UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the Transition Period From to
Commission File Number: 000-19370
Curative Health Services, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1503914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14 Research Way, Box 9052
East Setauket, New York 11733-9052
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 689-7000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days:
Yes X No______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
As of March 3, 1997, 12,305,735 shares of Common Stock of Curative Health
Services, Inc. were outstanding and the aggregate market value of such Common
Stock held by nonaffiliates (based upon its closing transaction price on such
date) was approximately $334 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which the Registrant intends to file not later than 120 days
following December 31, 1996, are incorporated by reference to Part III of this
Form 10-K Report.
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PART I
Item 1 Business
General
Curative Health Services, Inc. is a leading disease management company in
the chronic wound care market. Currently, the Company manages, on behalf of
hospital clients, a nationwide network of Wound Care Centers(R) that offers a
comprehensive range of services which enable the Company to provide customized
wound care. The Company's Wound Management Program consists of diagnostic and
therapeutic treatment regimens which are designed to meet each patient's
specific wound care needs on a cost effective basis. The Company's treatment
regimens are based on critical pathways designed for wound healing. The Company
has a proprietary database of patient outcomes that the Company has collected
since 1988 containing approximately 130,000 patient records which indicate an
overall healing rate of approximately 80% for patients completing therapy. The
Company's Wound Care Center(R) network consists of 105 outpatient clinics
located on or near campuses of acute care hospitals in 31 states. The Company is
developing new service models for other health care delivery settings and
currently manages ten wound care programs at subacute and long term acute care
facilities and operates eight freestanding Wound Care Centers(R).
The Company believes that the high degree of specialization and expertise
offered by the Wound Care Centers(R) provide benefits: (i) to patients through
superior wound care, thus enhancing their quality of life, in many cases,
allowing them to avoid amputation; (ii) to affiliated hospitals by enabling them
to differentiate themselves from their competitors through better wound care
treatment outcomes, to reduce costs by decreasing inpatient lengths of stay and
to increase revenue through the introduction of new patients; (iii) to
affiliated physicians by providing greater access to patients; and (iv) to
insurers and managed care providers by offering a cost effective alternative to
traditional wound care.
Industry
Market Overview. Chronic wounds are common in patients with diabetes and
venous stasis disease, as well as in patients who are immobilized and afflicted
with pressure sores. A chronic wound generally is a wound which shows no signs
of significant healing in four weeks or has not healed in eight weeks. The
healing of a wound is dependent upon adequate blood flow to stimulate new cell
growth and combat infection. When adequate blood flow does not occur, the
healing process is retarded, often resulting in a chronic wound that can last
for months or years. Without effective treatment, a chronic wound may lead to
more severe medical conditions, such as infection, gangrene and amputation,
which are costly to payors and impede the quality of life for the patient.
According to Chronic Wound Care: A Clinical Source Book for Healthcare
Professionals (Health Management Publications, 1990), it is estimated that at
least three million people suffer from chronic wounds in the United States. Of
the three million people with chronic wounds, an estimated 1.5 million have
pressure sores, over 700,000 have diabetic ulcers, and over 600,000 suffer from
venous stasis ulcers. Diabetic ulcers are responsible for 60,000 limb
amputations each year, accounting for more than half of all such procedures not
related to trauma. Venous stasis disease and pressure sores often afflict the
elderly, who constitute the most rapidly growing segment of the U.S. population
and account for a disproportionately large share of total U.S. health care
expenditures. It is estimated that the wound care segment of the U.S. health
care industry generated $2 billion in expenditures in 1994. It is also
anticipated that the wound care market will continue to grow due to the aging
population and the increasing incidence of health disorders, such as diabetes,
which may lead to chronic wounds.
Traditional Approach to Chronic Wound Care. Traditional chronic wound care
treatment, which is typically administered by a primary care physician, relies
principally on cleansing and debriding the wound, controlling infection with
antibiotics and protecting the wound. For example, topical or oral antibiotics
are administered to decrease the bacterial count in the wound, protective
dressings are used to decrease tissue trauma and augment repair and various
topical agents are applied that chemically cleanse the wound and remove wound
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exudate. These passive treatments do not directly stimulate the underlying wound
healing process. In many cases, the patient may have to see a number of health
care professionals before effective treatment is received. In addition, under
this traditional care model, patients must manage their own care, which often
leads to non-compliance and treatment failure which may lead to infection,
gangrene and amputation. Although wound care programs have begun to evolve to
more specialized and aggressive treatment regimens, the Company believes that a
significant medical need and market opportunity exists for products and services
that improve and accelerate the wound healing process.
The Curative Approach to Chronic Wound Care
The Company's Wound Management Program is a comprehensive array of
diagnostic and therapeutic treatment regimens with all the components of care
necessary to treat chronic wounds. The Company's Wound Management Program is
administered primarily through the Company's nationwide network of Wound Care
Centers. The Company believes the Wound Management Program provides a better
approach to chronic wound management than the traditional approach, which the
Company believes lacks comprehensive wound programs, effective technology,
positive outcomes and cost efficiency. Each Wound Management Program offers its
patients a multi-disciplinary team of health care professionals, including a
medical director, surgeon, nurse, case manager, nutritionist and
endocrinologist.
In most cases, patients arriving at the Company's Wound Care Centers have
been treated with traditional wound healing techniques, but continue to suffer
from chronic wounds. In some cases, patients come to a Wound Care Center after
they have received an opinion from their primary physician that limb amputation
is required. Upon the commencement of treatment under the Company's Wound
Management Program, medical personnel conduct a systematic diagnostic assessment
of the patient. Specialized treatment protocols are then established for the
patient, based on the underlying cause of the wound and the unique status of the
patient. After the assessment phase, the course of treatment in the Wound
Management Program may include revascularization, infection control, wound
debridement, growth factor therapy, skin grafting, nutrition, protection
devices, patient education, referrals, and effective management of care through
patient/provider communications.
To measure the effectiveness of the Company's Wound Management Program,
the Company has developed a functional assessment scoring system to measure the
healing of a wound. Under this system, a chronic wound is considered healed when
(i) it is completely covered by epithelium (i.e., a membranous cellular tissue
that covers and protects a wound as it heals), (ii) maturing skin is present in
the wound, (iii) there is minimal drainage from the wound, (iv) the wound
requires only a protective dressing and (v) the limb involved is functional. The
Company has a proprietary database of patient outcomes that the Company has
collected since 1988 containing approximately 130,000 patient records which
indicate an overall healing rate of approximately 80% for patients completing
therapy.
A unique aspect of the Company's Wound Management Program is the use of
Procuren(R), the Company's wound healing agent which is used to treat
approximately 20% of patients. Procuren(R) is a naturally occurring complex
mixture of several growth factors that promotes the growth of skin, soft tissue
and blood vessels. Procuren(R) is produced by stimulating the release of growth
factors from platelets contained in the patient's own blood. Blood is taken from
the patient at the treatment center and then sent to a Company-operated blood
processing facility located in the same state where the patient's blood was
drawn. To produce Procuren, the Company separates the platelets from the
remainder of the blood sample. Thrombin, a substance in the body that is active
in the wound healing process, is added to the platelets, causing the platelets
to release growth factors. The platelet shells are discarded and the growth
factors are diluted and placed in a buffered solution which is frozen until
used. When required as part of the patient's wound care treatment program,
Procuren is applied topically to the wound area by soaking a gauze dressing in
the Procuren solution and covering the wound area with the gauze. Procuren, as
part of a comprehensive treatment algorithm, has been used to treat over 37,000
patients to date. The Company believes that Procuren stimulates a normal wound
healing response in patients with chronic wounds in much the same way as the
body naturally initiates healing.
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Company-sponsored studies suggest that the use of Procuren as part of the
Company's Wound Management Program is both efficacious and cost-effective. For
example, a Company-sponsored retrospective study of patients with diabetic
ulcers (who tend to have the most severe chronic wounds) published by CP Fylling
and PC McKeown in 1990 found that the average charges for a conventional
treatment program were $19,000 as compared to $14,000 for a specialized wound
management program that included the use of Procuren. In addition to costing
less, the specialized program had a healing rate of 79% as compared to 24% for
patients enrolled in the conventional treatment program. Furthermore, 60% of the
conventionally treated patients required amputations at the end of the study
compared with only 19% in the specialized group of patients.
Strategy
The Company's objective is to enhance its position as a leading disease
management company in the chronic wound care market. The Company's growth
strategy is to continue to improve and refine the Wound Management Program while
broadening its delivery models to cover the entire continuum of care for wound
management. Key elements of this strategy include:
Continue to Develop the Company's Nationwide Network of Outpatient Wound
Care Centers. The Company intends to continue to establish additional outpatient
Wound Care Centers on or near the campuses of acute care hospitals. Despite the
Company's rapid growth from 32 outpatient centers in 1991 to 105 outpatient
centers as of the end of 1996, the Company believes the opportunity for further
growth remains substantial. The Company has identified over 300 additional
markets in the United States which the Company believes have the population
necessary to support a dedicated wound care program. The Company believes
hospitals are continually seeking low cost, high quality solutions to wound
management such as those provided by the Company. In addition, the Company
believes it enables its hospital clients to differentiate themselves from their
competitors through better wound care treatment outcomes, reduced costs due to
decreased inpatient lengths of stay and increased revenue through the
introduction of new patients. As a result, the Company believes there is a
significant opportunity for the Company to continue to expand its Wound Care
Center operations through affiliation with acute care hospitals.
Develop New Service Models to Enhance Market Penetration. The Company is
actively developing new service models in new health care delivery settings such
as inpatient programs for subacute and long term care facilities (e.g., nursing
homes and long term acute care hospitals) and freestanding outpatient Wound Care
Centers. The Company currently operates eight freestanding outpatient Wound Care
Centers all of which have opened since October 1995, and ten inpatient programs,
including seven subacute care nursing home-based programs, one subacute care
hospital-based program and two long term acute care hospital-based programs, all
but one of which has opened since October 1995. Ultimately the Company may also
expand its service models to physician offices and the home. Pressure sores, the
most common form of chronic wound, usually occur among nursing home, subacute
care and home patients due to the sedentary lifestyle associated with those care
settings. As the Company further develops its inpatient service models, the
Company believes it will become more capable of penetrating the large pressure
sore market. The freestanding service model allows the Company to strategically
grow its business through select target marketing and enter markets where a
suitable partner is not available. Furthermore, the Company believes the
freestanding model gives the Company greater control over healing outcomes and
the cost of services, both of which are important when working with managed care
providers.
Provide a Comprehensive Managed Care Product. In addition to providing new
revenue opportunities, the Company believes its ability to provide its services
as a comprehensive managed care product in a number of settings will increase
its attractiveness to managed care payors seeking to provide a continuum of care
while reducing risk. With its Wound Management Program and increasing presence
in multiple health care delivery settings, the Company can offer managed care
payors a shared risk relationship which the Company believes will provide better
patient healing outcomes and more cost-effective services for subscribers.
Enhance the Company's Wound Management Program. The Company currently
offers a unique Wound Management Program which includes assessment, vascular
studies, revascularization, infection control, wound debridement, growth factor
therapy, skin grafting, nutrition, protection devices, patient education,
4
referrals and effective management of care through patient/provider
communications. In addition, the Company is continually exploring and seeking
advances in wound care management services and products which could enhance its
current Wound Management Program. The Company is actively pursuing such advances
through the continuous development of its current services, and the
consideration of acquisition opportunities and co-marketing arrangements with
other providers of wound care products and services.
Expand Into Other Disease Management Areas. Longer term, the Company is
considering capitalizing on its disease management expertise by expanding its
services into other disease management areas to meet the growing continuum of
health care needs of patients and providers. The Company believes that there is
a significant market potential for the delivery of other disease management
services through its existing network of Wound Care Centers. The possibilities
for expansion of the Company's disease management services include the treatment
of chronic wound related diseases such as diabetes, as well as non-chronic wound
related diseases such as cardiovascular disorders.
Wound Care Operations
The Company's wound care operations offer health care providers the
opportunity to create specialty wound care departments designed to meet the
needs of chronic wound patients. The initial focus of the Company's wound care
operations has been hospital outpatient Wound Care Centers. The Company is
currently expanding its programmatic approach to wound care to alternate site
inpatient settings such as subacute and long term acute care inpatient
facilities. In these models the Company has established the wound care programs
as cooperative ventures with health care providers to offer a multi-disciplinary
approach to the treatment of chronic wounds. In addition, the Company is
expanding its market penetration with the establishment of freestanding
outpatient Wound Care Centers.
Hospital Outpatient Wound Care Centers. Outpatient Wound Care Centers,
located on or near the campuses of acute care hospitals, represent the Company's
core business. A typical hospital outpatient Wound Care Center consists of 4,000
square feet of space comprising four to eight exam rooms, a nursing station, and
physician and administrative offices. These Wound Care Centers are designed to
deliver all necessary outpatient services for the treatment of chronic wounds,
with the hospital providing any inpatient care, such as revascularization or
surgical debridement.
The Company currently offers its hospital clients two outpatient Wound
Care Center models: a management model and an "under arrangement" model. The
differences between these two models relate primarily to the employment of the
clinical staff at the Wound Care Center and the basis for the management fees
paid to the Company. In the management model, the only employee of the Company
at the Wound Care Center is the Wound Care Center's Program Director, and the
Company generally receives a fixed monthly management fee and a variable case
management fee. In the "under arrangement" model, the Company employs all of the
clinical and administrative staff (other than physicians) at the Wound Care
Center and the Company generally receives fees based on the services provided to
each patient. In all other material respects the two models are identical. In
both models, physicians remain independent and the Company recruits and trains
the physicians and staff associated with the Wound Care Center. The physicians
providing services at a Wound Care Center are recruited by the Company primarily
from among the doctors who work at the hospital and practice in related areas.
In addition, in both models the Company develops, manages and provides Procuren
processing services for the Wound Care Center, and the Company's field support
departments provide the staff at each Wound Care Center with clinical oversight,
quality assurance, reimbursement consulting, sales and marketing and general
administrative support services. The terms of the Company's contract with each
hospital are negotiated individually. Generally, in addition to the management
fees described above, the contracts provide for development fees and Procuren
processing fees charged to the hospital based on utilization. In both models,
the hospital and the physician bill the patient for the services provided and
are responsible for seeking reimbursement from insurers or other third party
payors.
The first Wound Care Center opened in 1988 and there are currently 105
hospital outpatient Wound Care Centers in operation in 31 states. The Company
has entered into contracts or letters of intent with eight hospitals to open
additional Wound Care Centers. The Company's hospital client base ranges from
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medium-sized community-based hospitals to large hospitals affiliated with
national chains and not-for-profit hospitals in local markets. The Company
selects hospital clients based on a number of criteria. A suitable hospital
client typically can accommodate at least 200 inpatient beds, offers services
which complement the Wound Management Program, including physician specialists
in the areas of general, plastic and vascular surgery, endocrinology and
diabetes, is financially stable and has a solid reputation in the community it
serves. Of the Company's 105 current hospital outpatient Wound Care Centers, 90
are management model centers and 15 are "under arrangement" model centers.
At December 31, 1996, the Company had management contracts with 37 acute
care hospitals directly or indirectly owned by Columbia/HCA. These hospitals
collectively accounted for approximately 28% of the consolidated revenues of the
Company for the year ended December 31, 1996. The Company and Columbia/HCA are
currently in discussions initiated by Columbia/HCA to standardize the management
contracts and operating procedures at the Wound Care Centers in hospitals owned
by Columbia/HCA, as well as any Wound Care Centers to be opened in hospitals
owned by Columbia/HCA in the future. Representatives of Columbia/HCA have
indicated to the Company that the purpose of the discussions is to provide
easier access to the Company's Wound Management Program and to enhance wound
care services at Columbia/HCA's hospitals. Although the Company believes that
standardizing the management contracts and operating procedures will ultimately
strengthen its relationship with Columbia/HCA, there can be no assurance these
discussions with Columbia/HCA will not result in changes which would have an
adverse impact on the Company's business, financial condition and results of
operations, including, without limitation, price concessions, contract
termination provisions less favorable to the Company, and increased costs borne
by the Company.
Inpatient Wound Care Programs. The Company is addressing the needs of the
inpatient wound care market through the development of inpatient programs. The
Company currently manages ten inpatient programs including seven subacute care
nursing home-based programs, one subacute care hospital-based program and two
long term acute care hospital-based programs in five states and plans to
continue to develop similar inpatient programs. This model is designed to access
the segment of the chronic wound market comprised of non-ambulatory patients in
alternate site inpatient facilities. These patients often have pressure 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. The training, field support and Procuren processing services provided by
the Company to a facility in connection with an inpatient wound care program are
similar to those provided to the Company's hospital clients in connection with
the hospital outpatient Wound Care Centers. The Company typically manages
between 10 and 20 beds per facility. Under the Company's existing inpatient
contracts, the staff of the inpatient program is employed by the health care
facility and the Company receives management fees on a per patient basis, as
well as Procuren processing fees based on utilization; however, the Company's
inpatient program model is still under development and the terms of its future
inpatient program contracts may not be the same as the existing contracts.
Freestanding Outpatient Wound Care Centers. In the last quarter of 1995,
the Company began to establish freestanding Wound Care Centers in which the
Company is the owner and operator. The Company believes that this delivery model
will allow the Company to expand its market penetration in the outpatient
setting by allowing the Company to strategically penetrate markets without the
constraint of finding a hospital or contracting with competing hospitals. The
Company currently has eight freestanding centers in eight states and is planning
to continue expansion of this model in select markets. The freestanding Wound
Care Centers resemble standard outpatient facilities or specialized physician
practices. The Company employs the staff of the Wound Care Center and is
responsible for billing patients for all services provided at the Wound Care
Center and for seeking reimbursement from third party payors. To date the
Company has not employed any of the physicians providing services at its
freestanding Wound Care Centers; however, the Company's freestanding Wound Care
Center model is still under development and the Company may employ physicians at
these models in the future.
Procuren Production Facilities. The Company currently produces Procuren in
39 facilities in 31 states, all of which are registered with the FDA as blood
processing facilities. The Company's personnel at these facilities produce
Procuren at the direction of Wound Care Center physicians.
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Contract Terms and Renewals
Substantially all of the revenues of the Company are derived from
management contracts with acute care hospitals. The contracts generally have
initial terms of three to five years and many have automatic renewal terms
unless specifically terminated. During the year ending December 31, 1997, the
contract terms of 31 of the Company's management contracts will expire,
including 26 contracts which provide for automatic one-year renewals. The
contracts often provide for early termination either by the client hospital if
specified performance criteria are not satisfied, or by the Company under
various other circumstances. Historically, come contracts have expired without
renewal and others have been terminated by the Company or the client hospital
for various reasons prior to their scheduled expiration. Generally, the Company
elects to negotiate a mutual termination of a management contract if a client
hospital desires to terminate the contract prior to its stated term. The
continued success of the Company is subject to its ability to renew or extend
existing management contracts and obtain new management contracts. Hospitals
choose to terminate or not to renew contracts based on decisions to terminate
their programs or to convert their programs from independently managed programs
to programs operated internally. There can be no assurance that any hospital
will continue to do business with the Company following expiration of its
management contract or earlier, if such management contract is terminable prior
to expiration. In addition, any changes in the Medicare program or third party
reimbursement levels which generally have the effect of limiting or reducing
reimbursement levels for health services provided by programs managed by the
Company could result in the early termination of existing management contracts
and would adversely affect the ability of the Company to renew or extend
existing management contracts and to obtain new management contracts. The
termination or non-renewal of a material number of management contracts could
result in a significant decrease in the Company's net revenues and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Managed Care Operations
The Company's managed care strategy is currently focused on marketing
Wound Care Center services to local managed care organizations ("MCOs") in
concert with its hospital clients' efforts to promote all hospital-based
services to such MCOs. In those instances where hospital clients are unable to
establish contractual relations with a large local MCO or in those markets where
the Company operates freestanding Wound Care Centers where it would otherwise be
appropriate, the Company seeks to establish relations directly with MCOs. The
Company's contractual arrangements with MCOs, which will vary based upon the
needs of the particular MCO, are expected to provide for the Company to receive
compensation on a fee-for-service, fixed case rate or at-risk capitation basis.
While the Company anticipates that initially most of its managed care contracts
will be fee-for-service or case rate contracts, it expects that at-risk
capitation could become a contracting method.
The Company's longer term managed care strategy is to establish a wound
care carve-out product with selected MCOs. The Company has begun to develop
tools to help MCOs assess their current wound care experiences (both clinical
outcomes and costs) against the Company's Wound Management Program in order to
demonstrate that a wound care carve-out product can provide added value. In
order to make itself more attractive to MCOs by offering a broader disease
management program, the Company intends, where appropriate, to align itself with
other disease management companies focused on complementary diseases such as
cardiac care (venous stasis management) and diabetes. The Company expects that
contracts for a carve-out product will provide at-risk arrangements with MCOs
(i.e., fixed case rates or capitation).
The Company's managed care operations are overseen by a Vice President of
Managed Care. To date, the Company's managed care operations have been limited.
Although the Company or its hospital clients have been reimbursed for wound
treatment by a number of MCOs on a case-by-case basis, the Company currently has
no contracts that require or incentivize subscribers to use the Company's wound
care services. There can be no assurance that the Company will be able to
successfully expand its managed care operations.
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Sales and Marketing
The Company's sales and marketing strategy consists of a two-fold approach
involving the development of new wound care programs as well as the referral of
patients into the operating Wound Care Centers. To accomplish this strategy the
Company has divided the United States into five operating regions each headed by
a Regional Vice President. The sales and marketing effort in each region is
directed by a Regional Sales Manager under the supervision of the Regional Vice
President. The Regional Sales Manager is responsible for the activities of the
Account Executives and Professional Liaisons. The primary job of the Account
Executives is the development of new wound care programs. The Professional
Liaisons are primarily responsible for sales efforts related to community
education directed at physicians and other healthcare professionals, and
increasing patient enrollment at existing Wound Care Centers.
As of December 31, 1996, the sales force consisted of five Regional Sales
Managers, 11 Account Executives and 44 Professional Liaisons.
In addition to the above, a sales and marketing plan is developed each
year at each Wound Care Center. The execution of the plan is the responsibility
of the Program Director at the Wound Care Center. The plan details the
anticipated marketing for the year including radio, print and television
advertising as well as professional symposiums. The cost of this plan is
generally shared between the Company and the hospital. The Company markets the
Wound Care Center concept to hospitals as a therapeutic "Center of Excellence."
The Company believes that having a Wound Care Center can differentiate a
hospital from its competitors and can increase the hospital's revenues through
the introduction of new patients, which leads to an increase in ambulatory
surgeries, X-rays, laboratory tests and inpatient surgeries, such as
debridements, vascular surgeries and plastic surgeries. The Company has
demonstrated that Wound Care Centers provide significant incremental revenues to
participating hospitals, and therefore provide an attractive economic
opportunity for hospitals. Potential benefits to treating physicians include the
healing of difficult-to-heal wounds and an expansion of the physician's
practice.
Patents and Proprietary Rights
The Company's success depends in part on its ability to enforce patents,
maintain trade secret protection and operate without infringing on or violating
the proprietary rights of third parties. One U.S. patent has issued, and one
additional application for a patent in the United States has been filed,
relating to the manufacture and use of Procuren for wound care. There can be no
assurance that any pending patent applications will be approved or that any
issued patents will provide the Company with competitive advantages in the
future or will not be challenged by any third parties or, if involved in a
challenge, will be found valid and infringed. Furthermore, there can be no
assurance that others will not design around the patents. The issued U.S. patent
is jointly owned by the University of Minnesota and the Company. The joint
interest of the University of Minnesota is licensed exclusively to the Company
under a paid in full, royalty free arrangement. The U.S. government has a
nonexclusive grant back license under the issued U.S. patent for all government
purposes. The additional pending U.S. application is owned by the Company and is
not subject to the government grant back license.
In addition to patent protection, the Company also relies, in part, on
trade secrets, proprietary know-how and technological advances which it seeks to
protect by measures such as confidentiality agreements with its employees,
consultants and other parties with whom it does business. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, that others will not independently
develop products similar to Procuren or that the Company's trade secrets and
proprietary know-how will not otherwise become known, be independently
discovered by others or found to be unprotected. The Company is aware of a
limited number of physicians who appear to be utilizing an autologous platelet
extract for the treatment of chronic wounds.
The Company has registered the names "Procuren" and "Wound Care Center" as
trademarks in the United States for use in connection with the Company's wound
care operations.
8
Government Regulation
The Company's Wound Care Centers and the production and marketing of its
products and services are subject to extensive regulation by numerous
governmental authorities in the United States, both federal and state. Although
the Company believes that it is currently in compliance with applicable laws,
regulations and rules, some of such laws are broadly written and subject to
little or no interpretation by courts or administrative authorities. Hence,
there can be no assurance that a third party or governmental agency will not
contend that certain aspects of the Company's operations or procedures are
subject to or are not in compliance with such laws, regulations or rules or that
the state or federal regulatory agencies or courts would interpret such laws,
regulations and rules in the Company's favor. The sanctions for failure to
comply with such laws, regulations or rules could include denial of the right to
conduct business, significant fines and criminal penalties. Additionally, an
increase in the complexity or substantive requirements of such laws, regulations
or rules could have a material adverse effect on the business, financial
position and results of operations of the Company.
The FDA regulates drugs and biologics that move in interstate commerce and
requires that such products receive pre-marketing approval based on evidence of
safety and efficacy. Since Procuren is produced at one of the Company's blood
processing facilities in the state where the Wound Care Center which will
dispense the Procuren is located and so is not intended to be shipped across
state lines, the Company believes, based on the advice of its counsel, that
under current law and regulations, FDA approval is not required for the Company
to distribute and sell Procuren through the Wound Care Centers. The FDA is
currently reassessing its regulation of other autologous and somatic cell
products and has publicly stated that it believes that if any component of a
drug or biological or if any patient receiving such substance moves in
interstate commerce, a sufficient nexus with interstate commerce exists for FDA
to require pre-marketing approval and licensure. While the production of
Procuren includes components that are shipped in interstate commerce, to date
the FDA has not determined that Procuren, as currently prepared, is subject to
licensure or pre-market approval. Although the Company believes interstate
shipment of the final biologic product is required to trigger pre-marketing
approval and licensure, a determination by the FDA to require Procuren to obtain
pre-marketing approval would materially and adversely affect the Company.
Because FDA approval has not been required for Procuren, and state
approvals are generally limited to licensing of facilities, there has been no
independent determination of its efficacy by any governmental entity. If the FDA
were to require submission of a product license application ("PLA") as a
condition for the continued distribution and sale of Procuren, the Company might
have to demonstrate the safety, purity, potency and effectiveness of the product
through extensive clinical trials. Neither the Company nor any third party has
conducted the controlled clinical trials required to establish Procuren's
efficacy. Compliance with the requirements for a PLA is time-consuming and
involves the expenditure of substantial resources. There can be no assurance
that the Company would be able to establish efficacy or to obtain or maintain
the necessary FDA approvals to manufacture and distribute Procuren.
Any change in current regulatory interpretations by or positions of state
officials where the Wound Care Center's are located could adversely affect the
Company's distribution of Procuren within those states. In states where Wound
Care Centers are not currently located, the Company intends to utilize the same
approaches adopted elsewhere for achieving state compliance. However, state
regulatory requirements could adversely affect the Company's ability to
establish Wound Care Centers in such other states.
Various state and federal laws regulate the relationships between
providers of health care services and physicians and other clinicians, including
employment or service contracts, investment relationships and referrals for
certain designated health services. These laws include the fraud and abuse
provisions and referral restrictions of the Medicare and Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remunerations for the referral of Medicare and Medicaid patients or for
the ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil or criminal
penalties for individuals or entities including exclusion from participation in
the Medicare or Medicaid programs. Several states have adopted similar laws that
cover patients in private programs as well as government programs. Because the
anti-fraud and abuse laws have been broadly interpreted, they limit the manner
in which the Company can operate its business and market its services to, and
contract for services with, other health care providers. No assurance can be
9
given regarding compliance in any particular factual situation, as there is no
procedure for advisory opinions from government officials.
Additionally, federal and some state laws impose restrictions on
physician's referrals for certain designated health services to entities with
which the physician has a financial relationship. The Company believes its
operations are structured to comply with these restrictions to the extent
applicable. However, there are efforts to expand the scope of these referral
restrictions. Federal legislation is being considered to expand current law from
its application to Medicare and Medicaid business to all payors, and to
additional health services. Certain states are considering adopting similar
restrictions or expanding the scope of existing restrictions. There can be no
assurance that the federal government or other states in which the Company
operates will not enact similar or more restrictive legislation or restrictions
that could under certain circumstances limit the manner in which the Company can
operate its business and have a negative impact on the Company's business,
financial condition and results of operations.
The laws of many states prohibit physicians from sharing professional fees
with non-physicians and prohibit non-physician entities, such as the Company,
from practicing medicine and from employing physicians to practice medicine. The
laws in most states regarding the corporate practice of medicine have been
subjected to limited judicial and regulatory interpretation. The Company
believes its current and planned activities do not constitute prohibited fee
splitting or violate any prohibition against the corporate practice of medicine.
There can be no assurance, however, that future interpretations of such laws
will not require structural or organizational modifications of the Company's
existing business.
Pursuant to the federal Occupational Safety and Health Act, employers have
a general duty to provide a work place for their employees that is safe from
hazard. The U.S. Occupational Safety and Health Administration ("OSHA") has
issued rules relevant to certain hazards that are found in the Company's blood
processing facilities. In addition, OSHA issued a standard in 1992 applicable to
protection of workers from blood-borne pathogens. Failure to comply with this
standard relating to blood-borne pathogens, other applicable OSHA rules or with
the general duty to provide a safe work place could subject the Company to
substantial fines and penalties.
Third Party Reimbursement
The Company, through its wound care operations, provides contractual
management services for fees and sells Procuren to acute care hospitals and
other health care providers. These providers, in turn, seek reimbursement from
third party payors, such as Medicare, Medicaid, health maintenance organizations
and private insurers, including Blue Cross/Blue Shield plans. The availability
of reimbursement from such payors has been a significant factor in the Company's
ability to increase its revenue streams and will be important for future growth.
In addition to hospital outpatient Wound Care Centers which it manages for
its clients, the Company owns and operates freestanding outpatient Wound Care
Centers. With respect to services and products provided through its freestanding
centers, the Company is subject to the risks inherent in third party
reimbursement, including the risks associated with billing third party payors.
As of December 31, 1996, the Company operated eight freestanding outpatient
Wound Care Centers which contributed approximately $865,000 or 1% of the
Company's revenues for the year ended December 31, 1996. However, the Company
anticipates that the number of, and amount of revenues attributable to, its
freestanding centers will increase in the future as the Company pursues its
strategy of expanding into new health care delivery settings. See
"Business--Strategy."
Each third party payor formulates its own coverage and reimbursements
decisions. In 1992 the Health Care Financing Administration ("HCFA"), the agency
that administers the Medicare program nationally, published a national coverage
decision denying coverage for Procuren based on its determination that the
safety and efficacy of Procuren had not been established and so the use of
Procuren was not "reasonable and necessary" within the meaning of applicable
law. Procuren sales represent a significant part of the Company's revenues and
earnings and the Company believes that Procuren, as a component of its Wound
Management Program, is a significant component of the Company's services.
Although the Company has not, and the Company believes that its clients have
not, in general experienced difficulty in securing third party reimbursement for
Wound Care Center services and the use of Procuren from private insurers, some
hospitals have experienced denials, delays and difficulties in obtaining such
10
reimbursement. In some cases where Procuren reimbursement has been denied by a
payor, the hospitals have ceased providing Procuren to patients whose only means
of payment is through such payor. To the Company's knowledge, no widespread
denials have been received by hospitals regarding reimbursement for other Wound
Care Center services or reimbursement of management fees charged by the Company
to its hospital clients. The Company discusses coverage and reimbursement issues
with its hospital clients and third party payors on a regular basis. Such
discussions will continue as the Company seeks to maximize hospital
reimbursement for Procuren and other wound care services. Although no individual
coverage and reimbursement decision is material to the Company, a widespread
denial of reimbursement coverage for Procuren or other services would have a
material adverse effect on the Company's business, financial position and
results of operations.
Medicare regulations limit reimbursement for health care charges paid to
related parties. A party is considered "related" to a provider if it is deemed
to be controlled by the provider. On occasion, fiscal intermediaries under
contract to HCFA to audit hospital Medicare claims have asserted that one test
for determining control for this purpose is whether the percentage of the total
revenues of the party received from services rendered to the provider is so high
that it effectively constitutes control. Although the Company believes it does
not currently receive sufficient revenues from any customer, including
Columbia/HCA, that would make it a related party, it is possible that such
regulations could limit the number of management contracts that the Company
could have with Columbia/HCA or any other client.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, the
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery and payment systems and may in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system. It is possible that future legislation enacted by Congress
or state legislatures will contain provisions which may materially adversely
affect the business, financial position and results of operations of the Company
or may change the operating environment for the Company's targeted customers
(including hospitals and managed care organizations). Health care industry
participants may react to such legislation or the uncertainty surrounding
related proposals by curtailing or deferring expenditures and initiatives,
including those relating to the Company's programs and services. It is also
possible that future legislation either could result in modifications to the
nation's public and private health care insurance systems, which could affect
reimbursement policies in a manner adverse to the Company, or could encourage
integration or reorganization of the health care delivery system in a manner
that could materially affect the Company's ability to compete or to continue its
operations without substantial changes. The Company cannot predict which other
legislation relating to its business or to the health care industry may be
enacted, including legislation relating to third party reimbursement, or what
effect any such legislation may have on its business, financial position and
results of operations.
Competition
The Company's principal competition in the chronic wound care market
consists of specialty clinics that have been established by some hospitals or
physicians. Although numerous companies, many of which have resources greater
than the Company, are conducting research in the area of drugs to promote the
healing of chronic wounds, to the Company's knowledge, no competitive products
are currently on the market that actively promote wound healing. The Company
believes that the cost and quality of wound care services provided are the
principal factors that affect competition.
In the market for disease management products and services, the Company
faces competition from other disease management facilities, general health care
facilities and service providers, pharmaceutical companies, biopharmaceutical
companies and other competitors. Many of these companies have substantially
greater capital resources and marketing staffs, and greater experience in
commercializing products and services, than the Company. In addition, recently
developed technologies, or technologies that may be developed in the future, are
or may be the basis for products which compete with the Company's chronic wound
care products. The Company is aware that other companies are developing products
which may be in direct competition with Procuren. There can be no assurance that
11
the Company will be able to enter into co-marketing arrangements with respect to
these products, or that the Company will be able to compete effectively against
such companies in the future.
Employees
As of December 31, 1996, the Company employed 567 full-time employees, of
which 423 employees were in the wound care operations, 85 employees were in
Procuren production, 22 employees were in technical support and 37 employees
were in general administration and finance. The Company expects to add
additional personnel to its wound care operations in the next year. The Company
believes that its relations with its employees are good.
Item 2 Properties
The Company's headquarters and technical support facility is located in
East Setauket, Long Island, New York. The Company leases this 21,000 square foot
facility under a lease running through 2002. Given the current utilization of
its facilities and its option for additional space, the Company believes that
its facilities are adequate and suitable for its operation. The Company also
leases two regional offices for its wound care operations totaling 3,000 square
feet, eight freestanding Wound Care Centers totaling 17,700 square feet and 16
production facilities totaling 30,400 square feet. The Company's facilities at
the hospital outpatient Wound Care Centers are owned or leased by the hospitals.
Item 3 Legal Proceedings
On December 6, 1996 the United States District Court for the Eastern
District of New York approved the class action settlement in a lawsuit filed
against the Company and certain of its officers by a shareholder. The settlement
disposed of allegations by the shareholder that the Company failed to meet its
disclosure obligations with respect to certain practices of UltraMed, Inc. The
Company denied any liability or wrongdoing and the settlement was neither an
admission of any liability or wrongdoing by the Company or any of its officers
or employees. The action was settled for a total payment of $0.5 million of
which 50% was paid by the Company's insurer.
The Company is also a party to other litigation in the ordinary course of
business. The Company does not believe that such litigation is likely to have a
material adverse effect on its financial position or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders
None.
12
PART II
Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is traded over the counter on the Nasdaq
National Market System and trades under the symbol "CURE". As of March 1, 1997,
there were approximately 275 holders of record of the Company's common stock.
The Company has not paid any cash dividends since its inception. The Company
currently does not intend to pay cash dividends in the foreseeable future but
intends to retain all earnings, if any, for use in its business operations.
The following table set forth, for the fiscal periods indicated, the range
of high and low sales prices of the common stock as quoted on the Nasdaq
National Market System:
High Low
---- ---
1996
Fourth Quarter.......... $ 28 1/4 $ 18 1/2
Third Quarter........... 26 7/8 15 3/4
Second Quarter.......... 28 17
First Quarter........... 21 3/8 13 1/4
1995
Fourth Quarter.......... $ 16 3/8 $ 12
Third Quarter........... 17 8 3/8
Second Quarter.......... 9 3/8 5
First Quarter........... 5 3/8 3 7/16
13
Item 6 Selected Consolidated Financial Data
Five year selected consolidated financial data and other operating
information of Curative Health Services, Inc., and Subsidiaries follow:
Year Ended December 31,
----------------------
1992 1993 1994 1995 1996
---------------------------------------------------
(thousands, except per share and operating data)
Statement of Operations Data:
Revenues ...................................... $ 24,572 $ 31,265 $ 40,567 $ 52,442 $67,395
Costs and operating expenses:
Costs of products sales and services ....... 12,365 16,637 20,478 26,189 37,828
Selling, general and administrative ........ 10,379 12,050 15,177 18,209 19,208
Research and development ................... 6,667 7,852 6,480 4,143 --
Restructuring charge ....................... -- -- 1,684 -- --
-------- -------- -------- -------- -------
Total costs and operating expenses ............ 29,411 36,539 43,819 48,541 57,036
-------- -------- -------- -------- -------
Income (loss) from continuing operations
before interest income and minority
interest ................................... (4,839) (5,274) (3,252) 3,901 10,359
Interest income ............................... 998 549 306 528 1,344
Minority interest in net loss of
consolidated subsidiary .................... 166 336 218 -- --
-------- -------- -------- -------- -------
Income (loss) from continuing operations....... (3,675) (4,389) (2,728) 4,429 11,703
Income (loss) from discontinued operations .... 26 (188) (4,545) -- --
-------- -------- ------- -------- -------
Income (loss) before income taxes ............. (3,649) (4,577) (7,273) 4,429
11,703
Income taxes .................................. -- -- -- 219 1,008
-------- -------- -------- -------- -------
Net income (loss) ............................. $ (3,649) $ (4,577) $ (7,273) $ 4,210 $10,695
======== ======== ======== ======== =======
Net income (loss) per common and
common equivalent shares from:
Continuing operations.................... $ (0.37) $ (0.44) $ (0.27) $ 0.39 $ 0.90
Discontinued operations ................. -- (0.02) (0.46) -- --
-------- -------- -------- -------- -------
Total ................................. $ (0.37) $ (0.46) $ (0.73) $ 0.39 $ 0.90
======== ======== ======== ======== =======
Weighted average common and
common equivalent shares outstanding ....... 9,889 9,904 9,958 10,768 11,909
Operating Data:
Wound care facilities at end of period ........ 42 56 63 84 123
Number of new patients ........................ 11,508 16,235 22,529 30,023 38,699
Balance Sheet Data:
Working capital ............................... $ 19,128 $ 11,709 $ 7,267 $ 12,575 $45,760
Total assets .................................. 29,074 25,278 18,592 25,030 61,959
Long-term debts
(including capital lease obligation) ....... 202 515 1,254 1,198 1,044
Deficit........................................ (22,285) (26,862) (34,135) (29,925) (19,230)
Stockholders' equity .......................... 21,439 16,837 9,778 15,611 50,270
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's principal business is the delivery of chronic wound care
services through its nationwide network of Wound Care Centers located in or near
acute care hospitals. Substantially all of the Company's revenues are currently
14
generated under its contracts with acute care hospitals for the management of
chronic wound care programs and the production of Procuren. The Company
currently markets two types of Wound Care Center management contracts to
hospitals: a management model and an "under arrangement" model.
In the management model, the Company provides management and support
services for a chronic wound care facility owned or leased by the hospital and
staffed by employees of the hospital, and generally receives a fixed monthly
management fee and a variable case management fee. In the "under arrangement"
model, the Company provides management and support services, as well as the
clinical and administrative staff, for a chronic wound care facility owned or
leased by the hospital, and generally receives fees based on the services
provided to each patient. In both models, physicians remain independent, and the
Company recruits and trains the physicians and staff associated with the Wound
Care Center. In addition, in both models, the Company receives fees for the
production of Procuren based on utilization.
Of the 105 hospital outpatient Wound Care Centers in operation as of
December 31, 1996, 90 were management model Wound Care Centers, and 15 were
"under arrangement" model Wound Care Centers. The Company's fees under its
management contracts with acute care hospitals are paid by the hospitals
directly. See "Business--Third Party Reimbursement."
The Company is currently expanding its chronic wound care operations into
new health care delivery settings, including inpatient facilities and
freestanding Wound Care Centers owned and operated by the Company. Although
these new models accounted for 2% of the Company's revenues in 1996, the Company
anticipates that the percentage of its revenues attributable to these and other
new models will increase in the future as the Company expands its services
across the continuum of care for wound management. These new models are still in
the development phase; however, the Company anticipates that the nature of the
revenues produced by and risks associated with these new models may not be the
same as those associated with its current business.
Business Restructuring and Realignment
During 1994, the Company realigned its business strategy to focus on
developing and expanding its growing wound care business while narrowing the
focus and scope of research and development of new biopharmaceutical products.
The primary goal of the Company's new strategy is to be profitable and enhance
the Company's long term growth potential by devoting financial and
organizational resources to expand its national network of Wound Care Centers.
In order to ensure that sufficient resources were available to pursue this
strategy, a restructuring of Company activities was implemented. The
restructuring included a significant reduction in research and development
activities, including the termination of 15 research personnel and the
termination of outside research contracts related to new drug discovery efforts.
Additionally, the Company reduced its European development activities with the
termination of four people responsible for the development of strategic
alliances for future products. These changes enabled the Company to
significantly reduce research and development expenditures from $7.9 million in
1993 to $4.1 million in 1995 and $0 in 1996. The 1994 restructuring also
included the discontinuation of the Company's business of establishing a wound
care program in a comprehensive outpatient rehabilitation facility and the
write-off of receivables related to this business.
In the Company's continuing effort to focus on its wound care service
business, during the second quarter of 1995 the Company instituted a further
realignment of its business activities which included the discontinuation of all
new product research and development. The Company's research and development
activities are now committed to the technical support of Procuren (expenses
classified in cost of sales). Also in 1995, the Company completed the
divestiture of its European operations with the sale of its majority-owned
German subsidiary.
Results of Operations
Fiscal Year 1995 vs. Fiscal Year 1996. The Company's revenues increased
from $52.4 million in 1995 to $67.4 million in 1996, a 29% increase. The
increased revenue is primarily attributable to the operation of 84 wound care
facilities at the end of 1995 compared with 123 at the end of 1996 and a 13%
increase in revenues at existing wound care facilities related to higher patient
volume. Total new patients to the wound care facilities increased 29% from
30,023 in 1995 compared to 38,699 in 1996. The total number of patients
15
receiving Procuren therapy increased 15% from 6,854 in 1995 compared to 7,912 in
1996; however, the percentage of patients receiving Procuren decreased from 23%
in 1995 to 20% in 1996. The Company believes that this decrease is attributable
primarily to an increase in the percentage of less severe chronic wounds being
treated at the Company's Wound Care Centers, for which physicians are less
likely to prescribe Procuren, as well as a lack of available reimbursement for
Medicare patients. The Company believes that this shift in the severity of the
wounds treated at a Wound Care Center occurs as the local medical community
becomes familiar with the services offered by the Wound Care Center and refers a
broader range of chronic wound patients to the Wound Care Center for treatment.
The Company anticipates that the percentage of patients receiving Procuren will
continue to decline gradually in the future.
Costs of product sales and services increased from $26.2 million in 1995
to $37.8 million in 1996, a 44% increase. Fiscal 1996 includes $1.9 million of
technical service costs which were reported as research and development expenses
for 1995. Excluding technical services costs, the increase in cost of product
sales and services from 1995 to 1996 was 37%. The increase is attributable to
additional staffing and operating expenses of approximately $4.8 million
associated with the operation of 39 additional wound care facilities at the end
of 1996, as well as increased volume at existing wound care facilities.
Additionally, these 39 facilities include five freestanding Wound Care Centers
and six additional under arrangement Wound Care Centers at which the services
component of costs is higher than at the Company's other facilities due to the
additional clinical staffing and expenses that these models require. As compared
with 1995, the higher services components at these facilities accounted for an
additional $2.2 million of the increase in product costs and services for 1996.
As a percentage of revenues, costs of product sales and services (excluding
technical services) was 50% in 1995 compared with 53% in 1996. The increase is
attributable to new Wound Care Centers which include a higher service component.
Selling, general and administrative expenses increased from $18.2 million
in 1995 to $19.2 million in 1996, a 5% increase. The increase is attributable
to additional staffing and operating expenses of approximately $1.5 million
associated with the growth in the wound care business particularly related to
field support departments, offset by a $0.5 million decrease in expenses related
to European operations which were discontinued in the second quarter of 1995. As
a percentage of revenues, selling, general and administrative expenses were 35%
in 1995 compared with 29% in 1996. The decrease is attributable to the
discontinuation of the European operations as well as the ability of the Company
to obtain leverage by spreading the costs of its overhead structure over a
broader revenue base.
Research and development expense was $4.1 million for 1995. The Company
did not incur any research and development expenses in 1996 since it
discontinued all new product research and development in the second quarter of
1995. Technical service costs associated with the support of Procuren are
classified as a cost of product sales. This classification began in 1996.
Interest income increased to $1.3 million in 1996 from $0.5 million in
1995. The increase was primarily due to higher cash balances resulting from the
net proceeds of the $22.6 million common stock offering in August 1996, as well
as cash provided from operations.
Net income improved from $4.2 million or $.39 per share in 1995 to $10.7
million or $.90 per share in 1996. The increase in earnings of $6.5 million is
primarily attributable to savings of approximately $2.2 million related to the
discontinuation of new product research and development, an improvement in
operating margins associated with the revenue growth particularly related to
existing Wound Care Centers and economies of scale achieved from market growth
and the termination of European operations.
Fiscal Year 1994 vs. Fiscal Year 1995. The Company's revenues increased
from $40.6 million in 1994 to $52.4 million in 1995, a 29% increase. The
increase in revenues in 1995 over 1994 is primarily attributable to the
operation of 84 wound care facilities at the end of 1995 compared with 63 at the
end of 1994 and a 13% increase in revenues at existing wound care facilities
related to volume increases. Total new patients to the wound care facilities
increased 33% from 22,529 in 1994 compared to 30,023 in 1995. The total number
of new patients receiving Procuren therapy increased 16% from 5,899 in 1994
compared to 6,854 in 1995; however, the percentage of patients receiving
Procuren decreased from 26% in 1994 to 23% in 1995. The Company believes that
16
this decrease occurs as the local medical community becomes familiar with the
services offered by a Wound Care Center and refers a broader range of chronic
wound patients to the Wound Care Center for treatment, including more patients
with less severe wounds which are less likely to be treated with Procuren, as
well as a lack of available reimbursement for Medicare patients.
Costs of product sales and services increased from $20.5 million in 1994
to $26.2 million in 1995, a 28% increase. Compared to 1994, the increase is
attributable to additional staffing and operating expenses of approximately $4.8
million associated with the operation of the additional 21 wound care facilities
in 1995 and increased volume at existing wound care facilities. Additionally,
the operation of an additional five Procuren production facilities and volume
increases at existing production facilities increased costs approximately $0.6
million. As a percentage of revenues, costs of product sales and services was
50% in 1994 and 1995.
Selling, general and administrative expenses increased from $15.2 million
in 1994 to $18.2 million in 1995, a 20% increase. The increase is primarily
attributable to additional staffing and operating expenses of approximately $2.3
million associated with the growth in the wound care business particularly
related to field support departments. Additionally, approximately $0.5 million
of the increase is attributable to provisions recorded related to the Company's
guarantee of the obligations of UltraMed, Inc., See Note L of Notes to
Consolidated Financial Statements of the Company. Further, legal expenses
increased $0.4 million related to legal proceedings, increase in contracting
issues and general corporate matters. As a percentage of revenues, selling,
general and administrative expenses were 37% in 1994 compared to 35% in 1995.
The decrease reflects the Company's ability to obtain leverage by spreading the
costs of its overhead structure over a broader revenue base.
Research and development expenses decreased from $6.5 million in 1994 to
$4.1 million in 1995, a 37% decrease. The decrease was attributable to the
corporate restructuring of research and development implemented in 1994,
including the discontinuation of new biopharmaceutical drug discovery efforts
resulting in a reduction in staffing and operating expenses of approximately
$1.7 million. Additionally, during 1995 the Company implemented a further
realignment of its research and development activities which included
discontinuation of the CT-102 and CT-112 product development programs. The
Company's product development activities are now committed to the technical
support of Procuren.
Income (loss) from continuing operations improved from a $2.7 million loss
in 1994 to net income of $4.4 million in 1995. The $7.1 million improvement was
attributable to a reduction in research and development of $2.3 million, a
restructuring charge in 1994 totaling $1.7 million and an improvement in
operating margin associated with the revenue growth and economies of scale
achieved from market growth.
Liquidity and Capital Resources
Working capital was $45.8 million at December 31, 1996 compared to $12.6
million at December 31, 1995. Total cash, cash equivalents and marketable
securities held-to-maturity as of December 31, 1996 was $43.1 million and was
invested primarily in highly liquid money market funds, commercial paper and
government securities. The ratio of current assets to current liabilities
increased from 2.5:1 at December 31, 1995 to 5.3:1 at December 31, 1996. The
increase in working capital and improvement in the ratio of current assets to
current liabilities was primarily attributable to the net proceeds of $22.6
million from the secondary public offering of 1,437,500 shares of common stock
and net income for fiscal year 1996.
Cash flows provided by operations for 1996 totaled $9.7 million primarily
attributable to the net income for the period. Cash flows used in investing
activities for 1996 totaled approximately $31 million primarily attributable to
the excess of purchases of marketable securities held to maturity over sales of
$28.5 million and capital expenditures including furniture, equipment and
leasehold improvements of $2.5 million. Cash flows provided by financing
activities totaled $23.7 million for 1996 primarily attributable to net proceeds
of $22.6 million from the secondary public offering and proceeds from the
exercise of stock options.
During 1996, the Company experienced a $4.5 million increase in net
accounts receivable primarily due to the increase in revenues and the average
number of days receivables were outstanding increased from 49 days as of
17
December 31, 1995 to 59 days as of December 31, 1996. Further, compared to
December 31, 1995, the Company's accounts payable and accrued expenses increased
$2.5 million as of December 31, 1996.
In May 1995, the Company sold its 62% interest in its majority owned
German subsidiary to the subsidiary's general manager. In connection with the
sale, the Company made a working capital commitment of 0.5 million Deutsche Mark
(dm) which was paid in 1995. Additionally, the Company is entitled to future
contingent payments of 30% of the subsidiary's profits up to 0.5 million dm.
Additionally, there are contingent payments of approximately 1.0 million dm due
the Company representing previously advanced intercompany loans. Since the
subsidiary had a history of operating losses, the Company has not recorded any
amounts due from the subsidiary. Further, the Company remains a guarantor of the
former subsidiary's revolving credit facility of 1.4 million dm (approximately
$1 million) and is obligated for any related interest payments.
At December 31, 1996, the Company had available approximately $14 million
of net operating loss carryforwards and research credits for federal income tax
purposes. Pursuant to the Tax Reform Act of 1986, the Company believes that the
use of these net operating loss carryforwards in any particular year may be
limited as a result of changes in ownership which occurred in prior periods. See
Note H of Notes to Consolidated Financial Statements of the Company.
The Company's longer term cash requirements include working capital for
the further expansion of its wound care business. Other cash requirements are
anticipated for capital expenditures in the normal course of business. The
Company expects that, based on its current business plan, its existing cash,
cash equivalents and marketable securities will be sufficient to satisfy its
currently anticipated working capital needs. The effects of inflation and
foreign currency translation risks are considered immaterial.
Cautionary Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include statements
regarding intent, belief or current expectations of the Company and its
management. These forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in
these statements. Factors that might cause such differences include, but are not
limited to, changes in the Company's level of business with Columbia/HCA
Healthcare Corporation, changes in the government regulations relating to the
Company's wound care operations or Procuren, uncertainties relating to health
care reform initiatives, changes in the availability of third party
reimbursements for the Company's products and services, and the other risks and
uncertainties detailed throughout this report and from time to time in the
Company's filings with the Securities and Exchange Commission.
Item 8 Consolidated Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference
to the Consolidated Financial Statements listed in Item 14(a) of Part IV of this
Report.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
18
PART III
This information required by Part III of this Form 10-K is omitted from
this Report in that the Registrant will file a definitive proxy statement
pursuant to Regulation 14(a) for its 1997 Annual Meeting of Stockholders (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
Item 10 Directors and Executive Offices of the Registrant
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
Item 11 Executive Compensation
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
Item 13 Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
19
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Index to Financial Statements.
The following consolidated financial statements of Curative Health
Services, Inc. are included herein:
Page
Number
Report of Independent Auditors ................................... F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 ........ F-2
Consolidated Statements of Operations for each of the years ended
December 31, 1996, 1995 and 1994 ........................ F-3
Consolidated Statements of Stockholders' Equity for each of the
years ended December 31, 1996, 1995 and 1994 ............ F-4
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1996, 1995 and 1994 ........................ F-5
Notes to Consolidated Financial Statements ...................... F-6
2. Financial Statement Schedules. The following financial statement
schedule of Curative Health Services, Inc. is included herein:
Schedule Page
II Valuation and Qualifying Accounts and Reserves.......... S-1
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.
3. Exhibits. The exhibits listed in the accompanying Index to Exhibits
immediately following the financial statement schedules are filed
with this report.
(b) Reports on Form 8-K. No reports filed on Form 8-K filed by the Company
during the fiscal quarter ended December 31, 1996.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CURATIVE HEALTH SERVICES, INC.
By: /s/ John Vakoutis
John Vakoutis
President, Chief Executive Officer
and Director
Dated: March 27, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Vakoutis and John C. Prior, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in 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
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John Vakoutis President, Chief Executive Officer, March 27, 1997
- ----------------- (Principal Executive Officer) and
John Vakoutis Director
/s/ John C. Prior Senior Vice President Finance and March 27, 1997
- ----------------- Chief Financial Officer
John C. Prior (Principal Financial and Accounting
Officer) and Secretary
/s/ Gerardo Canet Director March 27, 1997
- -----------------
Gerardo Canet
/s/ Daniel Gregorie, MD Director March 27, 1997
- -----------------------
Daniel Gregorie, MD
/s/ Lawrence C. Hoff Director March 27, 1997
- --------------------
Lawrence C. Hoff
/s/ Timothy I. Maudlin Director March 27, 1997
- ----------------------
Timothy I. Maudlin
/s/ Gerard Moufflet Director March 27, 1997
- -------------------
Gerard Moufflet
/s/ Lawrence J. Stuesser Chairman of the Board and Director March 27, 1997
- ------------------------
Lawrence J. Stuesser
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CURATIVE HEALTH SERVICES, INC.
By: ____________________________
John Vakoutis
President, Chief Executive
Officer and Director
Dated: March 27, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Vakoutis and John C. Prior, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in 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
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
____________________ President, Chief Executive Officer, March 27, 1997
John Vakoutis (Principal Executive Officer) and
Director
____________________ Senior Vice President Finance and March 27, 1997
John C. Prior Chief Financial Officer
(Principal Financial and Accounting
Officer) and Secretary
____________________ Director March 27, 1997
Gerardo Canet
________________________ Director March 27, 1997
Daniel Gregorie, MD
________________________ Director March 27, 1997
Lawrence C. Hoff
________________________ Director March 27, 1997
Timothy I. Maudlin
________________________ Director March 27, 1997
Gerard Moufflet
________________________ Chairman of the Board and Director March 27, 1997
Lawrence J. Stuesser
Report of Independent Auditors
Board of Directors and Stockholders
Curative Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Curative
Health Services, Inc. and subsidiaries (formerly Curative Technologies, Inc.
and subsidiaries) as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index as Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the consolidated financial position of Curative Health
Services, Inc. and subsidiaries at December 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
January 31, 1997
F - 1
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
1996 1995
-------------------
ASSETS
Cash and cash equivalents ................................ $ 5,226 $ 2,835
Marketable securities held-to-maturity ................... 37,838 9,365
Accounts receivable (less allowance of $941 and $514
at December 31, 1996 and 1995, respectively) ......... 12,319 7,776
Prepaid and other current assets ......................... 1,022 820
-------- --------
Total current assets .................................. 56,405 20,796
Property and equipment, net .............................. 4,754 3,383
Other assets ............................................. 800 851
-------- --------
Total assets .......................................... $ 61,959 $ 25,030
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable ......................................... $ 7,368 $ 5,066
Accrued expenses ......................................... 3,137 2,992
Capital lease obligations ................................ 140 163
-------- --------
Total current liabilities ............................. 10,645 8,221
Long term debt 1,000 1,000
Capital lease obligations 44 198
Stockholders' 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,12,215,423 shares issued and
outstanding (10,426,769 shares in 1995) ............. 121 104
Additional paid in capital ............................ 69,421 45,474
Deficit ............................................... (19,230) (29,925)
-------- --------
50,312 15,653
Subscription receivable ............................... (42) (42)
-------- --------
Total stockholders' equity ............................ 50,270 15,611
-------- --------
Total liabilities and stockholders' equity .................. $ 61,959 $ 25,030
========= =========
See notes to consolidated financial statements
F - 2
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
1996 1995 1994
Revenues ....................................................................... $ 67,395 $ 52,442 $ 40,567
Costs and operating expenses:
Costs of product sales and services ......................................... 37,828 26,189 20,478
Selling, general and administrative ......................................... 19,208 18,209 15,177
Research and development .................................................... -- 4,143 6,480
Restructuring charge ........................................................ -- -- 1,684
------ ------ ------
Total costs and operating expenses ....................................... 57,036 48,541 43,819
Income (loss) from continuing operations before interest
income and minority interest ................................................ 10,359 3,901 (3,252)
Interest income ................................................................ 1,344 528 306
Minority interest in net loss of consolidated subsidiary ....................... -- -- 218
------ ------ ------
Income (loss) from continuing operations ....................................... 11,703 4,429 (2,728)
Loss from discontinued operations .............................................. -- -- (4,545)
------ ------ ------
Income (loss) before income taxes .............................................. 11,703 4,429 (7,273)
Income taxes ................................................................... 1,008 219 --
------ ------ ------
Net income (loss) .............................................................. $ 10,695 $ 4,210 $ (7,273)
====== ====== ======
Net income (loss) per common and common equivalent shares from:
Continuing operations........................................................ $ .90 $ .39 $ (.27)
Discontinued operations...................................................... -- -- (.46)
------ ------ ------
$ .90 $ .39 $ (.73)
====== ====== ======
Net income (loss) per common and common equivalent share assuming full dilution
from:
Continuing operations ....................................................... $ .89 $ .38 $ (.27)
Discontinued operations ..................................................... -- -- (.46)
------ ------ ------
$ .89 $ .38 $ (.73)
====== ====== ======
Weighted average common and common equivalent shares
outstanding ................................................................. 11,909 10,768 9,958
====== ====== ======
Weighted average common and common equivalent shares
assuming full dilution ...................................................... 12,018 11,112 9,958
====== ====== ======
See notes to consolidated financial statements
F - 3
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
Foreign
Additional Currency Total
Common Stock Paid in Translation Subscription Stockholders'
Shares Amount Capital Deficit Adjustment Receivable Equity
Balance, December 31, 1993 ...... 9,909,094 $ 99 $ 43,757 $ (26,862) $ (115) $ (42) $ 16,837
Foreign currency
translation adjustment ...... (64) (64)
Exercise of options ........... 98,250 1 196 197
Director share purchase program 342 1 1
Shares issued for patent rights 17,000 80 80
Net loss for 1994 ............. (7,273) (7,273)
----------------------------------------------------------------------------------------------
Balance, December 31, 1994 ...... 10,024,686 100 44,034 (34,135) (179) (42) 9,778
Foreign currency
translation adjustment ...... 179 179
Exercise of warrants .......... 5,803 --
Exercise of options ........... 396,280 4 1,397 1,401
Tax benefit from stock option
exercises ................... 43 43
Net income for 1995 ........... 4,210 4,210
----------------------------------------------------------------------------------------------
Balance, December 31, 1995 ...... 10,426,769 104 45,474 (29,925) -- (42) 15,611
Secondary public offering, net
of expenses of $1,806 ...... 1,437,500 14 22,618 22,632
Exercise of warrants .......... 102,608 1 1
Exercise of options ........... 248,546 2 1,249 1,251
Tax benefit from stock option
exercises .................. 80 80
Net income for 1996 ........... 10,695 10,695
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 ...... 12,215,423 $121 $ 69,421 $ (19,230) $ -- $ (42) $ 50,270
==============================================================================================
See notes to consolidated financial statements
F - 4
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
1996 1995 1994
---------------------------
OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 10,695 $ 4,210 $ (7,273)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing activities:
Discontinued operations .................................. -- -- 4,545
Depreciation & amortization .............................. 1,185 998 1,032
Provision for doubtful accounts, net ..................... 427 150 388
Write-off of abandoned patent applications ............... -- 382 --
Minority interest in net loss of consolidated subsidiary.. -- -- (218)
Non-cash restructuring charges ........................... -- -- 752
Loss on sale of CTGmbH ................................... -- 111 --
Change in operating assets and liabilities:
Increase in accounts receivable .......................... (4,970) (1,524) (901)
(Increase) decrease in prepaid and other current assets .. (202) 324 (60)
Increase in accounts payable and accrued expenses ........ 2,527 1,297 225
-------- -------- ---
NET CASH PROVIDED BY (USED IN) CONTINUING ACTIVITIES........ 9,662 5,948 (1,510)
NET CASH USED IN DISCONTINUED ACTIVITIES ................... -- -- (404)
-------- -------- ---
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........ 9,662 5,948 (1,914)
INVESTING ACTIVITIES:
Deferred patent costs ...................................... -- -- (165)
Sale of CT GmbH ............................................ -- (286) --
Purchases of property and equipment ........................ (2,505) (2,001) (612)
Purchases of marketable securities held-to-maturity ........ (38,923) (12,418) (3,820)
Sales of marketable securities held-to-maturity ............ 10,450 5,861 5,909
-------- -------- ---
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ........ (30,978) (8,844) 1,312
FINANCING ACTIVITIES:
Proceeds from loans and revolving line of credit ........... -- -- 403
Proceeds from exercise of stock options and warrants ....... 1,252 1,401 198
Proceeds from secondary public offering, net of expenses ... 22,632 -- --
Principal payments on capital lease obligations ............ (177) (143) (139)
-------- -------- ---
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 23,707 1,258 462
Effect of exchange rate changes on cash and cash equivalents -- 14 (51)
-------- -------- ---
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... 2,391 (1,624) (191)
Cash and cash equivalents at beginning of year ............. 2,835 4,459 4,650
-------- -------- ---
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 5,226 $ 2,835 $ 4,459
======== ======== =====
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid ............................................ $ 93 $ 119 $ 143
======== ======== =====
See Notes E and F for Non-Cash Transactions
See notes to consolidated financial statements
F - 5
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: The Company was organized under the laws of the State of
Minnesota in October 1984. It is a disease management company in the chronic
wound care business. The Company manages a nationwide network of Wound Care
Centers that offers patients a multi-disciplinary comprehensive wound treatment
program. The Company's management agreements with hospitals and other health
care providers generally have a term of 5 years.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. In May 1995 the
Company sold its 62% interest in its German subsidiary (See Note B). Operating
results of that subsidiary for the first five months of 1995 are included in the
consolidated operating results. In August 1993, the Company acquired the
remaining interest in another foreign affiliate which was previously 50% owned
(See Note B). The joint venture was previously accounted for on the equity
method and effective with the acquisition, the accounts were consolidated. As
part of the restructuring of the Company in 1994 the operations of this
subsidiary were terminated. Intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Net Income (Loss) per Common Share: Net income (loss) per common and
common equivalent share is based on the weighted average number of common shares
outstanding for 1995 and 1996 plus dilutive common share equivalents.
Outstanding warrants and options have not been included in the 1994 computations
as the effect of such would be antidilutive.
Foreign Currency Translation: Revenues and expenses of subsidiary
operations denominated in foreign currencies have been translated at average
rates for the applicable periods.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives (generally 5 to 7 years). Leased
equipment capitalized and leasehold improvements are amortized over the life of
the lease or the useful life of the related asset, whichever is shorter.
Research and Development: All costs relating to research and development
activities are expensed in the year in which they are incurred.
Other Assets: As of December 31, 1995 and 1996, other assets consist of
costs associated with filing patent and trademark applications which totalled
$851,000 and $800,000, respectively. During 1995 the Company wrote-off
deferred patent costs of $382,000 related to patent applications no longer
being pursued. In December 1992, the Company received broad patent coverage on
wound healing agents derived from platelets. Costs and expenses related to
this patent of $920,000 are being amortized over the life of the patent
(17 years) and trademarks of $75,000 are being amortized over the estimated
life of the trademark (20 years) using the straight-line method.
Cash and Cash Equivalents: Cash and cash equivalents represent demand
deposits with banks, certificates of deposit with maturities of less than three
months at time of purchase and highly liquid money market fund investments.
F-6
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Marketable Securities Held-to-Maturity: Held-to-maturity marketable
securities represent highly liquid money market instruments with maturities of
greater than three months at time of purchase. These securities, consisting
principally of securities of U.S. Government agencies maturing at various dates
through November 1997, are valued at amortized cost which approximates market.
The Company's investment policy gives primary consideration to safety of
principal, liquidity and return. The Company invests its funds with institutions
that have high credit ratings and to date has not experienced any losses on its
investments. The Company follows the provisions of Financial Accounting
Standards Board (FASB) No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." This pronouncement requires all companies with investments
in debt and equity securities to classify these securities as held-to-maturity,
trading, or available for sale. The Company classifies its investments in such
securities as held-to-maturity as the Company has the intent and ability to hold
these securities to maturity. As of December 31, 1995 and 1996, the Company had
approximately $5,000 and $53,000 of unrealized gains on marketable securities,
respectively.
Concentration of Credit Risk: Substantially all of the Company's revenues
have been generated from Wound Care Centers which the Company has established as
cooperative ventures with acute care hospitals in the United States to provide a
multi-disciplinary treatment protocol for chronic wounds. The Company provides
contractual management services for fees and sells Procuren to acute care
hospitals and other health care providers. Credit is extended based on an
evaluation of the hospital's financial condition and collateral is generally not
required.
Revenues: Revenues are recognized when products are dispensed or as
contractual management services are rendered.
Income Taxes: The Company follows the provisions of FASB No. 109,
"Accounting for Income Taxes." Under FASB No. 109, the liability method is used
in accounting for income taxes, whereby deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Stock Based Compensation Plans: In October 1995, FASB issued Statement No.
123, "Accounting for Stock-Based Compensation," which requires all companies to
either recognize expense for stock-based awards based on their fair market value
on the date of grant, or provide pro forma disclosures of the effects "as if"
the Company had recognized the stock-based compensation expense. The Company
adopted the new rules in 1996. As permitted by FASB No. 123, the Company has
provided disclosure of the pro forma impact on net income and earnings per
share as if the fair value-based method had been applied (See Note G).
Reclassifications: The Company has reclassified the presentation of
certain information in the 1994 and 1995 financial statements to conform with
the 1996 presentation format. This included the reclassification of $790,000 and
$936,000 in 1994 and 1995, respectively, to cost of product sales and services,
those costs associated with the Company's laboratory operations previously
presented as selling, general and administrative expenses.
Additionally, the Company has classified costs of $1.9 million related to
technical services dedicated to the support of its platelet releasate technology
in cost of product sales and services in 1996. These costs were classified as
research and development in previous years since such costs were related to new
product development and drug discovery. In the Company's continuing effort to
focus on its wound care service business, during the second half of 1995 the
Company instituted a realignment of its business activities which included the
discontinuance of further product research and development.
F-7
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE B -- ACQUISITIONS AND DIVESTITURES
In August 1993, the Company acquired the remaining 50 percent interest in
its foreign affiliated joint venture, Curative Technologies S.A. (CTSA) for
$135,000 cash. This joint venture was previously accounted for on the equity
method. Effective with this acquisition, the accounts of CTSA were consolidated
and were immaterial to the Company's results of operations. As a result of the
acquisition, $209,000 of deferred revenue, related to the 1991 sale of
co-marketing rights to its foreign affiliate, was realized in the 1993 statement
of operations. This amount was net of previously unrecognized equity in CTSA's
losses. The proforma results of operations of CTSA for 1993 are not presented
due to the insignificant impact on reported results. As part of the Company's
restructuring in 1994, the operations of this subsidiary were terminated and the
assets liquidated (See Note M).
During the second quarter of 1995, the Company sold its 62% interest in
its German subsidiary to the subsidiary's general manager. In connection with
the sale, the Company made a working capital commitment of 0.5 million Deutsche
Marks (dm) which was paid in 1995. Additionally, the Company is entitled to
future contingent payments of 30 percent of the former subsidiary's profits up
to 500,000 dm. There are contingent payments of approximately one million dm due
the Company representing previously advanced intercompany loans. Since the
former subsidiary has had a history of operating losses, the Company has not
recorded any amounts due. Further, the Company remains a guarantor of the former
subsidiary's revolving credit facility of $1.4 million dm ($1.0 million) and is
obligated to make the interest payments on the outstanding indebtedness. The
accounting for the sale resulted in a charge to operations of $111,000 in 1995.
As a result of the transaction, the accounts of the foreign subsidiary are no
longer consolidated.
NOTE C -- PROPERTY AND EQUIPMENT
A summary of property and equipment and related accumulated depreciation
and amortization follows:
December 31,
1996 1995
(In thousands)
--------------
Property and equipment ........................... $5,616 $3,729
Leased equipment capitalized ..................... 1,371 1,511
Leasehold improvements ........................... 2,653 1,895
------ ------
9,640 7,135
Less accumulated depreciation and amortization ... 4,886 3,752
------ ------
$4,754 $3,383
====== ======
NOTE D -- ACCRUED EXPENSES
Accrued expenses are as follows:
December 31,
1996 1995
(In thousands)
--------------
Incentive compensation and benefits. $3,016 $2,445
Research and technical service contracts 121 547
--- ---
$3,137 $2,992
===== =====
F-8
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE E -- LEASES
The Company has entered into several noncancellable operating leases for
the rental of certain office space expiring in various years through 2002. The
Company also leases certain equipment under noncancellable capital and operating
leases expiring in various years through 1999. The principal lease for office
space provides for initial monthly rental of $28,442 escalating to $40,482 in
the final year. The following is a schedule of future minimum lease payments, by
year and in the aggregate, under capital leases and noncancellable operating
leases with initial or remaining terms of one year or more at December 31, 1996:
Capital Operating
Leases Leases
------ ------
(In thousands)
1997..................................... $ 150 $1,203
1998..................................... 43 1,054
1999 .................................... 7 993
2000 .................................... - 830
2001..................................... - 701
Thereafter............................... - 244
--- ---
Total minimum lease payments............. 200 $5,025
=====
Less amounts representing interest....... (16)
Present value of net minimum lease payments
($140 current portion)................. $ 184
===
Equipment acquired under capital leases amounted to $0, $140,000 and $0 in
1996, 1995, and 1994, respectively. Rent expense for all operating leases was
$1,498,000, $897,000 and $738,000 for the years ended December 31, 1996, 1995
and 1994 respectively.
NOTE F -- STOCKHOLDERS' EQUITY
Common Stock: In March 1994, the Company issued 17,000 shares of common
stock in consideration of patent rights related to its core platelet releasate
technology.
In August 1996 the Company completed a secondary public offering of
1,437,500 shares of common stock at a price of $17.00 per share. Expenses
related to this offering were approximately $1,806,000.
Director Share Purchase Program: In April 1993, the Company established 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 for director's annual retainer and
meeting fees and, in lieu thereof, receive shares of common stock at market
value equal to the cash payment. The Program authorized the issuance of up to
120,000 shares of the Company's common stock at market value. In 1994, 1995 and
1996, the Company issued 342, 0, and 0 shares under the Program, respectively.
At December 31, 1995 and 1996, 118,406 shares of common stock were reserved for
future issuance under the Program.
Warrants: In August 1995, the Company exchanged 5,803 shares of common
stock for 12,500 shares issuable under warrants originally issued in connection
with a working capital loan agreement entered into December 1990 and terminated
in October 1991. In April 1996, the Company exchanged 102,608 shares of common
stock for 166,667 shares issuable under a bridge financing agreement entered
into in April 1991 and terminated upon the closing of the Company's 1991 initial
public offering. There was no cash exchanged in either transaction.
F-9
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE F -- STOCKHOLDERS' EQUITY (Continued)
Rights Plan: On October 25, 1995, the Board of Directors of the Company
declared a dividend of one preferred share purchase right per share for each
outstanding share of common stock of the Company. The dividend was paid on
November 6, 1995 to shareholders of record on that date. Under certain
circumstances each right may be exercised to purchase one-one hundredth of a
share of Series A Junior Participating Preferred Stock, par value $.01, of the
Company for $65. The rights which are redeemable by the Company at $.01 per
right expire in November 2005. The purchase right issued under the Company's
Rights Agreement dated October 22, 1995 provides the holder "in the event of (i)
the acquisition of 15% or more of the Company's outstanding common stock by an
Acquiring Person (as defined in the Rights Agreement), (ii) the commencement of
a tender offer or exchange offer which results in a person or group owning 15%
or more of the Company's common stock, to exercise each right (other than rights
held by an Acquiring Person) to purchase common stock of the Company or a
successor company with a market value of twice the $65 exercise price.
NOTE G -- STOCK BASED COMPENSATION PLANS
The Company has a stock option plan which provides for the granting of
non-qualified or incentive options to employees, directors, consultants and
advisors. The plan authorized granting of up to 2,456,695 shares of the
Company's common stock at the market value at the date of such grants. All
options are exercisable at times as determined by the Board of Directors not to
exceed ten years after the grant date.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations ("APB
25") in accounting for its stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"), requires use of option valuation models that were not
developed for use in valuing such stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and net income per share is
required by Statement 123, and has been determined as if the Company has
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.36%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 62.2%; and
a weighted-average expected life of the options of 4.0 years at December 31,
1996 and 1995.
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. The Company's pro forma
information is as follows:
1996 1995
Net Income: As Reported $10,695 $4,210
Pro Forma 10,088 4,126
Primary EPS: As Reported $ .90 $ .39
Pro Forma .85 .38
Fully Diluted EPS: As Reported $ .89 $ .38
Pro Forma .84 .37
F-10
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE G -- STOCK BASED COMPENSATION PLANS (Continued)
As required by statement FASB No. 123, the fair value method of accounting
has not been applied to options granted prior to January 1, 1995. As a result,
the pro forma compensation cost may not be representative of that to be expected
in future years.
Information as to options for shares of common stock granted as of
December 31, 1996 and 1995 is as follows:
1996 1995 1994
-----------------------------------------------------------------------------------------------
Weighted Avg Weighted Avg Weighted Avg
Options Exercise Price Options Exercise Price Options Exercise Price
Outstanding at beginning of year 1,131,611 $ 6.37 1,333,784 $ 5.21 1,280,918 $ 5.19
Granted ........................ 348,100 21.91 297,700 8.73 476,000 3.78
Exercised ...................... (248,546) 5.11 (396,280) 4.39 (98,250) 2.07
Cancelled ...................... (53,332) 10.98 (103,593) 5.33 (324,884) 5.20
------------- ---------- -----------
Outstanding at end of year ..... 1,177,833 15.04 1,131,611 6.37 1,333,784 5.21
============= =========== ===========
Exercisable at end of year ..... 318,481 315,238 432,540
============= =========== ===========
Weighted average fair value of
options granted ............. $11.64 $ 4.66
====== ======
The following table summarizes information about stock options outstanding
at December 31, 1996:
Weighted Average
Options Options Remaining
Exercise Price Outstanding Exercisable Contractual Life (In Years)
1.55 - 4.75 332,158 126,887 6.4
4.875 - 7.00 354,042 122,092 6.9
8.50 - 10.125 103,800 50,375 8.3
13.25 - 20.00 186,233 19,127 9.2
20.25 - 27.25 201,600 0 9.5
------- ------ ---
1,177,833 318,481 7.7
========= ======= ===
At December 31, 1996, 1,112,042 shares of common stock were reserved for
future issuance.
NOTE H -- INCOME TAXES
The Company has available approximately $12 million and $26 million of net
operating loss carryforwards (N.O.L.'s) and research credits as of December 31,
1996 and 1995, respectively, which may be used to reduce taxable income in
future years. The aforementioned net operating loss carryforwards include the
tax benefit of disqualifying dispositions related to stock options, the benefit
of which will be realized through an equity adjustment by the Company in the
period in which the carryforwards are fully utilized. The utilization of these
losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operating loss and research
credit carryforwards. The carryforwards begin to expire in fiscal year 1999 and
will continue to expire through fiscal year 2009. Additionally, based on
ownership changes which occurred in prior periods, it is expected that the
annual utilization of the otherwise available net operating loss and research
F-11
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
credit carryforwards will be limited by the provisions of Sections 382 and 383
of the Internal Revenue Code, as amended. As such, the Company may be restricted
as to the utilization of its net operating loss and
NOTE H -- INCOME TAXES (Continued)
research credit carryforwards incurred prior to July 1991. There was no income
tax provision for 1994. The provision for income taxes for 1996 and 1995 is as
follows (in thousands):
1996 1995
---- ----
Federal $ 4,553 $ 1,161
State 780 137
Utilization of N.O.L.'s (4,325) (1,079)
------ --------
Total income tax provision $ 1,008 $ 219
===== ===
A reconciliation of the federal statutory tax rate with the effective tax
rate is as follows:
1996 1995
---- ----
Federal statutory tax rate 35.0% 34.0%
State income taxes net
of federal benefit 4.0 2.0
Tax benefits of N.O.L.'s (30.0) (31.0)
----- -----
Effective tax rate 9.0% 5.0%
=== ===
The Company has recorded a net deferred tax asset of approximately $5.6
and $12.0 million at December 31, 1996 and 1995, respectively, related to the
aforementioned net operating loss carryforwards and research credits. Valuation
allowances at December 31, 1996 and 1995 of equal value have been recorded which
has the effect of reducing the carrying value of the deferred tax asset to zero.
The valuation allowances at December 31, 1996 and 1995 are of equal value since
it is more likely than not that none of the net operating loss will be utilized
due to the Company's history of operating losses and the uncertainty of future
profits. The valuation allowance decreased $6.4 million in 1996.
NOTE I -- LOANS PAYABLE AND LONG TERM DEBT
In December 1992 the Company's German subsidiary entered into a 1.4
million deutsche mark (dm) revolving credit facility. In April 1994 this
facility was increased to approximately 1.9 million dm, with 1.4 million dm
converted to a term loan due in May 1998, and .5 million dm as a revolving
credit facility reviewed for renewal annually. The facility provides for 10.0%
interest on outstanding balances. The Company is a guarantor of this long-term
facility for up to 1.4 million dm (approximately $1.0 million outstanding at
December 31, 1996 and 1995). In May 1995, the Company sold its 62% interest in
its German subsidiary. As part of the sale agreement the Company continues to
guarantee the long term loan and has assumed responsibility for the interest
payments on that loan (See Note B).
NOTE J -- MAJOR CUSTOMERS
In 1994, 1995 and 1996, the Company derived 17%, 24% and 28% of its
consolidated revenues from one customer, respectively.
NOTE K -- DISCONTINUED OPERATIONS
On February 22, 1994 (effective January 1, 1994), the Company divested a
wholly-owned subsidiary, UltraMed, Inc. (UltraMed), through the sale of all the
issued and outstanding capital stock of UltraMed. Prior to the sale, UltraMed's
principal operations consisted of the sale and distribution of wound care
supplies and medical
F-12
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE K -- DISCONTINUED OPERATIONS (Continued)
equipment which represented the Company's only business in durable medical
supplies and equipment. The purchase price for the stock was $4.6 million,
representing the net book value of UltraMed plus advances owed the Company. The
purchase price was payable pursuant to a promissory note, bearing interest at an
annual rate of 4%, payable in monthly installments associated with the cash flow
of the business but to be paid not later than December 31, 1996.
The note was secured by a stock pledge executed by the buyer in favor of
the Company, and a guarantee and security agreement executed by UltraMed
covering the assets of the business. In addition, the Company has provided the
buyer with certain indemnifications.
As a result of the divestiture, the consolidated financial statements as
of and for the year ended December 31, 1994, reflected the results of operations
for UltraMed as discontinued. Due to changes in Medicare reimbursement including
fee schedule reductions and changes in product coverage requirements and a U.S.
Department of Justice legal action and settlement (See Note L), the business of
UltraMed was adversely affected. In view of those events, the Company recorded a
charge of $4.5 million during the second quarter of 1994 principally related to
the impairment of the note receivable.
NOTE L -- LEGAL PROCEEDINGS
In December 1994 the Company entered into a settlement agreement with the
United States Department of Health and Human Services in connection with claims
raised under the Civil False Claims Act against the Company and UltraMed, a
former subsidiary which was sold in February 1994 (See Note K).
Under the settlement agreement UltraMed agreed to pay $2.1 million to the
United States, payable in equal semi annual installments through 1997 and the
Company guaranteed the obligations of UltraMed to the United States. The Company
advanced $0.3 million to UltraMed in 1994 in order for UltraMed to meet the
initial obligations under the settlement agreement. In connection with the
guarantee, the Company made payments totaling $1.6 million in 1995 to fully
satisfy the obligation. The Company charged operations $0.7 million in 1994 and
$1.2 million in 1995 related to the obligation. The payments and related charges
to operations were made as a result of the inability of UltraMed to liquidate
its assets at previously estimated values and the continuing deterioration of
the UltraMed business.
On December 6, 1996 the United States District Court for the Eastern
District of New York approved the class action settlement in a lawsuit filed
against the Company and certain of its officers by a shareholder. The settlement
disposed of allegations by the shareholder that the Company failed to meet its
disclosure obligations with respect to certain practices of UltraMed, Inc. The
Company denied any liability or wrongdoing and the settlement was neither an
admission of any liability or wrongdoing by the Company or any of its officers
or employees. The action was settled for a total payment of $500,000 of which
50% was paid by the Company's insurer.
The Company, in the ordinary course of business is the subject of or party
to various lawsuits, the outcome of which in the opinion of management, will not
have a material adverse effect on the consolidated financial statements.
NOTE M -- RESTRUCTURING CHARGE
The Company recorded a corporate restructuring charge of $1.7 million
during the second quarter of 1994. The restructuring plan included a significant
reduction in research and development activities, reduction in European
development activities, as well as a general reorganization of resources which
was approved by management in June 1994 and substantially completed by the end
of 1994.
F-13
CURATIVE HEALTH SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE M -- RESTRUCTURING CHARGE (Continued)
The restructuring included the termination of 15 research personnel and
the termination of outside research contracts related to new drug discovery
efforts. Additionally, the Company reduced its European development activities
with the termination of 4 people responsible for the development of strategic
alliances for future products. Further, the restructuring included the
discontinuance of the Company's business of establishing a wound care program in
a comprehensive outpatient rehabilitation facility.
The restructuring charge included approximately $500,000 for employee
severance and related costs, $363,000 related to property and equipment
write-offs, $348,000 related to research contract terminations, $113,000 in
provisions for leases and other facility obligations and $120,000 for legal and
other professional fees associated with the restructuring and reorganization for
the Company's operations. Also included is a charge of $240,000 for an
uncollectible advance associated with the Company's efforts to establish a wound
care program in a comprehensive outpatient rehabilitation facility. The employee
severance costs principally covered a reduction of personnel in research and
development and European administration. The amount of benefits paid in 1994 was
$100,000 covering 19 terminated employees. The amount of benefits paid in 1995
was $370,000. The restructuring charges included $932,000 of costs requiring
cash expenditures and the remaining $752,000 includes costs related to
write-offs and provisions which did not have cash requirements.
F-14
Schedule II
CURATIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED DECEMBER 31, 1996
COL. A COL.B COL. C COL. D COL. E
ADDITIONS
Balance at Charged to Charged to Balance at
Beginning Costs and Other Account Deductions End
DESCRIPTION of Period Expenses Describe Describe of Period
Year ended December 31, 1996
Allowance for doubtful accounts ..... $ 514,000 $ 782,000 $ - $(355,000)(3) $ 941,000
============ ============= ==== ============= ===========
Allowance for deferred tax valuation $12,000,000 $(6,400,000) $ - $ - $ 5,600,000
============ ============= ==== ============= ===========
Year ended December 31, 1995
Allowance for doubtful accounts ..... $ 364,000 $ 150,000 $ - $ -- $ 514,000
=========== ============= ==== ========= ===========
Allowance for deferred tax valuation $12,500,000 $ (500,000)(2)$ - $ -- $12,000,000
=========== ================ ==== ========= ===========
Year ended December 31, 1994
Allowance for doubtful accounts ..... $ -- $ 388,000 $ - $ (24,000)(1) $ 364,000
============ ============= ==== =============== ==========
Allowance for deferred tax valuation$ 9,600,000$ 2,900,000(2)$ - $ -- $12,500,000
============ ================ ==== =============== ===========
(1) Accounts written off during 1994
(2) Offset by (decrease) increase in net deferred tax assets
(3) Accounts written off during 1996
INDEX TO EXHIBITS
Exhibit No. Description Page No.
3.1 Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.0 Rights Agreement, dated as of October 25, 1995 between
Curative Technologies, Inc. and Bank Minnesota,
National Association, as Rights Agent (10)
4.1 Stock Purchase Agreement, dated July 6, 1989, among
the Company and certain investors named therein 1) (Ex. 4.2)
4.2 Form of Amendment and Waiver of Stock Purchase Agreement,
Shareholders' Agreement and Shareholder Control Agreement,
dated April 8, 1991, among the Company
and certain shareholders (1) (Ex. 4.5)
10.1 Master Lease, dated as of December 30, 1988, between Equitec
Leasing Company and the Company (1) (Ex. 10.1)
10.2 Warrant, dated as of December 31, 1990, from the Company to
Pacificorp Credit, Inc. dba Pacific Venture Finance, Inc. (1) (Ex. 10.4)
10.3 Development and Manufacturing Agreement, dated as of
November 30, 1990, between the Company and New York
Blood Center, Inc. (1) (Ex. 10.5)
10.4 License Agreement, dated as of November 30, 1990, between the
Company and New York Blood Center, Inc. (1) (Ex. 10.6)
10.5 Shareholders Agreement, dated September 21, 1990, among the
Company, Dilpi. Befriebswirt Wilhelm Bayatrz, Prof. Dr. Hans
Winkelmann and Curative Technologies GmbH (1) (Ex. 10.7)
10.6 Technology Transfer Agreement, dated September 21, 1990,
between Curative Technologies GmbH and the Company (1) (Ex. 10.8)
10.7 Support Agreement dated as of September 21, 1990, between
Curative Technologies GmbH and the Company (1) (Ex. 10.9)
10.8 Shareholders Agreement, dated November 16, 1990, between
the Company and Espace Diversifications S.A. (1) (Ex. 10.10)
10.9 Technology Transfer Agreement, dated February 5, 1991, between
the Company and Curative Technologies S.A. (1) (Ex. 10.11)
10.10 Trademark License Agreement, dated February 5, 1991, between
the Company and Curative Technologies S.A. (1) (Ex. 10.12)
10.11 Development and Manufacturing Agreement, dated November
16, 1990, between the Company and Foundation Nationale
de Transfusion Sanguine (FNTS) (1) (Ex. 10.13)
10.12 Manufacturing Agreement, dated January 22, 1991, among the
Company, Curative Technologies S.A. and FNTS (1) (Ex. 10.14)
10.13 Contractual Agreement for Wound Healing Product effective as of
January 1, 1988, between the Company and the University of
Minnesota Hospital and Clinic (1) (Ex. 10.17)
10.14 Form of Wound Care Center(R)Contract (1) (Ex. 10.18)
10.15 Consulting Agreement, dated March 29, 1991, between David R.
Knighton and the Company (1) (Ex. 10.20)
10.16 Lease Agreement dated June 13, 1989, between In-House Partners
and the Company (1) (Ex. 10.21)
10.17 Employment Agreement, dated as of October 1, 1990, between
Russell B. Whitman and the Company and related forms of
stock options (1) (Ex. 10.22)**
10.17.1 Transition and Consulting Agreement, dated as of June 15, 1995,
between Russell B. Whitman and the Company (13)
10.18 Employment Agreement, dated as of March 6, 1989, between
Gerardo Canet and the Company and related forms of
stock options (1) (Ex. 10.23)**
10.19 Employment Agreement, dated as of August 20, 1987, between
Ronald G. Duff and the Company (1) (Ex. 10.24)**
10.20 Employment Agreement, dated as of July 6, 1987, between
John C. Prior and the Company (1) (Ex. 10.25)**
10.21 Employment Agreement, dated as of April 17, 1989, between
Kathleen Kelleher and the Company (1) (Ex. 10.26)**
10.22 Employment Agreement, dated as of November 21, 1991, between
Kerstin B. Menander and the Company (5)**
10.23 1991 Stock Option Plan (1) (Ex. 10.27)**
10.24 Amendment No. 1 to the 1991 Stock Option Plan, (2)**
Amendment No. 2 to the 1991 Stock Option Plan and
Amendment No. 3 to the 1991 Stock Option Plan
10.25 Amended and Restated Bridge Financing Commitment Agreement,
dated April 30, 1991, with a form of warrant attached (1) (Ex. 10.28)
10.25.1 Amendment to Stock Subscription Warrant for Shares of Common
Stock of Curative Technologies, Inc. (12)
10.26 Letter Agreement, dated November 29, 1990, between the Company
and FNTS (1) (Ex. 10.29)
10.27 Agreement between the Company and Knighton Clinic of
Reparative Medicine, P.A. (5)
10.28 Consulting Agreement dated as of November 1, 1992, by and
between Embro Corporation, David R. Knighton and the Company (5)
10.29 Research Agreement dated January 1, 1993, by and between the
Company and Embro Corporation (5)
10.29.1 Termination Letter Agreement dated October 14, 1994, by and among
Embro Corporation, David R. Knighton and the Company (9)
10.30 Asset Purchase Agreement, dated June 24, 1992, among the Company,
UniqMed, Inc., Robert S. Baurys II, and UltraMed, Inc. (3)
10.31 Stock Purchase Agreement by and among UM Acquisition Corporation
and Curative Health Services, Inc., dated February 22, 1994 and
related agreements (4)
10.32 Employment Agreement, dated as of October 21, 1993, between
Howard Jones and the Company (7)**
10.33 Purchase Agreement among the Company, Curative Technologies S.A.
and FNTS (7)
10.34 Curative Health Services, Inc., Director Share Purchase Program (6)**
10.35 Curative Health Services, Inc. Employee 401(k) Savings Plan, as amended
and restated (8)**
10.36 Settlement Agreement by and between the University of California,
David R. Knighton and the Company dated September 1, 1993 (9)
10.37 Settlement Agreement by and among the United States of America and
UltraMed, Inc., Robert Baurys, Susan Hrim, Cy Corgan, Chris
Rosenski and the Company dated October 18, 1994 and related
agreements (9)
10.38 Employment Agreement dated as of October 26, 1994, between
John Vakoutis and the Company (9)**
10.38.1 Amendment of Employment Agreement, dated July 25, 1995
between John Vakoutis and the Company (13)**
10.39 Employment Agreement dated as of June 11, 1987, between
Judith Connell and the Company (9)**
10.40 Employment Agreement dated as of August 1, 1989, between
Carol Gleber and the Company (9)**
10.41 Employment Agreement dated as of June 17, 1987, between
Gary Jensen and the Company (9)**
10.42 Memorandum of Understanding - Settlement of Shareholder Lawsuit (13)
10.43 Final Judgment and Order of Dismissal with Prejudice of Class Action *
10.44 Curative Technologies, Inc. Non-Employee Stock Option Plan (11)
22. Subsidiaries of the Registrant *
23. Consent of Ernst & Young LLP *
* Filed herewith
** Required to be filed pursuant to Item 601(b) (10) (ii) or (iii) (A) of
Regulation S-K.
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Company's Registration Statement on Form S-1
(No. 33-39880).
(2) Incorporated by reference to Exhibit 10.25.1 to the Company's Quarterly
Report's on Form 10-Q for the quarters ended June 30, 1992, June 30, 1993
and June 30, 1996.
(3) Incorporated by reference to Exhibit 7(C)(2) to the Company's Current
Report on Form 8-K dated June 24, 1992.
(4) Incorporated by reference to Exhibit 7(C)(1) to the Company's Current
Report on Form 8-K dated February 22, 1994.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Company's Annual Report on Form 10-K filed for
the year ended December 31, 1992.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8 (filed July 7, 1993, No. 33-65710).
(7) Incorporated by reference to the similarly numbered exhibit to the
Company's Annual Report on Form 10-K filed for the year ended December 31,
1993.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-8 (filed October 13, 1994, No. 33-85188).
(9) Incorporated by reference to the similarly numbered exhibit to the
Company's Annual Report on Form 10-K filed for the year ended December 31,
1994.
(10) Incorporated by reference to similarly numbered exhibit to the Company's
Current Report on Form 8-K dated November 6, 1995.
(11) 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.
(12) Incorporated by reference to the similarly numbered Exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
(13) Incorporated by reference similarly numbered Exhibit to the Company's
Annual Report on Form 10-K filed for the year ended December 31, 1995.
Exhibit 10.43
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- ---------------------------------------------------------X
HARRY H. JACOBS,
Plaintiff, Master File No.
94-CV-2923 (TCP)
- against -
CURATIVE TECHNOLOGIES, INC.,
RUSSELL B. WHITMAN and JOHN C. PRIOR,
Defendants.
- -----------------------------------------------------------X
FINAL JUDGMENT AND ORDER OF DISMISSAL
WITH PREJUDICE OF CLASS ACTION
A. The above-captioned class action litigation is pending in this
Court on behalf of: All purchasers of the common stock of Curative
between March 31, 1993 and June 20, 1994, inclusive (the "Class
Period"), excluding Curative, its subsidiaries and affiliates, the
other Defendants and members of their immediate families, and the
heirs, successors-in-interest or assigns of any such Defendant (the
"Class").
B. The parties have proposed to settle their differences as set
forth in the Stipulation and Agreement of Compromise and Settlement, dated as of
July 24, 1996 (the "Settlement Agreement") and attached exhibits.
C. Plaintiff's Counsel have caused a Notice of Pendency of Class
Action, Class Action Determination, Proposed Settlement of Class Action,
Settlement Hearing and Right to Appeal (the "Notice") to be sent to all persons
who may be the Settlement. On September 27, 1996, Plaintiffs published a Summary
Notice of Hearing on Proposed Settlement of Class Action (the "Summary Notice")
in the national edition of The Wall Street Journal. Affidavits and/or
declaration of mailing of the Notice and publishing of the Summary Notice were
filed with the Court on November 26, 1996.
This Court has considered the arguments of counsel, the documents
described above, all other pleadings, papers and files herein, and has held a
hearing to permit persons opposed to the Settlement to make their views known.
Good cause appearing therefor, IT IS HEREBY ORDERED AS FOLLOWS:
1. The Court finds that: (a) the members of the Settlement Class are
so numerous that joinder of all Class Members in this action is impracticable;
(b) there are questions of law and fact common to the Class Members which
predominate over any individual issues; (c) the claims or defenses of the Class
Plaintiff is typical of the claims or defenses of the Class; (d) the Class
Plaintiff and his counsel have fairly and adequately protected the interests of
the Class; (e) the prosecution of separate actions by individual Class Members
would create a risk of inconsistent or varying adjudications with respect to
individual Class Members; (f) the prosecution of separate actions would create a
risk of adjudications with respect to individual Class Members that would as a
practical matter be dispositive of the interests of the other members; and (g)
the Defendants have acted or refused to act on grounds generally applicable to
the Class.
2. The Settlement Class, as defined above and in the Settlement
Agreement, is hereby certified as all purchasers of the common stock of Curative
between March 31, 1993 and June 20, 1994, inclusive, excluding Curative, its
subsidiaries and affiliates, the other Defendants and members of their immediate
families, and the heirs, successors-in-interest or assigns of any such
Defendant.
3. The Notice provided to potential Class Members constitutes the
best notice practicable under the circumstances and includes individual notice
to all Class Members who could be identified by reasonable effort. The
affidavits or declarations of mailing and publishing filed with this Court on
November 26, 1996, demonstrate that this Court's orders with respect to the
Notice have been complied with and further that the best notice practicable
under the circumstances was in fact given and constituted valid, due and
sufficient notice to the Class Members, complying fully with due process and
Rule 23 of the Federal Rules of Civil Procedure.
4. For purposes of this Final Judgment, the Court adopts and
incorporates the definitions in the Settlement Agreement.
5. This Court has jurisdiction of the subject matter of this
litigation, of all actions within this litigation, and over all parties to this
litigation, including all Class Members.
6. The proposed Settlement is hereby approved as fair, reasonable
and adequate.
7. The Court hereby decrees that neither the Settlement, nor this
Final Judgment, nor the fact of Settlement constitute an admission or concession
by any Defendant of any liability or wrongdoing whatsoever. The Final Judgment
is not a finding of the validity or invalidity of any claim asserted in the
Action, or of any wrongdoing by any Defendant. Neither the Settlement, nor
this Final Judgment, nor the Settlement negotiations, nor the Settlement
proceedings, nor the fact of Settlement, nor any documents related to
the Settlement shall be used or construed as an admission of any fault,
liability or wrongdoing by any person or entity, or shall be offered or received
in evidence as an admission, concession, presumption or inference against any
party in any proceeding other than such proceedings as may be necessary to
consummate or enforce the Settlement.
8. The names and addresses of all persons and entities who made a
timely request to be excluded from the Class, and are therefore not members of
the Class are set forth in Exhibit A.
9. This Action is hereby dismissed in accordance with the terms of
the Settlement Agreement, without costs (except as provided in the Settlement
Agreement) and upon the merits and with prejudice and in full and final
discharge of any and all claims of Class Plaintiff and Class Members.
10. The Released Parties are hereby released from the Released
Claims, as defined in the Settlement Agreement. "Released Claims" means and
includes any and all claims, whether known or unknown and whether based upon
federal or state law, statute or common law, against the Defendants or any of
them, or any of their present or former officers, directors, managing directors,
employees, agents, attorneys, financial advisors, insurers, underwriters,
selling group members, investment bankers, representatives, affiliates,
associates, parents, subsidiaries, general and limited partners and
partnerships, heirs, executors, administrators, successors and assigns (the
"Released Parties"), and whether bought directly, individually, representatively
or in any other capacity, in connection with, or that arise out of or relate to
(a) the purchase of the common stock of Curative by a Class member during the
Class Period, or (b) any act, or failure to act, omission, misrepresentation,
fact, event, transaction, occurrence, or other matter set forth, alleged,
embraced, underlying or otherwise referred to, or which could have been
asserted, alleged, embraced or complained of, in the Amended Complaint.
11. It is expressly determined, within the meaning of Rule 54(b) of
the Federal Rules of Civil Procedure that there is no just reason for delay and
the entry of this judgment is hereby expressly directed.
12. Plaintiff's Counsel in the action are hereby awarded attorneys=
fees in the amount of $150,000.00 to be paid in accordance with the terms of the
Settlement Agreement.
13. Plaintiff's Counsel in the action are hereby awarded
reimbursement of expenses in the amount of $10,000.00 to be paid in accordance
with the terms of the Settlement Agreement.
Dated: December 6, 1996
/s/ Thomas C. Platt
U.S.D.J.
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all of the subsidiaries of the registrant:
1. Wound Care Centers(R) of America Incorporated, organized under the laws of
Delaware.
2. CHS Services, Inc., organized under the laws of Delaware.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-54880) pertaining to the Curative Health Services Inc. and
subsidiaries 1991 Stock Option Plan, as amended in the Registration Statement
(Form S-8 No. 33-19370) pertaining to the Curative Health Services Inc. and
subsidiaries Director Share Purchase Program, and in the Registration Statement
(Form S-8 No. 33-85188) pertaining to the Curative Health Services Inc. and
subsidiaries Employee 401(k) Savings Plan of our report dated January 31, 1997,
with respect to the consolidated financial statements and schedule of Curative
Health Services, Inc. and subsidiaries (formerly Curative Technologies, Inc.)
included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Melville, New York
March 27, 1997