** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**AMENDMENT NO. 1 ON**

** **

**FORM 10-K/A**

** **

| **ý**                                  | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                  | ** ** | ** **                                                                                    |
| **FOR  THE FISCAL YEAR ENDED MAY 31, 2005** |
| ** **                                  | ** ** | ** **                                                                                    |
| **OR**                                      |
| ** **                                  | ** ** | ** **                                                                                    |
| **o**                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**FORTHE TRANSITION PERIOD FROM        TO        **

 

**Commissionfile number: 000-50371**

 

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**Curative Health Services, Inc.**

(Exactname of registrant as specified in its charter)

 

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

 

**61Spit Brook RoadNashua, New Hampshire 03060**

(Addressof principal executive offices)

 

**(603)888-1500**

(Registrant’stelephone number, including area code)

 

InternetWebsite:  **http://www.curative.com**

 

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SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: **None**

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

**CommonStock, par value $.01 per share**(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 £   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)has been 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 or a non-accelerated filer (as defined in Rule 12b-2 ofthe 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 upon the last sale price of such stock as reported by theNasdaq National Market).

 

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

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**NONE.**

 

 

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**EXPLANATORY NOTE**

 

This AmendmentNo. 1 on Form 10-K/A (“Form 10-K/A”) to our Annual Report on Form 10-K for thefiscal year ended December 31, 2005, initially filed with the Securities andExchange Commission (“SEC”) on April 11, 2006 (the “Original Filing”), is beingfiled to include information required by Items 10, 11, 12, 13 and 14 under PartIII. This information is being included in this Form 10-K/A because ourdefinitive proxy statement will not be filed within 120 days after the end ofour 2005 fiscal year. Reference to our proxy statement on the cover page ofthis Form 10-K/A has been deleted.

 

In addition,pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing hasbeen amended to contain currently-dated certifications from our Chief ExecutiveOfficer and Chief Financial Officer, as required by Section 302 of theSarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officerand Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1and 31.2, respectively.

 

Except for the foregoing amended information,this Form 10-K/A continues to describe conditions as of the date of theOriginal Filing, and we have not updated the disclosures contained herein toreflect events that occurred at a later date.

 

**Curative Health Services, Inc.Form 10-K/AIndex**

 
| **PART III**                                                                                             | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|
| Item 10. Directors and Executive Officers  of the Registrant                                             |       |
| Item 11. Executive Compensation                                                                          |       |
| Item 12. Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters |       |
| Item 13. Certain Relationships and Related  Transactions                                                 |       |
| Item 14. Principal Accounting Fees and  Services                                                         |       |
| **PART IV**                                                                                              | ** ** |
| Item 15. Exhibits, Financial Statement  Schedules                                                        |       |
| **SIGNATURES**                                                                                           | ** ** |

 

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# **Part III**

 

## **Item 10. Directorsand Executive Officers of the Registrant**

 

**BOARD OF DIRECTORS**

 

Set forth below is certain information about eachdirector of the Company, including name, age and principal occupations duringthe past five years.

 

Timothy I. Maudlin, 55, a co-founder of the Company,became Chairman of our Board of Directors in February 2005. He has been adirector of the Company since 1984, and served as Secretary of the Company fromNovember 1984 to December 1990. Mr. Maudlin also served as President of theCompany from November 1984 through December 1986. Mr. Maudlin has been theManaging Partner of Medical Innovation Partners, a venture capital firm, since1988 and since 1982 he has been an officer of the affiliated management companyof Medical Innovation Partners. Mr. Maudlin also served as a Principal ofVenturi Group LLC, an incubator and venture capital firm, from 1999 to October2001, and as Chief Financial Officer of Venturi Group LLC from October 2001into 2002. Currently, Mr. Maudlin also serves as a director of several privatecompanies. Mr. Maudlin is a certified public accountant and holds a B.A. degreefrom St. Olaf College and a Masters of Management degree from the KelloggSchool of Management at Northwestern University.

 

Paul F. McConnell, 52, has been the President andChief Executive Officer of the Company since November 2004, and a director ofthe Company since April 2004. Mr. McConnell founded Critical Care Systems, Inc.in 1991 and served as President and Chief Operating Officer of the Company fromApril 2004 through November 2004, following the acquisition of Critical CareSystems, Inc. by the Company. Mr. McConnell has more than 25 years ofhealthcare experience, primarily in the home infusion industry. Previously, Mr.McConnell held management positions with Critical Care America, including VicePresident of New Market Development. Mr. McConnell was also a founder of thenational home infusion therapy company, Chartwell Home Therapies, where hemanaged sales, marketing and operations. Prior to this, he held salesmanagement and hospital sales positions in the pharmaceutical industry. Mr.McConnell holds a B.S. degree in Biology from Bates College and a B.S. degreein Pharmacy from the Massachusetts College of Pharmacy and Health Sciences.

 

John C. Prior, 52, has been Chief Operating Officer ofthe Company since November 2004, and has been a director of the Company sinceApril 2001. Mr. Prior served as President of the Company’s Wound ManagementServices business unit, from March 2001 through November 2004. He also servedas Executive Vice President and General Manager of the Company from September2000 to March 2001, and as Interim Chief Executive Officer from March 2001 toSeptember 2001. From August 1995 until September 2000, Mr. Prior served asSenior Vice President, Finance and Chief Financial Officer. From February 1991to August 1995, Mr. Prior served as Vice President of Finance, and he wasSecretary from October 1993 until September 2001. From July 1987 to February1991 he served as Controller of the Company. From 1979 to 1987, Mr. Prior helda variety of positions in the Health Care Auditing/Consulting Group of KPMGPeat Marwick and was promoted to Senior Manager in 1984. He is a CertifiedPublic Accountant and a member of the American Institute of Certified PublicAccountants.

 

Paul S. Auerbach, M.D., M.S., 55, has been adirector of the Company since February 2000. Since March 2005, he served asClinical Professor of Surgery, Division of Emergency Medicine, StanfordUniversity Medical Center. From August 2003 to May 2004, Dr. Auerbach served asChief Operating Officer of KAI Pharmaceuticals, Inc., a private biotechnologycompany, and from May 2004 through March 2005, he served as an independentconsultant to a number of companies. From October 1999 to 2003, Dr. Auerbachserved as a VenturePartner with Delphi Ventures, a venture capital firm. From 1997

 

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until 1999, Dr. Auerbach served as Chief OperatingOfficer of MedAmerica, a private company, and from 1995 to 1996, he served asChief Operating Officer of Sterling Healthcare Group, a publicly traded company.Prior to that, Dr. Auerbach was Professor and Chief of Emergency Medicine atStanford University Medical Center and, prior to that, held the same positionsat Vanderbilt University Medical Center.

 

Daniel E. Berce, 52, has been a director of theCompany since February 2000. Since April 2003, Mr. Berce has served asPresident of AmeriCredit Corp., a publicly traded finance company, and since1990 Mr. Berce has served as a director of AmeriCredit Corp. From November 1996until April 2003, he served as Vice Chairman and Chief Financial Officer ofAmeriCredit Corp. From November 1994 until November 1996, Mr. Berce served asExecutive Vice President, Chief Financial Officer and Treasurer of AmeriCreditCorp. and from May 1990 until November 1994, he served as Vice President, ChiefFinancial Officer and Treasurer of AmeriCredit Corp. Prior to joiningAmeriCredit, he was a partner with Coopers & Lybrand for four years and waswith such firm for fourteen years. Mr. Berce is a certified public accountant. Mr.Berce is a director of AZZ Incorporated, a publicly held company thatmanufactures specialty electronic equipment and provides galvanizing servicesto the steel fabrication industry.

 

Lawrence P. English, 65, has been a director of theCompany since May 2000. Since June 2000, Mr. English has been the Chief ExecutiveOfficer and a director of QuadraMed Corporation, a publicly traded healthcareinformation technology company. Since December 2000, Mr. English has beenChairman of the Board of QuadraMed. As of January 5, 2005, QuadraMedconsolidated the executive officer positions of Chief Executive Officer andChief Operating Officer, and Mr. English assumed the roles of President andChief Operating Officer. Mr. English was the Founder and Chief ExecutiveOfficer of Lawrence P. English, Inc., a private turn-around management firm,from January 1999 to June 2000. He was the Chairman of the Board and ChiefExecutive Officer of Aesthetics Medical Management, Inc., a physician practicemanagement company for plastic surgeons, from July 1997 to January 1999. Untilhe resigned in September 2002, he served as Director of Clarent HospitalCorporation, formerly Paracelsus Healthcare Corporation, since May 1999 and asthe Non-Executive Chairman of the Board since February 2000. From March 1992 toAugust 1996, Mr. English was President of CIGNA HealthCare, one of the nation’slargest health maintenance organizations. Prior to 1992, Mr. English heldnumerous senior level positions at CIGNA. Mr. English was a member of theJackson Hole Group and a founder of the Allegiance for Managed Care. Mr.English possesses a Bachelor of Arts degree from Rutgers University and aMasters of Business Administration from George Washington University, and is agraduate of Harvard Business School’s Advanced Management Program.

 

Gerard Moufflet, 62, has been a director of theCompany since November 1989. Mr. Moufflet is the Chief Executive Officer andfounder of Acceleration International Corp., a private equity firm focused onhealthcare investments in Europe and the United States. From 1989 to December2001, Mr. Moufflet served as Managing Director of Advent InternationalCorporation, an equity investment firm with funds under management totalingover $6 billion. Prior to joining Advent, from 1972 to 1989, Mr. Mouffletworked for Baxter International, where he was in charge of various European andAfrican operations and served as Head of Worldwide Strategic Planning for thedialysis product line. When he became Corporate Vice President and VicePresident of Baxter World Trade, Baxter had grown to $7 billion in sales. Mr.Moufflet is a director of Serologicals Corporation, a publicly traded companyand global provider of biological products and enabling technologies, andAmerican Dental Partners, Inc., a publicly traded company. He also serves as adirector of several privately held companies in Europe and the United States. Mr.Moufflet is a graduate of the EDHEC Business School in France, and holds aMasters in Business Administration degree from the University of Pittsburghwhere he was a Pittsburgh Plate Class Foundation Scholar. He is a HarvardBusiness School Advanced Masters Program graduate and has been honored by thePresident of France as a “Chevalier de l’Ordre du Merite National.”

 

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**Audit Committee**

** **

The members of the Audit Committee are Messrs. Berce(as Chairman), English and Maudlin, each of whom is an “independent director”as defined in Rule 4200(a)(15) of the NASDAQ Marketplace Rules. Messrs.Berce and Maudlin are “financial experts” as the term is defined in theSecurities and Exchange Commission rules.

 

**EXECUTIVE OFFICERS**

 

Set forth below is certain information about eachcurrent executive officer of the Company who is not a director of the Company,including name, age and principal occupations during the past five years. Allof the executive officers of the Company are appointed by the Board ofDirectors to serve until the next Annual Meeting of the Shareholders or untiltheir successors are elected and qualified. The Company has adopted a Code ofEthics that applies to the Company’s Chief Executive Officer and seniorfinancial officers. The text of such Code of Ethics has been posted on theCompany’s website at www.curative.com. Any amendment to, or waiver from, aprovision of such Code of Ethics shall be posted on the Company’s website atwww.curative.com. In addition, the Company has adopted a Code of BusinessPractices as part of its compliance program, and a copy of such Code ofBusiness Practices is available upon written request to the Company.

 

Thomas W. Axmacher, 47, has served as our ExecutiveVice President of Finance and Chief Financial Officer since March 2003. FromApril 2002 to March 2003, he served as Senior Vice President of Finance andChief Financial Officer. From March 2001 to April 2002, he served as VicePresident of Finance and Chief Financial Officer. From August 1997 to March2001, Mr. Axmacher served as Vice President and Controller. From March 1991 toAugust 1997, he served as Controller of the Company. Prior to joining theCompany, Mr. Axmacher spent six years at Tempo Instrument Group, an electronicsmanufacturer, where he served as Vice President and Controller.

 

Roy McKinley, 47, has served as Senior Vice President,Wound Care Operations since November 2004. From September 2000 through November2004, he served as Senior Vice President, with business development, sales,marketing and related responsibilities for the Company’s wound care managementbusiness. From July 1998 to September 2000, Mr. McKinley held the position ofVice President of Sales and Marketing, and from January 1996 to 1998, he servedas the South West Region Vice President. Prior to joining the Company, Mr.McKinley was an Area Vice President for the Mid Atlantic Area for CoramHealthcare, Inc., a Denver-based alternate-site infusion and ancillaryhealthcare services company. From 1985 to 1993, Mr. McKinley held regional andgeneral management positions with McGaw, Inc. and Medical Care America, Inc.,in the medical supply and alternate-site infusion care industries.

 

Craig J. Vollmer, 39, has served as Senior VicePresident, Sales and Marketing since April 2004. Previously, he held thefollowing positions for Critical Care Systems, Inc. (a subsidiary of theCompany acquired in April 2004):  VicePresident of Sales from January 2003 to March 2004; National Sales Directorfrom February 2002 to December 2003 and Area Sales Director (South) from July2000 to January 2002. Prior to working with Critical Care Systems, Inc. and theCompany, Mr. Vollmer held sales and management positions with Coram Healthcareand Critical Care America.

 

Andrew C. Walk, 45, has served as Senior VicePresident, Operations for our Specialty Infusion business unit since April 2004.Previously, he served as Area Vice President of Critical Care Systems, Inc. (asubsidiary of the Company acquired in April 2004) from June 2000 to April 2004.In this position, he was responsible for directing the day-to-day management ofCritical Care Systems, Inc.’s Midwest branches. Mr. Walk has devoted his entirecareer to the health care field, bringing a wealth of experience to his role atthe Company. From 1998 to 2000, Mr. Walk was a partner in the St. Louis-basedhealth

 

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care consulting company, Healthcare StrategicInitiatives, where clients included hospitals, physicians and managed careorganizations. Prior to that, Mr. Walk worked for Coram Healthcare as aRegional Vice President from 1995 to 1998, and as a General Manager from 1992to 1995. Mr. Walk started his healthcare career in 1985 with Travacare which in1987 became Caremark Inc. and held various positions, including General Manager.Mr. Walk holds a B.S. degree in pharmacy from the St. Louis College ofPharmacy.

 

**SECTION 16(a)BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**

 

Section 16(a) of the Securities and Exchange Actof 1934 requires the Company’s directors and executive officers and all personswho beneficially own more than ten percent of the outstanding shares of theCompany’s Common Stock to file with the Securities and Exchange Commissioninitial reports of ownership and reports of changes in ownership of such CommonStock. Directors, executive officers and ten percent or more beneficial ownersare also required to furnish the Company with copies of all Section 16(a)reports filed. Based solely on a review of the copies of such forms and certainrepresentations, the Company believes that all Section 16(a) filingrequirements applicable to its executive officers, directors and ten percentshareholders were in compliance.

 

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## **Item 11. ExecutiveCompensation**

 

**EXECUTIVECOMPENSATION**

 

**SummaryCompensation Table**

 

The following table summarizes the cash and non-cashcompensation for each of the last three fiscal years awarded to or earned by(i) each person who served as the Chief Executive Officer of the Companyat any time during 2005, and (ii) the four executive officers of theCompany (other than its chief executive officer) most highly compensated insalary and bonus for 2005 who were also serving as executive officers of theCompany on December 31, 2005. (the “named executive officers”).

 
| ** **                                                      | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long Term  Compensation** | ** ** | ** **                       | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| **Name and Principal Position  (as of December 31, 2005)** | ** ** | **Year**   | ** ** | **Salary  ($)**         | ** ** | **Bonus  ($)(1)**           | ** ** | **Other  Annual  Comp.  ($)(2)** | ** ** | **Restricted  Stock  Awards  ($)(3)** | ** ** | **Securities  Underlying  Options  (#)** | ** ** | **All  Other  Comp.  ($)(4)** | ** ** |
|                                                            |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| Paul McConnell(5)                                               |       | 2005       |       | 405,288                 |       | 400,000                     |       | —                           |       | — |   | — |   | 5,642 |   |
| President and Chief Executive Officer                           |       | 2004       |       | 270,285                 |       | —                      |       | —                           |       | 2,000,000 |   | — |   | 2,163 |   |
|                                                            |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| John Prior                                                      |       | 2005       |       | 289,519                 |       | 39,000                      |       | 77,055                           |       | 326,000 |   | — |   | 3,015 |   |
| Chief Operating Officer                                         |       | 2004       |       | 283,846                 |       | —                      |       | —                           |       | — |   | 35,000 |   | 3,461 |   |
| ** **                                                      |       | 2003       |       | 270,000                 |       | —                      |       | —                           |       | — |   | 25,500 |   | 519 |   |
|                                                            |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| Andrew Walk (6)                                                 |       | 2005       |       | 221,346                 |       | 41,400                      |       | —                           |       | 163,000 |   | — |   | 4,259 |   |
| Senior Vice President Operations                                |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| Specialty Infusion                                              |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
|                                                            |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| Thomas Axmacher                                                 |       | 2005       |       | 276,539                 |       | 150,000                     |       | —                           |       | — |   | — |   | 2,039 |   |
| Executive Vice President                                        |       | 2004       |       | 244,069                 |       | —                      |       | —                           |       | 409,800 |   | 30,000 |   | 5,240 |   |
| and Chief Financial Officer                                     |       | 2003       |       | 210,516                 |       | 48,500                      |       | —                           |       | — |   | 25,500 |   | 2,826 |   |
|                                                            |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |
| Roy McKinley (6)                                                |       | 2005       |       | 212,115                 |       | 93,720                      |       | —                           |       | 97,800 |   | — |   | 3,404 |   |
| Senior Vice President Wound Care                                |       |       |       |                    |       |                        |       |                             |       |   |   |   |   |   |   |

 

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(1)                                  Amounts shown for 2003, 2004 and 2005represent bonuses paid under the Company’s Incentive Compensation Plan  All such awards are actually paid in thefiscal year immediately following the year for which the award is made, exceptthat Mr.McConnell’s payment was made in 2005 pursuant to his employmentagreement and Mr. Axmacher’s payment was made in 2005 pursuant to hisrelocation to the Company’s Nashua office.

 

(2)                                  Except as indicated, the value ofperquisites and other personal benefits paid to any of the named executiveofficers did not exceed the lesser of $50,000 or ten percent (10%) of salaryand bonus for that individual.

 

(3)                                  The number of shares of restricted stockawarded in 2005 were as follows:  Mr.Prior 100,000 shares, Mr. Walk 50,000 shares and Mr. McKinley 30,000 shares.The value of such shares is calculated using the closing price for theCompany’s Common Stock on the date of the award. One third of the restrictedstock awards vest after one year and the balance vest thereafter in eight equalquarterly installments following the initial vesting date. The recipients ofthe restricted

 

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stock awards are entitledto receive any dividends declared with respect to the restricted shares. As ofDecember 31, 2005, an aggregate of 377,604 shares of restricted stock was heldby the named executive officers with an aggregate value of $86,849 based on theclosing price on that date.

 

(4)                                  All amounts represent Company matchingcontributions to its 401(k) plan.

 

(5)                                  Mr. McConnell was hired as an executiveofficer in April 2004, and as President and Chief Executive Officer in November2004.

 

(6)                                  Mr. Walk andMr. McKinley were named executive officers in 2005.

 

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**Stock Option Tables**

 

The following tables summarize stock option grants andexercises during 2005 to or by the named executive officers, and the value ofthe options held by such persons at the end of 2005.

 

There were no stock option grants to named executiveofficers in 2005.

 

**Option Exercisesin Fiscal 2005andValue at End of Fiscal 2005**

 
| ** **     | ** ** | **Shares  Acquired on** | ** ** | **Value**         | ** ** | **Number of Securities  Underlying Unexercised  Options at  Fiscal Year End (#)** | ** ** | **Value of Unexercised  In-the Money Options at  Fiscal Year End ($)** | ** ** |
|----------------|------------|-------------------------|------------|-------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Name**       | ** ** | **Exercise  (#)**       | ** ** | **Realized  ($)** | ** ** | **Exercisable / Unexercisable**                                                   | ** ** | **Exercisable / Unexercisable (1)**                                    | ** ** |
| ** **     | ** ** | ** **              | ** ** | ** **        | ** ** | ** **                                                                        | ** ** | ** **                                                             | ** ** |
| Mr.  McConnell |       | —                  |       | —            |       | —                                                                            |       | $ — / $—                                                |       |
|           |       |                    |       |              |       |                                                                              |       |                                                                   |       |
| Mr. Prior      |       | —                  |       | —            |       | 172,162 / 14,588                                                                  |       | $ — / $—                                                |       |
|           |       |                    |       |              |       |                                                                              |       |                                                                   |       |
| Mr. Walk       |       |                    |       |              |       | 24,995 / 33,325                                                                   |       | $ —   $—                                      |       |
|           |       |                    |       |              |       |                                                                              |       |                                                                   |       |
| Mr. Axmacher   |       | —                  |       | —            |       | 120,914 / 14,587                                                                  |       | $ — / $—                                                |       |
|           |       |                    |       |              |       |                                                                              |       |                                                                   |       |
| Mr. McKinley   |       |                    |       |              |       | 75,204 / 6,670                                                                    |       | $ —   $—                                      |       |

 

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(1)                                  Calculation is based on the differencebetween the closing price of the Common Stock on December 31, 2005 and theexercise price of the options for each optionee.

 

**Compensation ofDirectors**

 

Except with regard to Special Committee meetingsdiscussed below and as noted with respect to Mr. Maudlin, in 2005, eachnon-employee director was paid an annual retainer of $15,000, paid quarterly;$1,500 for each Board meeting attended in person or $1,000 for each Boardmeeting participated in by means of conference telephone; $1,500 for each AuditCommittee meeting attended in person (other than an Audit Committee meetingheld on the same date as a Board meeting); $1,000 for each Audit Committeemeeting held on the same date as a Board meeting or participated in by means ofconference telephone; $1,250 for each non-Audit Committee meeting attended inperson (other than a non-Audit Committee meeting held on the same date as aBoard meeting); and $750 for each non-Audit Committee meeting held on the samedate as a Board meeting or participated in by means of conference telephone. Thechairman of the Audit Committee received an additional annual retainer fee of$4,000 and the chairman of each non-Audit Committee received an additionalannual retainer fee of $3,000. Commencing June 1, 2005, Mr. Maudlin, Mr.English and Mr. Berce each received a monthly retainer of $4000 forparticipation in meetings of a Special Committee of the Board established toconsider certain financial issues of the Company. Effective March 1, 2005, Mr.Maudlin received a monthly retainer of $5000, in recognition of his role asChairman of the Board and in lieu of receiving the annual retainer, paidquarterly, to non-employee directors.

 

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In 1993, the Company established a Director SharePurchase Program (the “Program”) to encourage ownership of its Common Stock byits directors. Under the program, each non-employee director can elect toforego receipt of annual retainer and meeting fees in cash and, in lieuthereof, receive shares of Common Stock having a market value at the date ofissuance equal to the cash payment.

 

In 1995, the Company established a Non-EmployeeDirector Stock Option Plan (the “Director Plan”). The purpose of the DirectorPlan is to promote the success of the Company by attracting and retainingnon-employee directors by supplementing their cash compensation and providing ameans for such directors to increase their holdings of Common Stock. TheCompany believes it is important that the interest of the directors be alignedwith those of its shareholders and that the Director Plan strengthens that link.The Director Plan provides for an automatic initial grant of options topurchase 15,000 shares of Common Stock, at market value on date of grant, to anon-employee director upon his or her initial election as a member of the Board.The Director Plan also provides for the automatic grant of an option topurchase 15,000 shares of Common Stock, at market value on the date of grant,each time a non-employee director is re-elected as a member of the Board. TheDirector Plan terminated on August 23, 2005.

 

**Employment andOther Agreements**

 

Each of Messrs. Paul F. McConnell, John C. Prior, Thomas Axmacher, W.Leroy McKinley and Andrew C. Walk (each an “Officer” and together, the“Officers”) has or has had an employment agreement with the Company (an“Employment Agreement”). Mr. Axmacher’s Employment Agreement was superseded bya Settlement and Separation Agreement (the “Settlement Agreement”) dated March22, 2006. The terms of the Settlement Agreement are set forth separately below.

 

Except as noted, the Employment Agreements are on substantiallyidentical terms. Under the Employment Agreements, each Officer receives an annualbase salary and is entitled to participate in any incentive compensationprogram in effect from time to time for executives of the Company. The annualbase salary of each of the Officers under his or her Employment Agreement as ofDecember 31, 2005 was as follows: Mr. McConnell $425,000, Mr. Prior $325,000,Mr. McKinley $220,000, Mr. Axmacher $290,000 and Mr. Walk $230,000. The salaryunder each Employment Agreement is subject to annual review and increase by theCompensation Committee. Except for Mr. Walk’s Employment Agreement and Mr.McConnell’s Employment Agreement, each Employment Agreement has an initial termof one year and renews automatically for additional one-year periods unlessnotice of termination is given at least three months prior to renewal. Mr.Walk’s Employment Agreement has an initial term of one year and renewsautomatically for additional one-year periods unless notice of termination isgiven at least 30 days prior to renewal. Mr. McConnell’s Employment Agreementhas an initial term of three years and renews automatically for additionalone-year periods unless notice of termination is given at least 30 days priorto renewal. Mr. McConnell’s agreement provides for a $400,000 (100%) bonusguaranteed for the first year of his employment. Mr. Walk’s EmploymentAgreement provides that he would receive a non-qualified stock option topurchase 50,000 shares of the Company’s common stock pursuant to the Company’s2001 Broad-Based Stock Incentive Plan.

 

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The Company may terminate each Employment Agreement at any time with orwithout cause upon 30 days’ prior written notice to the Officer, and theOfficer may terminate the Employment Agreement at any time upon 30 days’ priorwritten notice to the Company.

 

Except as noted below for Mr. Walk and Mr. McConnell, in the event theCompany terminates the Employment Agreement without cause prior to a change ofcontrol or elects not to renew, the Officer will be entitled to receive a lumpsum severance payment equal to the Officer’s then current base salary plus thearithmetic average of payments made to the Officer pursuant to the Company’sExecutive Bonus Compensation Program with respect to the three yearsimmediately preceding the fiscal year in which the date of termination occurs. Mr.Walk’s Employment Agreement provides that under such circumstances, he would beentitled to receive a lump sum severance payment equal to six months of histhen current base salary plus a pro-rated bonus based on his performance in thefiscal year in which termination occurs. Mr. McConnell’s agreement providesthat if termination of his employment occurs after April 23, 2005 but prior toApril 23, 2007, his severance payment shall equal his then current base salaryplus the arithmetic average of payments made to him with respect to the yearsin which he was employed by the Company. In addition, to the extent nototherwise required under the Company’s stock option plan, any unvested stockoption awards that would have vested during the twelve-month period followingthe date of termination of the Employment Agreement shall vest and becomeimmediately exercisable in full.

 

Except for Mr. Walk, if the Employment Agreement is terminated (or notrenewed) by the Company without cause or by the Officer for good reason duringthe twelve-month period immediately following a change in control (or isterminated or not renewed prior to a change in control at the request orinsistence of any person in connection with a change in control), the Officershall be entitled to a lump sum severance payment equal to the product of twotimes the sum of the then current annual base salary plus the arithmeticaverage of payments made to the Officer pursuant to the Company’s ExecutiveBonus Compensation Program with respect to the three fiscal years immediatelypreceding the fiscal year in which the date of termination occurs. Mr. Walk’sEmployment Agreement provides that under such circumstances, he would beentitled to receive a lump sum severance payment equal to his then current basesalary plus a pro-rated bonus based on his performance in the fiscal year inwhich termination occurs. In addition, to the extent not otherwise requiredunder the Company’s stock option plan, any unvested stock option awardsreceived by the Officer shall vest and become immediately exercisable in full.

 

Except for Mr. Walk, the Employment Agreement also restricts theOfficer from competing with the Company under certain circumstances during theOfficer’s employment with the Company and for a period of two years thereafter.Mr. Walk’s Employment Agreement provides for such restrictions during the termof his employment with the Company and for a period of one year thereafter.

 

***Additional Terms of Mr. McConnell’s EmploymentAgreement***

 

In addition,Mr. McConnell received $3.5 million in cash and stock stay bonuses, subject tocertain conditions. $1.5 million of this stay bonus shall be paid in cash onApril 23, 2007,

 

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subject to his remainingcontinuously employed by the Company until such date. However, such paymentshall be accelerated if prior to such date, a person or entity which is notthen controlling, controlled by or under common control with the Companyacquires (i) all or substantially all of the assets of the Company, or (ii)common stock of the Company (other than from the Company), with the effect thatafter such acquisition of stock, such person or entity holds an aggregateamount of common stock of the Company greater than 50% of the then outstandingCompany common stock (a “Bonus Acceleration Event”). If either of these eventsoccur, such cash stay bonus shall become due and payable within 5 business daysof such event.

 

Notwithstandingthe above, Mr. McConnell’s stay bonus shall not be accelerated in the eventthat Mr. McConnell is terminated for cause, and payment of such stay bonusshall not be accelerated in connection with any issuance of any security by theCompany. However, if prior to April 23, 2007, a Bonus Acceleration Event occursand during the twelve month period immediately following the Bonus AccelerationEvent, Mr. McConnell’s employment with the Company is terminated (or notrenewed) by the Company without cause, or by Mr. McConnell because he wasassigned duties inconsistent with his position or his base salary wasdecreased, then such stay bonus shall become due and payable within 5 businessdays of such termination of employment.

 

The remaining $2.0 million of stay bonus is an award of 157,604restricted stock units, one third of which will vest on April 23, 2005, withthe balance vesting in equal quarterly installments on the last date of each ofthe eight successive three-month periods following April 23, 2005. In addition,pursuant to his employment agreement, Mr. McConnell purchased certain shares ofthe Company’s Common Stock in the open market. These shares are subject tolockup restrictions and can only be transferred under limited circumstancesduring the lockup period. Half of such shares shall be subject to this lockuprestriction until 30 days after April 23, 2005, and the other half shall besubject to this lockup restriction until 30 days after April 23, 2006. Inaddition to the other exceptions provided in his employment agreement fortransferring such shares during this lockup period, Mr. McConnell may sell orotherwise transfer such shares during the lockup period if his employment withthe Company is terminated for any reason, other than for cause.

 

***Terms of Mr. Axmacher’s Settlement Agreement***

 

Mr. Axmacher’s Settlement Agreement provides that Mr. Axmacher shallremain in the active employ of the Company as Executive Vice President—Financeand Chief Financial Officer until April 30, 2006. Under the Agreement, Mr.Axmacher will perform the duties of the foregoing position and such otherduties as may reasonably be directed by the Chief Executive Officer. Under theSettlement Agreement, Mr. Axmacher’s employment with the Company will beterminated on April 30, 2006 unless sooner terminated by reason of theExecutive’s death, voluntary resignation or involuntary termination for Cause(as defined in his former Employment Agreement). During the term of hisemployment through April 30, 2006, Mr. Axmacher continued to receive his annualbase salary of $290,000 in effect under his prior Employment Agreement inbi-weekly installments, reduced by applicable employment withholdings, andemployment benefits on the same basis as in effect under his prior EmploymentAgreement.

 

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The Settlement Agreement contains waivers and releases by Mr. Axmacherof claims against the Company prior to the effective date of the Agreement. Inaddition, the Settlement Agreement provides that, if Mr. Axmacher remains inthe continuous employ of the Company until April 30, 2006, or if the Companyterminates his employment prior to April 30, 2006 without Cause, the Companyshall deposit with an escrow agent a settlement payment in a cash lump-sumequal to $300,000 plus accrued vacation, less applicable employmentwithholdings (collectively, the “Settlement Payment”) on May 1, 2006. Under theterms of the Escrow Agreement, the Settlement Payment shall be paid to Mr.Axmacher upon his execution of a waiver and release in the form attached to theSettlement Agreement, provided that the Company has not issued to the escrowagent a notice of dispute concerning payment of the Settlement Payment. Ifnotice of dispute is issued by the Company, the Settlement Payment shall not bemade until the parties deliver to the escrow agent notice that the dispute hasbeen resolved. The Settlement Agreement further provides that the Company shallobtain a letter of credit in favor of the foregoing escrow agent in the amountof the Settlement Payment pursuant to which the escrow agent may draw downpayment in the event the Company fails to make the Settlement Payment inaccordance with the terms of the Settlement Agreement. The Settlement Agreementprovides that if Mr. Axmacher is required to return the Settlement Paymentafter his receipt thereof, his waiver and release of claims shall not includeany claim he may have for amounts due pursuant to his prior the EmploymentAgreement with the Company.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The members ofthe Compensation Committee during 2005 consisted of Messrs. Auerbach, Berce andEnglish (who replaced Mr. Maudlin as Chair of the Compensation Committee inMarch 2005). Mr. Maudlin served as President of the Company from October 1985through December 1986. In December 2001, the Company loaned Mr. Maudlin$133,683. In January 2002, the Company loaned Dr. Auerbach $77,495. Each of theloans represented 80% of the aggregate exercise price payable to the Company bythe directors in connection with an exercise of certain Company stock options. Asof March 1, 2005, all of such loans had been fully repaid. See “CertainTransactions” for more information about these loans. 

 

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**Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters**

 

The followingtable summarizes the Company’s equity compensation plans as of December 31,2005:

 

**EQUITYCOMPENSATION PLAN INFORMATION**

** **
| **Plan Category**                                           | ** ** | **Number  of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted  average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number  of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                | ** ** | **(b)**                                                                              | ** ** | **(c)**                                                                                                                                                | ** ** |
| Equity compensation plans approved by  security holders     |       | 1,490,137                                                                                              |       | $                                                                                    | 9.87       |                                                                                                                                                   | 1,311,390  | (i) |
| Equity compensation plans not approved by  security holders |       | 1,022,808                                                                                              | (ii)       | $                                                                                    | 12.14      |                                                                                                                                                   | 338,953    | (iii) |
| Total                                                       |       | 2,512,945                                                                                              |       | $                                                                                    | 10.86      |                                                                                                                                                   | 1,650,343  |   |

 

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(i) This number includes 1,214,891 shares under the 2000 StockIncentive Plan and 96,499 shares under the 1995 Non-Employee Director Plan.

 

(ii) This number includes 956,808 securities under the 2001 Broad-BasedStock Incentive Plan (the “2001 Plan”) and 66,000 securities under the non-planemployee option agreements.

 

(iii) This number reflects 338,953 shares under the 2001 Plan.

 

**The 2001 Plan.**Underthe 2001 Broad-Based Stock Incentive Plan (the “Plan”), the Company can grantoptions, stock appreciation rights (“SAR”), restricted stock, restricted stockunits, performance awards, other stock grants or other stock-based awards. Thetotal number of shares of common stock authorized to be granted pursuant toAwards (as defined in the Plan, not incentive stock options) granted under thePlan is 2,000,000. As of December 31, 2005, options to purchase an aggregate of956,808 shares of the Company’s common stock were outstanding under the Plan. Anyemployee, officer, consultant, independent contractor and non-employeedirectors providing services to the Company or any of its affiliates iseligible to receive awards under the Plan. The Plan is administered by theCompensation Committee of the Board of Directors (the “Committee”). TheCommittee shall not have the authority to grant Awards to

 

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officers and directors in anaggregate amount that equals or exceeds fifty percent (50%) of the common stockauthorized to be granted pursuant to Awards granted under the Plan. No awardsmay be granted under the Plan after July 30, 2011. The exercise price per shareunder any stock option, the grant price of any SAR, and the purchase price ofany security which may be purchased under any other stock-based award shall notbe less than 100% of the fair market value of the Company’s common stock on thedate of grant of such option, SAR or award.

 

The Plan provides that the Committee may grant reload options,separately or together with another option, and may establish the terms andconditions of such reload options. Pursuant to a reload option, the optioneewould be granted a new option to purchase the number of shares not exceedingthe sum of (i) the number of shares of common stock tendered as payment uponthe exercise of the option to which such reload option relates, and (ii) thenumber of shares of the Company’s common stock tendered as payment of theamount to be withheld under income tax laws in connection with the exercise ofthe option to which such reload option relates. Reload options may be grantedwith respect to options granted under any stock option plan of the Company.

 

The holder of restricted stock may have all of the rights of ashareholder of the Company, including the right to vote the shares subject tothe restricted stock award and to receive any dividends with respect thereto,or such rights may be restricted as the Committee imposes. Restricted stock maynot be transferred by the holder until any restrictions established by theCommittee have lapsed. Upon termination of the holder’s employment during therestriction period, restricted stock and restricted stock units are forfeited,unless the Committee determines otherwise.

 

If any dividend or other distribution, recapitalization, stock split,reverse stock split, reorganization, merger, consolidation, split-up, spin-off,combination, repurchase, or exchange of shares of common stock or othersecurities of the Company or other similar corporate transaction or eventsaffects the shares of common stock such that an adjustment is appropriate inorder to prevent dilution or enlargement of the benefits or potential benefitsintended to be made available under the Plan or under an award, the Committeemay, in such manner as it deems equitable or appropriate in order to preventsuch dilution or enlargement of any such benefits or potential benefits, adjustany or all of (a) the number and type of shares (or other securities orproperty) which thereafter may be made the subject of awards, (b) the numberand type of shares (or other securities or property) subject to outstandingawards, and (c) the purchase or exercise price with respect to any award.

 

The Board of Directors may amend, alter, suspend, discontinue orterminate the Plan at any time, provided that no such amendment, alteration,suspension, discontinuation or termination shall be made that would violate therules or regulations of the NASDAQ National Market or of any securitiesexchange applicable to the Company.

 

**The Non-Plan Option Agreements.**Free-standing options granted include options issued as an inducement fornew hires and/or in connection with new hires associated with acquisitions bythe Company. These options are issued pursuant to Non-Qualified Stock OptionAgreements. These options terminate 10 years after the effective date of thegrant, unless earlier

 

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terminated upon termination ofemployment, death or disability. Upon termination or employment, death or disability,the employee will, in certain circumstances, get an additional period of monthsfollowing such event to exercise the options to the extent of the full numberof shares the employee was entitled to purchase on the date of such event. Theoptions generally become exercisable after one year with respect to one-thirdof the shares with the balance of the shares becoming exercisable in equalinstallments on the last day of each of the eight successive three-monthperiods following the initial exercisability date, and are not transferable orassignable by the employees that receive the grant. The exercise price pershare varies and is specified in the individual Non-Qualified Stock OptionAgreements.

 

In some cases, the non-plan Non-Qualified Stock Option Agreements andagreements under the 2001 Plan may contain provisions that restrict theactivities of the employee once the term of employment is over. Theserestrictions include restrictions on the former employee’s ability to competewith the Company for up to one year  withrespect to certain activities and restrictions on the former employee’s abilityto hire or contract for services with any employees for former employees of theCompany.

 

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**STOCK OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth the beneficialownership of Common Stock of the Company as of March 31, 2006 with respectto (1) each person who owned of record or was known by the Company to ownbeneficially more than five percent of the issued and outstanding shares ofCommon Stock, (2) each director or director nominee, (3) each namedexecutive officer, and (4) all directors and current executive officers asa group. 

 
| **Name and Address**                                                                                                                                                                                                                       | ** ** | **Amount and Nature  of Beneficial  Ownership** | ** ** | **Percentage of  Common Stock  Outstanding** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Trinidad  Capital Master Fund, Ltd; Trinidad  Management, LLC; Strategic Turnaround Equity  Partners, L.P.; Galloway Capital Management LLC;  Robert Ellin and Bruce Galloway  2121 Avenue of the Stars, Suite 1650  Los Angeles, CA 90049 |       | 681,326                                         | (1)        | 5.12                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Dimensional  Fund Advisors Inc.  1299 Ocean Avenue, 11th Floor  Santa Monica, CA 90401                                                                                                                                                     |       | 1,118,915                                       | (2)        | 8.59                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Paul S. Auerbach, M.D                                                                                                                                                                                                                 |       | 83,265                                          | (3),(4)    | *                                            |       |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Daniel E. Berce                                                                                                                                                                                                                       |       | 117,100                                         | (4)        | *                                            |       |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Lawrence P. English                                                                                                                                                                                                                   |       | 149,100                                         | (4)        | 1.13                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Timothy I. Maudlin                                                                                                                                                                                                                    |       | 164,385                                         | (4)        | 1.24                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Paul F. McConnell                                                                                                                                                                                                                          |       | 157,604                                         |       | 1.19                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Gerard Moufflet                                                                                                                                                                                                                            |       | 192,540                                         | (4)        | 1.45                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| John C. Prior                                                                                                                                                                                                                         |       | 397,337                                         | (4)        | 2.96                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Leroy McKinley                                                                                                                                                                                                                             |       | 108,283                                         | (4)        | *                                            |       |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Thomas W. Axmacher                                                                                                                                                                                                                         |       | 165,495                                         | (4)        | 1.25                                         | %          |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| Andrew Walk                                                                                                                                                                                                                                |       | 83,325                                          | (4)        | *                                            |       |
|                                                                                                                                                                                                                                       |       |                                            |       |                                         |       |
| All directors and current executive  officers as a group (11 persons)                                                                                                                                                                      |       | 1,701,758                                       | (4)        | 11.54                                        | %          |

 

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*                                         Ownership does not exceed 1%

 

(1)                                  Disclosure is made in reliance upon astatement on Schedule 13D filed with the Securities and ExchangeCommission on February 24, 2006.

 

(2)                                  Disclosure is made in reliance upon astatement on Schedule 13G filed with the Securities and Exchange Commission onFebruary 6, 2006.

 

(3)                                  Includes 15,000 shares held in trust.

 

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(4)                                  The number of shares shown in the tablewith respect to the following persons and group, includes the indicated numberof shares which are issuable upon exercise of options exercisable, orrestricted stock which would vest, within 60 days ofMarch 31, 2006 (“currently exercisable options”):  Dr. Auerbach, 83,265 shares; Mr. Berce,117,100 shares; Mr. English, 119,100  shares; Mr. Maudlin, 93,776shares; Mr. Moufflet, 73,517 shares; Mr. Prior, 175,078 shares; Mr.McKinley, 76,704 shares; Mr. Axmacher, 125,495 shares; Mr. Walk 33,325 sharesand all directors and current executive officers as a group, 1,701,758 shares.

 

**CHANGES IN CONTROL**

** **

The Company has entered into a Plan of Reorganizationdated February 6, 2006 which will result in a change in control of theCompany. See “Item 1. Business – Planned Reorganization and Chapter 11Bankruptcy Proceedings” above for more information.

 

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**Item 13. Certain Relationships and Related Transactions**

 

**CERTAINTRANSACTIONS**

** **

In December 2001 and January 2002, in order toencourage the executive officers of the Company to increase their equity stakein the Company, the Board of Directors offered to accelerate the exercisabilityof certain options held by executive officers (provided that the underlyingshares could not be sold until such time, if any, as the option would havebecome exercisable under its original terms) and to provide the directors andofficers with loans to cover 80% of the aggregate exercise price of any optionsthey elected to exercise. Under this program, in December 2001 Mr. Maudlinborrowed $133,683. In 2002, Dr. Auerbach borrowed $77,495, Mr. Prior borrowed$600,870, Mr. Mckinley borrowed $245,345 and Mr. Axmacher borrowed $103,795 tofund 80% of the exercise price of certain options. All of these loans boreinterest at an annual rate of 2.46% and matured three years from the date oforigination, provided that, to the extent that any of the shares acquiredpursuant to the exercise of the related option were sold, the proceeds of thatsale must be used to repay the principal and interest due on the loan. As ofMarch 1, 2005, all of such loans had been repaid in full.

 

In connection with the acquisition by the Company ofall of the outstanding stock of Critical Care Systems, Inc. in April 2004 (the“Acquisition”), the Company made certain purchase price payments to thestockholders of Critical Care Systems, Inc., and also paid a portion of thepurchase price into an escrow account, to be released to the such stockholders,subject to certain net working capital purchase price adjustment andindemnification obligations of such stockholders, all pursuant to the StockPurchase Agreement entered into among the Company, Critical Care Systems, Inc.and such stockholders. Mr. McConnell and Mr. Vollmer were stockholders ofCritical Care Systems, Inc. and Mr. Walk held an interest in Inland SolutionsLLC, which was also a stockholder of Critical Care Systems, Inc. In connectionwith the closing of the Acquisition, in April 2004 Mr. McConnell received$6,524,964.00, Mr. Vollmer received $284,323.00, and Mr. Walk received$698,554.00****as purchase price payments. Inconnection with the release of the net working capital purchase priceadjustment escrow, in or about August 2004 Mr. McConnell received $223,483.02,Mr. Walk received $32,459.54 and Mr. Vollmer received $13,211.56. In addition,in November 2005 Mr. McConnell received an additional $708,105, Mr. Vollmerreceived an additional $40,676.00, and Mr. Walk received an additional$102,848, representing their respective portions of the purchase price paymentsput into escrow, subject to certain indemnification obligations.

 

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## **Item 14. PrincipalAccounting Fees and Services**

 

Ernst & Young LLP, an independent registeredpublic accounting firm, served as independent auditors for the Company for thefiscal year ending December 31, 2005. Ernst & Young LLP hasserved as the Company’s independent auditors since September 1986.

 

| ** **                  | ** ** | **2005  Fees** | ** **    | **2004  Fees** | ** ** |
|-----------------------------|------------|----------------|---------------|----------------|------------|
| **Audit  Fees (1)**         | ** ** | ** **     | ** **    | ** **     | ** ** |
| Aggregate Audit Fees        |       | $              | 1,083,280     |           | $          | 873,000 |   |
| **Audit-Related  Fees (2)** | ** ** | ** **     | ** **    | ** **     | ** ** |
| Total Audit-Related Fees    |       | $              | —        |           | $          | 179,500 |   |
| **Tax Fees  (3)**           | ** ** | ** **     | ** **    | ** **     | ** ** |
| Aggregate Tax Fees          |       | $              | —        |           | $          | 7,000 |   |
| **All  Other Fees**         |       |           |          |           |       |
| Aggregate Other Fees        |       | $              | —        |           | $          | — |   |
| **Total  Fees**             | ** ** | **$**          | **1,083,280** | ** **     | **$**      | **1,059,000** | ** ** |

 

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(1)          Included fees and expenses related tothe fiscal year audit of the Company’s annual financial statements, reviews ofthe Company’s financial statements included in its quarterly reports on Form10-Q and other services provided in connection with other SEC filings,including comfort letters, consents and comment letters. In 2004, auditservices also included the audit of the Company’s internal control overfinancial reporting as required under Section 404 of the Sarbanes-Oxley Act.

 

(2)          Included fees billed for assuranceand related services that are reasonably related to the performance of theaudit or reviews of the Company’s financial statements and are not reportedunder “Audit Fees”. These services included employee benefit plan audits anddue diligence and accounting consultations in connection with acquisitions.

 

(3)          Included fees incurredfor professional services for tax compliance, tax advice and tax planning.

 

**Pre-ApprovalPolicies**

 

All services provided by our independent auditor,Ernst & Young LLP, are subject to pre-approval by our Audit Committee. TheAudit Committee may authorize the Chair of the Committee or any of theCommittee’s individual members to approve services by Ernst & Young LLP toensure prompt handling of pre-approval matters. The Chair then reports actiontaken at the next Audit Committee meeting. In seeking pre-approval from theAudit Committee, the Chief Financial Officer and the independent auditor mustjointly submit to the Audit Committee for its review and approval, in advanceof the performance of the services to be provided by the independent auditor, aschedule of audit, audit-related, tax and all other non-audit services proposedto be provided by the independent auditor. Such schedule must list the servicesto be provided and the amount of fees proposed to be approved relating to suchservices. The Audit Committee considers the overall relationship of fees foraudit and non-audit services in determining whether to approve such services**.**One-hundred percent (100%) of thenon-audit services performed in 2004 were approved by the Audit Committee. Therewere no non-audit services performed by our independent auditor in 2005.

 

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# **PART IV**

 

## **Item 15.Exhibits, Financial Statement Schedules**

## ** **

Note: Item 15 in the Original Filing is unchangedexcept for the filing of additional certifications pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Exhibits.

 

The exhibits filed or incorporated by reference in response to Item 601of Regulation S-K are listed in the Index to Exhibits. 

 
| **Number** | ** ** | **Description**                                                                                                                                                 |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 |

 

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# **SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities and Exchange Act of 1934, the Registrant has dulycaused this Amendment No. 1 to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Dated: April 26, 2006 | CURATIVE HEALTH SERVICES, INC. |
|----------------------------|--------------------------------|
|                       |                           |
|                       | By:                            | /s/ Thomas Axmacher |   |
|                       |                           | Thomas Axmacher |
|                       |                           | Chief Financial Officer |
|                       |                           | *(Principal Financial and Accounting  Officer)* |

 

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**Index to Exhibits**

 
| **Number** | ** ** | **Description**                                                                                                                                                 |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 |

 

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