006. ThePlan will, if confirmed and consummated, result in the cancellation anddischarge of all claims relating to the Senior Notes. Each Senior Noteholderwill receive a cash payment of approximately 54.9% of its respective claimrelated to the Senior Notes, unless a Senior Noteholder was qualified to electand did elect to receive its pro rata share of certain cash considerationprovided in the Plan and the New Curative Common Stock. Holders of existingshares of Old Curative Common Stock and options will not receive anydistributions under the Plan and all shares of Old Curative Common Stock andoptions will be extinguished. See Note 1.

 

TheBankruptcy Court entered an interim order authorizing the Company to enter intoa $45.0 million debtor-in-possession credit facility that is secured by all orsubstantially all of its assets and a pledge of the equity interests of each ofits subsidiaries, or DIP Financing. The proceeds of the DIP Financing were usedto pay, in full, all amounts outstanding under the Company’s Existing CreditFacility as of April 5, 2006 and also will be used for working capital andother general corporate purposes during the Chapter 11 Cases.  The DIP Financing remains subject to approvalby the Bankruptcy Court on a final basis. If the Bankruptcy Court does not enter a final order approving the DIPFinancing, the Existing Credit Facility will be reinstated.

 

The DIP Financing provides for a secured revolving credit facility ofup to $45.0 million, of which the Company can use up to $7.5 million as aletter of credit sub facility and up to $5.0 million as a swingline subfacility (i.e., a short-term loan advance facility). The Company used thefacility immediately to pay all of its outstanding borrowings under theprevious facility.

 

The Company will pay all accrued interest on outstanding LIBOR loans onthe last day of the applicable LIBOR period, provided in the case of any LIBORperiod greater than three months in duration, interest shall be payable atthree month intervals and on the last day of such LIBOR period. All accruedinterest on outstanding revolving credit LIBOR loan advances will bear interestat an annual rate equal to the LIBOR rate plus an additional amount based onthe Company’s senior leverage ratio, which additional amounts may range from 3%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 from 1.75%to 2.25% for the revolving credit base rate loans.

 

In the DIPFinancing Credit Agreement, the Company has made certain representations andwarranties 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.

 

The conditionsdiscussed above and the Company’s default on the Senior Notes raise substantialdoubt about the Company’s ability to continue as a going concern. Therefore,all of the Company’s outstanding debt has been classified as debt in defaultand included in current liabilities in the accompanying financial statements.

 

F-31

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**NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGINGACTIVITIES**

 

In April 2004 and in conjunction with the Company’s issuance of $185.0million of Senior Notes (see Notes 1 and 11), 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 Notes hedged,10.75% fixed rate amounts in exchange for floating interest rate (the 6-monthLIBOR rate plus a premium) payments over the life of the agreement without an exchangeof the underlying principal amount.

 

The swap was a cash flow hedge. Due to hedge ineffectiveness, measuredby comparing the change in the fair value of debt caused only by changes in theLIBOR yield curve to the change in the value of the swap, changes in fair valueof the swap were recognized in earnings, and the carrying value of the Company’sdebt was not marked to fair value. In June 2005, the Company terminated itsinterest rate swap agreement and paid a related fee of $0.5 million. The changesin fair value of $0.5 million and $1.1 million were recorded in other income asof December 31, 2005 and other expense as of December 31, 2004, respectively,in the accompanying statements of operations.

 

**NOTE 13 - NOTE GUARANTEES**

 

On April 23, 2004, the Company issued its $185.0 million aggregateprincipal amount of 10.75% Senior Notes (see Notes 1 and 11) under an Indenture(the “Indenture”), dated April 23, 2004, among the Company, its subsidiariesand Wells Fargo Bank, National Association. The Senior Notes are jointly andseverally guaranteed by all of the Company’s existing and future restrictedsubsidiaries (“Restricted Subsidiaries”), as defined in the Indenture, on afull and unconditional basis, and no separate consideration will be receivedfor the issuance of these guarantees. However, under certain circumstances, theCompany may be permitted to designate any of its Restricted Subsidiaries asUnrestricted Subsidiaries.

 

The Company has no assets or operations independent of its RestrictedSubsidiaries. Furthermore, as of April 23, 2004, there were no significantrestrictions on the ability of any Restricted Subsidiary to transfer to theCompany, without consent of a third party, any of such Restricted Subsidiary’sassets, whether in the form of loans, advances or cash dividends.

 

**NOTE 14 - STOCKHOLDERS’ EQUITY**

 

**Director Share Purchase Program**

 

The Company maintains a Director Share Purchase Program (the “Program”)to encourage ownership of its common stock by its directors. Under the Program,each non-employee director can elect to forego receipt of cash payments fordirector’s annual retainer and meeting fees and, in lieu thereof, receiveshares of common stock at market value equal to the cash payment. The Programauthorized the issuance of up to 120,000 shares of the Company’s common stockat market value. As of December 31, 2005 and 2004, 118,406 shares of commonstock were reserved for future issuance under the Program.

 

**Repurchaseof Common Stock**

 

The Company did not repurchase any of itscommon stock during 2005 and 2004.

 

**Notes Converted into Common Stock**

 

During 2005, none of theCompany’s convertible notes were converted into shares of common stock. InJanuary 2004, certain selling shareholders of Infinity InfusionCare, Ltd. exercised their rights under convertible notes and convertedapproximately $1.2 million of such notes into 72,715 shares of the Company’scommon stock.

 

F-32

----

 

**Restricted Common Stock**

 

A total of 250,000 and 317,604 restricted shares of the Company’scommon stock were granted by the Board of Directors in 2005 and 2004,respectively, to certain principal officers of the Company at various costs pershare. The awards relate to services to be provided over future years and, as aresult, the stock awards are subject to certain restrictions as provided in theagreements. These awards also automatically vest upon the respective officerand/or director’s retirement or termination of employment by the Companywithout cause. The restricted stock had a weighted average price of $3.38 and$9.12 at December 31, 2005 and 2004, respectively. The excess of market valueover cost of the shares awarded of $0.8 million and $2.9 million at December31, 2005 and 2004, respectively, were recorded as deferred compensation andreflected as a reduction of stockholders’ equity in the accompanyingconsolidated balance sheets. For the years ended December 31, 2005, 2004 and2003, related amortization expense amounted to approximately $1.3 million, $0.5million and $0, respectively.

 

**NOTE 15 - STOCK BASED COMPENSATION PLANS**

 

The Company has stock option plans which provide for the granting ofnon-qualified, incentive options, or restricted stock awards to employees anddirectors. The plans authorize granting of up to 8,394,595 shares of theCompany’s common stock at the market value at the date of such grants. Alloptions are exercisable at times as determined by the Board of Directors, notto exceed ten years after the grant date. Upon confirmation of the Company’sPlan of Reorganization (see Note 1), all of the Company’s outstanding stockoptions and plans will be cancelled.

 

Pro forma information regarding net (loss) income and net (loss) incomeper share is required by SFAS No. 123, “Accounting for Stock BasedCompensation,” and has been determined as if the Company has accounted for itsstock options under the fair value method of that Statement. The fair value forthese options was estimated at the date of grant using a Black-Scholes optionpricing model with the following weighted-average assumptions at December 31,2005, 2004 and 2003, respectively: risk-free interest rate of 3.99%, 2.83% and 2.4%; no dividend yields;volatility factor of the expected market price of the Company’s common stock of73.7%, 69.2% and 70.0%; and a weighted-average expected life of the options offour years.

 

The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company’s stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management’s opinion, the existing models do not necessarily provide areliable single measure of the fair value of its stock options.

 

F-33

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A summary of the Company’s stock option activity and relatedinformation for the years ended December 31 is as follows:

 
| ** **                                     | ** ** | **2005  Weighted Average** | ** ** | **2004  Weighted Average** | ** ** | **2003  Weighted Average** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | ** **                 | ** ** | **Exercise**               | ** ** | ** **                 | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                     | ** ** | **Options**                | ** ** | **Price**                  | ** ** | **Options**                | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| Outstanding  at beginning of year              |       | 3,633,229                  |       | $                          | 13.27      |                       | 3,286,449  |   | $ | 13.89 |   | 3,454,963 |   | $ | 12.51 |   |
| Granted                                        |       | 580,000                    |       | 3.16                       |       | 1,003,750                  |       | 12.71 |   | 873,850 |   | 16.35 |   |
| Exercised                                      |       | —                     |       | —                     |       | (30,791                    | )          | 9.58 |   | (457,863 | ) | 8.71 |   |
| Cancelled                                      |       | (1,700,284                 | )          | 13.38                      |       | (626,179                   | )          | 15.81 |   | (584,501 | ) | 13.47 |   |
| Outstanding  at end of year                    |       | 2,512,945                  |       | 10.86                      |       | 3,633,229                  |       | 13.27 |   | 3,286,449 |   | 13.89 |   |
| Exercisable  at end of year                    |       | 1,554,511                  |       | 12.11                      |       | 2,283,425                  |       | 12.65 |   | 1,682,645 |   | 11.92 |   |
| Weighted average fair value of options granted |       |                       |       | $                          | 3.18       |                       |       |   | $ | 6.68 |   |   |   | $ | 8.74 |   |

 

The followingtable summarizes information about stock options outstanding at December 31,2005:

 
| ** **          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Remaining**           | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Contractual**         | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Shares**              | ** ** | **Life**                | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| $ 1.90         | -          | $ 2.85             |       |                    | 73,000     |   | 9.46 |   | $ | 2.38 |   | — |   | — |   |
| 2.86                | -          | 4.28                    |       |                    | 439,000    |   | 9.22 |   | 3.27 |   | — |   | — |   |
| 4.29                | -          | 6.41                    |       |                    | 481,143    |   | 4.91 |   | 5.58 |   | 461,140 |   | $ | 5.57 |   |
| 6.42                | -          | 9.62                    |       |                    | 60,918     |   | 6.74 |   | 8.10 |   | 46,585 |   | 8.23 |   |
| 9.63                | -          | 14.43                   |       |                    | 987,209    |   | 7.56 |   | 12.98 |   | 648,060 |   | 12.97 |   |
| 14.44               | -          | 21.65                   |       |                    | 340,430    |   | 6.33 |   | 16.59 |   | 327,481 |   | 16.59 |   |
| 21.66               | -          | 32.47                   |       |                    | 131,245    |   | 1.75 |   | 29.57 |   | 71,245 |   | 28.47 |   |
|                |       |                    |       | 2,512,945               |       |   |   |   |   | 1,554,511 |   |   |   |
|                     |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

At December31, 2005, 1,650,343 shares of common stock were reserved for future issuance,excluding shares reserved for options outstanding.

 

F-34

----

 

**NOTE 16 - INCOMETAXES**

 

The Company had net deferred tax assets of $19.5 million beforerecording a full valuation allowance to reflect the uncertainty of realizationof those assets. Included in net deferred tax assets is a net operating loss asgenerated in 2005 of approximately $9.2 million which expires in 2025.

 

Significant components of the Company’s deferred income tax assets andliabilities for the years ended December 31 were as follows (in thousands):

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Deferred  income tax assets:          |       |     |       |     |       |
| Bad debt reserve                      |       | $        | 3,513      |     | $          | 3,120 |   |
| Intangible asset amortization         |       | 781      |       | 727      |       |
| Capital loss carryforward             |       | 9,625    |       |     |       |
| Net operating loss                    |       | 9,170    |       | 22       |       |
| Accrued expenses                      |       | 2,247    |       | 1,017    |       |
| Total deferred income tax assets      |       | 25,336   |       | 4,886    |       |
| Valuation  allowance                  |       | (19,476  | )          | —   |       |
| Net deferred  income tax assets       |       | 5,860    |       | 4,886    |       |
|                                  |       |     |       |     |       |
| Deferred  income tax liabilities:     |       |     |       |     |       |
| Goodwill amortization                 |       | (3,239   | )          | (2,230   | )          |
| Tax over book depreciation            |       | (2,621   | )          | (1,217   | )          |
| Installment sale                      |       | —   |       | (64      | )          |
| Total deferred income tax liabilities |       | (5,860   | )          | (3,511   | )          |
| Total deferred income tax assets      |       | $        | —     |     | $          | 1,375 |   |

 

Total net long-term deferred income tax assets of $0 and $909,000 areincluded in other assets in the accompanying balance sheets for the years endedDecember 31, 2005 and 2004, respectively.

 

Significant components of the (benefit) provision for income taxes forthe years ended December 31 were as follows (in thousands):

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                              |       |     |       |     |       |     |       |
| Federal                               |       | $        | (5,096     | )        | $          | (3,256   | )          | $ | 4,998 |   |
| State                                 |       | (72      | )          | 18       |       | 1,075    |       |
| Deferred:                             |       |     |       |     |       |     |       |
| Federal                               |       | 1,234    |       | (582     | )          | 2,325    |       |
| State                                 |       | 141      |       | (14      | )          | 98       |       |
| Total income  tax (benefit) provision |       | $        | (3,793     | )        | $          | (3,834   | )          | $ | 8,496 |   |
|                                       |            |          |            |          |            |          |            |  |  |  |  |

 

F-35

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A reconciliation of income tax computed at the U.S. Federal statutorytax rate to income tax (benefit) expense for the years ended December 31 was asfollows:

 
| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  statutory tax rate                    |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State income  taxes net of Federal tax benefit |       | —   |       | —   |       | 4.6      | %          |
| Goodwill  impairment                           |       | (18.0    | )%         | (31.6    | )%         | —   |       |
| Valuation  Allowance                           |       | (18.4    | )%         | —   |       | —   |       |
| Reversing  tax reserves                        |       | 4.2      | %          | —   |       |     |       |
| Other                                          |       | 0.8      | %          | (0.8     | )%         | (0.2     | )%         |
| Effective  tax rate                            |       | 3.6      | %          | 2.6      | %          | 39.4     | %          |

 

**NOTE 17 - SEGMENT INFORMATION**

 

The Company follows the provisions of SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.”  The Company has two reportable segments:  Specialty Infusion and Wound Care Management.In its Specialty Infusion business unit, the Company purchasesbiopharmaceutical and other pharmaceutical products from suppliers andcontracts with insurance companies and other payors to provide its services,which include coordination of patient care, 24-hour nursing and pharmacy availability,patient education and reimbursement billing and collection services. In itsWound Care Management business unit, the Company contracts with hospitals tomanage outpatient Wound Care Center® programs. The Company evaluatessegment performance based on (loss) income from operations. The accountingpolicies of the reportable segments are the same as those described in Note 1. Intercompanytransactions are eliminated to arrive at consolidated totals.

 

The following tables present the results of operations and total assetsof the reportable segments of the Company at and for the years ended December31 (in thousands):

 
| ** **                     | ** ** | **At and for the Year Ended December 31, 2005** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **Specialty  Infusion**                         | ** ** | **Wound Care  Management** | ** ** | **Totals** | ** ** |
| Revenues                       |       | $                                               | 232,169    |   | $ | 28,890 |   | $ | 261,059 |   |
| (Loss)  income from operations |       | $                                               | (86,504    | ) | $ | 5,725 |   | $ | (80,779 | ) |
| Total assets                   |       | $                                               | 157,368    |   | $ | 11,920 |   | $ | 169,288 |   |

 
| ** **                     | ** ** | **At and for the Year Ended December 31, 2004** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **Specialty  Infusion**                         | ** ** | **Wound Care  Management** | ** ** | **Totals** | ** ** |
| Revenues                       |       | $                                               | 198,055    |   | $ | 26,925 |   | $ | 224,980 |   |
| (Loss)  income from operations |       | $                                               | (99,562    | ) | $ | 3,937 |   | $ | (95,625 | ) |
| Total assets                   |       | $                                               | 265,881    |   | $ | 17,903 |   | $ | 283,784 |   |

 

F-36

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| ** **              | ** ** | **At and for the Year Ended December 31, 2003** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|
| ** **              | ** ** | **Specialty  Infusion**                         | ** ** | **Wound Care  Management** | ** ** | **Totals** | ** ** |
| Revenues                |       | $                                               | 134,596    |   | $ | 28,898 |   | $ | 163,494 |   |
| Income from  operations |       | $                                               | 17,456     |   | $ | 2,578 |   | $ | 20,034 |   |
| Total assets            |       | $                                               | 216,088    |   | $ | 17,850 |   | $ | 233,938 |   |

 

The results of operations shown above exclude amounts from discontinuedoperations (see Note 5).

 

**NOTE 18 –NET (LOSS) INCOME PER SHARE**

 

Net (loss) income per common share, basic, is computed by dividing thenet (loss) income by the weighted average number of common shares outstanding. Net(loss) income per common share, diluted, is computed by dividing adjusted net(loss) income (see below) by the weighted average number of shares outstandingplus dilutive common share equivalents. The following table sets forth thecomputation of weighted average shares, basic and diluted, used in determiningbasic and diluted (loss) income per share for the years ended December 31 (inthousands):

 
| ** **                                                                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Denominator:                                                                                            |       |     |       |     |       |     |       |
| Denominator for basic income per share,  weighted average shares                                        |       | 13,002   |       | 12,932   |       | 12,536   |       |
|                                                                                                    |       |     |       |     |       |     |       |
| Effect of dilutive employee stock options  and convertible notes(1)                                     |       | —   |       | —   |       | 1,280    |       |
|                                                                                                    |       |     |       |     |       |     |       |
| Denominator:                                                                                            |       |     |       |     |       |     |       |
| Denominator for diluted (loss) income per  share, adjusted weighted average shares assuming conversions |       | 13,002   |       | 12,932   |       | 13,816   |       |

 

----

(1)          Potentially dilutive employee and directorstock options that have been excluded from this amount because they areanti-dilutive amounted to approximately 2,513,000, 3,633,000 and 2,006,000 in2005, 2004 and 2003, respectively.

 

F-37

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Adjusted net (loss) income and net (loss) income per common share,diluted, for the years ended December 31 were computed as follows (inthousands, except per share data):

 
| ** **                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net (loss)  income, as reported                             |       | $        | (101,592   | )        | $          | (141,405 | )          | $ | 13,075 |   |
| Add back  interest related to convertible notes, net of tax |       | —   |       | —   |       | 212      |       |
| Adjusted net  (loss) income                                 |       | $        | (101,592   | )        | $          | (141,405 | )          | $ | 13,287 |   |
|                                                        |       |     |       |     |       |     |       |
| Net (loss)  income per common share, diluted                |       | $        | (7.81      | )        | $          | (10.93)  | (2)        | $ | 0.96 | (3) |
|                                                        |       |     |       |     |       |     |       |
| Weighted  average shares, diluted                           |       | 13,002   |       | 12,932   |       | 13,816   |       |

 

----

(2)          Basic shares were used to calculate net lossper common share, diluted, for the years ended December 31, 2005 and 2004 sincethe effects of using stock options and convertible notes would have ananti-dilutive effect on income per share. If not anti-dilutive, weightedaverage shares, diluted, would have been 13,080,434 and 13,558,662 for theyears ended December 31, 2005 and 2004, respectively.

 

(3)          In accordance with SFAS No. 128, “Earnings PerShare,” net income per common share, diluted, for the year ended December 31,2003 was calculated under the “as if converted” method, which requires addingshares related to convertible notes that have no contingencies to thedenominator for diluted income per share and adding to net income, thenumerator, tax effected interest expense relating to those convertible notes.

 

**NOTE 19 -EMPLOYEE BENEFITS**

 

The Company maintains a qualified Employee Savings Plan (the “Plan”)for eligible employees under Section 401(k) of the Internal Revenue Code. ThePlan provides for voluntary employee contributions through salary reductionsand employer contributions at the discretion of the Company. The Company hadpreviously authorized employer contributions of 25% of employees’ contributionup to 1% of the employees’ compensation. As of July 1, 2003, the Companyamended the Plan to reflect employer contributions of 50% of employees’contribution up to 2% of the employees’ compensation. The Company’scontribution match was $0.8 million, $0.6 million and $0.3 million in 2005,2004 and 2003, respectively.

 

**NOTE 20 - RELATED PARTY TRANSACTIONS**

 

During 2002, the Company advanced approximately $1.9 million to certainofficers and directors of the Company. The Company received promissory notespayable with maturity dates ranging from February 19, 2004 to March 1, 2005****for such advances, which bear interest atan annual rate of 2.46% payable on the maturity date. At December 31, 2004,$1.5 million in principal amounts outstanding under these promissory notes areincluded in notes receivable-stockholders in the accompanying consolidatedbalance sheets. As of March 1, 2005, all such loans were paid in full.

 

F-38

----

 

**NOTE 21 -LEGAL PROCEEDINGS**

 

In the normal course of the Company’s business, it may be involved inlawsuits, claims, and investigations, including any arising out of services orproducts provided by or to the Company’s operations, personal injury claims andemployment disputes, the outcome of which, in the opinion of management, willnot have a material adverse effect on the Company’s financial position, cashflows or results of operations.

 

On March 27, 2006, the Petition Date, Curative filed a PrepackagedJoint Plan of Reorganization under Chapter 11 of the Bankruptcy Code in theUnited States Bankruptcy Court for the Southern District of New York. TheChapter 11 proceedings are further discussed in Note 1. The Chapter 11proceedings were entered into in response to various issues that havenegatively affected the Company’s liquidity and ability to service itsobligations.

 

Material pending legal proceedings, other than the Chapter 11proceedings above and other than ordinary, routine litigation incidental to thebusiness, to which the Company became or were a party during the year endedDecember 31, 2005, or subsequent thereto but before the filing of this report,are summarized below.

 

***Apex Therapeutic Care Litigation***

 

On October 26, 2005, the Company commenced litigation in the UnitedStates District Court for the Central District of California, entitled “CurativeHealth Services, Inc. vs. James H. Williams, et al.,” 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 seeking $60.0 millionin compensatory damages and available punitive damages, the Company isdisputing its obligation to make further payments under an amended and restatedpromissory note, dated May 30, 2002, made in favor of the former stockholdersin connection with the acquisition of Apex. Prior to commencement of theaction, Curative sent a letter to the representative of the former stockholdersindicating that Curative would not be making the installment payment due onSeptember 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 $1.5 million. This event did not cause a defaultunder, or acceleration of, any other obligations of Curative.

 

***DHS Audit***

 

Two of the Company’s subsidiaries, Apex and eBioCare, might be subjectto potential indemnification liabilities to three independent retail pharmaciesthat previously did business with Curative. The indemnification claims are inconnection with an audit conducted by the Department of Health Services of theState of California related to the pharmacies’ medical billing for clottingfactor supplied to the pharmacies by Apex and eBioCare, and the pharmacies’medical billing for the anti-inhibitor product “FEIBA” supplied to thepharmacies by Apex and eBioCare. While liability with respect to these claimsis uncertain at this time, Apex and eBioCare believe that some amount ofmonetary loss is reasonably possible if the pharmacies assert and prevail onindemnification claims. Apex and eBioCare estimate that the range of loss maybe anywhere from $0 to $39.3 million. As the amount of potential exposurecannot be estimated at this time, no related loss provision has been accrued inthe consolidated financial statements as of December 31, 2005.

 

F-39

----

 

**NOTE 22 – QUARTERLY DATA (UNAUDITED)**

 

The following table sets forth the unaudited financial results of the Companyfor the eight quarters ended December 31, 2005 (in thousands, except per sharedata):

 
| ** **         | ** ** | ** **      | ** ** | ** **    | ** ** | ** **            | ** ** | **Net (Loss) Income** | ** ** | **Net (Loss) Income**               | ** ** |
|--------------------|------------|-----------------|------------|---------------|------------|-----------------------|------------|-----------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | **Total**       | ** ** | **Gross**     | ** ** | ** **            | ** ** | **Per Common**   | ** ** | **Per Common**                 | ** ** |
| ** **         | ** ** | **Revenues(1)** | ** ** | **Profit(1)** | ** ** | **Net (Loss) Income** | ** ** | **Share, Basic** | ** ** | **Share, Diluted(2) (3)** | ** ** |
| **Quarter  Ended** |       |            |       |          |       |                  |       |                  |       |                                |       |
| **2005**           |       |            |       |          |       |                  |       |                  |       |                                |       |
| December 31        |       | $               | 68,715     |          | $          | 14,803                |       | $                     | (12,528    | )                                   | $          | (0.96 | ) | $ | (0.96 | ) |
| September 30       |       | 67,135          |       | 14,020        |       | (80,926               | )          | (6.22                 | )          | (6.22                               | )          |
| June 30            |       | 65,879          |       | 13,313        |       | (4,774                | )          | (0.37                 | )          | (0.37                               | )          |
| March 31           |       | 59,330          |       | 12,732        |       | (3,364                | )          | (0.26                 | )          | (0.26                               | )          |
|               |       |            |       |          |       |                  |       |                  |       |                                |       |
| **2004**           |       |            |       |          |       |                  |       |                  |       |                                |       |
| December 31        |       | $               | 62,018     |          | $          | 12,638                |       | $                     | (139,340   | )                                   | $          | (10.77 | ) | $ | (10.77 | ) |
| September 30       |       | 64,398          |       | 15,115        |       | (2,066                | )          | (0.16                 | )          | (0.16                               | )          |
| June 30            |       | 59,190          |       | 15,117        |       | (3,132                | )          | (0.24                 | )          | (0.24                               | )          |
| March 31           |       | 39,374          |       | 13,180        |       | 3,133                 |       | 0.24                  |       | 0.23                                |       |

 

----

(1)          Excludes amounts from discontinued operations.See Note 5 of Notes to Consolidated Financial Statements.

 

(2)          See Note 18 for net (loss) income per sharecalculation. 

 

(3)          Weighted average shares used in the abovecalculations have been corrected for 2004. Such correction resulted in anincrease in Net loss per share of $.01 for the fourth quarter of 2004.

 

F-40

----

 

**SCHEDULE II**

 

**CURATIVE HEALTH SERVICES, INC. ANDSUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

**YEARS ENDED DECEMBER 31, 2005, 2004 and 2003**

 
| **COL. A**                                      | ** ** | **COL. B**                         | ** ** | **COL. C**                          | ** ** | **COL. D**   | ** ** | **COL. E**            | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                      | ** ** | ** **                         | ** ** | **Additions**                       | ** ** | ** **   | ** ** | ** **            | ** ** |
| **Description**                                 | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Other(2)** | ** ** | **Deductions****(1)** | ** ** | **Balance at  End  of Year** | ** ** |
| ** **                                      | ** ** | ** **                         | ** ** | ** **                          | ** ** | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Year ended  December 31, 2005                   |       |                               |       |                                |       |         |       |                  |       |   |   |
| Allowance  for doubtful accounts                |       | $                                  | 3,560,000  |                                | $          | 8,409,000    |       | $                     | —     |   | $ | 4,553,000 |   | $ | 7,416,000 |   |
|                                            |       |                               |       |                                |       |         |       |                  |       |   |   |
| Valuation  allowance – deferred tax assets |       | $                                  | —     |                                | $          | 1,375,000    |       | $                     | 18,101,000 |   | $ | — |   | $ | 19,476,000 |   |
|                                            |       |                               |       |                                |       |         |       |                  |       |   |   |
| Year ended  December 31, 2004                   |       |                               |       |                                |       |         |       |                  |       |   |   |
| Allowance  for doubtful accounts                |       | $                                  | 3,414,000  |                                | $          | 2,339,000    |       | $                     | —     | ** ** | $ | 2,193,000 |   | $ | 3,560,000 |   |
|                                            |       |                               |       |                                |       |         |       |                  |       |   |   |
| Year ended  December 31, 2003:                  |       |                               |       |                                |       |         |       |                  |       |   |   |
| Allowance  for doubtful accounts                |       | $                                  | 2,854,000  |                                | $          | 2,164,000    |       | $                     | —     | ** ** | $ | 1,604,000 |   | $ | 3,414,000 |   |
|                                            |       |                               |       |                                |       |         |       |                  |       | ** ** |   |   |   |   |   |   |
|                                                 |            |                                    |            |                                     |            |              |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  Accounts written off.

(2)  Represents deferred tax assets in 2005 wherea full valuation allowance was provided.

 

S-1

----

 

**INDEX TO EXHIBITS**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                     |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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  for the quarter ended September 30, 2004)                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.1             |       | Curative Health Services, Inc., Director  Share Purchase Program (incorporated by reference to Exhibit 10.28.3 of the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  1996)**                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.2             |       | 1991 Stock Option Plan (incorporated by  reference to Exhibit 10.27 to the Company’s Registration Statement on Form  S-1 No. 33-39879)**                                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.3             |       | Curative Technologies, Inc. Non-Employee  Director Stock Option Plan (incorporated by reference to Exhibit 10.25.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  1996)**                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.4             |       | Employment Agreement, dated as of September  1, 1997 between John C. Prior and the Company (incorporated by reference to  Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 1997)**                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.5             |       | Amendment No. 4 to the 1991 Stock Option  Plan (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1998)**                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.6             |       | Amendment No. 1 to Curative Technologies,  Inc. Non-Employee Director Stock Option Plan (incorporated by reference to  Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 1998)**                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                |
| 10.7             |       | Amendment to the Non-Employee Director  Stock Option Plan (incorporated by reference to Exhibit 10.19.2 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2000)**                                                                                                                                |

 

----

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8             |       | Form of Restricted Stock Award Agreement,  dated August 11, 1999 (incorporated by reference to Exhibit 10.25 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2000)**                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9             |       | Non-Employee Director Severance Plan  (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 30, 2000)**                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10            |       | Asset Purchase Agreement among Cytomedix,  Inc., Cytomedix, N.V., CHS Services, Inc. and Curative Health Services, Inc.,  dated as of October 12, 2000 (incorporated by reference to Exhibit 10.25 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2000)                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11            |       | Employment Agreement, dated as of September  18, 2000, between Roy McKinley and the Company (incorporated by reference to  Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2000)**                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12            |       | Curative Health Services, Inc. 2000 Stock  Incentive Plan (incorporated by reference to Exhibit 10.24 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)**                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13            |       | Stock Purchase Agreement, dated as of March  19, 2001, by and among Curative Health Services, Inc. and certain  stockholders of eBioCare.com, Inc. (incorporated by reference to Exhibit 2.1  to the Company’s Current Report on Form 8-K, filed April 13, 2001)                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14            |       | Form of Stockholder Purchase Agreement,  between Curative Health Services, Inc. and all other stockholders of  eBioCare.com, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s  Current Report on Form 8-K, filed April 13, 2001)                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.15            |       | Form of Option/Warrant Repurchase and  Surrender Agreement between eBioCare.com, Inc. and the holders of options and  warrants to purchase common stock of eBioCare.com, Inc. (incorporated by  reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K, filed  April 13, 2001)                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.16            |       | Curative Health Services, Inc. 2001  Broad-Based Stock Incentive Plan (incorporated by reference to Exhibit 10.37  to the Company’s Annual Report on Form 10-K for the year ended December 31,  2001)**                                                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.17            |       | Curative Health Services, Inc. form of  Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit  10.38 to the Company’s Annual Report on Form 10-K for the year ended December  31, 2001)**                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.18            |       | Stock Purchase Agreement, dated as of January  27, 2002, by and among Curative Health Services, Inc. and the stockholders of  Apex Therapeutic Care, Inc. (incorporated by reference to Exhibit 2 to the  Company’s Current Report on Form 8-K, filed March 11, 2002)                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.19            |       | Purchase Agreement, dated as of June 10,  2002, by and among Curative Health Services, Inc., Infinity Infusion, LLC and  Infinity Infusion II, LLC, and IIC GP, LLC, Azar I. Delpassand, Dr. Ebrahim  Delpassand, Tara Imani, Maryam Panahi and Yassamin Norouzian (incorporated by  reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed  June 11, 2002) |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20            |       | Amended and Restated Loan and Security  Agreement, dated as of May 17, 2002, by and among Curative Health Services,  Inc., eBioCare.com, Inc., Hemophilia Access, Inc., Apex Therapeutic Care,  Inc. and Healthcare Business Credit Corporation (incorporated by reference to  Exhibit 99.3 to the Company’s Current Report on Form 8-K, filed June 11,  2002)                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.21            |       | Amendment No. 1 to Purchase Agreement,  dated as of June 28, 2002, by and among Curative Health Services, Inc.,  Infinity Infusion, LLC and Infinity Infusion II, LLC and Bijan Imani, as  Sellers’ Representative on behalf of the Sellers (incorporated by reference  to Exhibit 2.2 to the Company’s Current Report on Form 8-K, filed July 2,  2002)                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22            |       | Employment agreement, dated as of March 13,  2002, between Thomas Axmacher and the Company (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2002)**                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23            |       | Registration Rights and Lock-Up Agreement,  dated as of February 28, 2002, by and among Curative Health Services, Inc.  and the stockholders of Apex Therapeutic Care, Inc. (incorporated by  reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for  the year ended December 31, 2002)                                                                       |

 

----

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24            |       | Amendment No. 1 to the Registration Rights  and Lock-Up Agreement, dated as of February 27, 2003, by and between Curative  Health Services, Inc. and Jon M. Tamiyasu, in his capacity as the  Stockholders’ Representative under the Registration Rights and Lock-Up  Agreement, dated as of February 28, 2002, by and among Curative Health  Services, Inc. and the shareholders of Apex Therapeutic Care, Inc.  (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002) |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.25            |       | Kerlin Agreement, dated February 28, 2002,  by and among Curative Health Services, Inc., Kerlin Capital Group, LLC,  William K. Doyle and Cheryl S. Doyle as Trustees of the William K. Doyle and  Cheryl S. Doyle Family Trust, dated July 15, 1991, and Timothy J. Fahringer  (the Kerlin Parties) and the stockholders of Apex Therapeutic Care, Inc.  (incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2002)                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.26            |       | Amendment No. 1 to the Kerlin Agreement,  dated as of February 27, 2003, by and among Curative Health Services, Inc.,  Jon M. Tamiyasu, in his capacity as the Stockholders’ Representative under  the Stock Purchase Agreement, dated as of January 27, 2002, by and among  Curative Health Services, Inc. and the shareholders of Apex Therapeutic Care,  Inc. and the Kerlin Parties (incorporated by reference to Exhibit 10.48 to  the Company’s Annual Report on Form 10-K for the year ended December 31,  2002)                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.27            |       | Form of Amendment to Executive Employment  Agreements with John C. Prior and Roy McKinley (incorporated by reference to  Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2002)**                                                                                                                                                                                                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.28            |       | Amendment No. 1 to Curative Health  Services, Inc. 2001 Broad-Based Stock Incentive Plan (incorporated by  reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2003)**                                                                                                                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.29            |       | Amendment No. 2 to Curative Health  Services, Inc. 2001 Broad-Based Stock Incentive Plan (incorporated by  reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2003)**                                                                                                                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.30            |       | Credit Agreement, dated as of June 9, 2003,  between General Electric Capital Corporation and the Company (incorporated by  reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2003)                                                                                                                                                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.31            |       | Consent and First Amendment to Credit  Agreement, dated as of July 11, 2003, among General Electric Capital  Corporation and the Company (incorporated by reference to Exhibit 10.2 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)                                                                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.32            |       | Second Amendment to Credit Agreement, dated  as of October 10, 2003, among General Electric Capital Corporation and the  Company and the related Term Note (incorporated by reference to Exhibit 10.2  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003)                                                                                                                                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33            |       | Form of Acknowledgment Relating to  Employment Agreement, dated as of June 3, 2003, executed by John C. Prior and  Roy McKinley (incorporated by reference to Exhibit 10.3 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)**                                                                                                                                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34            |       | Form of Acknowledgment of Assignment of  Employment Agreement, dated as of June 3, 2003, executed by Thomas Axmacher  (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2003)**                                                                                                                                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.35            |       | Form of Amendment to and Second  Acknowledgment Relating to Employment Agreement, dated as of August 19, 2003,  executed by John C. Prior and Roy McKinley (incorporated by reference to Exhibit  10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003)**                                                                                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36            |       | Form of Amendment to and Second  Acknowledgment of Assignment of Employment Agreement, dated as of August 19,  2003, executed by Thomas Axmacher (incorporated by reference to Exhibit 10.6  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003)**                                                                                                                                                                                                                                                              |

 

----

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37            |       | Form of Acknowledgment of Limitations on  Exercise of Stock Options, dated as of June 3, 2003, executed by Timothy I.  Maudlin, Gerard Moufflet, Lawrence P. English, Paul S. Auerbach and Daniel E.  Berce (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003)**                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.38            |       | Third Amendment to Credit Agreement, dated  as of December 31, 2003, among General Electric Capital Corporation and the  Company (incorporated by reference to Exhibit 10.63 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2003)                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.39            |       | Escrow Agreement, dated April 23, 2004, by  and among Curative Health Services, Inc., Christopher J. York in his capacity  as representative of the Sellers, and The Bank of New York, as escrow agent  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed April 30, 2004)                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.40            |       | Amended and Restated Credit Agreement,  dated as of April 23, 2004, by and among Curative Health Services, Inc.,  certain other borrowers signatory thereto, certain lenders referred to  therein, GECC Capital Markets Group, Inc. and General Electric Capital  Corporation (incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K, filed April 30, 2004) |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.41            |       | Employment Agreement, dated as of April 23,  2004, by and between Curative Health Services, Inc. and Paul F. McConnell  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed  May 4, 2004)**                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.42            |       | Noncompetition Agreement, dated as of April  23, 2004, by and between Curative Health Services, Inc. and Paul F. McConnell  (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed  May 4, 2004)**                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.43            |       | Restricted Stock Unit Award Agreement,  dated as of April 23, 2004, by and between Curative Health Services, Inc. and  Paul F. McConnell (incorporated by reference to Exhibit 10.3 to the Company’s  Current Report on Form 8-K, filed May 4, 2004)**                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.44            |       | Separation from Employment Agreement, dated  April 27, 2004, between William C. Tella and the Company (incorporated by  reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended  June 30, 2004)**                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.45            |       | Amendment No. 1 to Curative Health  Services, Inc. 2000 Stock Incentive Plan (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2004)**                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.46            |       | Amendment No. 3 to Curative Health  Services, Inc. Non-Employee Director Stock Option Plan (incorporated by  reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2004)**                                                                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.47            |       | Swap Transaction Agreement, dated May 3,  2004, between National City Bank and the Company (incorporated by reference  to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2004)                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.48            |       | First Amendment to Amended and Restated  Credit Agreement and Collateral Documents, made and entered into as of May 3,  2004, among General Electric Capital Corporation and the Company  (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 30, 2004)                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.49            |       | Second Amendment to Amended and Restated  Credit Agreement, made and entered into as of June 30, 2004, among General  Electric Capital Corporation and the Company (incorporated by reference to  Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2004)                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.50            |       | Third Amendment to Amended and Restated  Credit Agreement, made and entered into as of October 20, 2004, among General  Electric Capital Corporation and the Company (incorporated by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2004)                                                                                   |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                   |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.51            |       | Transition Agreement, dated as of October  2, 2004, by and between the Company and Joseph L. Feshbach (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  November 16, 2004)**                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.52            |       | Restricted Stock Award Agreement, dated as  of November 10, 2004, by and between the Company and Joseph L. Feshbach  (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K, filed  November 16, 2004)**                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.53            |       | Amendment to Employment Agreement, dated as  of November 15, 2004, by and between the Company and Paul F. McConnell  (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on  Form 8-K, filed  November 16, 2004)**                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.54            |       | Amended and Restated Employment Agreement,  effective as of December 31, 2004, by and between the Company and John C.  Prior (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed December 20, 2004)**                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.55            |       | Employment agreement, dated as of April 23,  2004, between Andrew C. Walk and the Company (incorporated by reference to  Exhibit 10.63 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2004)**                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.56            |       | Employment agreement, dated as of April 23,  2004, between Craig Vollmer and the Company (incorporated by reference to  Exhibit 10.64 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2004)**                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.57            |       | Restricted Stock Unit Award Agreement,  dated as of December 14, 2004, by and between Curative Health Services, Inc.  and Thomas Axmacher (incorporated by reference to Exhibit 10.65 to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2004)**                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.58            |       | Form of Restricted Stock Award Agreement  (incorporated by reference to Exhibit 10.66 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2004)**                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.59            |       | Form of Incentive Stock Option Agreement —  2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.67 to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2004)**                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.60            |       | Form of Non-Qualified Stock Option  Agreement (incorporated by reference to Exhibit 10.68 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2004)**                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.61            |       | Form on Director Non-Qualified Stock Option  Agreement (incorporated by reference to Exhibit 10.69 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 2004)**                                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.62            |       | Separation Agreement, by and between  Curative Health Services, Inc. and Nancy F. Lanis, dated as of February 23,  2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current  Report on Form 8-K, filed  March 1, 2005)**                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.63            |       | Restricted Stock Award Agreement, dated as  of February 23, 2005, by and between Curative Health Services, Inc. and Nancy  F. Lanis (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed  March 1, 2005)**                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.64            |       | Fourth Amendment to Amended and Restated  Credit Agreement, by and between the Company, its subsidiaries and General  Electric Capital Corporation, a Delaware corporation, effective as of  December 31, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s  Current Report on Form 8-K, filed March 1, 2005) |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.65            |       | Second Amendment to Employment Agreement,  dated March 24, 2005, by and between the Company and Paul F. McConnell  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed  March 25, 2005)**                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.66            |       | Amendment to Restricted Stock Unit Award  Agreement, dated March 24, 2005, by and between the Company and Paul F.  McConnell (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed  March 25, 2005)**                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.67            |       | Separation Agreement, dated March 28, 2005,  by and between the Company and Anne Bruce (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 26,  2005)**                                                                                                                     |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.68            |       | Waiver Agreement entered into among the  Company, its subsidiaries and General Electric Capital Corporation, effective  as of June 30, 2005 (incorporated by reference Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)                                                                |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.69            |       | Compensation Agreement, dated as of May 27,  2005, between the Company and Thomas Axmacher (incorporated by reference to  Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2005)**                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.70            |       | Lease and Agreement, dated June 10, 1991,  by and between Executive Tower, Inc. and Critical Care Systems Inc.  (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2005)                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.71            |       | Amendment to Lease, dated as of June 4,  2001, by and between Brookhaven (Nashua), LLC and Critical Care Systems, Inc.  (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended September 30, 2005)                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.72            |       | Second Amendment to Lease, dated as of June  25, 2001, by and between Brookhaven (Nashua), LLC and Critical Care Systems,  Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005)                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.73            |       | Third Amendment to Lease, dated as of  November 7, 2003, by and between Brookhaven (Nashua), LLC and Critical Care  Systems, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.74            |       | Fourth Amendment to Lease, dated as of July  11, 2005, by and between Brookhaven (Nashua), LLC and Critical Care Systems,  Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005)                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.75            |       | Waiver Agreement, dated as of October 14,  2005, entered into among the Company, its subsidiaries and General Electric  Capital Corporation (incorporated by reference to Exhibit 10.6 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2005)                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.76            |       | Waiver Agreement, dated as of November 7,  2005, entered into among the Company, its subsidiaries and General Electric  Capital Corporation (incorporated by reference to Exhibit 10.7 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2005)                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.77            |       | Plan Support Agreement, dated December 2,  2005, by and among Curative Health Services, Inc., its subsidiaries, and the  Supporting Noteholders (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed December 5, 2005)                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.78            |       | Forbearance Agreement, dated December 1,  2005, by and among Curative Health Services, Inc, its subsidiaries, and GE  Capital (incorporated by reference to Exhibit 10.2 to the Company’s Current  Report on Form 8-K, filed  December 5, 2005)                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.79            |       | Amendment to Plan Support Agreement, dated  December 14, 2005, by and among Curative Health Services, Inc., its  subsidiaries, and the Supporting Noteholders (incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed December 16,  2005)                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.80            |       | Amendment to Forbearance Agreement, entered  into on December 28, 2005 and effective as of December 23, 2005, by and among  Curative Health Services, Inc., its subsidiaries, and General Electric  Capital Corporation (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K, filed January 4, 2006) |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.81            |       | Waiver Agreement, dated as of April 3,  2006, by and among Curative Health Services, Inc., its subsidiaries and  General Electric Capital Corporation (incorporated by reference to Exhibit  10.2 to the Company’s Current Report on Form 8-K, filed April 10, 2006)                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.82            |       | Asset Purchase Agreement, dated as of  December 1, 2005, among Curative Health Services, Inc. and ProCare Pharmacy,  Inc. and ProCare Pharmacy Direct, Inc.*                                                                                                                                                                                 |

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                           |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21               |       | List of Subsidiaries*                                                                                                                                     |
|             |       |                                                                                                                                                      |
| 23               |       | Consent of Ernst & Young LLP*                                                                                                                         |
|             |       |                                                                                                                                                      |
| 24               |       | Power of Attorney (included on signature  page)*                                                                                                          |
|             |       |                                                                                                                                                      |
| 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  |

 

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*                                         Filedherewith

 

**                                  Requiredto be filed pursuant to Item 601(b)(10)(ii)(A) or (iii) of Regulation S-K

 

The Company has excluded from the exhibits filed with this reportinstruments defining the rights of holders of long-term convertible debt of theCompany where the total amount of the securities authorized under suchinstruments does not exceed 10% of its total assets. The Company hereby agreesto furnish a copy of any of these instruments to the SEC upon request.

 

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